AMPHENOL CORP annual report, FY2012

Amphenol Corporation — Fiscal 2012 Form 10-K Summary

Business context and reporting period

Amphenol designs, manufactures and markets electrical, electronic and fiber-optic connectors, interconnect systems, antennas and specialty cable. Its two reportable segments are Interconnect Products and Assemblies and Cable Products. The filing covers the fiscal year ended December 31, 2012; quarterly data are provided for the fourth quarter ended December 31, 2012.

Primary end markets: information technology and communications, industrial and automotive, and military and commercial aerospace.
2012 sales mix: approximately 57% information technology and communications, 24% industrial and automotive, and 19% military and commercial aerospace.
Approximately 68% of sales were outside the United States; China represented approximately 25% of sales.
No customer accounted for more than 10% of annual sales.

Financial performance and position

Metric	2012	2011	Change
Net sales	$4,292.1 million	$3,939.8 million	+9%
Gross profit	$1,343.2 million	$1,243.7 million	+8%
Gross margin	31.3%	31.6%	-0.3 percentage points
Operating income	$828.3 million	$751.7 million	+10%
Operating margin	19.3%	19.1%	+0.2 percentage points
Net income attributable to Amphenol	$555.3 million	$524.2 million	+6%
Diluted EPS	$3.39	$3.05	+11%
Operating cash flow	$674.7 million	$565.2 million	+19%

Reported net margin was approximately 12.9% versus 13.3% in 2011.
Adjusted diluted EPS, excluding $2.0 million of acquisition-related costs and an $11.3 million tax cost related to delayed U.S. tax legislation, was $3.47. The filing does not present a corresponding adjusted 2011 EPS excluding the listed items because the reported comparable figure was also $3.05 after adjustments described by management.
Cash, cash equivalents and short-term investments increased to $942.5 million from $648.9 million.
Working capital increased to $1,818.4 million from $1,538.8 million; accounts receivable were $910.7 million and inventories were $733.7 million at year-end.
Total debt, including the current portion, was $1,706.5 million versus $1,377.1 million. Debt consisted principally of the $500.4 million revolving facility, $600.0 million of 4.75% senior notes due 2014, $500.0 million of 4.00% senior notes due 2022, and $100.0 million of receivables securitization borrowings.
Approximately $608.1 million, or 36% of borrowings, carried floating interest rates, primarily based on LIBOR.
Liquidity included $499.6 million of unused revolving credit capacity. Management stated that available cash, operating cash flow and borrowing capacity were sufficient to meet obligations for the next twelve months.

Cash deployment and capital allocation

Capital expenditures were $129.1 million; management expected 2013 capital expenditures of approximately $150 million to $170 million.
The Company spent $251.5 million on five acquisitions in 2012, primarily in automotive, commercial aerospace, industrial and communications markets.
The Company repurchased 6.6 million shares for approximately $380.0 million in 2012, completing the authorization under its prior repurchase program.
Dividends declared increased to $0.42 per share from $0.06 per share; dividends paid were $70.1 million versus $10.3 million.
In January 2013, the Board authorized a new program to repurchase up to 10 million shares through January 2015. Through February 15, 2013, 0.7 million shares had been repurchased for $50.3 million.

Material changes versus the prior comparable period

Sales growth was 10% in local currencies and 5% organically, excluding currency and acquisition effects. The stronger U.S. dollar reduced reported sales by approximately $48.3 million.
Interconnect Products and Assemblies sales increased 9% to $4.0 billion, with strength in automotive, industrial, mobile devices, IT and data communications, and commercial aerospace. Military aerospace and wireless infrastructure sales declined.
Cable Products sales increased 11% to $304.8 million, primarily from stronger broadband demand.
Consolidated gross margin declined modestly because of product mix and lower Interconnect segment margins, while operating margin improved through cost control and lower selling, general and administrative expense as a percentage of sales.
Interest expense increased to $59.6 million from $43.0 million, primarily because of higher average debt related to share repurchases and the 2022 senior notes issuance.
Goodwill increased by $186.6 million to $1,932.7 million, primarily from 2012 acquisitions. No goodwill impairment was recorded.
The 2011 period included a $21.5 million flood-related casualty charge and a $17.8 million gain from reducing a contingent acquisition obligation; neither item recurred in 2012.
Accounts receivable increased $143.5 million and inventory increased $83.9 million. Inventory days improved to 83 from 89, while days sales outstanding increased to 72 from 71.

Guidance, outlook, commentary and risks

Management emphasized organic growth, productivity, cost control, customer collaboration, global manufacturing and strategic acquisitions. The filing does not provide specific 2013 revenue or earnings guidance.
Backlog was approximately $800 million at December 31, 2012, up from $746 million, but management cautioned that orders may be canceled, often have short lead times, and may not indicate future demand.
Key risks include dependence on communications markets, rapid technology changes, pricing pressure from large customers, defense-budget reductions, competition, commodity costs, foreign exchange, political and economic instability outside the United States, acquisition integration and goodwill impairment.
Approximately $2.2 billion of foreign earnings were intended to remain permanently reinvested outside the United States; potential repatriation tax was not estimable.
Pension and post-employment obligations increased to $244.6 million from $207.0 million, primarily because of lower discount rates. Estimated 2013 pension contributions were approximately $21.0 million.
Unrecognized tax benefits that could affect the effective tax rate were approximately $16.2 million; management expected that audits or statute expirations could affect approximately $5.6 million over the following twelve months.
Legal proceedings and environmental matters were not expected by management to have a material effect. Certain cleanup costs are reimbursed by Honeywell under a historical agreement, but future environmental liabilities remain uncertain.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management and the auditor concluded that internal controls were effective as of December 31, 2012.

Most important facts for investors to verify

Whether organic growth and margin performance remain resilient if communications, mobile-device, defense or broadband demand weakens.
The refinancing or repayment plan for the $600.0 million of senior notes due in November 2014.
The effect of acquisition integration, goodwill of $1.9 billion and future acquisition spending on leverage and returns.
The geographic location and potential repatriation constraints of the $942.5 million of cash and short-term investments.
Exposure to floating-rate debt, foreign exchange movements and raw-material price inflation.
Future pension contributions, tax-audit settlements and the potential impact of environmental or legal contingencies.
Actual 2013 capital expenditures, share repurchases, dividend policy and any formal earnings guidance issued after the filing.