Amphenol Corporation — FY2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. The filing is an annual Form 10-K; fourth-quarter 2011 results are included in the annual and quarterly disclosures. Amphenol designs and manufactures electrical, electronic, fiber-optic connectors, interconnect systems, coaxial cable and specialty cable. Its principal markets are information technology and communications, industrial/automotive, and commercial aerospace/military.
Business Context
- 2011 sales mix was approximately 59% information technology and communications, 21% industrial/automotive, and 20% commercial aerospace and military.
- Approximately 68% of sales were outside the United States; China represented approximately 25% of sales.
- Interconnect Products and Assemblies generated approximately 93% of sales; Cable Products generated approximately 7%.
- No customer accounted for more than 10% of sales. The Company served more than 10,000 customer locations in approximately 70 countries.
- Backlog increased to $746 million at December 31, 2011, from $680 million at December 31, 2010, although management cautioned that backlog may not indicate future demand because of short lead times and cancellation rights.
Financial Performance and Liquidity
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $3,939.8 million | $3,554.1 million | +11% |
| Gross profit | $1,243.7 million | $1,158.2 million | +7% |
| Gross margin | 31.6% | 32.6% | Down 1.0 point |
| Operating income | $751.7 million | $700.4 million | +7% |
| Operating margin | 19.1% | 19.7% | Down 0.6 point |
| Net income attributable to Amphenol | $524.2 million | $496.4 million | +6% |
| Diluted EPS | $3.05 | $2.82 | +8% |
| Operating cash flow | $565.2 million | $424.9 million | +33% |
- Reported net income margin was approximately 13.3%, compared with 14.0% in 2010. The effective tax rate was 26.2%, versus 24.3%; excluding favorable tax adjustments, the rates were 26.8% and 27.4%, respectively.
- Cash, cash equivalents and short-term investments totaled $648.9 million at year-end, compared with $624.2 million in 2010. Working capital was $1.539 billion.
- Accounts receivable increased to $767.2 million, with days sales outstanding rising to approximately 71 from 68. Inventory increased to $649.9 million, with inventory days rising to 89 from 77.
- Capital expenditures were $100.2 million, acquisitions used $303.3 million, and share repurchases used $672.2 million. The Company generated a $10.8 million decrease in cash and cash equivalents after financing and investing activities.
- Total debt, including current maturities, was $1.377 billion, compared with $800.0 million in 2010. The Company had $307.6 million of undrawn availability under its $1.0 billion revolving credit facility and was in compliance with its covenants.
- At December 31, 2011, 56% of outstanding borrowings were subject to floating interest rates, primarily LIBOR. Management stated that a 10% change in LIBOR would not materially affect interest expense.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected strength in wireless devices, automotive, industrial, commercial aerospace and international markets. Organic sales growth was 6% in U.S. dollars, excluding currency and acquisition effects.
- Interconnect sales increased 11% in U.S. dollars, while Cable Products sales increased 5%. International sales increased 16% in U.S. dollars, compared with approximately 1% growth in U.S. sales.
- Margins declined because of higher commodity and other input costs, partially offset by volume, productivity actions and price increases.
- Two automotive acquisitions were completed during 2011, with approximately $303 million invested in acquisitions. Goodwill increased by approximately $212.8 million, primarily from these acquisitions.
- The Company repurchased 13.4 million shares for approximately $672.2 million, reducing weighted-average diluted shares to 171.8 million from 176.3 million.
- Research and development expense increased to $88.9 million from $77.6 million.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2012 capital expenditures of approximately $110 million to $130 million and believed available cash, operating cash flow and borrowing capacity would fund obligations for the next twelve months.
- In January 2012, the Company issued $500 million of 4.00% senior notes due 2022 and used the proceeds to repay revolving-credit borrowings. The Company also amended its receivables securitization facility, extending it to January 2013 and reducing certain fees.
- The quarterly dividend was increased from $0.015 per share to $0.105 per share beginning with the first-quarter 2012 dividend.
- A September 2011 flood at the Sidney, New York facility resulted in a $21.5 million pretax charge, or approximately $13.5 million after tax, and approximately $18 million of business interruption impact. The facility was substantially back to full production by the end of the fourth quarter.
- A $17.8 million contingent acquisition-related liability was reversed as an operating gain, producing an estimated $11.2 million after-tax benefit, because defense-market performance expectations declined and the related earn-out was no longer probable.
- Key risks include dependence on communications markets, defense-budget reductions, competition and pricing pressure, commodity-cost inflation, foreign exchange, international political and economic conditions, acquisition integration, goodwill impairment, interest rates and compliance with debt covenants.
- Goodwill totaled $1.746 billion, or approximately 39% of total assets. No goodwill impairment was recorded. The Company carried a $193.6 million pension funded-status deficit and estimated 2012 pension contributions of approximately $26 million.
- Legal proceedings and environmental matters were not expected by management to have a material effect. Environmental costs for three historic sites were reimbursed by Honeywell under an existing agreement.
Investor Verification Checklist
- Verify whether sales growth and margin performance continued after the 2011 recovery in communications, automotive, industrial and aerospace markets.
- Assess the effect of commodity prices, pricing actions and productivity improvements on gross and operating margins.
- Reconcile debt growth, the January 2012 note issuance, share repurchases and the sustainability of the increased dividend.
- Monitor working-capital trends, particularly the increase in inventory days and accounts-receivable days.
- Evaluate acquisition performance, integration execution and the carrying value of $1.746 billion of goodwill.
- Review exposure to communications and defense spending, foreign exchange, floating-rate debt and international operations.
- Confirm the financial and operational effects of the Sidney flood and any remaining insurance recoveries or remediation obligations.