Business Context and Reporting Period
Amphenol Corporation designs and manufactures electrical, electronic and fiber-optic connectors, interconnect systems, antennas, sensors and specialty cable. The company operates through Interconnect Products and Assemblies and Cable Products and Solutions.
This Form 10-K covers the fiscal year ended December 31, 2015. The filing also provides unaudited fourth-quarter 2015 data. Approximately 70% of 2015 sales were outside the United States; China represented approximately 30% of sales. Interconnect Products and Assemblies generated 94% of sales, and Cable Products and Solutions generated 6%.
Financial Performance and Position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $5,568.7 million | $5,345.5 million | Up 4% |
| Gross profit | $1,779.5 million | $1,693.8 million | Up 5% |
| Gross margin | 31.9% | 31.7% | Up 20 basis points |
| Operating income | $1,104.7 million | $1,034.6 million | Up 7% |
| Operating margin | 19.8% | 19.4% | Up 40 basis points |
| Net income attributable to Amphenol | $763.5 million | $709.1 million | Up 8% |
| Diluted EPS | $2.41 | $2.21 | Up 9% |
| Operating cash flow | $1,030.5 million | $880.9 million | Up 17% |
- 2015 organic sales growth was 3% in U.S. dollars, while local-currency sales growth was 8%; currency translation reduced sales by approximately $190.3 million.
- Interconnect Products and Assemblies sales increased 5% to $5,239.1 million, with a 22.1% segment operating margin versus 21.8% in 2014.
- Cable Products and Solutions sales decreased 7% to $329.6 million, with a 12.2% operating margin versus 12.4% in 2014.
- Growth was led by automotive, mobile devices, industrial and IT/data communications. Mobile networks, commercial aerospace, military and broadband communications declined.
- Cash, cash equivalents and short-term investments totaled $1,760.4 million at year-end, compared with $1,329.6 million in 2014. Working capital was $2,841.6 million.
- Total debt, including the current portion, was $2,813.5 million, compared with $2,656.2 million in 2014. Commercial paper outstanding was $823.9 million, and there were no borrowings under the $1.5 billion revolving credit facility.
- Capital expenditures were $172.1 million, or $163.4 million net of asset disposals. The company expects 2016 capital expenditures of approximately $180 million to $200 million.
- Dividends declared increased to $163.7 million, or $0.53 per share, from $140.6 million, or $0.45 per share, in 2014. The quarterly dividend was increased to $0.14 per share beginning in the third quarter of 2015.
- The company repurchased 4.5 million shares for $248.9 million during 2015. Approximately 5.5 million shares remained authorized for repurchase as of January 31, 2016.
Fourth-Quarter 2015 Data
| Metric | Q4 2015 | Q4 2014 |
|---|---|---|
| Net sales | $1,430.5 million | $1,426.5 million |
| Gross profit | $458.5 million | $456.7 million |
| Operating income | $289.0 million | $278.9 million |
| Net income attributable to Amphenol | $200.1 million | $193.5 million |
| Diluted EPS | $0.63 | $0.61 |
Material Changes Versus the Prior Comparable Period
- Sales growth moderated to 4% in 2015 from 16% in 2014, primarily reflecting currency headwinds and weaker communications-related demand.
- Profitability improved because of higher volumes, cost-reduction actions and stronger Interconnect segment margins. Acquisition-related expenses declined to $5.7 million from $14.1 million.
- Interest expense declined to $68.3 million from $80.4 million, despite higher average debt, because of lower borrowing rates and refinancing activity.
- Operating cash flow increased by $149.6 million, supported by higher earnings and a favorable working-capital change.
- Goodwill increased to $2,692.9 million from $2,616.7 million, primarily from three 2015 acquisitions, partially offset by foreign-currency translation. No goodwill impairment was recorded.
- Comprehensive income attributable to Amphenol increased to $619.8 million from $558.3 million, despite a $151.5 million foreign-currency translation loss in accumulated other comprehensive income.
- Backlog increased to approximately $1,121 million at December 31, 2015 from $1,043 million, although management cautions that short lead times and cancellable orders limit its predictive value.
Outlook, Risks and Unusual Items
- Management expects ongoing cash requirements to be funded through operating cash flow, cash and investments, commercial paper and available credit facilities, and believes liquidity is sufficient for the next twelve months.
- On January 8, 2016, Amphenol acquired FCI Asia Pte Ltd for approximately $1.179 billion, net of cash acquired, using cash held outside the United States. Purchase accounting and pro forma information were incomplete at the filing date and were to be disclosed in the first-quarter 2016 Form 10-Q.
- Approximately 49% of 2015 sales came from communications markets, including mobile devices, IT/data communications, mobile networks and broadband. Demand is exposed to rapid technology changes, customer concentration and operator capital-spending cycles.
- Apple-related sales, including sales through EMS companies and subcontractors believed to manufacture for Apple, represented approximately 11% of 2015 sales. No customer represented 10% or more in 2014 or 2013.
- Other key risks include foreign-currency movements, international political and economic conditions, raw-material costs and availability, defense-budget changes, customer pricing pressure, acquisition integration, cybersecurity, pension obligations and debt covenant compliance.
- At year-end, 29% of outstanding borrowings, or $828.9 million, were subject to floating interest rates. Management stated that a 10% change in LIBOR would not materially affect interest expense.
- Unfunded pension and post-employment obligations totaled approximately $266.0 million. Expected 2016 plan contributions were approximately $22.0 million.
- Legal proceedings arise from normal business activities, but management does not expect them to have a material adverse effect. The company also reported substantial compliance with environmental requirements.
- Foreign earnings of approximately $3.699 billion were designated for permanent reinvestment outside the United States; the filing does not provide a reliable estimate of the potential tax cost of repatriation.
Investor Verification Items
- Verify the first-quarter 2016 Form 10-Q for the completed purchase-price allocation, pro forma results and operating contribution of FCI.
- Assess whether automotive and mobile-device growth can offset weakness in mobile networks, broadband communications, aerospace and military markets.
- Review debt maturities, commercial-paper refinancing capacity and compliance with revolving-credit covenants following the FCI acquisition.
- Reconcile reported results with organic and local-currency growth to isolate acquisition and foreign-exchange effects.
- Monitor Apple-related concentration, communications-market exposure and customer pricing pressure.
- Evaluate goodwill of $2,692.9 million and the sensitivity of impairment testing to revenue, profitability and valuation assumptions.
- Review foreign-currency translation losses, permanently reinvested foreign earnings and potential repatriation taxes.