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APH > SEC Filings for APH > Form 10-K on 21-Feb-2014All Recent SEC Filings

Show all filings for AMPHENOL CORP /DE/

Form 10-K for AMPHENOL CORP /DE/


21-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

The following discussion and analysis of the results of operations for the three fiscal years ended December 31, 2013, 2012 and 2011 has been derived from and should be read in conjunction with the consolidated financial statements included in Part II, Item 8 herein.

Overview

The Company is a global designer, manufacturer and marketer of electrical, electronic and fiber optic connectors, interconnect systems, antennas, sensor and sensor-based products and coaxial and high-speed specialty cable. The Company operates through two reporting segments: (i) Interconnect Products and Assemblies and (ii) Cable Products and Solutions. In 2013, approximately 69% of the Company's sales were outside the U.S. The primary end markets for our products are:

information technology and communication devices and systems for the converging technologies of voice, video and data communications;

a broad range of industrial applications and traditional and hybrid-electric automotive applications; and

commercial aerospace and military applications.

The Company's products are used in a wide variety of applications by numerous customers. The Company encounters competition in its markets and competes primarily on the basis of technology innovation, product quality, price, customer service and delivery time. There has been a trend on the part of OEM customers to consolidate their lists of qualified suppliers to companies that have a global presence, can meet quality and delivery standards, have a broad product portfolio and design capability and have competitive prices. The Company has focused its global resources to position itself to compete effectively in this environment. The Company believes that its global presence is an important competitive advantage as it allows the Company to provide quality products on a timely and worldwide basis to its multinational customers.

The Company's strategy is to provide comprehensive design capabilities, a broad selection of products and a high level of service on a worldwide basis while maintaining continuing programs of productivity improvement and cost control in the areas in which it competes. The Company focuses its research and development efforts through close collaboration with its OEM customers to develop highly-engineered products that meet customer needs and have the potential for broad market applications and significant sales within a one-to-three year period. The Company is also focused on controlling costs. The Company does this by investing in modern manufacturing technologies, controlling purchasing processes and expanding into lower cost areas.

The Company's strategic objective is to further enhance its position in its served markets by pursuing the following success factors:

          Develop performance-enhancing interconnect solutions;

          Pursue broad diversification;

          Expand global presence;

          Control costs;

          Pursue strategic acquisitions and investments; and

          Foster collaborative, entrepreneurial management.


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For the year ended December 31, 2013, the Company reported net sales, operating income and net income attributable to Amphenol Corporation of $4,614.7 million, $896.8 million and $635.7 million, respectively, up 8%, 8% and 14%, respectively, from 2012. Sales and profitability trends are discussed in detail in "Results of Operations" below. In addition, a strength of the Company has been its ability to consistently generate cash. The Company uses cash generated from operations to fund capital expenditures and acquisitions, repurchase shares of its common stock, pay dividends and reduce indebtedness. In 2013, the Company generated operating cash flow of $769.1 million.

Results of Operations

The following table sets forth the components of net income attributable to Amphenol Corporation as a percentage of net sales for the periods indicated.

                                                         Year Ended December 31,
                                                        2013       2012      2011
Net sales                                                100.0 %    100.0 %  100.0 %
Cost of sales                                             68.5       68.7     68.4
Casualty loss related to flood                               -          -      0.5
Change in contingent acquisition-related obligations         -          -     (0.5 )
Acquisition-related expenses                               0.2          -      0.1
Selling, general and administrative expenses              11.9       12.0     12.4
Operating income                                          19.4       19.3     19.1
Interest expense                                          (1.4 )     (1.4 )   (1.1 )
Other income, net                                          0.3        0.2      0.2
Income before income taxes                                18.3       18.1     18.2
Provision for income taxes                                (4.5 )     (5.1 )   (4.8 )
Net income                                                13.8       13.0     13.4
Net income attributable to noncontrolling interests          -       (0.1 )   (0.1 )
Net income attributable to Amphenol Corporation           13.8 %     12.9 %   13.3 %

