Amphenol Corporation: FY2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. The filing is an annual report rather than a standalone quarterly filing; fourth-quarter financial data are included in the unaudited quarterly table.
Business context
Amphenol designs, manufactures and markets electrical, electronic and fiber-optic connectors, interconnect systems, coaxial cable and specialty cable. Its two reportable segments are Interconnect Products and Assemblies and Cable Products. End-market exposure was approximately 61% information technology and communications, 16% industrial and automotive, and 23% commercial aerospace and military. Approximately 64% of sales were outside the United States, and China represented approximately 22% of sales.
Amphenol operated in approximately 60 countries, employed approximately 32,200 people and served more than 10,000 customer locations. Its largest customer represented approximately 7% of 2009 net sales.
Key financial metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Net sales | $2,820.1 million | $3,236.5 million | Down 13% |
| Gross profit | $886.6 million | $1,049.2 million | Down 16% |
| Gross margin | 31.4% | 32.4% | Down 100 basis points |
| Operating income | $488.9 million | $632.2 million | Down 23% |
| Operating margin | 17.3% | 19.5% | Down 220 basis points |
| Net income attributable to Amphenol | $317.8 million | $419.2 million | Down 24% |
| Diluted EPS | $1.83 | $2.34 | Down 22% |
| Cash flow from operations | $582.3 million | $481.5 million | Up 21% |
| Capital expenditures | $63.1 million | $108.3 million | Down 42% |
| Acquisitions | $280.0 million | $135.8 million | Up 106% |
Operating cash flow exceeded net income primarily because of working-capital reductions, including lower receivables and inventories. Cash and cash equivalents were $384.6 million at year-end; cash, cash equivalents and short-term investments totaled $422.4 million. Working capital was $917.2 million, compared with $701.0 million at December 31, 2008.
Total debt, including the current portion, was $753.4 million, compared with $786.5 million in 2008. The company issued $600.0 million of unsecured 4.75% Senior Notes due November 2014 and used the proceeds principally to repay revolving-credit borrowings. At year-end, $150.0 million was outstanding under the revolving facility, with $602.0 million available. The company was in compliance with its debt covenants; credit ratings were BBB- from Standard & Poor’s and Baa3 from Moody’s.
Material changes versus the prior comparable period
- Sales declined 13% in U.S. dollars, 12% in local currencies and 16% organically, reflecting the global economic downturn.
- Interconnect Products and Assemblies sales declined 13% to $2.57 billion; Cable Products sales declined 11% to $253.5 million.
- Sales decreased across industrial, telecommunications and data communications, automotive, wireless communications, military and aerospace markets. Cable sales were affected by weaker broadband and cable-television spending.
- Gross and operating margins contracted because of lower volumes. Cost-control actions partly offset the pressure, while Cable Products benefited from lower material costs and operational reductions.
- International sales declined 12% in U.S. dollars; the stronger U.S. dollar reduced reported sales by approximately $38.2 million.
- Amphenol invested approximately $280.0 million in acquisitions, including two significant acquisitions focused on military aerospace, wireless infrastructure and telecommunications and data communications. Goodwill increased by approximately $136.3 million to $1.37 billion.
- Operating cash flow increased despite lower earnings, supported by reductions in accounts receivable and inventory. Days sales outstanding improved to approximately 64 days from 72 days, and inventory days improved to 80 from 88.
- Share repurchases were $0 in 2009, compared with $293.6 million in 2008. The quarterly dividend remained $0.015 per share, or $0.06 annually.
Fourth-quarter information
Fourth-quarter 2009 net sales were $758.3 million, gross profit was $241.6 million, operating income was $138.5 million and net income attributable to Amphenol was $87.6 million. Diluted EPS was $0.50, including a $4.6 million pretax charge for early extinguishment of interest-rate swaps, equivalent to approximately $0.02 per share after tax.
Outlook, contingencies and unusual items
- Management expected 2010 capital expenditures of approximately $80 million to $100 million and believed available cash, operating cash flow, revolver capacity and access to credit markets would fund operating needs, debt service, dividends and planned investments for the next twelve months.
- Management estimated a possible voluntary U.S. pension contribution of approximately $15 million to $20 million in 2010. Pension and post-employment benefit obligations totaled approximately $176.5 million at year-end.
- Effective January 1, 2010, approximately $82.0 million of receivables previously sold under the securitization program would be recognized as accounts receivable and short-term debt. Management stated that credit ratios and ratings already treated the receivables as debt.
- Interest-rate swaps covering $150.0 million of floating-rate debt fixed LIBOR at 4.73% through July 2010. A 10% change in LIBOR was not expected to have a material effect on interest expense.
- Goodwill impairment testing through June 30, 2009 identified no impairment. Goodwill represented approximately 43% of total assets, making future operating performance and acquisition integration important valuation considerations.
- Backlog was $534 million at December 31, 2009 versus $505 million at December 31, 2008; management cautioned that short lead times, cancellations and demand fluctuations limit its usefulness as a demand indicator.
- Legal proceedings and environmental matters, including remediation obligations associated with sites covered by the Honeywell Agreement, were not expected by management to have a material adverse effect. The company remains exposed to potential future environmental claims.
- Primary risks include communications-market concentration, customer pricing pressure, defense-budget changes, global economic conditions, foreign-exchange movements, raw-material costs, acquisition integration and goodwill impairment, debt covenant compliance, pension assumptions and international operating risks.
Investor verification points
- Verify the sustainability of the 2009 operating cash flow improvement and the effect of lower receivables and inventory on future working capital.
- Assess whether communications, industrial, automotive and commercial aerospace demand recovered sufficiently to support margin expansion.
- Review the performance and integration of the 2009 acquisitions and the sensitivity of $1.37 billion of goodwill to operating deterioration.
- Reconcile reported debt and liquidity after the January 2010 consolidation of the $82 million receivables program.
- Monitor the 2011 revolver maturity, 2014 Senior Notes maturity, covenant headroom and refinancing requirements.
- Evaluate pension funding needs, raw-material pricing, foreign-exchange exposure and the potential effect of environmental and tax contingencies.
- Confirm management’s stated 2010 capital-expenditure expectations and the absence of formal revenue or earnings guidance in the filing.