10-K 1 a14-25561_110k.htm 10-K

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

x       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 2014

 

or

 

o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

 

Commission file number 1-10879

 

 

AMPHENOL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

(State of Incorporation)

 

22-2785165

(I.R.S. Employer Identification No.)

 

358 Hall Avenue, Wallingford, Connecticut 06492

203-265-8900

 

Securities registered pursuant to Section 12(b) of the Act:

 

Class A Common Stock, $.001 par value

 

New York Stock Exchange, Inc.

(Title of each class)

 

(Name of each exchange on which registered)

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes x  No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Act).  Yes o No x

 

The aggregate market value of Amphenol Corporation Class A Common Stock, $.001 par value, held by non-affiliates was approximately $13,355 million based on the reported last sale price of such stock on the New York Stock Exchange on June 30, 2014.

 

As of January 31, 2015, the total number of shares outstanding of Registrant’s Class A Common Stock was 310,195,600

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s definitive proxy statement, which is expected to be filed within 120 days following the end of the fiscal year covered by this report, are incorporated by reference into Part III hereof.

 

 

 



Table of Contents

 

INDEX

 

Page

 

 

PART I

 

 

Item 1.

Business

2

 

 

General

2

 

 

Our Strategy

3

 

 

Markets

4

 

 

Customers and Geographies

6

 

 

Manufacturing

6

 

 

Research and Development

7

 

 

Intellectual Property

7

 

 

Raw Materials

8

 

 

Competition

8

 

 

Backlog

8

 

 

Employees

8

 

 

Environmental Matters

8

 

 

Other

8

 

 

Cautionary Information for Purposes of Forward Looking Statements

8

 

Item 1A.

Risk Factors

9

 

Item 1B.

Unresolved Staff Comments

12

 

Item 2.

Properties

12

 

Item 3.

Legal Proceedings

12

 

Item 4.

Mine Safety Disclosures

13

PART II

 

 

 

 

Item 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

13

 

Item 6.

Selected Financial Data

15

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

25

 

Item 8.

Financial Statements and Supplementary Data

27

 

 

Report of Independent Registered Public Accounting Firm

27

 

 

Consolidated Statements of Income

28

 

 

Consolidated Statements of Comprehensive Income

29

 

 

Consolidated Balance Sheets

30

 

 

Consolidated Statements of Changes in Equity

31

 

 

Consolidated Statements of Cash Flow

32

 

 

Notes to Consolidated Financial Statements

33

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

52

 

Item 9A.

Controls and Procedures

52

 

Item 9B.

Other Information

53

PART III

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

53

 

Item 11.

Executive Compensation

53

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

53

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

53

 

Item 14.

Principal Accounting Fees and Services

53

PART IV

 

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

54

 

 

Signature of the Registrant

56

 

 

Signatures of the Directors

56

 

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PART I

 

Item 1. Business

 

General

 

Amphenol Corporation (together with its subsidiaries, “Amphenol” or the “Company”) is one of the world’s largest designers, manufacturers and marketers of electrical, electronic and fiber optic connectors, interconnect systems, antennas, sensors and sensor- based products and coaxial and high-speed specialty cable. The Company estimates, based on reports of industry analysts, that the worldwide sales of interconnect and sensor-related products were approximately $133 billion in 2014.

 

The Company was incorporated in 1987. Certain predecessor businesses, which now constitute part of the Company, have been in business since 1932.

 

The Company’s strategy is to provide its customers with comprehensive design capabilities, a broad selection of products and a high level of service on a world-wide basis while maintaining continuing programs of productivity improvement and cost control. The Company operates through two reporting segments: Interconnect Products and Assemblies and Cable Products and Solutions.  The Interconnect Product and Assemblies segment primarily designs, manufacturers and markets a broad range of connector and connector systems, value-add products and other products, including antennas and sensors, used in a broad range of applications in a diverse set of end markets.  Interconnect products include connectors, which when attached to an electrical, electronic or fiber optic cable, a printed circuit board or other device, facilitate transmission of power or signal.  Value-add systems generally consist of a system of cable, flexible circuits or printed circuit boards and connectors for linking electronic equipment.  The Cable Products and Solutions segment primarily designs, manufacturers and markets cable, value-added products and components for use primarily in the broadband communications and information technology markets as well as certain applications in other markets.

 

The table below provides a summary of our reporting segments, the 2014 net sales contribution of each segment, the primary industry and end markets that we service and our key products:

 

Reporting Segment

 

Interconnect Products and Assemblies

 

Cable Products and Solutions

 

 

 

 

 

% of  2014 Net Sales:

 

93%

 

7%

 

 

 

 

 

Primary End Markets

 

·      Automotive

·      Broadband Communications

·      Commercial Aerospace

·      Industrial

·      Information Technology and Data Communications

·      Military

·      Mobile Devices

·      Mobile Networks

 

·      Automotive

·      Broadband Communications

·      Industrial

·      Information Technology and Data Communications

·      Mobile Networks

 

 

 

 

 

 

Key Products

 

Connector and Connector Systems:

·      fiber optic interconnect products

·      harsh environment interconnect products

·      high speed interconnect products

·      power interconnect products, bus bars and distribution systems

·      radio frequency interconnect products and antennas

·      other connectors

 

Value-Add Products:

·      backplane interconnect systems

·      cable assemblies and harnesses

·      cable management products

 

Other:

·      antennas

·      flexible and rigid printed circuit boards

·      hinges

·      installation accessories

·      molded parts

·      sensors and sensor-based products

 

Cable:

·      coaxial cable

·      power cable

·      specialty cable

 

Value-Add Products:

·      cable assemblies

 

Components:

·      combiner/splitter products

·      connector and connector systems

·      fiber optic components

 

 

 

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·      switches

·      touch panels and lenses

 

 

 

Information regarding our operations by reporting segment and the Company’s long-lived assets appears in Note 11 of the Notes to the Consolidated Financial Statements.

 

Our Strategy

 

The Company’s overall strategy is to provide its customers with 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.  Specifically, our business strategy is as follows:

 

·                  Pursue broad diversification - The Company constantly drives to increase its diversity of markets, customers, applications and products.  Due to the tremendous variety of opportunities in the electronics industry, management believes that it is very important to ensure participation wherever significant growth opportunities are available.  This diversification positions us to proliferate our technologies across the broadest array of opportunities and reduces our exposure to any particular market, thereby reducing the variability of our financial performance.  An overview of the Company’s market and product participation is described under “Markets”.

 

·                  Develop performance-enhancing interconnect solutions - The Company seeks to expand the scope and number of its preferred supplier relationships.  The Company works closely with its customers at the design stage to create and manufacture innovative solutions.  These products generally have higher value-added content than other interconnect products and have been developed across the Company’s markets.  The Company is focused on technology leadership in the interconnect areas of radio frequency, power, harsh environment, high-speed and fiber optics, as well as sensors, as it views these technology areas to be of particular importance to our global customer base.

 

·                  Expand global presence - The Company intends to further expand its global manufacturing, engineering, sales and service operations to better serve its existing customer base, penetrate developing markets and establish new customer relationships.  As the Company’s global customers expand their international operations to access developing world markets and lower manufacturing costs in certain regions, the Company is continuing to expand its international footprint in order to provide just-in-time capabilities to these customers.  The majority of the Company’s international operations have broad capabilities including new product development.  The Company is also able to take advantage of the lower manufacturing costs in some regions, and has established low-cost manufacturing and assembly facilities in the three major geographical markets of the Americas, Europe/Africa and Asia.

 

·                  Control costs - The Company recognizes the importance in today’s global marketplace of maintaining a competitive cost structure.  Innovation, product quality and comprehensive customer service are not mutually exclusive with controlling costs.  Controlling costs is part of a mindset.  It is having the discipline to invest in programs that have a good return, maintaining a cost structure as flexible as possible to respond to changes in the marketplace, dealing with suppliers and vendors in a fair but prudent way to ensure a reasonable cost for materials and services and creating a mindset of managers to manage the Company’s assets as if they were their own.

 

·                  Pursue strategic acquisitions and investments - The Company believes that the fragmented interconnect industry continues to provide significant opportunities for strategic acquisitions.  Accordingly, we continue to pursue acquisitions of high growth potential companies with strong management teams that complement our existing business while further expanding our product lines, technological capabilities and geographic presence.  Furthermore, we seek to enhance the performance of acquired companies by leveraging Amphenol’s business strategy and access to low-cost manufacturing around the world.  In 2014, the Company invested $518 million in two separate acquisitions in the automotive and industrial markets, which broadened and enhanced the Company’s customer base and product offerings in these markets.

 

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·                  Foster collaborative, entrepreneurial management - Amphenol’s management system is designed to provide clear income statement and balance sheet responsibility in a flat organizational structure.  Each general manager is incented to grow and develop his or her business and to think entrepreneurially in providing innovative, timely and cost-effective solutions to customer needs.  In addition, Amphenol’s general managers have access to the resources of the larger organization and are encouraged to work collaboratively with other general managers to meet the needs of the expanding marketplace and to achieve common goals.

 

Markets

 

The Company sells products to customers in a diversified set of end markets.

