AMPHENOL CORP /DE/ - 10-Q Quarterly Report

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o

As of November 2, 2004, the total number of shares outstanding of Class A Common Stock was 88,485,998.

AMPHENOL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

		September 30, 2004			December 31, 2003
		(Unaudited)
ASSETS
Current Assets:
	Cash and short term cash investments	$	22,523		$	23,533
	Accounts receivable, less allowance for doubtful accounts of $10,574 and $9,244, respectively		199,271			172,488
	Inventories		233,888			221,385
	Prepaid expenses and other assets		42,588			33,943

Total current assets			498,270			451,349

Land and depreciable assets, less accumulated depreciation of $332,055 and $327,469, respectively			185,441			178,266
Deferred debt issuance costs			5,948			7,014
Goodwill			546,282			516,335
Deferred taxes and other assets			21,761			28,420

		$	1,257,702		$	1,181,384

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
	Accounts payable	$	130,935		$	116,835
	Accrued interest		2,435			2,939
	Accrued salaries, wages and employee benefits		36,051			31,091
	Other accrued expenses		88,850			56,098
	Current portion of long-term debt		11,612			10,679

Total current liabilities			269,883			217,642

Long-term debt			458,231			532,280
Accrued pension and post employment benefit obligations			85,108			100,326
Other liabilities			12,707			7,730
Shareholders' Equity:
	Common stock		88			88
	Additional paid-in capital (deficit)		(215,502	)		(238,168	)
	Accumulated earnings		744,101			626,430
	Accumulated other comprehensive loss		(64,036	)		(64,944	)
	Treasury stock, at cost		(32,878	)		—

Total shareholders' equity			431,773			323,406

		$	1,257,702		$	1,181,384

AMPHENOL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(dollars in thousands, except per share data)

AMPHENOL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

(dollars in thousands)

AMPHENOL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(dollars in thousands, except per share data)

The condensed consolidated balance sheets as of September 30, 2004 and December 31, 2003, and the related consolidated statements of income for the three and nine months ended September 30, 2004 and 2003 and of cash flow for the nine months ended September 30, 2004 and 2003 include the accounts of Amphenol Corporation and its subsidiaries (the "Company"). The interim financial statements included herein are unaudited. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such interim financial statements have been included. The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the financial statements and notes included in the Company's 2003 Annual Report on Form 10-K.

The Company has two reportable business segments: (i) interconnect products and assemblies and (ii) cable products. The interconnect products and assemblies segment produces connectors and connector assemblies primarily for the communications, aerospace, industrial and automotive markets. The cable products segment produces coaxial and flat ribbon cable and related products primarily for communications markets, including cable television. The Company evaluates the performance of business units on, among other things, profit or loss from operations before interest expense, headquarter's expense allocations, income taxes and nonrecurring gains and losses. The Company's reportable segments are an aggregation of business units that have similar production processes and products.

The segment results for the three months ended September 30, 2004 and 2003 are as follows:

The segment results for the nine months ended September 30, 2004 and 2003 are as follows:

Reconciliation of segment operating income to consolidated income before taxes for the three and nine months ended September 30, 2004 and 2003:

Total comprehensive income for the nine months ended September 30, 2004 and 2003 is summarized as follows:

In the course of pursuing its normal business activities, the Company is involved in various legal proceedings and claims. Management does not expect that amounts, if any, which may be required to be paid by reason of such proceedings or claims will have a material effect on the Company's consolidated financial position or results of operations.

Certain operations of the Company are subject to federal, state and local environmental laws and regulations that govern the discharge of pollutants into the air and water, as well as the handling and disposal of solid and hazardous wastes. The Company believes that its operations are currently in substantial compliance with all applicable environmental laws and regulations and that the costs of continuing compliance will not have a material effect on the Company's financial position or results of operations.

The Company is currently involved in the environmental cleanup of several sites for conditions that existed at the time Amphenol was acquired from Allied Signal Corporation in 1987 (Allied Signal merged with Honeywell International Inc. in December 1999 ("Honeywell")). Amphenol and Honeywell were named jointly and severally liable as potentially responsible parties in relation to such sites. Amphenol and Honeywell have jointly consented to perform certain investigations and remedial and monitoring activities at two sites and they have been jointly ordered to perform work at another site. The costs incurred relating to these three sites are reimbursed by Honeywell based on an agreement (the "Honeywell Agreement") entered into in connection with the acquisition in 1987. For sites covered by the Honeywell Agreement, to the extent that conditions or circumstances occurred or existed at the time of or prior to the acquisition, Honeywell is obligated to reimburse Amphenol 100% of such costs. Honeywell representatives continue to work closely with the Company in addressing the most significant environmental liabilities covered by the Honeywell Agreement. Management does not believe that the costs associated with resolution of these or any other environmental matters will have a material adverse effect on the Company's financial position or results of operations. The environmental cleanup matters identified by the Company, including those referred to above, are covered under the Honeywell Agreement.