2013 Compared to 2012

Net sales were $4,614.7 million for the year ended December 31, 2013 compared to $4,292.1 million for the year ended December 31, 2012, an increase of 8% in U.S. dollars, 7% in local currencies and 4% organically (excluding both currency and acquisition impacts). Sales in the Interconnect Products and Assemblies segment (approximately 93% of net sales) increased 7% in 2013 in U.S. dollars and in local currencies and 4% organically compared to 2012 ($4,269.0 million in 2013 versus $3,987.3 million in 2012). The sales growth was driven by increases in nearly all of our served markets with contributions from both organic growth and the Company's acquisition program. Sales to the automotive market increased (approximately $104.0 million), driven primarily by participation in new programs, higher vehicle volumes and acquisitions. Sales to the IT and data communications equipment market increased (approximately $57.7 million), primarily due to broad-based strength in servers, storage and network hardware. Sales to the commercial aerospace market increased (approximately $54.0 million) due to increased demand driven by higher levels of airplane production and new airplane platforms and acquisitions. Industrial market sales increased (approximately $42.9 million), primarily reflecting the impact of acquisitions. Sales to the mobile networks market increased (approximately $23.0 million), primarily due to an increase in worldwide network build-outs with particular strength in North America and Europe. Sales to the mobile devices market increased slightly (approximately $4.6 million). This was partially offset by reductions in sales to the military market (approximately $9.8 million), primarily due to reductions in procurement by defense contractors related to budget uncertainties. Sales in the Cable Products and Solutions segment (approximately 7% of net sales) increased 13% in 2013 in U.S. dollars and 14% in local currencies and were down 3% organically compared to 2012 ($345.7 million in 2013 versus $304.8 million in 2012). Increased sales levels were due to a 2012 acquisition which was partially offset by overall lower spending at cable operators. Cable Products and Solutions sales are primarily in the broadband communications market.

Geographically, sales in the U.S. in 2013 increased approximately 4% ($1,430.6 million in 2013 versus $1,379.7 million in 2012) compared to 2012. International sales for 2013 increased approximately 9% in U.S. dollars and in local currencies ($3,184.1 million in 2013 versus $2,912.4 million in 2012) compared to 2012 with particular strength in Europe. The comparatively weaker U.S. dollar in 2013 had the effect of increasing net sales by approximately $15.4 million when compared to foreign currency translation rates in 2012.

The gross profit margin as a percentage of net sales was 31.5% in 2013 compared to 31.3% in 2012. The increase in gross profit margin as a percentage of sales relates primarily to higher margins in the Interconnect Products and Assemblies segment due primarily to increased volume and cost reduction actions. Operating margin in the Interconnect Products and Assemblies segment was 21.8%


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and 21.5% of sales in 2013 and 2012, respectively. Operating margin in the Cable Products and Solutions segment decreased to 13.4% in 2013 from 13.5% of sales in 2012, primarily as a result of market pricing and product mix. On a consolidated basis, operating income margin was 19.4%, up 10 basis points from 2012, which included the impact of acquisition-related expenses discussed below.

As separately presented in the Consolidated Statements of Income, the Company incurred $6.0 million and $2.0 million of acquisition-related expenses in 2013 and 2012, respectively, in connection with acquisitions made during each of these respective years. These expenses include professional fees, transaction-related fees and other external expenses. For the years ended December 31, 2013 and 2012, these expenses had an impact on net income of $4.6 million, or $0.02 per share, and $2.0 million, or $0.01 per share, respectively. Excluding the effect of these expenses, operating income margin was 19.6% in 2013 compared to 19.3% in 2012.

Selling, general and administrative expenses were $548.1 million and $512.9 million in 2013 and 2012 and represented approximately 11.9% of net sales for 2013 and 2012, respectively. Administrative expenses increased approximately $9.9 million in 2013 primarily related to increases in employee related benefits, stock-based compensation expense and amortization of acquisition-related identified intangible assets and represented approximately 4.6% and 4.7% of net sales in 2013 and 2012, respectively. Research and development expenses increased approximately $11.0 million in 2013 reflecting increases in expenses for new product development and represented approximately 2.2% of net sales for both 2013 and 2012. Selling and marketing expenses increased approximately $14.3 million in 2013 primarily related to the increase in sales volume and represented approximately 5.1% of net sales for both 2013 and 2012.

Interest expense was $63.6 million for 2013 compared to $59.6 million for 2012. The increase is primarily attributed to higher average debt levels from the Company's acquisitions and stock repurchase programs.

Other income, net, was $13.4 million for 2013 compared to $10.1 million for 2012, primarily related to interest income on higher levels of cash, cash equivalents and short-term investments.