 

Automotive - Amphenol is a leading supplier of advanced interconnect systems and sensors for a growing array of automotive applications.  In addition, Amphenol has developed advanced technology solutions for hybrid-electric vehicles and is working with the leading global customers to proliferate these advanced interconnect products into next-generation automobiles.  Sales into the automotive market represented approximately 15% of the Company’s net sales in 2014 with sales into the following primary end applications:

 

·                  engine management and control

·                  exhaust monitoring and cleaning

·                  hybrid-electric vehicles

·                  infotainment and communications

·                  lighting

·                  safety and security systems

·                  telematics systems

 

Broadband Communications - Amphenol is a world leader in broadband communication products for the cable, satellite and telco video and data networks, with industry-leading engineering, design and manufacturing expertise. The Company offers a wide range of products to service the broadband market, from customer premises cables and interconnect devices to distribution cable and fiber optic components, as well as interconnect products integrated into headend equipment.  Sales into the broadband communications market represented approximately 7% of the Company’s net sales in 2014 with sales into the following primary end applications:

 

·                  cable modems

·                  cable, satellite and telco networks

·                  high-speed internet hardware

·                  network switching equipment

·                  satellite interface devices

·                  set top boxes

 

Commercial Aerospace - Amphenol is a leading provider of high-performance interconnect systems and components to the rapidly expanding commercial aerospace market.  In addition to connector and assembly products, the Company also provides high technology cable management products.  All of Amphenol’s products are specifically designed to operate in the harsh environments of commercial aerospace while also providing substantial weight reduction, simplified installation and minimal maintenance procedures.  Sales into the commercial aerospace market represented approximately 6% of the Company’s net sales in 2014 with sales into the following primary end applications:

 

·                  aircraft and airframe power distribution

·                  avionics

·                  controls and instrumentation

·                  engines

·                  in-flight entertainment

·                  lighting and control systems

·                  wire bundling and cable management

 

Industrial - Amphenol is a technology leader in the design, manufacture and supply of high-performance interconnect systems and sensors for a broad range of industrial applications.  Amphenol’s core competencies include application-specific industrial interconnect solutions utilizing integrated assemblies, including with both cable and flexible printed circuits, as well as high-power interconnects requiring advanced engineering and system integration.  In particular, our innovative solutions facilitate the increasing demands of embedded computing and power distribution. Sales into the

 

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industrial market represented approximately 17% of the Company’s net sales in 2014 with sales into the following primary end applications:

 

·                  alternative and traditional energy generation

·                  factory and machine tool automation

·                  geophysical

·                  heavy equipment

·                  instrumentation

·                  LED lighting

·                  marine

·                  medical equipment

·                  rail mass transit

 

Information Technology and Data Communications - Amphenol is a global provider of interconnect solutions to designers and manufacturers of internet-enabling systems.  With our industry-leading high speed, power and fiber optic technologies, together with superior simulation and testing capability and cost effectiveness, Amphenol leads the way in interconnect development for the information technology (“IT”) and datacom market. Whether industry standard or application-specific designs are required, Amphenol provides customers with products that enable performance at the leading edge of next-generation, high-speed technology.  Sales into the IT and datacom market represented approximately 16% of the Company’s net sales in 2014 with sales into the following primary end applications:

 

·                  data centers

·                  internet appliances

·                  optical and copper networking equipment

·                  servers

·                  storage systems

 

Military - Amphenol is a world leader in the design, manufacture and supply of high-performance interconnect systems and antennas for harsh environment military applications. Such products require superior performance and reliability under conditions of stress and in hostile environments such as rapid and severe temperature changes, vibration, pressure, humidity and nuclear radiation.  Amphenol provides an unparalleled product breadth, from military specification connectors to customized high-speed board level interconnects; from flexible to rigid printed circuit boards; from backplane systems to completely integrated assemblies.  Amphenol is a technology leader, participating in all major programs from the earliest inception across each phase of the production cycle.  Sales into the military market represented approximately 11% of the Company’s net sales in 2014 with sales into the following primary end applications:

 

·                  avionics

·                  communications

·                  engines

·                  ground vehicles and tanks

·                  naval

·                  ordnance and missile systems

·                  radar systems

·                  rotorcraft

·                  satellite and space programs

·                  unmanned aerial vehicles

 

Mobile Devices - Amphenol designs and manufactures an extensive range of interconnect products, antennas and electromechanical components found in a wide array of mobile computing devices.  Amphenol’s capability for high-volume production of these technically demanding, miniaturized products, combined with our speed of new product introduction, are critical drivers of the Company’s long-term success in this market.  Sales into the mobile devices market represented approximately 17% of the Company’s  net sales in 2014 with sales into the following primary end applications:

 

·                  mobile and smart phones, including wearable devices and other accessories

·                  mobile computing devices, including laptops, tablets, ultrabooks and e-readers

 

Mobile Networks - Amphenol is a leading global interconnect solutions provider to the mobile networks market.  The Company offers a wide product portfolio.  The Company’s products are used in virtually every wireless communications standard, including 3G, 3.5G, 4G, LTE, TD-LTE and other future IP-based solutions.  In addition, the Company works with service providers around the world to offer an array of antennas and installation-related site solution interconnect products.  Sales into the mobile

 

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networks market represented approximately 11% of the Company’s net sales in 2014 with sales into the following primary end applications:

 

·                  cellular base stations

·                  cell site antenna systems

·                  combiners, filters and amplifiers

·                  core network controllers

·                  mobile switches

·                  radio links

·                  wireless routers

 

Customers and Geographies

 

The Company manufactures and sells a broad portfolio of products on a global basis to customers in various industries. Our customers include many of the leaders in their respective industries, and our relationships with them typically date back many years. We believe that this diversified customer base provides us an opportunity to leverage our skills and experience across markets and reduces our exposure to particular end markets.  Additionally, we believe that the diversity of our customer base is an important strength of the Company.

 

There has been a trend on the part of original equipment manufacturer (“OEM”) customers to consolidate their lists of qualified suppliers to companies that have a broad portfolio of leading technology solutions, design capability, global presence, and the ability to meet quality and delivery standards while maintaining competitive prices.  The Company has positioned its global resources to compete effectively in this environment.  As an industry leader, the Company has established close working relationships with many of its customers on a global basis. These relationships allow the Company to better anticipate and respond to these customer needs when designing new products and new technical solutions. By working with customers in developing new products and technologies, the Company is able to identify and act on trends and leverage knowledge about next-generation technology across our products.  In addition, the Company has concentrated its efforts on service, procurement and manufacturing improvements focused on increasing product quality and lowering product lead-time and cost.  For a discussion of risks related to the Company’s foreign operations, see the risk factor titled “The Company is subject to the risks of political, economic and military instability in countries outside the United States” in Part I, Item 1A herein.

 

The Company’s products are sold to thousands of OEMs in approximately 70 countries throughout the world. The Company also sells certain products to electronic manufacturing services (“EMS”) companies, to original design manufacturers (“ODMs”) and to communication network operators.  No single customer accounted for more than 10% of the Company’s net sales for the years ended December 31, 2014, 2013 or 2012.

 

The Company sells its products through its own global sales force, independent representatives and a global network of electronics distributors. The Company’s sales to distributors represented approximately 13% of the Company’s net sales in 2014.  In addition to product design teams and customer collaboration arrangements, the Company uses key account managers to manage customer relationships on a global basis such that it can bring to bear its total resources to meet the worldwide needs of its multinational customers.

 

Manufacturing

 

The Company is a global manufacturer employing advanced manufacturing processes including molding, stamping, plating, turning, extruding, die casting and assembly operations as well as proprietary process technology for specialty and coaxial cable production as well as sensor fabrication. Outsourcing of certain manufacturing processes is used when cost-effective. Substantially all of the Company’s manufacturing facilities are certified to the ISO9000 series of quality standards, and many of the Company’s manufacturing facilities are certified to other quality standards, including QS9000, ISO14000, TS16949 and TS16469.

 

The Company’s manufacturing facilities are generally vertically integrated operations from the initial design stage through final design and manufacturing.  The Company has an established manufacturing presence in over 30 countries. Our global coverage positions us near many of our customers’ locations and allows us to assist them in consolidating their supply base and lowering their production costs. In addition, the Company generally relies on local general management in every region, which we believe creates a strong degree of organizational stability and deeper understanding of local markets. We believe our balanced geographic distribution lowers our exposure to any particular geography.  The Company designs, manufactures and assembles its products at facilities in the Americas, Europe, Asia, Australia and Africa.  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.

 

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The Company employs a global manufacturing strategy to lower its production and logistics costs and to improve service to customers. The Company’s strategy is to maintain strong cost controls in its manufacturing and assembly operations. The Company is continually evaluating and adjusting its expense levels and workforce to reflect current business conditions and maximize the return on capital investments.  The Company sources its products on a worldwide basis.  To better serve certain high volume customers, the Company has established just-in-time facilities near these major customers.  The Company’s international manufacturing and assembly facilities generally serve the respective local markets and coordinate product design and manufacturing responsibility with the Company’s other operations around the world.  The Company has lower cost manufacturing and assembly facilities in China, Macedonia, Malaysia, Mexico, India, Indonesia, Eastern Europe and North Africa to serve regional and world markets.  For a discussion of risks attendant to the Company’s foreign operations, see the risk factor titled “The Company is subject to the risks of political, economic and military instability in countries outside the United States” in Part I, Item 1A herein.

