Tyco International Ltd. (TYC) reported diluted GAAP earnings per share (EPS) from continuing operations of $0.42 for the fiscal second quarter of 2007. Results include charges of $0.05 per share for separation activities and $0.02 per share for restructuring in connection with Tyco’s previously-announced restructuring program. Revenue in the quarter increased 7 percent versus the prior year to $10.8 billion, with organic revenue growth of 4.4 percent.

Analysts were expecting the company to earn $0.47 on $10.77 billion in sales. But we are actually more concerned about the implications for Amphenol (APH). As we have noted before, Tyco’s electronics division is one of Amphenol’s primary competitors. By seeing how Tyco is doing in the market we can gauge how successful Amphenol’s efforts have been.

Tyco had this to say about the performance of Electronics:

Revenue increased 10 percent in the quarter with organic revenue growth of 6 percent. Solid growth in the automotive, industrial machinery, aerospace and defense, power utility, undersea telecommunications, mobile
phone and consumer electronics markets was partially offset by sales declines in the computer and communication service provider markets. Geographically, growth was strong in Europe and Asia. In North America, with the exception of strong growth in the undersea telecommunications business, revenue declined modestly. The segment’s book to bill ratio was 1.03 in the quarter.

Operating income decreased 2 percent to $455 million. Operating income before special items increased 1 percent. Operating earnings were adversely impacted by $43 million of higher material costs, primarily copper, and modestly higher investment in engineering and selling. Special items in the quarter included $15 million of restructuring and asset impairment costs compared to $4 million in the prior year quarter.

Amphenol had 14% sales growth but did not break out the organic growth from that of actuisitions. Their 18.8% operating margin far exceeded Tyco’s 13.3%. All in all, Amphenol seems to be more than holding its own against its larger foe.

When Amphenol (APH) reported earnings recently, we said we were surprised they didn’t beat by an even wider margin. Although copper prices rose late in the quarter, for much of the period they were near the low end of the recent range. Of course, now that the prices are once again rising the modest guidance increase appears appropriate. We just expected a little more oomph from the current quarter.
Today Investor’s Business Daily presents a somewhat different perspective in an article titled Connector Maker Amphenol Copes With Rising Prices:

It’s hard to avoid: If a firm’s costs go up, its profits go down.Amphenol (NYSE:APH - News) has impressed investors by bucking this logic.

The firm makes connectors, the thousands of different products that link electronic gizmos. Its connectors end up in cars, planes and almost any device that uses electric or fiber optic signals. It also makes cables.

To manufacture all this, it needs raw materials. They include gold, aluminum, copper and oil-based resin. Prices of those commodities have skyrocketed.

Yet with material costs rising, the firm managed to boost profits.

Raw materials were a “big head wind,” Shawn Harrison of Longbow Research said. “They were able to manage through that fantastically.”

How? Some of the price rises were passed on to customers. But mostly, analysts say, the firm kept other costs very low.

The article also includes this chart, which we think makes for a handy reference.

There is little doubt that Amphenol is well-managed and efficient. We just aren’t quite so sure about the assertion that skyrocketing raw materials costs acted as a headwind in the latest quarter.

Disclosure: Author is long STREETTRACKS GOLD (GLD) at time of publication.

2007 First Quarter Results Reported by Amphenol Corporation: Financial News - Yahoo! Finance

Amphenol Corporation (APH) reported today that first quarter 2007 diluted earnings per share increased 39% to $.43 compared to $.31 per share for the comparable 2006 period. (All per share amounts included herein have been adjusted to reflect the Company’s 2 for 1 stock split effective in March 2007.) Such per share amount for 2007 includes the benefit of $.01 per share relating to a reduction in tax expense of approximately $1.5 million for tax reserve adjustments relating to the completion of the audit of certain of the Company’s prior year tax returns. Sales for the first quarter 2007 increased 14% to $651.0 million compared to $569.0 million for the 2006 period. Currency translation had the effect of increasing sales by approximately $14.5 million in the first quarter 2007 compared to the 2006 period.

Consensus estimates were for $0.41 on $641 million of sales. Adjusting for the tax benefit they beat by a penny (2.4%) on EPS and by 1.6% on the top line. This level of earnings surprise is less than we are accustomed to seeing from Amphenol.

Furthermore, we noted in October that the company’s margins are inversely related to copper prices:

The company had been implementing price hikes along the way as copper and energy prices soared (both are crucial inputs for the cable segment.) However, there is a lag between when the company sees rising costs and when they can be fully passed along to customers. Margins were hurting during that lag time. Given the recent decline in energy prices and stabilization of copper prices, the company’s price increases appear to be catching up with costs.

Although copper prices rose late in the quarter, for much of the period they were near the low end of the recent range. Of course, now that the prices are once again rising the modest guidance increase appears appropriate. We just expected a little more oomph from the current quarter.

Shares of electronic component producer Amphenol (APH) soared yesterday after the company reported solid results. After reviewing the company’s earnings release and conference call, we had the following observations.

On their conference call, management noted that profits had improved in their cable business:

From a segment standpoint, in the cable segment margins increased to 12.4%, up 70 basis points from last year and 50 basis point sequentially from 2Q. Margins in this segment have been under a significant pressure as a result of increases in material and trade related costs driven by higher commodity and energy prices. The company has implemented multiple price increases in both 2005 and 2006 that have collectively begun to bring up margins in this segment.

The company had been implementing price hikes along the way as copper and energy prices soared (both are crucial inputs for the cable segment.)  However, there is a lag between when the company sees rising costs and when they can be fully passed along to customers. Margins were hurting during that lag time. Given the recent decline in energy prices and stabilization of copper prices, the company’s price increases appear to be catching up with costs. However, it is worth noting that costs could quickly swing the other way again. Given our beliefs on the direction of future commodity prices, we view these margin gains as temporary.

Operationally, however, the company continues to manage things well. The company came public following a leveraged buyout, and has diligently reduced its debt load since then. If they can continue to do so even while making additional acquisitions it is quite possible they will receive upgraded credit ratings in the near future. Here is management’s breakdown of this quarter’s sources and uses of cash flow:

The cash flow from operations along with 6 million of proceeds from the exercise of stock options were used to fund 24 million in capital expenditures, 13 million of stock buyback, 2.7 million in dividend payments, a debt reduction of 19 million, and an increase in cash on hand of approximately $17 million.

Finally, Amphenol also doesn’t seem to be experiencing the same degree of slowdown in their wireless end markets as have been seen by some other firms. In response to a question about this, management said:

We just feel that there are still tremendous opportunities out there. I always say that there is about half of the
world connect to market available to us because it’s essentially covered by many small companies that do not have our global presence, small companies that do not have our leading product and manufacturing technology. They do not have the cost levels that are required to compete on a global basis. So there is tremendous opportunity still to gain, and therefore we will certainly be undertaking – undergo any fluctuations that are there in the demand. But we can obviously continue to mitigate those fluctuations with our own undertakings to gain positions in emerging markets, in new segments of the business and so forth, and that is clearly our intent.

Summary: Amphenol beat earnings estimates by $0.04 in the first quarter, but $0.03 was due to the contribution of a recent acquisition (the company had guided for it to be slightly dilutive in the first half) and the remaining $0.01 was due to less conservative allowances for doubtful receivables. While the stronger than anticipated performance of the acquisition is positive, the resulting earnings surprise should be viewed as one-time in nature since the underlying business did not exceed expectations. Still, organic sales growth of 12 per cent is quite strong. The company has been paying down debt since its IPO out of leveraged buyout firm KKR, and its credit rating may earn an upgrade if debt reductions continue.

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