The provision for income taxes was at an effective rate of 24.6% in 2013 and 28.2% in 2012. The 2013 tax rate reflects a decrease in tax expense and the 2012 tax rate reflects an increase in tax expense of $11.3 million, or $0.07 per diluted common share, resulting from the delay, by the U.S. government, in the reinstatement of certain federal income tax provisions for the year 2012 relating primarily to research and development credits and certain U.S. taxes on foreign income that are part of the tax provisions within the American Taxpayer Relief Act. Such tax provisions were reinstated on January 2, 2013 with retroactive effect to 2012. Under U.S. GAAP, the benefit to the Company of $11.3 million relating to the 2012 tax year was recorded as a benefit in the first quarter of 2013 at the date of reinstatement; as such, between the fourth quarter of 2012 and the first quarter of 2013, there is no net impact on the Company from an income statement perspective. The 2013 tax rate also reflects a reduction in tax expense of $3.6 million for tax reserve adjustments relating to the completion of the audits of certain of the Company's prior year tax returns. Excluding these impacts as well as the net impact of the acquisition-related expenses, the Company's effective tax rate for 2013 and 2012 was 26.3% and 26.7%, respectively.

The Company operates in over sixty tax jurisdictions, and at any point in time has numerous audits underway at various stages of completion. With few exceptions, the Company is subject to income tax examinations by tax authorities for the years 2010 and after. The Company is generally not able to precisely estimate the ultimate settlement amounts or timing until the close of an audit.
The Company evaluates its tax positions and establishes liabilities for uncertain tax positions that may be challenged by local authorities and may not be fully sustained, despite the Company's belief that the underlying tax positions are fully supportable. As of December 31, 2013, the amount of the liability for unrecognized tax benefits, which if recognized would impact the effective tax rate, was approximately $14.9 million, the majority of which is included in other long-term liabilities in the accompanying Consolidated Balance Sheets. Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted for changing facts and circumstances, including progress of tax audits and closing of statute of limitations. Based on information currently available, management anticipates that over the next twelve month period, audit activity could be completed and statutes of limitations may close relating to existing unrecognized tax benefits of approximately $1.8 million.

2012 Compared to 2011

Net sales were $4,292.1 million for the year ended December 31, 2012 compared to $3,939.8 million for the year ended December 31, 2011, an increase of 9% in U.S. dollars, 10% in local currencies and 5% organically (excluding both currency and acquisition impacts). Sales in the Interconnect Products and Assemblies segment in 2012 (approximately 93% of net sales) increased 9% in U.S. dollars, 10% in local currencies and 5% organically compared to 2011 ($3,987.3 million in 2012 versus $3,666.0 million in 2011). The Company achieved strong organic growth in the automotive, industrial, mobile devices, IT and data communications equipment, and commercial aerospace markets. Sales to the automotive market increased (approximately $121.7 million), driven primarily by acquisitions and growth in new electronics applications. Industrial market sales increased (approximately $79.2 million),


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primarily reflecting acquisitions and increased sales to the alternative energy and oil and gas markets. Sales to the mobile devices market increased (approximately $69.6 million), primarily due to increased demand on new mobile computing platforms. Sales to the IT and data communications equipment market increased (approximately $63.6 million), primarily due to increased sales of high speed and power products in latest generation servers. Sales to the commercial aerospace market increased (approximately $38.0 million), primarily due to higher airplane production volumes as well as new airplane platforms. This was partially offset by reductions in sales to the military market (approximately $22.9 million), primarily due to reductions in procurement by defense contractors related to budget uncertainties and a reduction in sales to the mobile networks market (approximately $26.6 million), primarily due to slowed demand at base station/equipment manufacturers. Sales in the Cable Products and Solutions segment in 2012 (approximately 7% of net sales) increased 11% in U.S. dollars, 14% in local currencies and 8% organically compared to 2011 ($304.8 million in 2012 versus $273.7 million in 2011). Organic growth was primarily due to increased demand in the broadband communications market.

Geographically, sales in the U.S. in 2012 increased approximately 9% ($1,379.7 million in 2012 versus $1,268.9 million in 2011) compared to 2011.
International sales for 2012 increased approximately 9% in U.S. dollars and 11% in local currencies ($2,912.4 million in 2012 versus $2,670.9 million in 2011) compared to 2011 with particular strength in Asia. The comparatively stronger U.S. dollar in 2012 had the effect of decreasing net sales by approximately $48.3 million when compared to foreign currency translation rates in 2011.

The gross profit margin as a percentage of net sales was 31.3% in 2012 compared to 31.6% in 2011. The decrease in gross profit margin as a percentage of sales relates primarily to lower margins in the Interconnect Products and Assemblies segment due primarily to product mix, partially offset by increased margins in the Cable Products and Solutions segment, primarily as a result of higher volumes and favorable product mix from an acquisition in 2012. Operating margin in the Interconnect Product and Assemblies segment was 21.5% of sales in both 2012 and 2011 as the lower gross margin was offset by lower selling, general, and administrative expenses. Operating margin in the Cable Products and Solutions segment increased to 13.5% in 2012 from 12.7% of sales in 2011, primarily as a result of higher gross margins. On a consolidated basis, operating margins improved from 19.1% in 2011 to 19.3% in 2012.