 

Net sales by geographic region as a percentage of our total  net sales were as follows:

 

 

 

For the Years Ended

 

 

 

2014

 

2013

 

2012

 

United States

 

31

%

31

%

32

%

China

 

27

%

27

%

25

%

Other international locations

 

42

%

42

%

43

%

Total

 

100

%

100

%

100

%

 

Net sales by geographic area are based on the customer location to which the product is shipped.

 

Research and Development

 

The Company generally implements its product development strategy through product design teams and collaboration arrangements with customers, which result in the Company obtaining approved vendor status for its customers’ new products and programs.  The Company focuses its research and development efforts primarily on those product areas that it believes have the potential for broad market applications and significant sales within a one to three year period.  The Company seeks to have its products become widely accepted within the industry for similar applications and products manufactured by other potential customers, which the Company believes will provide additional sources of future revenue.  By developing application specific products, the Company has decreased its exposure to standard products, which generally experience greater pricing pressure.

 

Our research, development, and engineering efforts are supported by approximately 1,700 people and are performed primarily by individual operating units focused on specific markets and technologies.  The Company’s research and development expense for the creation of new and improved products and processes was $114.8 million, $103.4 million and $92.5 million for 2014, 2013 and 2012, respectively.

 

Intellectual Property

 

Patents and other proprietary rights are important to our business. We also rely upon trade secrets, manufacturing know-how, continuing technological innovations, and licensing opportunities to maintain and improve our competitive position. We review third-party proprietary rights, including patents and patent applications, as available, in an effort to develop an effective intellectual property strategy, avoid infringement of third-party proprietary rights, identify licensing opportunities, and monitor the intellectual property claims of others.

 

We own a large portfolio of patents that principally relate to electrical, optical, electronic, antenna and sensor products. We also own a portfolio of trademarks and are a licensee of various patents and trademarks. Patents for individual products extend for varying periods according to the date of patent filing or grant and the legal term of patents in the various countries where patent protection is obtained. Trademark rights may potentially extend for longer periods of time and are dependent upon national laws and use of the trademarks.

 

While we consider our patents and trademarks to be valued assets, we do not believe that our competitive position or our operations are dependent upon or would be materially impacted by the loss of any single patent or group of related patents.

 

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Raw Materials

 

The Company purchases a wide variety of raw materials for the manufacture of its products, including precious metals such as gold and silver used in plating, aluminum, steel, copper, titanium and metal alloy products used for cable, contacts and connector shells, certain rare earth metals used in sensors and plastic materials used for cable and connector bodies and inserts. Such raw materials are generally available throughout the world and are purchased locally from a variety of suppliers. The Company is generally not dependent upon any one source for raw materials, or if one source is used the Company attempts to protect itself through long-term supply agreements.  Information regarding our purchasing obligations related to commitments to purchase certain goods and services is disclosed in Note 13 of the Notes to the Consolidated Financial Statements.

 

Competition

 

The Company encounters competition in substantially all areas of its business. The Company competes primarily on the basis of technology innovation, product quality, price, customer service and delivery time.  Competitors within the Interconnect Products and Assemblies segment include TE Connectivity, Molex, Yazaki, Foxconn, Sensata, FCI, JST, Delphi, Hirose and JAE, among others. The primary competitors within the Cable Products and Solutions segment are Commscope and Belden, among others.  In addition, the Company competes with a large number of smaller companies who compete in specific geographies, markets or products.

 

Backlog

 

The Company estimates that its backlog of unfilled orders as of December 31, 2014 was approximately $1,043 million compared with backlog of approximately $1,032 million as of December 31, 2013.  Orders typically fluctuate from quarter to quarter based on customer demand and general business conditions. Unfilled orders may generally be cancelled prior to shipment of goods. It is expected that all or a substantial portion of the backlog will be filled within the next 12 months. Significant elements of the Company’s business, such as sales to the communications related markets (including wireless communications, information technology and data communications) and broadband communications and sales to distributors, generally have short lead times. Therefore, backlog may not be indicative of future demand.

 

Employees

 

As of December 31, 2014, the Company had approximately 50,700 employees worldwide, of which approximately 40,600 were located in lower cost regions. Of these employees, approximately 42,200 were hourly employees and the remainder were salaried employees. The Company believes that it has a good relationship with its unionized and non-unionized employees.

 

Environmental Matters

 

Certain operations of the Company are subject to environmental laws and regulations which govern the discharge of pollutants into the air and water, as well as the handling and disposal of solid and hazardous wastes. The Company believes that its operations are currently in substantial compliance with applicable environmental laws and regulations and that the costs of continuing compliance will not have a material effect on the Company’s financial condition, results of operations or cash flows.

 

Other

 

The Company’s annual report on Form 10-K and all of the Company’s other filings with the Securities and Exchange Commission (“SEC”) are available to view, without charge, on the Company’s web site, www.amphenol.com, as soon as reasonably practicable after they are filed electronically with the SEC. Copies are also available without charge, from Amphenol Corporation, Investor Relations, 358 Hall Avenue, Wallingford, CT 06492.

 

Cautionary Information for Purposes of Forward Looking Statements

 

Statements made by the Company in written or oral form to various persons, including statements made in this annual report on Form 10-K and other filings with the SEC, that are not strictly historical facts are “forward looking” statements. Such statements should be considered as subject to uncertainties that exist in the Company’s operations and business environment. Certain of the risk factors, assumptions or uncertainties that could cause the Company to fail to conform with expectations and predictions are described below under the caption “Risk Factors” in Part I, Item IA and elsewhere in this annual report on Form 10-K.  Should one or more of these risks or uncertainties occur, or should the Company’s assumptions

 

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prove incorrect, actual results may vary materially from those described in this annual report on Form 10-K as anticipated, believed, estimated or expected.  We do not intend to update these forward looking statements.

 

Item 1A. Risk Factors

 

Investors should carefully consider the risks described below and all other information in this annual report on Form 10-K. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties not presently known to the Company or that it currently deems immaterial may also impair the Company’s business and operations.

 

If actions taken by management to limit, monitor or control financial enterprise risk exposures are not successful, the Company’s business and consolidated financial statements could be materially adversely affected. In such case, the trading price of the Company’s common stock could decline and investors may lose all or part of their investment.

 

The Company is dependent on the communications industry, including information technology and data communications, wireless communications and broadband communications.

 

Approximately 51% of the Company’s 2014 net sales came from sales to the communications industry, including information technology and data communication, wireless communications and broadband communications, with 17% of the Company’s 2014 net sales coming from sales to the mobile device market. Demand for these products is subject to rapid technological change (see below—“The Company is dependent on the acceptance of new product introductions for continued revenue growth”). These markets are dominated by several large manufacturers and operators who regularly exert significant price pressure on their suppliers, including the Company. There can be no assurance that the Company will be able to continue to compete successfully in the communications industry, and the Company’s failure to do so could have an adverse effect on the Company’s financial condition and results of operations.

 

Approximately 7% and 11% of the Company’s 2014 net sales came from sales to the broadband communications and mobile networks markets, respectively.  Demand for the Company’s products in these markets depends primarily on capital spending by operators for constructing, rebuilding or upgrading their systems. The amount of this capital spending and, therefore, the Company’s sales and profitability will be affected by a variety of factors, including general economic conditions, consolidation within the communications industry, the financial condition of operators and their access to financing, competition, technological developments, new legislation and regulation of operators. There can be no assurance that existing levels of capital spending will continue or that spending will not decrease.

 

Changes in defense expenditures may reduce the Company’s sales.

 

Approximately 11% of the Company’s 2014 net sales came from sales to the military market. The Company participates in a broad spectrum of defense programs and believes that no one program accounted for more than 1% of its 2014 net sales. The substantial majority of these sales are related to both U.S. and foreign military and defense programs. The Company’s sales are generally to contractors and subcontractors of the U.S. or foreign governments or to distributors that in turn sell to the contractors and subcontractors. Accordingly, the Company’s sales are affected by changes in the defense budgets of the U.S. and foreign governments. A significant decline in U.S. defense expenditures and foreign government defense expenditures could adversely affect the Company’s business and have an adverse effect on the Company’s financial condition and results of operations.

 

The Company encounters competition in substantially all areas of its business.

 

The Company competes primarily on the basis of technology innovation, product quality, price, customer service and delivery time. Competitors include large, diversified companies, some of which have substantially greater assets and financial resources than the Company, as well as medium to small companies. There can be no assurance that additional competitors will not enter the Company’s existing markets, nor can there be any assurance that the Company will be able to compete successfully against existing or new competition, and the inability to do so could have an adverse effect on the Company’s business, financial condition and results of operations.

 

The Company is dependent on the acceptance of new product introductions for continued revenue growth.

 

The Company estimates that products introduced in the last two years accounted for approximately 20% of 2014 net sales. The Company’s long-term results of operations depend substantially upon its ability to continue to conceive, design, source and market new products and upon continuing market acceptance of its existing and future product lines. In the

 

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ordinary course of business, the Company continually develops or creates new product line concepts. If the Company fails to or is significantly delayed in introducing new product line concepts or if the Company’s new products are not met with market acceptance, its business, financial condition and results of operations may be adversely affected.

