APH

Amphenol Corporation 2008 Annual Report Summary (Form 10-K)

Business Context and Reporting Period

This filing covers the fiscal year ended December 31, 2008. Amphenol Corporation is a global designer, manufacturer, and marketer of electrical, electronic, and fiber optic connectors, interconnect systems, and coaxial/flat-ribbon cable. The company operates two primary segments: Interconnect Products and Assemblies (91% of sales) and Cable Products (9% of sales). Primary end markets include communications (62% of sales), industrial/automotive (19%), and commercial aerospace/military (19%). Approximately 64% of net sales originated outside the United States.

Key Financial Metrics

Margins: Gross margin was 32.4% in 2008 (vs. 32.6% in 2007). Operating margin was 19.5% in 2008 (vs. 19.4% in 2007). The effective tax rate was 28.0% in 2008.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 14% year-over-year. Interconnect sales rose 15%, driven by growth in wireless communications, military/aerospace, and telecommunications markets. Cable sales increased 1%, primarily due to price increases.
• Profitability: Net income increased 19% to $419.2 million. Operating income grew 14%.
• Acquisitions: The company spent approximately $136 million on acquisitions in 2008, including three significant deals in wireless infrastructure, military/aerospace, and internet markets. Goodwill increased by $140.5 million.
• Geographic Mix: International sales increased 23% in U.S. dollars, while U.S. sales remained relatively flat. The weak U.S. dollar contributed approximately $34.3 million to reported sales growth.
• Inventory: Inventory increased $55.6 million to $512.5 million, with inventory days rising from 80 to 88 due to a slowdown in sales activity in the fourth quarter of 2008.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management expects capital expenditures in 2009 to be approximately $85 million. The company anticipates funding operations, dividends, and debt service through internal cash flow and its revolving credit facility.
• Dividends: The company pays a quarterly dividend of $0.015 per share. Total dividends paid in 2008 were $10.6 million.
• Stock Repurchases: The company retired 12.1 million shares for $293.6 million in 2008. Approximately 1.8 million shares remained available for repurchase under the program as of year-end.
• Risks:
  • Economic Sensitivity: 62% of revenue comes from the communications industry, which is subject to rapid technological change and price pressure. A global economic slowdown impacted fourth-quarter sales.
  • Foreign Exchange: 64% of sales are international, exposing the company to currency fluctuations.
  • Raw Materials: Volatility in prices for gold, silver, copper, and plastic resins could impact margins if not passed on to customers.
  • Goodwill Impairment: With $1.23 billion in goodwill, a significant decline in financial performance could trigger non-cash impairment charges.
• Unusual Items: No unusual items were recorded in 2008. A one-time flood charge of $20.7 million occurred in 2006 but did not impact 2008 results.

Investor Verification Checklist

• Inventory Levels: Verify the trend in inventory days (88 days in 2008 vs. 80 in 2007) and management's ability to reduce inventory in response to the economic slowdown.
• Acquisition Integration: Assess the performance of the three major 2008 acquisitions and the $131.7 million in accrued performance-based cash consideration.
• Debt Covenants: Confirm continued compliance with the $1 billion Revolving Credit Facility covenants, particularly the debt-to-EBITDA ratio, given the increase in total debt to $786.5 million.
• Pension Obligations: Review the funded status of the U.S. pension plan, which saw a significant reduction in plan assets in 2008 due to equity market losses, increasing the accrued liability to $165.9 million.
• Foreign Currency Exposure: Monitor the impact of currency translation on future earnings, given that 64% of sales are non-U.S.