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Amphenol Corporation 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2001, for Amphenol Corporation, a Delaware corporation. The Company operates in two reportable segments: Interconnect Products and Assemblies (connectors for communications, aerospace, industrial, and automotive markets) and Cable Products (coaxial and flat ribbon cable for communications). As of July 31, 2001, there were 41,690,296 shares of Class A Common Stock outstanding.

Key Financial Metrics

(All figures in thousands, except per share data)

Margins: Gross profit margin (including depreciation) was 34% for both Q2 and the six months ended June 30, 2001, compared to 32% in the prior year periods. Selling, general, and administrative expenses remained constant at approximately 14% of net sales.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 18% in Q2 2001 and 7% for the six-month period compared to 2000. This was primarily driven by a decline in coaxial cable sales for broadband communication systems and lower interconnect sales to telecom and datacom markets.
• Offsetting Growth: Decreases were partially offset by increased sales of interconnect products for aerospace applications (Q2) and aerospace/industrial applications (six months).
• Currency Impact: Currency translation reduced sales by approximately $8.6 million in Q2 and $16.8 million for the six-month period compared to 2000 exchange rates.
• Profitability: Despite lower sales, operating income for the six months increased slightly ($113,139 vs. $110,123) due to improved gross margins and lower interest expenses.
• Interest Expense: Decreased to $14,109 (Q2) and $28,319 (6 months) from $15,494 and $31,337 in 2000, attributable to lower average debt levels and interest rates.
• Cash Flow: Operating cash flow decreased to $45,023 for the six months ended June 30, 2001, from $66,330 in 2000, primarily due to a net increase in non-cash working capital components.

Guidance, Outlook, and Risks

• Liquidity: The Company expects to fund debt service, capital expenditures, and product development through internally generated cash flow and its revolving credit facility. Availability under the $150 million revolving credit facility was $102,578 at June 30, 2001.
• Dividends: The Company has not paid and does not intend to commence payment of cash dividends on common stock.
• Debt Covenants: The Company is subject to financial covenants including interest coverage and leverage ratio tests under its Bank Agreement.
• Environmental Contingencies: Amphenol and Allied Signal (now Honeywell) are jointly liable for environmental cleanup sites. Allied is obligated to pay 80% of costs up to $30 million and 100% of costs in excess. Approximately $21,700 in costs have been incurred to date. Management does not expect a material adverse effect.
• Accounting Changes: The Company adopted FAS No. 133 (Derivatives) effective Jan 1, 2001, with no material cumulative effect. It expects to adopt FAS No. 141 and 142 (Goodwill) effective Jan 1, 2002, which will stop goodwill amortization in favor of impairment testing.
• Forward-Looking Risks: Uncertainties include economic and currency conditions, market demand, pricing, and competitive factors.

Investor Verification Checklist

• Verify the sustainability of the 34% gross margin given the 18% drop in Q2 sales volume.
• Confirm the extent of exposure to the telecom/datacom market downturn versus the growth in aerospace/industrial sectors.
• Review the specific terms of the Bank Agreement covenants to ensure continued compliance given the debt load of ~$748 million.
• Monitor the status of environmental cleanup costs and the enforcement of the cost-sharing agreement with Allied/Honeywell.
• Assess the impact of the upcoming adoption of FAS 142 on future earnings, specifically the cessation of goodwill amortization.