 

Covenants in the Company’s credit agreements may adversely affect the Company.

 

The Credit Agreement, dated as of July 31, 2013, among the Company, certain subsidiaries of the Company and a syndicate of financial institutions (the “Revolving Credit Facility”), contains financial and other covenants, such as a limit on the ratio of debt to earnings before interest, taxes, depreciation and amortization, a limit on priority indebtedness and limits on incurrence of liens. Although the Company believes none of these covenants is presently restrictive to the Company’s operations, the ability to meet the financial covenants can be affected by events beyond the Company’s control, and the Company cannot provide assurance that it will meet those tests. A breach of any of these covenants could result in a default under the Revolving Credit Facility. Upon the occurrence of an event of default under any of the Company’s credit facilities, the lenders could elect to declare amounts outstanding thereunder to be immediately due and payable and terminate all commitments to extend further credit. If the lenders accelerate the repayment of borrowings, the Company may not have sufficient assets to repay the Revolving Credit Facility and other indebtedness.

 

Downgrades of the Company’s credit rating could adversely affect the Company’s results of operations and financial condition.

 

If the credit rating agencies that rate the Company’s debt were to downgrade the Company’s credit rating in conjunction with a deterioration of the Company’s performance, it may increase the Company’s cost of capital and make it more difficult for the Company to obtain new financing, which could adversely affect the Company’s business.

 

Inability to access capital markets may adversely affect the Company’s business.

 

The Company’s ability to invest in its business and make strategic acquisitions requires access to the capital markets. If general economic and capital market conditions deteriorate significantly, it could impact the Company’s ability to access the capital markets. While the Company has not encountered any financing difficulties, the capital and credit markets have experienced significant volatility in recent years.  Market conditions could make it more difficult to access capital to finance investments and acquisitions.  As such, this could adversely affect the results of operations, financial condition and cash flows.

 

The Company’s results may be negatively affected by changing interest rates.

 

The Company is subject to interest rate volatility with regard to existing and future issuances of debt. The Company monitors the mix of fixed-rate and variable-rate debt, as well as the mix of short-term debt versus long-term debt. As of December 31, 2014, $676.3 million, or 25% of the Company’s outstanding borrowings were subject to floating interest rates, primarily due to changes in LIBOR.   In 2014, the Company issued $750.0 million principal amount of unsecured 2.55% senior notes due January 2019, $375.0 million principal amount of unsecured 1.55% senior notes due September 2017 and $375.0 million principal amount of unsecured 3.125% senior notes due September 2021.  The Company used all of the net proceeds of these offerings to repay the outstanding $600.0 million 4.75% senior notes that were due in November 2014 and to repay amounts outstanding under its Revolving Credit Facility and Credit Agreement, which reduced the Company’s interest expense.

 

As of December 31, 2014, the Company had the following unsecured Senior Notes outstanding:

 

Principal
Amount
(in millions)

 

Fixed
Interest
Rate

 

Maturity

 

Issue Price as a
% of Face
Value

 

$

 375.0

 

1.55

%

September 2017

 

99.898

%

750.0

 

2.55

 

January 2019

 

99.846

 

375.0

 

3.125

 

September 2021

 

99.912

 

500.0

 

4.00

 

February 2022

 

99.746

 

 

A 10% change in LIBOR at December 31, 2014 would have no material effect on the Company’s interest expense. The Company does not expect changes in interest rates to have a material effect on income or cash flows in 2015, although there can be no assurances that interest rates will not change significantly.

 

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The Company’s results may be negatively affected by foreign currency exchange rates.

 

The Company conducts business in many international currencies through its worldwide operations, and as a result is subject to foreign exchange exposure due to changes in exchange rates of the various currencies. Changes in exchange rates can positively or negatively affect the Company’s sales, gross margins and equity. The Company attempts to minimize currency exposure risk in a number of ways including producing its products in the same country or region in which the products are sold, thereby generating revenues and incurring expenses in the same currency, cost reduction and pricing actions, and working capital management.  However, there can be no assurance that these actions will be fully effective in managing currency risk, especially in the event of a significant and sudden decline in the value of any of the international currencies of the Company’s worldwide operations, which could have an adverse effect on the Company’s results of operations and financial condition.

 

The Company is subject to the risks of political, economic and military instability in countries outside the United States.

 

Non-U.S. markets account for a substantial portion of the Company’s business.  During 2014, non-U.S. markets constituted approximately 69% of the Company’s net sales, with China constituting approximately 27% of the Company’s net sales. The Company employs approximately 90% of its workforce outside the United States. The Company’s customers are located throughout the world and it has many manufacturing, administrative and sales facilities outside the United States. Because the Company has extensive non-U.S. operations as well as significant cash and cash investments held at institutions located outside of the U.S., it is exposed to risks that could negatively affect sales, profitability or the liquidity of such cash and cash investments including:

 

·                  tariffs, trade barriers and trade disputes;

·                  regulations related to customs and import/export matters;

·                  longer payment cycles;

·                  tax issues, such as tax law changes, examinations by taxing authorities, variations in tax laws from country to country as compared to the U.S. and difficulties in repatriating cash generated or held abroad in a tax-efficient manner;

·                  challenges in collecting accounts receivable;

·                  employment regulations and local labor conditions;

·                  difficulties protecting intellectual property;

·                  instability in economic or political conditions, including inflation, recession and actual or anticipated military or political conflicts; and

·                  the impact of each of the foregoing on outsourcing and procurement arrangements.

 

The Company may experience difficulties and unanticipated expense of assimilating newly acquired businesses, including the potential for the impairment of goodwill.

 

The Company has completed a number of acquisitions in the past few years and anticipates that it will continue to pursue acquisition opportunities as part of its growth strategy.  The Company may experience difficulty and unanticipated expense in integrating such acquisitions and the acquisitions may not perform as expected. At December 31, 2014, the total assets of the Company were $7,027.0 million, which included $2,616.7 million of goodwill (the excess of fair value of consideration paid over the fair value of net identifiable assets of businesses acquired). The Company performs annual evaluations for the potential impairment of the carrying value of goodwill.  Such evaluations have not resulted in the need to recognize an impairment. However, if the financial performance of the Company’s businesses were to decline significantly, the Company could incur a material non-cash charge to its income statement for the impairment of goodwill.

 

The Company may experience difficulties in obtaining a consistent supply of materials at stable pricing levels, which could adversely affect its results of operations.

 

The Company uses basic materials like aluminum, steel, copper, titanium, metal alloys, gold, silver, certain rare earth metals and plastic resins, in its manufacturing processes. Volatility in the prices of such materials and availability of supply may have a substantial impact on the price the Company pays for such materials. In addition, to the extent such cost increases cannot be recovered through sales price increases or productivity improvements, the Company’s margin may decline.

 

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The Company may not be able to attract and retain key employees.

 

The Company’s continued success depends upon its continued ability to hire and retain key employees at its operations around the world. Any difficulties in obtaining or retaining the management and other human resource competencies that the Company needs to achieve its business objectives may have an adverse effect on the Company’s performance.

 

Changes in general economic conditions and other factors beyond the Company’s control may adversely impact its business.

 

The following factors could adversely impact the Company’s business:

 

·                  A global economic slowdown in any of the Company’s market segments;

·                  The effects of significant changes in monetary and fiscal policies in the U.S. and abroad including significant income tax changes, currency fluctuations and unforeseen inflationary pressures;

·                  Rapid material escalation of the cost of regulatory compliance and litigation;

·                  Unexpected government policies and regulations affecting the Company or its significant customers;

·                  Unforeseen intergovernmental conflicts or actions, including but not limited to armed conflict, trade wars, and acts of terrorism or war;

·                  Unforeseen interruptions to the Company’s business with its largest customers, distributors and suppliers resulting from but not limited to, strikes, financial instabilities, computer malfunctions, inventory excesses, natural disasters, or other disasters such as fires or explosions;

·                  Increases in employment costs, particularly in low-cost regions in which the Company currently operates;

·                  Changes in assumptions, such as discount rates and lower than expected investment performance related to the Company’s benefit plans; and

·                  Failures of our management information or other systems due to cyber-attacks, computer viruses and other security breaches despite the Company’s implementation of information technology security measures.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

The Company’s fixed assets include plants and warehouses and a substantial quantity of machinery and equipment, most of which is general purpose machinery and equipment using tools and fixtures and in many instances having automatic control features and special adaptations. The Company’s plants, warehouses, machinery and equipment are in good operating condition, are well maintained and substantially all of its facilities are in regular use. The Company considers the present level of fixed assets along with planned capital expenditures as suitable and adequate for operations in the current business environment. At December 31, 2014, the Company operated a total of 330 plants, warehouses and offices of which (a) the locations in the U.S. had approximately 3.2 million square feet, of which 1.7 million square feet were leased; (b) the locations outside the U.S. had approximately 10.3 million square feet, of which 7.4 million square feet were leased; and (c) the square footage by segment was approximately 12.6 million square feet and 0.9 million square feet for the Interconnect Products and Assemblies segment and the Cable Products and Solutions segment, respectively.

