01—Abstract
Summary
Summary of the 10-K filed March 30, 1999. Cited figures are marked; the original filing is the authoritative source.
Amphenol Corporation's 1998 10-K shows a company with solid operating performance but a heavily leveraged balance sheet following the May 1997 KKR-led Merger and Recapitalization.
Net sales rose 3.9% to $918.9 milliona in 1998 from $884.3 million, driven by a 6% increase in interconnect products and assemblies (wireless, data, and smart card applications), partially offset by a 2% decline in cable products as international coaxial cable demand weakened in Asia and Latin America. Operating income fell to $149.7 million from $155.4 million, and operating margin slipped to 16.3% from 17.6%, pressured by coaxial cable pricing and rising depreciation and goodwill amortization. The key investor concern is leverage.
Interest expense more than doubled-related increase to $81.2 millionb from $64.7 million, consuming most of operating income. Net income declined to $36.5 million ($2.07 per share) from $26.7 million in 1997, which was itself depressed by a $24.5 million extraordinary loss. Long-term debt stood at roughly $952 million against a shareholders' deficit of $(292) million, and cash flow from operations fell to $53.2 million from $86.3 million as interest payments rose to $78.6 million.
The company has paid no dividends since its 1991 IPO and is restricted from dividends and share repurchases under its debt covenants. Management expects 1999 capital expenditures of about $30 millionc and cash interest of roughly $76 million, funded by internal cash flow and its $150 million revolver, of which approximately $128 million was available at year-end. The filing also highlights a diversified customer and geographic base (about 60% of sales in North America, 46% outside the U.S., and no customer above 5%), a sizable backlog of $221.5 million, and a manageable environmental exposure in which former parent Allied Signal shares liability for certain sites.
Year 2000 remediation is estimated at $3.0 milliond with no material impact expected. Overall, the company's operating franchise appears sound, but returns to equity holders depend on sustained cash generation to service roughly $950 million of debt.
02—Key points
Key Highlights
- Net sales grew 3.9% to $918.9 million in 1998, with interconnect products up 6% to $718.1 million while cable products declined 2% to $200.8 million.
- Operating income declined to $149.7 million (16.3% margin) from $155.4 million (17.6% margin), reflecting pricing pressure on coaxial cable products.
- Interest expense rose to $81.2 million from $64.7 million, following the May 1997 Merger and Recapitalization, and now absorbs over half of operating income.
- Net income was $36.5 million, or $2.07 per share ($2.03 diluted), up from $26.7 million in 1997 but still reflecting heavy interest burden.
- Cash flow from operations fell to $53.2 million from $86.3 million, as cash interest payments increased to $78.6 million.
- Long-term debt of roughly $952 million and a shareholders' deficit of $(292.3) million reflect the leveraged recapitalization; the company has no dividend policy and is restricted by debt covenants.
- Backlog rose to $221.5 million from $209.2 million, and the company has a global footprint with about 46% of sales outside the U.S.
03—Questions
Frequently Asked Questions
Why did Amphenol's net income increase in 1998 despite lower operating income?
1997 net income of $26.7 million was reduced by a $24.5 million extraordinary loss from early debt extinguishment and $2.5 million of merger-related expenses. Because 1998 had no comparable extraordinary item, reported net income rose to $36.5 million even though operating income and pre-tax income from operations both declined.
How leveraged is Amphenol, and can it service its debt?
Long-term debt was about $952 million at year-end 1998, against a shareholders' deficit of $(292) million. Interest expense of $81.2 million exceeded the company's EBITDA-based capacity to comfortably cover it, leaving limited free cash flow after capital expenditures of $26.3 million. Management projects 1999 cash interest of about $76 million and debt amortization of only $1.7 million, suggesting near-term service relies on operating cash flow and revolver availability of roughly $128 million.
Will Amphenol pay dividends or buy back stock?
No. The company has paid no cash dividends since its 1991 IPO and does not intend to start. Its credit agreement restricts dividends and share repurchases, and management plans to retain earnings to fund operations and repay debt.
What are the main risks to Amphenol's business?
Key risks include pricing pressure on coaxial cable products, weak demand in international cable television markets such as Asia and Latin America, currency and raw material cost volatility (gold, copper, aluminum, plastics), and the possibility that cable TV systems shift away from coaxial technology. Environmental liabilities at several sites are shared with former parent Allied Signal, and management does not expect them to be material.
How concentrated is Amphenol's customer base?
The customer base is diversified: no single customer accounted for more than 5% of 1998 sales, though U.S. government-related contracts made up about 8%. Distributors represented roughly 27% of sales, and the company's largest end markets were communications (53%, including 23% cable television) and aerospace and military (25%).
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