The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for stock options. Accordingly, no compensation cost has been recognized for the stock options. Had compensation cost for stock options been determined based on the fair value of the option at date of grant consistent with the provisions of FAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share for the three and nine

months ended September 30, 2004 and 2003 would have been reduced to the pro forma amounts indicated below:

On January 21, 2004, the Company announced a two-for-one stock split that was effective for shareholders of record as of March 17, 2004. The additional shares were distributed on March 29, 2004. The share information included herein has been restated to reflect the effect of such stock split.

The Company and its domestic subsidiaries have a defined benefit pension plan covering substantially all U.S. employees. Plan benefits are generally based on years of service and compensation and are noncontributory. Certain foreign subsidiaries have defined benefit plans covering their employees. Certain U.S. employees not covered by the defined benefit plan are covered by defined contribution plans. The Company also provides certain health care and life insurance benefits to certain eligible retirees through post-retirement benefit programs. The following is a summary, based on the most recent actuarial valuations, of the Company's net cost for pension benefits and other benefits for the three and nine months ended September 30, 2004 and 2003:

Based on the most recent actuarial calculations, the Company made a voluntary cash contribution to the U.S. defined benefit pension plan of $20 million in September 2004.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(dollars in millions, unless otherwise noted, except per share data)

Quarter and nine months ended September 30, 2004 compared to the quarter and nine months ended September 30, 2003

Net sales increased approximately 22% to $384.1 and 26% to $1,126.5 in the third quarter and nine months of 2004, respectively, compared to sales of $314.8 and $897.5, respectively, for the same periods in 2003. External sales of interconnect products and assemblies increased 24% in U.S. dollars and 20% in local currencies in the third quarter of 2004 compared to 2003 ($333.5 in 2004 versus $269.9 in 2003) and 26% in U.S. dollars and 22% in local currencies in the nine months of 2004 compared to 2003 ($980.5 in 2004 versus $777.9 in 2003). Sales increased in the Company's major end markets including the mobile communication, wireless infrastructure, military/aerospace, industrial, automotive and computer/data communications markets. Sales increases occurred in all major geographic regions and resulted primarily from the continuing development of new application specific and value added products, and to a lesser extent, from acquisitions. Sales of cable products increased 13% in the third quarter of 2004 compared to 2003 ($50.6 in 2004 versus $44.9 in 2003) and 22% in the nine months of 2004 compared to 2003 ($146.0 in 2004 and $119.6 in 2003). Such increase is primarily attributable to increased sales of coaxial cable products for the broadband communications market resulting from increased capital spending by both domestic and international cable operators for network upgrades and expansion. Sales in the United States in the third quarter and nine months of 2004 increased 23% and 26%, respectively, compared to the same periods in 2003 ($175.6 and $508.5 in 2004 versus $143.3 and $404.9 in 2003); and increased approximately 22% and 25%, respectively, in local currency compared to 2003. International sales for the third quarter and nine months of 2004 increased approximately 22% and 25%, respectively, in U.S. dollars ($208.5 and $618.0 in 2004 versus $171.5 and $492.6 in 2003) and increased approximately 16% and 19%, respectively, in local currency compared to 2003. Currency translation had the effect of increasing sales in the third quarter and nine months of 2004 by approximately $10.4 and $35.1, respectively, when compared to exchange rates for the 2003 period.

The gross profit margin as a percentage of net sales (including depreciation in cost of sales) was 33% and 32% for the third quarter and nine months of 2004, respectively, compared to 31% for both the third quarter and nine months of 2003. The increase in gross margin in the nine month period is generally attributable to an increase in margin for interconnect products and assemblies. The increase in gr

			Page
Part I		Financial Information
	Item 1.	Financial Statements:
		Condensed Consolidated Balance Sheets at September 30, 2004 (unaudited) and December 31, 2003	3
		Consolidated Statements of Income (unaudited) for the Three and Nine Months Ended September 30, 2004 and 2003	4
		Condensed Consolidated Statements of Cash Flow (unaudited) for the Nine Months Ended September 30, 2004 and 2003	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	10
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14
	Item 4.	Controls and Procedures	14
Part II		Other Information	15
	Item 1.	Legal Proceedings	15
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
	Item 3.	Defaults upon Senior Securities	15
	Item 4.	Submission of Matters to a Vote of Security Holders	15
	Item 5.	Other Information	15
	Item 6.	Exhibits	16
Signatures			19
Exhibit Index			20