 

The Company believes that its facilities are suitable and adequate for the business conducted therein and are being appropriately utilized for their intended purposes. Utilization of the facilities varies based on demand for the products. The Company continuously reviews its anticipated requirements for facilities and, based on that review, may from time to time acquire or lease additional facilities and/or dispose of existing facilities.

 

Item 3. Legal Proceedings

 

The Company and its subsidiaries have been named as defendants in several legal actions in which various amounts are claimed arising from normal business activities. Although the amount of any ultimate liability with respect to such matters cannot be precisely determined, in the opinion of management, such matters are not expected to have a material adverse effect on the Company’s financial condition or results of operations.

 

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Item 4. Mine Safety Disclosures

 

Not applicable.

 

PART II

 

Item 5.  Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

The Company effected the initial public offering of its Class A Common Stock in November 1991. The Company’s common stock has been listed on the New York Stock Exchange since that time under the symbol “APH.” The following table sets forth on a per share basis the high and low sales prices for the common stock for both 2014 and 2013 as reported on the New York Stock Exchange.  The Company effected a two-for-one stock split in the form of a stock dividend, payable to stockholders of record as of October 2, 2014, which was paid on October 9, 2014.  The per share information reflected below has been retroactively restated to reflect the effect of the stock split for all periods presented.

 

 

 

2014

 

2013

 

 

 

High

 

Low

 

High

 

Low

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

$

46.85

 

$

42.30

 

$

37.33

 

$

33.35

 

Second Quarter

 

49.38

 

45.78

 

41.65

 

35.75

 

Third Quarter

 

52.92

 

47.47

 

42.69

 

37.06

 

Fourth Quarter

 

55.50

 

45.73

 

44.59

 

37.42

 

 

The below graph compares the performance of Amphenol over a period of five years ending December 31, 2014 with the performance of the Standard & Poor’s 500 Stock Index and the Dow Jones U.S. Electrical Components and Equipment (“DJUSEC”) Index.

 

Total Daily Compounded Return indices reflect reinvested dividends and are weighted on a market capitalization basis at the time of each reported data point.  The comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast future performance.

 

 

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As of January 31, 2015, there were 36 holders of record of the Company’s common stock. A significant number of outstanding shares of common stock are registered in the name of only one holder, which is a nominee of The Depository Trust Company, a securities depository for banks and brokerage firms. The Company believes that there are a significant number of beneficial owners of its common stock.

 

Contingent upon declaration by the Board of Directors, the Company generally pays a quarterly dividend on its common stock.  In July 2013, the Board of Directors approved an increase in the quarterly dividend rate from $0.0525 to $0.10 per share effective with the third quarter 2013 dividend and in July 2014 approved a further increase in the quarterly dividend rate from $0.10 to $0.125 per share effective with the third quarter 2014 dividend.  Total dividends declared during 2014, 2013 and 2012 were $140.6 million, $96.8 million and $67.7 million, respectively. Total dividends paid in 2014, 2013 and 2012 were $101.9 million, $96.8 million and $70.1 million, respectively, including those declared in the prior year and paid in the current year.  The Company intends to retain the remainder of its earnings not used for dividend payments to provide funds for the operation and expansion of the Company’s business (including acquisition-related activity), to repurchase shares of its common stock and to repay outstanding indebtedness.

 

The Company’s Revolving Credit Facility contains financial covenants and restrictions, some of which may limit the Company’s ability to pay dividends, and any future indebtedness that the Company may incur could limit its ability to pay dividends.

 

The following table summarizes the Company’s equity compensation plan information as of December 31, 2014.

 

 

 

Equity Compensation Plan Information

 

Plan category

 

Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights

 

Weighted average
exercise price of
outstanding options,
warrants and rights

 

Number of securities
remaining available
for future issuance

 

 

 

 

 

 

 

 

 

Equity compensation plans approved by security holders

 

27,806,260

 

$

31.61

 

25,290,502

 

Equity compensation plans not approved by security holders

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

27,806,260

 

$

31.61

 

25,290,502

 

 

Repurchase of Equity Securities

 

In January 2013, the Company’s Board of Directors authorized a stock repurchase program under which the Company could repurchase up to 20 million shares of its common stock during the two year period ending January 31, 2015 (the “2013 Stock Repurchase Program”).   During the year ended December 31, 2014, the Company repurchased 11.4 million shares of its common stock for $539.4 million.  These treasury shares have been retired by the Company and common stock and retained earnings were reduced accordingly.   At December 31, 2014, the Company had repurchased all shares authorized under the 2013 Stock Repurchase Program.  The table below reflects the Company’s stock repurchases for the year ended December 31, 2014:

 

Period

 

Total
Number of
Shares
Purchased

 

Average Price Paid
per Share

 

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs

 

Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs

 

January 1 to January 31, 2014

 

1,386,000

 

$

43.07

 

1,386,000

 

10,042,610

 

February 1 to February 28, 2014

 

1,418,778

 

42.77

 

1,418,778

 

8,623,832

 

March 1 to March 31, 2014

 

17,188

 

43.88

 

17,188

 

8,606,644

 

April 1 to April 30, 2014

 

 

 

 

8,606,644

 

May 1 to May 31, 2014

 

2,455,228

 

47.61

 

2,455,228

 

6,151,416

 

June 1 to June 30, 2014

 

254,400

 

47.70

 

254,400

 

5,897,016

 

July 1 to July 31, 2014

 

47,800

 

48.14

 

47,800

 

5,849,216

 

August 1 to August 31, 2014

 

1,348,490

 

48.55

 

1,348,490

 

4,500,726

 

September 1 to September 30, 2014

 

1,600,000

 

51.80

 

1,600,000

 

2,900,726

 

October 1 to October 31, 2014

 

2,900,726

 

47.78

 

2,900,726

 

 

November 1 to November 30, 2014

 

 

 

 

 

December 1 to December 31, 2014

 

 

 

 

 

Total

 

11,428,610

 

$

47.20

 

11,428,610

 

 

 

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In January 2015, the Board of Directors authorized a stock repurchase program under which the Company may repurchase up to 10 million shares of common stock during the two year period ending January 20, 2017 (the “2015 Stock Repurchase Program”).  The price and timing of any such purchases under the 2015 Stock Repurchase Program will depend on factors such as levels of cash generation from operations, the volume of stock option exercises by employees, cash requirements for acquisitions, economic and market conditions and stock price.

 

Item 6.  Selected Financial Data

 

(dollars in millions, except per share data)

 

2014

 

2013

 

2012

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Operations

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

5,345.5

 

$

4,614.7

 

$

4,292.1

 

$

3,939.8

 

$

3,554.1

 

Net income attributable to Amphenol Corporation

 

709.1

(1)

635.7

(2)

555.3

(3)

524.2

(4)

496.4

(5)

Net income per common share—Diluted

 

2.21

(1)

1.96

(2)

1.69

(3)

1.53

(4)

1.41

(5)

 

 

 

 

 

 

 

 

 

 

 

 

Financial Condition

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and short-term investments

 

$

1,329.6

 

$

1,192.2

 

$

942.5

 

$

648.9

 

$

624.2

 

Working capital

 

2,458.5

 

1,547.7

 

1,818.4

 

1,538.8

 

1,337.1

 

Total assets

 

7,027.0

 

6,168.0

 

5,215.5

 

4,445.2

 

4,015.9

 

Long-term debt, including current portion

 

2,673.9

 

2,132.8

 

1,706.5

 

1,377.1

 

800.0

 

Shareholders’ equity attributable to Amphenol Corporation

 

2,907.4

 

2,859.5

 

2,430.0

 

2,171.8

 

2,320.9

 

Weighted average shares outstanding—Diluted

 

320,430,140

 

324,548,998

 

327,894,222

 

343,651,176

 

352,651,986

 

Cash dividends declared per share

 

$

0.45

 

$

0.305

 

$

0.21

 

$

0.03

 

$

0.03

 

 


(1)         Includes (a) acquisition-related expenses of $4.3 ($4.1 after-tax) relating to 2014 acquisitions and (b) $9.8 ($6.2 after-tax) relating to the acquired backlogs of completed acquisitions for an aggregate impact of $0.04 per share.  Net income per common share-diluted for the year ended December 31, 2014, excluding the effect of these items is $2.25.

 

(2)         Includes (a) acquisition-related expenses of $6.0 ($4.6 after tax) or $0.01 per share, relating to 2013 acquisitions, (b) $3.6, or $0.01 per share, income tax benefit due primarily to the favorable completion of prior year audits, and (c) an income tax benefit of $11.3, or $0.03 per 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.  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, or $0.03 per share, relating to the 2012 tax year was recorded as a benefit in the first quarter of 2013 at the date of reinstatement.  Net income per common share-diluted for the year ended December 31, 2013, excluding the effect of these items is $1.93.

 

(3)         Includes (a) acquisition-related expenses of $2.0 ($2.0 after tax) or $0.01 per share, relating to 2012 acquisitions and (b) income tax costs of $11.3, or $0.03 per share, relating to a 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.  Such tax provisions were reinstated on January 2, 2013 with retroactive effect to 2012.  Net income per common share-diluted for the year ended December 31, 2012, excluding the effect of these items is $1.73.