As separately presented in the Consolidated Statements of Income, the Company incurred $2.0 million of acquisition-related expenses in both 2012 and 2011 in connection with acquisitions made during each of these respective years. For the years ended December 31, 2012 and 2011, these expenses had an impact of $2.0 million and $1.8 million on net income, respectively, or $0.01 per share for each year.

Selling, general and administrative expenses were $512.9 million and $486.3 million in 2012 and 2011. Selling, general, and administrative expenses increased approximately 5% in 2012 over 2011, compared to a 9% increase in sales, and therefore, declined as a percentage of sales from 12.4% in 2011 to 12.0% in 2012. The decrease as a percentage of sales relates primarily to cost control actions and product mix. Administrative expenses increased approximately $24.5 million in 2012, primarily related to increases in stock-based compensation expense, salaries and employee-related benefits and amortization of acquisition-related identified intangible assets, and represented approximately 4.7% and 4.5% of sales for 2012 and 2011, respectively. Research and development expenditures increased approximately $3.6 million in 2012, reflecting increases in expenditures for new product development and represented approximately 2.2% and 2.3% of sales for 2012 and 2011, respectively. Selling and marketing expenses in 2012 were consistent with amounts incurred in 2011 and represented approximately 5.1% and 5.6% of sales for 2012 and 2011, respectively.

Interest expense was $59.6 million for 2012 compared to $43.0 million for 2011. The increase is primarily attributed to higher average debt levels related to the stock repurchases made under the 2011 Program and higher average borrowing costs due primarily to the issuance of the 4.00% Senior Notes in January 2012.

Other income, net, was $10.1 million for 2012 compared to $8.1 million for 2011, primarily related to interest income on higher levels of cash, cash equivalents and short-term investments.

The provision for income taxes was at an effective rate of 28.2% in 2012 and 26.2% in 2011. The 2012 tax rate reflects an increase in tax expense of $11.3 million, or $0.07 per diluted common share, resulting from the delay, by the U.S. government, in the reinstatement of certain federal income tax provisions for the year 2012 relating primarily to research and development credits and certain U.S. taxes on foreign income that are part of the tax provisions within the American Taxpayer Relief Act. Such tax provisions were reinstated on January 2, 2013 with retroactive effect to 2012. Under U.S. GAAP, the benefit to the company of $11.3 million relating to the 2012 tax year will be recorded as a benefit in the first quarter of 2013 at the date of reinstatement; as such, between the fourth quarter of 2012 and the first quarter of 2013, there is no net impact on the Company from an income statement perspective. The 2011 tax rate reflects a decrease of $4.5 million, relating primarily to reserve adjustments from the favorable settlement of certain tax positions and the completion of prior year audits. Excluding these impacts as well as the net impact of the acquisition-related expenses, the loss incurred related to the 2011 Sidney flood and the 2011 contingent consideration gain, the Company's effective tax rate for 2012 and 2011 was 26.7% and 26.8%, respectively.


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Liquidity and Capital Resources

Cash flow provided by operating activities was $769.1 million for 2013 compared to $674.7 million for 2012. The increase in cash flow provided by operating activities for 2013 compared to 2012 is primarily due to an increase in net income and a net decrease in other long-term assets partially offset by a higher increase in components of working capital. Cash flow provided by operating activities was $674.7 million for 2012 compared to $565.2 million for 2011. The increase in cash flow provided by operating activities for 2012 compared to 2011 is primarily due to an increase in net income and a lower increase in components of working capital, partially offset by a net increase in other long-term assets.

The components of working capital as presented on the accompanying Consolidated Statements of Cash Flow increased $26.3 million in 2013 due primarily to increases in accounts receivable, inventory, and other current assets of $37.0 million, $8.0 million and $18.4 million, respectively, offset by increases in accounts payable and accrued liabilities of $6.9 million and $30.2 million, respectively. The components of working capital as presented on the accompanying Consolidated Statements of Cash Flow increased $8.9 million in 2012 due primarily to increases in inventory and accounts receivable of $45.9 million and $123.9 million, respectively, offset by increases in accounts payable and accrued liabilities of $99.4 million and $61.5 million, respectively. The components of working capital increased $110.3 million in 2011 due primarily to increases in inventory, accounts receivable, and other current assets of $88.5 million, $9.7 million and $8.9 million, respectively, and a decrease of $27.5 million in accounts payable, partially offset by a $24.3 million increase in accrued liabilities.

