Amphenol (APH) Ratings Affirmed by S&P; Outlook Stable

• U.S designer and manufacturer of interconnect and sensor products Amphenol Corp.'s 2014 results were in line with our expectations and illustrate the favorable environment in certain end markets such as automotive.
• We are affirming our 'BBB+' long-term corporate credit rating on the company.
• In addition, we are revising our liquidity assessment on Amphenol to "strong" from "adequate" (in accordance with our criteria).
• The stable outlook reflects our expectation that the company's strong market position and consistent operating performance will continue despite challenging market conditions in certain end markets such as military and networking equipment.

On Feb. 23, 2015, Standard & Poor's Ratings Services affirmed its 'BBB+' long-term corporate credit rating and 'A-2' short-term corporate credit rating on Wallingford, Conn.-based Amphenol (NYSE: APH). The outlook is stable. At the same time, we affirmed the 'BBB+' issue ratings on the company's senior debt.

The ratings reflect Amphenol's position as one of the leading manufacturers in the world in the highly fragmented and competitive interconnect and sensor industries. The worldwide market for interconnect was about $50 billion and for sensors was about $80 billion in 2014. The company serves about eight major end markets, with industrial (17% of 2014 revenue), mobile devices (17%), and automotive (15%) comprising the top three. This diversity enables the company to mitigate weakness in any particular market, such as military and networking equipment. Country risk is low reflecting broad geographic diversification with the U.S. accounting for about 30% of revenues, China 25%, and Europe 45%.

The company has made several strategic acquisitions in recent years that improved its position in several markets as well as filled in gaps in others. We expect the company to continue to make small to midsize acquisitions to broaden its portfolio and geographic presence. The company's $450 million acquisition of CASCO Automotive Group in August 2014 provides further market opportunities in the connectors and sensors markets, which are experiencing strong growth. In addition, the company's focus on costs and margin improvement has led to stable EBITDA margins in the mid-20% area in 2014. We expect the company to maintain this profitability over the next two years. Based on those factors we assess Amphenol's business risk profile as "satisfactory."

Amphenol's leverage was 1.5x at the end of 2014, up slightly from 1.3x a year ago. The increase in leverage is the result of the partially debt-funded acquisition of CASCO Automotive Group. We expect the company to maintain its current financial policies, which include balancing shareholder returns with growth initiatives, share repurchases, and strategic acquisitions. Dividends should continue to grow as earnings increase, and acquisitions and share repurchases will be funded through discretionary cash flow, which we expect to be at least $700 million annually over the next two years. We view the company's financial risk profile as "minimal" based on our expectation that the company will reduce leverage to below the 1.5x level over the next 24 months.

Our initial analytical outcome is 'a-'. Despite Amphenol's leading market position and consistent free operating cash flow (FOCF) generation, the company operates in a fragmented industry and has a relatively weaker market position and more limited business diversity compared to 'A'-rated companies across industries. This comparison has a one-notch negative effect, resulting in a corporate credit rating of 'BBB+.'

Based on the company's operating trends and outlook our base case assumes:

• U.S. real GDP of 3% in 2015
• Eurozone real GDP growth of 1%
• Asia-Pacific real GDP growth of 5.3%
• Revenue growth of about 3%, reflecting the continuing organic revenue growth trends experienced in 2014

We are revising our liquidity assessment on Amphenol to "strong" from "adequate" (per our criteria). The revision is based on our expectation that the company's sources of liquidity will exceed its uses by more than 1.5x over the next 24 months and will remain above 1x even if forecasted EBITDA were to decline by 30% while the company maintains sufficient covenant headroom. We expect the company would remain compliant with its covenants in the event of an EBITDA decline of this magnitude. A cash and short-term investments balance of about $1.3 billion at Dec. 31, 2014, and availability under a $1.5 billion commercial paper facility, support the company's liquidity. We expect the company to use about 50% of annual FOCF to fund share repurchases. The change to the liquidity assessment has no impact on the corporate credit rating.

The stable outlook reflects our expectation that the company's leading market position and consistent operating performance will continue despite challenging market conditions in certain end markets. We also expect the company to maintain leverage below 1.5x.

Deterioration in operating profitability or a more aggressive acquisition or financial policy leading to sustained leverage in the 2x area would result in a downgrade.

Given our view of the company's business risk profile and limited business diversity, an upgrade is not likely over the next 24 months.

You May Also Be Interested In

• Wells Fargo upgrades S&P 500 Industrials to favorable
• AT&T and Corning sign $3B fiber supply agreement
• Carnival surges on earnings beat and strong 2027 bookings