 

(4)         Includes (a) a tax benefit related to reserve adjustments from the favorable settlement of certain international tax positions and the completion of prior year audits of $4.5, or $0.01 per share, (b) a contingent payment adjustment of approximately $17.8 ($11.2 after tax) or $0.03 per share, (c) a charge for expenses incurred in connection with a flood at the Company’s Sidney, New York facility of $21.5 ($13.6 after tax) or $0.04 per share and (d) acquisition-related

 

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expenses of $2.0 ($1.8 after tax) relating to 2011 acquisitions.  Net income per common share-diluted for the year ended December 31, 2011, excluding the effect of these items is $1.53.

 

(5)         Includes a tax benefit related to reserve adjustments from the favorable settlement of certain international tax positions and the completion of prior year audits of $20.7, or $0.06 per share.  Net income per common share-diluted for the year ended December 31, 2010, excluding the effect of this item is $1.35.

 

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 years ended December 31, 2014, 2013 and 2012 has been derived from and should be read in conjunction with the consolidated financial statements included in Part II, Item 8 herein (dollars in millions except per share data).

 

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 2014, 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:

 

·                  Pursue broad diversification;

·                  Develop performance-enhancing interconnect solutions;

·                  Expand global presence;

·                  Control costs;

·                  Pursue strategic acquisitions and investments; and

·                  Foster collaborative, entrepreneurial management.

 

In 2014, the Company reported net sales, operating income and net income attributable to Amphenol Corporation of $5,345.5, $1,034.6 and $709.1, respectively, up 16%, 15% and 12%, respectively, from 2013.  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,

 

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repurchase shares of its common stock, pay dividends and reduce indebtedness.  In 2014, the Company generated operating cash flow of $880.9.

 

Results of Operations

 

The Company effected a two-for-one stock split in the form of a stock dividend, payable to stockholders of record as of October 2, 2014, which was paid on October 9, 2014.  The share and per share information included herein has been retroactively restated to reflect the effect of the stock split for all periods presented.

 

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,

 

 

 

2014

 

2013

 

2012

 

Net sales

 

100.0

%

100.0

%

100.0

%

Cost of sales

 

68.3

 

68.5

 

68.7

 

Acquisition-related expenses

 

0.2

 

0.2

 

 

Selling, general and administrative expenses

 

12.1

 

11.9

 

12.0

 

Operating income

 

19.4

 

19.4

 

19.3

 

Interest expense

 

(1.5

)

(1.4

)

(1.4

)

Other income, net

 

0.3

 

0.3

 

0.2

 

Income before income taxes

 

18.2

 

18.3

 

18.1

 

Provision for income taxes

 

(4.8

)

(4.5

)

(5.1

)

Net income

 

13.4

 

13.8

 

13.0

 

Net income attributable to noncontrolling interests

 

(0.1

)

 

(0.1

)

Net income attributable to Amphenol Corporation

 

13.3

%

13.8

%

12.9

%

 

2014 Compared to 2013

 

Net sales were $5,345.5 for the year ended December 31, 2014 compared to $4,614.7 for the year ended December 31, 2013, an increase of 16% in both U.S. dollars and in local currencies and 8% organically (excluding both currency and acquisition impacts) over the prior year.  Sales in the Interconnect Products and Assemblies segment (approximately 93% of net sales) increased 17% in 2014 in both U.S. dollars and in local currencies and 8% organically compared to 2013 ($4,992.6 in 2014 versus $4,269.0 in 2013).  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; partially offset by a small decrease in sales in the information technology and data communications equipment market.  Sales to the industrial market increased (approximately $276.2) reflecting particular growth within the energy and heavy equipment markets driven by the impact of organic growth and acquisitions. Sales to the automotive market increased (approximately $271.2), driven primarily by ongoing ramp ups of new, high-technology programs as well as higher vehicle production volumes and acquisitions.  Sales to the mobile networks market increased (approximately $112.4), primarily due to an increase in worldwide network build-outs.  Sales to the commercial aerospace market increased (approximately $49.7) primarily due to increased demand resulting from higher production levels of next generation jetliners and acquisitions.  Sales to the mobile devices market increased (approximately $46.6) primarily due to growth in smartphones and accessories.  Sales to the military market increased slightly (approximately $3.5). This was partially offset by reductions in sales to the information technology and data communications equipment market (approximately $20.2) due to declining networking product sales partially offset by growth in storage and server products.   Sales in the Cable Products and Solutions segment (approximately 7% of net sales) increased 2% in 2014 in U.S. dollars and 3% in both local currencies and organically compared to 2013 ($352.9 in 2014 versus $345.7 in 2013) primarily due to growth in international markets.  Cable Products and Solutions sales are primarily in the broadband communications market.

 

Geographically, sales in the U.S. in 2014 increased approximately 17% ($1,673.5 in 2014 versus $1,430.6 in 2013) compared to 2013.  International sales for 2014 increased approximately 15% in U.S. dollars and in local currencies ($3,672.0 in 2014 versus $3,184.1 in 2013) compared to 2013 with particular strength in Europe.  The comparatively stronger U.S. dollar in 2014 had the effect of decreasing net sales by approximately $3.1 when compared to foreign currency translation rates in 2013.

 

The gross profit margin as a percentage of net sales was 31.7% in 2014 compared to 31.5% in 2013.  The increase in gross profit margin as a percentage of sales relates primarily to higher gross profit margins in the Interconnect Products and Assemblies segment due to increased volume and cost reduction actions.

 

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Selling, general and administrative expenses were $645.1 and $548.0 and represented approximately 12.1% and 11.9% of net sales for 2014 and 2013, respectively.  The increase in Selling, general and administrative expenses as a percentage of sales in 2014 compared to 2013 is partially due to higher selling, general and administrative expenses on a percent of net sales basis arising from the inclusion in 2014 of an acquisition in the interconnect product and assemblies segment completed late in 2013 that has higher selling, general and administrative expenses on a percent of net sales basis compared to the average of the Company.  Administrative expenses increased approximately $46.7 in 2014 primarily related to increases in employee related benefits, stock-based compensation expense and amortization of acquisition-related identified intangible assets and represented approximately 4.8% and 4.6% of net sales in 2014 and 2013, respectively.  Research and development expenses increased approximately $11.4 in 2014 reflecting increases in expenses for new product development and represented approximately 2.1% of net sales in 2014 and 2.2% of net sales in 2013.  Selling and marketing expenses increased approximately $39.0 in 2014 primarily related to the increase in sales volume and represented approximately 5.1% of net sales for both 2014 and 2013.

 

On a consolidated basis, operating income margin was 19.4% for 2014 and 2013 and included the impact of acquisition-related expenses discussed below. Operating margin in the Interconnect Products and Assemblies segment was 21.8% for both 2014 and 2013 reflecting higher gross profit margin offset by higher selling, general and administrative expense as described above.   Operating margin in the Cable Products and Solutions segment decreased to 12.4% in 2014 from 13.4% in 2013, primarily as a result of market pricing and product mix.

 

As separately presented in the Consolidated Statements of Income, the Company incurred $14.1 and $6.0 of acquisition-related expenses in 2014 and 2013, respectively, in connection with acquisitions made during each of these respective years.  These expenses include amortization of the value associated with acquired backlog, professional fees, transaction-related fees, and other external expenses incurred in connection with acquisitions.  For the years ended December 31, 2014 and 2013, these expenses had the impact on net income of $10.2, or $0.04 per share, and $4.6, or $0.01 per share, respectively.  Excluding the effect of these expenses, operating income margin in 2014 and 2013 was 19.6% for both years.

 

Interest expense was $80.4 for 2014 compared to $63.6 for 2013. The increase is primarily attributable to higher average debt levels related to the Company’s stock repurchase program as well as acquisition activity.

 

Other income, net, increased to $18.3 in 2014 compared to $13.4 in 2013, 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 26.5% in 2014 and 24.6% in 2013.   The 2013 tax rate reflects a decrease in tax expense of $11.3, or $0.03 per 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.  The 2013 tax rate also reflects a reduction in tax expense of $3.6 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 2014 and 2013 was 26.5% and 26.3%, respectively.

 

The Company operates in the U.S. and numerous foreign taxable 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 2011 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, 2014, the amount of the liability for unrecognized tax benefits, which if recognized would impact the effective tax rate, was $19.2 the majority of which is included in Accrued pension benefit obligations and 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 $3.3.

 

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2013 Compared to 2012

 

Net sales were $4,614.7 for the year ended December 31, 2013 compared to $4,292.1 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 in 2013 versus $3,987.3 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), 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), primarily due to broad-based strength in servers, storage and network hardware.  Sales to the commercial aerospace market increased (approximately $54.0) due to increased demand driven by higher levels of airplane production and new airplane platforms and acquisitions.  Industrial market sales increased (approximately $42.9), primarily reflecting the impact of acquisitions.  Sales to the mobile networks market increased (approximately $23.0), 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).  This was partially offset by reductions in sales to the military market (approximately $9.8), 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 in 2013 versus $304.8 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 in 2013 versus $1,379.7 in 2012) compared to 2012.  International sales for 2013 increased approximately 9% in U.S. dollars and in local currencies ($3,184.1 in 2013 versus $2,912.4 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 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% 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 and $2.0 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 incurred in connection with acquisitions.  For the years ended December 31, 2013 and 2012, these expenses had an impact on net income of $4.6, or $0.01 per share, and $2.0, 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 and $512.9 in 2013 and 2012 and represented approximately 11.9% of net sales for 2013 and 2012, respectively.  Administrative expenses increased approximately $9.9 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 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 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 for 2013 compared to $59.6 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 for 2013 compared to $10.1 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, or $0.03 per diluted common

 

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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 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 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.