The following represents the significant changes in the amounts as presented on the accompanying Consolidated Balance Sheets in 2013. Accounts receivable increased $90.3 million to $1,001.0 million resulting from higher sales levels, the impact of acquisitions of $48.0 million and translation resulting from the comparatively weaker U.S. dollar at December 31, 2013 compared to December 31, 2012 ("Translation"). Days sales outstanding at December 31, 2013 and 2012 were 70 days and 72 days, respectively. Inventory increased $58.9 million to $792.6 million, primarily due to the impact of higher sales activity and the impact of acquisitions of $48.7 million. Inventory days at December 31, 2013 and 2012 were 80 and 83, respectively. Other current assets increased $51.8 million to $171.7 million, primarily due to increases in value added tax and other receivables and the impact of acquisitions of $26.9 million. Land and depreciable assets, net, increased $115.0 million to $532.4 million reflecting capital expenditures of $158.3 million, fixed assets from acquisitions of $66.2 million and Translation, partially offset by depreciation of $113.0 million and disposals. Goodwill and other long term assets increased $386.9 million to $2,478.0 million, primarily as a result of five acquisitions in the Interconnect Products and Assemblies segment completed during 2013 and Translation. Accounts payable increased $53.4 million to $549.9 million, primarily as a result of an increase in purchasing activity during the year related to higher sales levels, the impact of acquisitions of $33.6 million and Translation. Payable days at December 31, 2013 and 2012 were 56 days. Total accrued expenses increased $66.7 million to $358.5 million, primarily due to increases in accrued salaries and the impact of acquisitions of $52.4 million. Accrued pension and post-employment benefit obligations decreased $64.6 million to $180.0 million due primarily to a decrease in the projected benefit obligation as a result of an increase in the discount rate assumption. Other long-term liabilities increased $32.6 million due primarily to an increase in deferred tax liabilities.

In 2013, cash flow provided by operating activities of $769.1 million, net borrowings of $418.2 million, proceeds from the exercise of stock options including excess tax benefits from stock-based payment arrangements of $116.2 million, and proceeds from the disposal of fixed assets of $3.7 million, were used to fund acquisition related payments of $484.9 million, purchases of treasury stock of $324.7 million, capital expenditures of $158.4 million, dividend payments of $96.8 million, net purchases of short-term investments of $53.7 million and payments to shareholders of noncontrolling interests of $4.4 million, which resulted in an increase in cash and cash equivalents including the impact of Translation of $196.0 million.

In 2012, cash flow provided by operating activities of $674.7 million, net borrowings of $325.2 million, proceeds from the exercise of stock options including excess tax benefits from stock-based payment arrangements of $117.1 million, and proceeds from the disposal of fixed assets of $4.8 million, were used to fund purchases of treasury stock of $380.0 million, acquisition-related payments of $251.5 million, capital expenditures of $129.1 million, net purchases of short-term investments of $117.8 million, payments to shareholders of noncontrolling interests of $5.2 million and dividend payments of $70.1 million, which resulted in an increase in cash and cash equivalents including the impact of Translation of $175.8 million.

At December 31, 2013 and 2012, the Company had cash, cash equivalents and short-term investments of $1,192.2 million and $942.5 million, respectively. The majority of these amounts are located outside of the U.S. The Company does not currently intend to repatriate these funds. However, any repatriation of funds would result in the need to accrue and pay income taxes.

In July 2013, the Company amended its revolving credit facility (the "Revolving Credit Facility") to (1) reduce borrowing costs, (2) extend the maturity date to July 2018 and (3) increase aggregate commitments under the Revolving Credit Facility by $500.0 million, thereby increasing the Revolving Credit Facility to $1,500.0 million. At December 31, 2013, borrowings and availability under the Revolving Credit Facility were $927.3 million and $572.7 million, respectively. The interest rate on borrowings under the


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Revolving Credit Facility was at a spread over LIBOR. The Revolving Credit Facility requires payment of certain annual agency and commitment fees and requires that the Company satisfy certain financial covenants. At December 31, 2013, the Company was in compliance with the financial covenants under the Revolving Credit Facility.

In November 2009, the Company issued $600.0 million principal amount of unsecured 4.75% Senior Notes due November 2014 (the "4.75% Senior Notes") at 99.813% of their face value. Interest on the 4.75% Senior Notes is payable semi-annually on May 15 and November 15 of each year to the holders of record as of the immediately preceding May 1 and November 1. The Company may, at its . . .

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