How did Amphenol's profitability change in 2005?

Net sales increased 18% to $1,808.1 million, operating income rose 24% to $343.3 million, and net income climbed 26% to $206.3 million. Operating margin expanded to 18.9% from 18.1%, and the effective tax rate fell to 33.0% from 34.0%, partly due to the American Jobs Creation Act of 2004. Organic growth excluding acquisitions was 8%.

What was the significance of the Teradyne (TCS) acquisition?

In December 2005, Amphenol acquired Teradyne's backplane and connection systems business for about $384.7 million in cash, plus roughly $8.8 million in transaction costs. TCS had 2005 sales of approximately $373 million and supplies high-speed, high-density printed circuit board interconnects to data communications, storage, server, and wireless infrastructure markets. The deal added $239.3 million of goodwill and $45.5 million of intangibles, and TCS was excluded from the 2005 internal control assessment, which is a point to monitor.

How much debt does Amphenol carry, and is it at risk?

Long-term debt, including the current portion, totaled $781.0 million at year-end 2005, up from $449.1 million. The company's $1 billion revolving credit facility matures in 2010 and carries a rate of LIBOR plus 60 basis points. Covenants are comfortably met (interest coverage 9.04x versus a 3x minimum; leverage 1.96x versus a 3.50x maximum). Credit ratings are BBB- from S&P and Ba1 from Moody's. The company has swaps fixing $650 million of floating-rate debt, and management believes its liquidity is sufficient for the next twelve months.

What are the main risks to Amphenol's business?

Key risks include dependence on the communications industry (about 51% of sales), where large customers exert pricing pressure; cable television capital spending cycles (about 12% of sales); changes in defense budgets (about 24% of sales); the need to keep launching new products (about 20% of sales came from products introduced in the last two years); raw material cost volatility (gold, copper, steel, aluminum); integration risk from acquisitions; and potential goodwill impairment, given that goodwill is $886.7 million of total assets of $1.93 billion.

What shareholder returns and upcoming cost changes should investors expect?

Amphenol began paying a quarterly dividend of $0.03 per share in 2005, with $10.8 million declared that year and the intent to continue. Share repurchases totaled $8.7 million in 2005, with about 3.3 million shares remaining under the authorization, which expires September 30, 2006. Starting in 2006, FAS 123R will add roughly $10 million of pre-tax stock compensation expense, and interest expense is expected to rise to about $40 million from $24.1 million, reflecting higher debt levels. Capex is planned at about $75 million for 2006.

APH 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 16, 2006. Cited figures are marked; the original filing is the authoritative source.

Amphenol Corporation (APH) reported a strong fiscal 2005, with net sales up 18% to $1,808.1 million^a, operating income up 24% to $343.3 million, and net income up 26% to $206.3 million.

Growth was driven by new application-specific interconnect products, wireless infrastructure demand, military/aerospace programs, and acquisitions. Excluding acquisitions, sales rose 8%. Operating margin expanded to 18.9% from 18.1%, and diluted EPS reached $2.28^b versus $1.82 in 2004.

Operating cash flow was $229.6 million^c, funding $57.1 million of capex and $512.3 million of acquisitions, including the roughly $385 million purchase of Teradyne's backplane and connection systems business (TCS) in December 2005. The balance sheet became more leveraged. Long-term debt rose to $781.0 million from $449.1 million after a July 2005 refinancing into a $1 billion unsecured revolving credit facility (expanded in November 2005) and $720.9 million of revolver borrowings at year-end.

Goodwill more than doubled to $886.7 million^d, and total assets reached $1.93 billion. Covenant ratios were comfortable (interest coverage 9.04x versus a 3x minimum; leverage 1.96x versus a 3.50x maximum), and the company's credit ratings are BBB- (S&P) and Ba1 (Moody's).

The company also began a quarterly dividend of $0.03 per share in 2005 and adopted FAS 123R in 2006, which management estimates will add roughly $10 million of pre-tax expense. Key watch items for investors include concentration in the communications market (about 51% of sales), cable television capital spending cycles (about 12% of sales), integration risk from the TCS acquisition (excluded from the 2005 internal control assessment), the higher debt load and floating-rate exposure (partly hedged with swaps), and the continuing consolidation strategy in a fragmented interconnect market where the top 10 producers hold about 51% share.