 

Liquidity and Capital Resources

 

Cash flow provided by operating activities was $880.9 for 2014 compared to $769.1 for 2013. The increase in cash flow provided by operating activities for 2014 compared to 2013 is primarily due to an increase in net income and a lower increase in the net components of working capital.  Cash flow provided by operating activities was $769.1 for 2013 compared to $674.7 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.

 

The components of working capital as presented on the accompanying Consolidated Statements of Cash Flow increased $18.9 in 2014 due primarily to increases in accounts receivable, inventory, and other current assets of $111.5, $51.6 and $10.0, respectively, offset by increases in accounts payable and accrued liabilities of $66.8 and $87.3, respectively. The components of working capital as presented on the accompanying Consolidated Statements of Cash Flow increased $26.3 in 2013 due primarily to increases in accounts receivable, inventory, and other current assets of $37.1, $8.0 and $18.4, respectively, offset by increases in accounts payable and accrued liabilities of $6.9 and $30.2, respectively.   The components of working capital as presented on the accompanying Consolidated Statements of Cash Flow increased $8.9 in 2012 due primarily to increases in inventory and accounts receivable of $45.9 and $123.9, respectively, offset by increases in accounts payable and accrued liabilities of $99.4 and $61.5, respectively.

 

The following represents the significant changes in the amounts as presented on the accompanying Consolidated Balance Sheets in 2014 compared to 2013.  Accounts receivable increased $122.7, to $1,123.7 resulting from higher sales levels, the impact of acquisitions of $37.4, offset by the effect of translation from exchange rate changes at December 31, 2014 compared to December 31, 2013 (“Translation”).   Days sales outstanding at December 31, 2014 and 2013 were 71 and 70, respectively.  Inventories increased $73.0, to $865.6, primarily due to the impact of higher sales activity and the impact of acquisitions of $32.8 offset by Translation. Inventory days at December 31, 2014 and 2013 were 79 and 80, respectively.  Other current assets increased $13.4 to $185.2, primarily due to increases in deferred tax assets of $14.0 and the impact of acquisitions.  Land and depreciable assets, net, increased $58.3 to $590.7 reflecting capital expenditures of $209.1 and net fixed assets from acquisitions of $8.6, partially offset by depreciation of $126.7, disposals of $7.6 and Translation.  Goodwill increased $327.6 to $2,616.7 primarily as a result of two acquisitions in the Interconnect Products and Assemblies segment completed during 2014 offset by Translation.  Intangibles and other long-term assets increased $126.6 primarily due to an increase in identifiable intangible assets resulting from acquisitions in 2014.  Accounts payable increased $68.5, to $618.4, primarily as a result of an increase in purchasing activity during the year related to higher sales levels, the impact of acquisitions of $24.4 offset by Translation. Payable days at December 31, 2014 and 2013 were 57 and 56, respectively. Total accrued expenses increased $28.4 to $386.9, primarily due to increases in accrued salaries, accrued interest and the impact of acquisitions of $16.0 offset by Translation.  Accrued pension benefit obligations and other long-term liabilities increased $124.6 to $371.2 due primarily to an increase in the projected benefit obligation relating to the Company’s pension plans as a result of a change in discount rate and mortality assumptions and an increase in deferred tax liabilities.

 

In 2014, cash flow provided by operating activities of $880.9, net borrowings of $528.9 and proceeds from the exercise of stock options including excess tax benefits from stock-based payment arrangements of $130.1 were used to fund  purchases of treasury stock of $539.4, acquisition related payments of $518.2, net capital expenditures of $203.5, dividend payments of $101.9, net purchases of short-term investments of $60.2 and payments to shareholders of noncontrolling interests of $3.6, which resulted in an increase in cash and cash equivalents of $113.1. Translation had the impact of decreasing cash and cash equivalents by $31.0 in 2014.

 

In 2013, cash flow provided by operating activities of $769.1, net borrowings of $418.2, proceeds from the exercise of stock options including excess tax benefits from stock-based payment arrangements of $116.2, and proceeds from the disposal of fixed assets of $3.7, were used to fund acquisition related payments of $484.9, purchases of treasury stock of

 

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$324.7, capital expenditures of $158.4, dividend payments of $96.8, net purchases of short-term investments of $53.7 and payments to shareholders of noncontrolling interests of $4.4, which resulted in an increase in cash and cash equivalents including the impact of Translation of $184.3.  Translation had the impact of increasing cash and cash equivalents by $11.7 in 2013.

 

At December 31, 2014 and 2013, the Company had cash, cash equivalents and short-term investments of $1,329.6 and $1,192.2, 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.

 

The ability to generate cash from operating activities is one of the Company’s fundamental financial strengths.  As a result, the Company has significant flexibility to meet its financial commitments.  The Company uses debt financing to lower the overall cost of capital and increase return on stockholders’ equity.  The Company has a history of borrowing funds domestically and continues to have the ability to borrow funds domestically at reasonable interest rates.  The Company’s debt financing includes the use of a commercial paper program, revolving credit facilities and senior notes as part of its overall cash management strategy.  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, 2014, the Company was in compliance with the financial covenants under the Revolving Credit Facility.

 

In 2014, the Company issued $750.0 principal amount of unsecured 2.55% senior notes due January 2019, $375.0 principal amount of unsecured 1.55% senior notes due September 2017 and $375.0 principal amount of unsecured 3.125% senior notes due September 2021.  The issuances of these senior notes were used to repay the $600.0 4.75% senior notes which matured during the year and to repay borrowings under the Company’s revolving credit facilities.   In September 2014, the Company entered into a commercial paper program pursuant to which the Company issues short-term unsecured commercial paper notes in one or more private placements.   Amounts available under the commercial paper program are borrowed, repaid and re-borrowed from time to time. The commercial paper program was rated A-2 by Standard & Poor’s and P-2 by Moody’s and is backstopped by the Revolving Credit Facility. The maximum aggregate principal amount of the commercial paper notes that may be outstanding under the commercial paper program at any time is $1,500.0 and commercial paper notes outstanding as of December 31, 2014 was $671.0.  The Company incurred fees and expenses related to the issuance of the commercial paper and senior notes of $11.1, which are capitalized and will be amortized to interest expense over the respective terms of the debt.   The Company reviews its optimal mix of short-term and long-term debt regularly and may replace certain amounts of commercial paper, short-term debt and current maturities of long-term debt with new issuances of long-term debt in the future.  Refer to Note 2 of the Consolidated Financial Statements for further information related to the Company’s debt.

 

The Company’s primary sources of liquidity are internally generated cash flow, the Company’s commercial paper program, credit facilities, and cash, cash equivalents and short-term investments.  The Company expects that ongoing cash requirements will be funded from these sources; however, the Company’s sources of liquidity could be adversely affected by, among other things, a decrease in demand for the Company’s products or a deterioration in certain of the Company’s financial ratios.  However, management believes that the Company’s cash, cash equivalents and short-term investment position, ability to generate strong cash flow from operations, and availability under its credit facilities will allow it to meet its obligations for the next twelve months.

 

The Company’s primary ongoing cash requirements will be for operating and capital expenditures, product development activities, repurchase of its common stock, funding of pension obligations, dividends and debt service.  The Company may also use cash to fund all or part of the cost of acquisitions. The Company expects that capital expenditures in 2015 will be approximately $180.0 to $200.0.   Contingent upon declaration by the Board of Directors, the Company generally pays a quarterly dividend on its common stock.  In July 2013, the Board of Directors approved an increase in the quarterly dividend rate from $0.0525 to $0.10 per share effective with the third quarter 2013 dividend and in July 2014 approved a further increase in the quarterly dividend rate from $0.10 to $0.125 per share effective with the third quarter 2014 dividend.  Total dividends declared during 2014, 2013 and 2012 were $140.6, $96.8 and $67.8, respectively. Total dividends paid in 2014, 2013 and 2012 were $101.9, $96.8 and $70.1, respectively, including those declared in the prior year and paid in the current year.   The Company’s debt service requirements consist primarily of principal and interest on the senior notes, the revolving credit facilities, and commercial paper program.

 

In January 2013, the Board of Directors authorized a stock repurchase program under which the Company could repurchase up to 20 million shares of its common stock during the two year period ending January 31, 2015 (the “2013 Stock Repurchase Program”). During the twelve months ended December 31, 2014, the Company repurchased 11.4 million shares of its common stock for $539.4.  These treasury shares have been retired by the Company and common stock and retained

 

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earnings were reduced accordingly.  At December 31, 2014, the Company had repurchased all shares authorized under the 2013 Stock Repurchase Program.

