APH

Business Context and Reporting Period

Company: Amphenol Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: Amphenol operates two primary segments: Interconnect products and assemblies (connectors for communications, military, aerospace, industrial, and automotive markets) and Cable products (coaxial and flat ribbon cable for communications). The company is a large accelerated filer incorporated in Delaware.

Key Financial Metrics

All figures in thousands, except per share data.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 18% in the third quarter and 20% for the nine months ended September 30, 2008, compared to the same periods in 2007. In local currencies, growth was 16% and 17%, respectively. The Interconnect segment drove this growth with a 19% increase in the quarter, while the Cable segment grew 4%.
• Profitability: Net income rose 23% in the quarter and 27% for the nine-month period. Operating margins in the Interconnect segment improved by 0.4% (quarter) and 0.5% (nine months) due to operating leverage and new high-margin products. Conversely, Cable segment margins declined 1.7% and 1.1% due to higher material costs.
• Working Capital: Accounts receivable increased by $73.3 million and inventories by $65.0 million, primarily driven by higher sales volumes and acquisitions. Days sales outstanding increased slightly from 69 to 70 days.
• Debt and Liquidity: The company drew approximately $760 million on its $1 billion Revolving Credit Facility. Cash provided by operations increased to $310.7 million for the nine-month period, up from $254.9 million in 2007.

Guidance, Outlook, and Risks

• Management Commentary: Management attributes sales growth to new application-specific solutions and increased presence with leading companies in target markets. The weaker U.S. dollar positively impacted reported sales by approximately $15.9 million in the quarter and $64.0 million for the nine months.
• Capital Allocation: The company repurchased approximately 3.8 million shares for $143.7 million during the first nine months of 2008. No shares were repurchased in the third quarter. A voluntary $20 million contribution was made to the U.S. Pension Plan in September 2008.
• Acquisitions: Goodwill increased by $98.0 million, largely due to adjustments for performance-based cash consideration on prior acquisitions ($99.9 million) and new acquisitions in the Interconnect segment.
• Risks and Contingencies:
  • Environmental: The company is involved in environmental cleanup of sites related to its 1987 acquisition from Allied Signal. Costs are reimbursed by Honeywell under an indemnification agreement; management does not expect a material adverse effect.
  • Market Risk: Exposure to foreign currency exchange rates and interest rate changes. The company utilizes interest rate swaps to fix LIBOR rates on portions of its debt.
  • Liquidity: Sources of liquidity could be adversely affected by decreased demand, deterioration of financial ratios, or credit rating declines.

Investor Verification Checklist

• Acquisition Accounting: Verify the final assessment of fair value attributes for 2007 and 2008 acquisitions, as the company noted preliminary assessments may not differ materially but are still being completed.
• Material Costs: Monitor the impact of rising material costs on the Cable segment margins, which have declined despite price increases.
• Debt Covenants: Confirm continued compliance with financial covenants under the $1 billion Revolving Credit Facility, especially given the high utilization ($760 million drawn).
• Stock Repurchase Program: Track the remaining capacity of the stock repurchase program (7.8 million shares remaining as of Sept 30, 2008) and future buyback activity.
• Environmental Indemnification: Review the status of the Honeywell indemnification agreement regarding environmental liabilities to ensure continued reimbursement coverage.