02—Key points

Key Highlights

Net sales rose 18% to $1,808.1 million in 2005 (8% organic growth excluding acquisitions), with net income up 26% to $206.3 million and diluted EPS of $2.28 versus $1.82 in 2004.
Operating margin improved to 18.9% from 18.1%, driven by higher-margin application-specific products, operating leverage, and cost control, while the cable segment margin declined on material cost inflation.
Acquisition spending of $512.3 million, including the ~$385 million Teradyne Backplane & Connection Systems (TCS) purchase in December 2005, which added ~$373 million of annual sales and $239.3 million of goodwill.
Total debt increased to $781.0 million from $449.1 million, mainly from revolver borrowings under a new $1 billion unsecured credit facility; covenant ratios were well within limits, and interest rate swaps fix $650 million of floating-rate debt.
Strong cash generation: operating cash flow of $229.6 million covered $57.1 million of capex and $8.0 million of dividends, with the remainder funding acquisitions and share repurchases.
End-market exposure is concentrated: communications (51% of sales), industrial/automotive (25%), and commercial aerospace/military (24%); 56% of sales are outside the U.S.
Goodwill reached $886.7 million (about 46% of total assets), creating potential impairment risk if performance declines, though no impairment has been recorded to date.

03—Questions

Frequently Asked Questions

How did Amphenol's profitability change in 2005?
Net sales increased 18% to $1,808.1 million, operating income rose 24% to $343.3 million, and net income climbed 26% to $206.3 million. Operating margin expanded to 18.9% from 18.1%, and the effective tax rate fell to 33.0% from 34.0%, partly due to the American Jobs Creation Act of 2004. Organic growth excluding acquisitions was 8%.
What was the significance of the Teradyne (TCS) acquisition?
In December 2005, Amphenol acquired Teradyne's backplane and connection systems business for about $384.7 million in cash, plus roughly $8.8 million in transaction costs. TCS had 2005 sales of approximately $373 million and supplies high-speed, high-density printed circuit board interconnects to data communications, storage, server, and wireless infrastructure markets. The deal added $239.3 million of goodwill and $45.5 million of intangibles, and TCS was excluded from the 2005 internal control assessment, which is a point to monitor.
How much debt does Amphenol carry, and is it at risk?
Long-term debt, including the current portion, totaled $781.0 million at year-end 2005, up from $449.1 million. The company's $1 billion revolving credit facility matures in 2010 and carries a rate of LIBOR plus 60 basis points. Covenants are comfortably met (interest coverage 9.04x versus a 3x minimum; leverage 1.96x versus a 3.50x maximum). Credit ratings are BBB- from S&P and Ba1 from Moody's. The company has swaps fixing $650 million of floating-rate debt, and management believes its liquidity is sufficient for the next twelve months.
What are the main risks to Amphenol's business?
Key risks include dependence on the communications industry (about 51% of sales), where large customers exert pricing pressure; cable television capital spending cycles (about 12% of sales); changes in defense budgets (about 24% of sales); the need to keep launching new products (about 20% of sales came from products introduced in the last two years); raw material cost volatility (gold, copper, steel, aluminum); integration risk from acquisitions; and potential goodwill impairment, given that goodwill is $886.7 million of total assets of $1.93 billion.
What shareholder returns and upcoming cost changes should investors expect?
Amphenol began paying a quarterly dividend of $0.03 per share in 2005, with $10.8 million declared that year and the intent to continue. Share repurchases totaled $8.7 million in 2005, with about 3.3 million shares remaining under the authorization, which expires September 30, 2006. Starting in 2006, FAS 123R will add roughly $10 million of pre-tax stock compensation expense, and interest expense is expected to rise to about $40 million from $24.1 million, reflecting higher debt levels. Capex is planned at about $75 million for 2006.

04—Continue

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