		Three months ended September 30,						Nine months ended September 30,
		2004			2003			2004			2003
Net sales		$	384,103		$	314,798		$	1,126,483		$	897,465
Costs and expenses:
	Cost of sales, excluding depreciation and amortization		250,417			208,677			737,678			594,530
	Depreciation and amortization expense		9,736			9,133			28,902			27,507
	Selling, general and administrative expense		53,647			44,616			159,263			128,626

Operating income			70,303			52,372			200,640			146,802
Interest expense			(5,597	)		(7,179	)		(17,025	)		(22,997	)
Other expenses, net			(1,607	)		(2,447	)		(5,326	)		(5,856	)
Expense for early extinguishment of debt			—			—			—			(10,367	)

Income before income taxes			63,099			42,746			178,289			107,582
Provision for income taxes			(21,453	)		(14,534	)		(60,618	)		(36,578	)

Net income		$	41,646		$	28,212		$	117,671		$	71,004

Net income per common share—Basic		$	.47		$	.33		$	1.34		$	.83

	Average common shares outstanding—Basic		87,961,000			86,380,352			88,037,522			85,595,944

Net income per common share—Diluted		$	.47		$	.32		$	1.31		$	.81

	Average common shares outstanding—Diluted		89,467,309			88,537,954			89,735,753			87,640,436

		Nine months ended September 30,
		2004			2003
Net income		$	117,671		$	71,004
Adjustments for cash from operations:
	Depreciation and amortization		28,902			27,507
	Amortization of deferred debt issuance costs		1,066			1,096
	Expense for early extinguishment of debt		—			10,367
	Net change in non-cash components of working capital		(977	)		2,725
	Other long term assets and liabilities		(13,602	)		(7,350	)

Cash flow provided by operations			133,060			105,349

Cash flow from investing activities:
	Additions to property, plant and equipment		(29,240	)		(21,740	)
	Investments in acquisitions		(30,703	)		(34,457	)

Cash flow used by investing activities			(59,943	)		(56,197	)

Cash flow from financing activities:
	Net change in borrowings under revolving credit facilities		(13,865	)		2,015
	Decrease in borrowings under Bank Agreement		(61,000	)		(116,543	)
	Retirement of debt: old Bank Agreement		—			(439,500	)
	senior subordinated notes		—			(148,740	)
	fees and expenses relating to refinancing		—			(8,870	)
	Borrowings under new Bank Agreement		—			625,000
	Net change in receivables sold		11,200			6,100
	Payment of fees related to secondary stock offering		—			(77	)
	Proceeds from exercise of stock options including tax benefit		22,416			27,785
	Purchase of treasury stock		(32,878	)		—

Cash flow used by financing activities			(74,127	)		(52,830	)

Net change in cash and short-term cash investments			(1,010	)		(3,678	)
Cash and short-term cash investments, balance beginning of period			23,533			20,659

Cash and short-term cash investments, balance end of period		$	22,523		$	16,981

Cash paid during the period for:
	Interest	$	16,463		$	24,437
	Income taxes, net of refunds		31,627			24,776

	September 30, 2004		December 31, 2003
Inventories consist of:
Raw materials and supplies	$	55,168	$	48,917
Work in process		119,270		116,023
Finished goods		59,450		56,445

	$	233,888	$	221,385

		Interconnect products and assemblies				Cable products				Total
		2004		2003		2004		2003		2004		2003
Net sales
	—external	$	333,468	$	269,852	$	50,635	$	44,946	$	384,103	$	314,798
	—inter segment		674		400		3,803		2,258		4,477		2,658
Segment operating income			68,157		50,280		6,801		5,131		74,958		55,411

	Pension Benefits						Other Benefits				Pension Benefits						Other Benefits
	Three months ended September 30,										Nine months ended September 30,
	2004			2003			2004		2003		2004			2003			2004		2003
Service cost	$	1,760		$	1,478		$	21	$	18	$	5,276		$	4,434		$	63	$	54
Interest cost		4,399			4,224			194		200		13,195			12,672			582		600
Expected return on plan assets		(5,033	)		(4,926	)		—		—		(15,094	)		(14,778	)		—		—
Amortization of transition obligation		—			—			16		16		—			—			48		48
Amortization of net actuarial losses		1,382			854			225		214		4,146			2,562			675		642

Net benefits cost	$	2,508		$	1,630		$	456	$	448	$	7,523		$	4,890		$	1,368	$	1,344