 

In January 2015, the Board of Directors authorized a stock repurchase program under which the Company may repurchase up to 10 million shares of common stock during the two year period ending January 20, 2017 (the “2015 Stock Repurchase Program”).  The price and timing of any such purchases under the 2015 Stock Repurchase Program will depend on factors such as levels of cash generation from operations, the volume of stock option exercises by employees, cash requirements for acquisitions, economic and market conditions and stock price.

 

Environmental Matters

 

Certain operations of the Company are subject to environmental laws and regulations which govern the discharge of pollutants into the air and water, as well as the handling and disposal of solid and hazardous wastes. The Company believes that its operations are currently in substantial compliance with applicable environmental laws and regulations and that the costs of continuing compliance will not have a material effect on the Company’s financial condition, results of operations or cash flows.

 

Inflation and Costs

 

The cost of the Company’s products is influenced by the cost of a wide variety of raw materials, including precious metals such as gold and silver used in plating; aluminum, copper, titanium and steel used for contacts, shells and cable; certain rare earth metals used in sensors; and plastic materials used in molding connector bodies, inserts and cable.  The Company strives to offset the impact of increases in the cost of raw materials, labor and services through price increases, productivity improvements and cost saving programs.  However, in certain markets, particularly in the communications related markets, this can be difficult and there is no guarantee that the Company will be successful.

 

Foreign Exchange

 

The Company conducts business in many international currencies through its worldwide operations, and as a result is subject to foreign exchange exposure due to changes in exchange rates of the various currencies. Changes in exchange rates can positively or negatively affect the Company’s sales, gross margins and equity. The Company attempts to minimize currency exposure risk in a number of ways including producing its products in the same country or region in which the products are sold, thereby generating revenues and incurring expenses in the same currency, cost reduction and pricing actions, and working capital management. However, there can be no assurance that these actions will be fully effective in managing currency risk, especially in the event of a significant and sudden decline in the value of any of the international currencies of the Company’s worldwide operations.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for such goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract(s); (3) determine the transaction price(s); (4) allocate the transaction price(s) to the performance obligations in the contract(s); and (5) recognize revenue when (or as) the entity satisfies a performance obligation.  The guidance also requires advanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016 with early adoption not permitted.  The amendments may be applied retrospectively to each period presented or with the cumulative effect recognized as of the date of initial application. The Company is currently evaluating ASU 2014-09.

 

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), amending FASB Accounting Standards Subtopic 205-40 to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Specifically, the amendments (1) provide a definition of the term “substantial doubt,” (2) require an evaluation every reporting period, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that financial statements are

 

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issued.  ASU 2014-15 is effective for fiscal years ending after December 15, 2016, and for annual periods and interim periods thereafter.  The Company is currently evaluating ASU 2014-15 and does not anticipate a material impact on its consolidated financial statements.

 

Pensions

 

The Company and certain of its domestic subsidiaries have defined benefit pension plans (“U.S. Plans”), which cover certain U.S. employees and which represent the majority of the plan assets and benefit obligations of the aggregate defined benefit plans of the Company.  The U.S. Plans’ benefits are generally based on years of service and compensation and are generally noncontributory. Certain U.S. employees not covered by the U.S. Plans are covered by defined contribution plans.  Certain foreign subsidiaries also have defined benefit plans covering their employees (the “International Plans”). The pension expense for the U.S. Plans and International Plans (the “Plans”) approximated $22.4, $30.1 and $25.2 in 2014, 2013 and 2012, respectively, and is calculated based upon a number of actuarial assumptions established on January 1 of the applicable year, including a weighted-average discount rate, mortality projections, rate increase of future compensation levels, and an expected long-term rate of return on the respective Plans’ assets.

 

The discount rate used by the Company for valuing pension liabilities is based on a review of high quality corporate bond yields with maturities approximating the remaining life of the projected benefit obligations. The discount rate for the U.S. Plans on this basis was 3.75% at December 31, 2014 and 4.60% at December 31, 2013. The mortality assumptions used by the Company reflect commonly used mortality tables and improvement scales for each plan. In 2014, the Company considered the updated mortality tables and improvement scales recently issued by the Society of Actuaries along with other mortality information available to develop updated mortality assumptions for the U.S. Plans. These updated mortality assumptions reflected increased life expectancies for plan participants. The decrease in the discount rate and the updated mortality assumptions resulted in an increase in the accrued benefit obligation for the U.S. Plans of approximately $80.0 at December 31,2014.

 

In developing the expected long-term rate of return assumption for the U.S. Plans, the Company evaluated input from its external actuaries and investment consultants as well as long-term inflation assumptions. Projected returns by such consultants are based on broad equity and bond indices.  The Company also considered its historical twenty-year compounded return of approximately 9%, which has been in excess of these broad equity and bond benchmark indices. The expected long-term rate of return on the U.S. Plans’ assets is based on an asset allocation assumption of 60% with equity managers (with an expected long-term rate of return of approximately 9%) and 40% with fixed income managers (with an expected long-term rate of return of approximately 7%).  The Company believes that the long-term asset allocation on average will approximate 60% with equity managers and 40% with fixed income managers. The Company regularly reviews the actual asset allocation and periodically rebalances investments to its targeted allocation when considered appropriate. Based on this methodology, the Company’s expected long-term rate of return assumption to determine the accrued benefit obligation of the U.S. Plans at December 31, 2014 and 2013 is 8.00%.

 

The Company made cash contributions to the Plans of $23.8, $23.3 and $21.8 in 2014, 2013 and 2012, respectively. The total liability for accrued pension and post-employment benefit obligations under the Company’s pension and post-retirement benefit plans increased in 2014 to $279.3 ($5.0 of which is included in other accrued expenses primarily representing required contributions to be made during 2015 for unfunded foreign plans) from $179.5 in 2013 primarily due to a decrease in the discount rate and update in mortality projections. The Company estimates that, based on current actuarial calculations, it will make a cash contribution to the Plans in 2015 of approximately $22.0, most of which is related to the U.S. Plans.  Cash contributions in subsequent years will depend on a number of factors including the investment performance of the respective Plans’ assets.

 

The Company offers various defined contribution plans for U.S. and foreign employees. Participation in these plans is based on certain eligibility requirements.  The Company matches the majority of employee contributions to the U.S. defined contribution plans with cash contributions up to a maximum of 5% of eligible compensation.  The Company provided matching contributions of approximately $3.8, $3.0 and $2.7 in 2014, 2013 and 2012, respectively.

 

Critical Accounting Policies and Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Estimates are adjusted as new information becomes available.  The Company’s critical accounting policies and estimates are set forth below.

 

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Revenue Recognition - The Company’s primary source of revenues is from product sales to its customers.  Revenue from sales of the Company’s products is recognized at the time the goods are delivered and title passes, provided the earning process is complete and revenue is measurable.  Delivery is determined by the Company’s shipping terms, which are primarily freight on board shipping point.  Revenue is recorded at the net amount to be received after deductions for estimated discounts, allowances and returns.  These estimates and reserves are determined and adjusted as needed based upon historical experience, contract terms and other related factors.  The shipping costs for the majority of the Company’s sales are paid directly by the Company’s customers.  In the broadband communications market (approximately 7% of net sales in 2014), the Company pays for shipping costs to the majority of its customers.  Shipping costs are also paid by the Company for certain customers in the Interconnect Products and Assemblies segment.  Amounts billed to customers related to shipping costs are immaterial and are included in net sales.  Shipping costs incurred to transport products to the customer which are not reimbursed are included in Selling, general and administrative expense.

 

Inventories - Inventories are stated at the lower of standard cost, which approximates average cost, or market. Provisions for slow-moving and obsolete inventory are made based on historical experience and product demand. Should future product demand change, existing inventory could become slow-moving or obsolete, and provisions would be increased accordingly.

 

Depreciable Assets - Property, plant and equipment are carried at cost less accumulated depreciation. The appropriateness and the recoverability of the carrying value of such assets are periodically reviewed taking into consideration current and expected business conditions.  The Company has not recorded any significant impairments.

 

Goodwill - The Company performs its annual evaluation for the impairment of goodwill for the Company’s reporting units as of each June 30. The Company has defined its reporting units as the two reportable business segments “Interconnect Products and Assemblies” and “Cable Products and Solutions”, as the components of these reportable business segments have similar economic characteristics.  In 2014, the Company utilized the option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.  In accordance with applicable guidance, an entity is not required to calculate the fair value of a reporting unit unless the Company determines, based on a qualitative assessment of events and circumstances, that it is more likely than not that its fair value is less than its carrying amount.   As of June 30, 2014, the Company has determined that it is more likely than not that the fair value of its reporting units is greater than their carrying amounts. The Company has not recognized any goodwill impairment in 2014, 2013 or 2012 in connection with its annual impairment test.

 

Defined Benefit Plan Obligation - The defined benefit plan obligation is based on significant assumptions such as mortality rates, discount rates and plan asset rates of return as determined by the Company in consultation with the respective benefit plan actuaries and investment advisors (Note 7).

 

Income Taxes - Deferred income taxes are provided for revenue and expenses which are recognized in different periods for income tax and financial statement reporting purposes.  At December 31, 2014, the cumulative amount of undistributed earnings of foreign affiliated companies was approximately $3.3 billion.  Deferred income taxes are not provided on undistributed earnings of foreign affiliated companies as it is the Company’s intention to reinvest these earnings permanently outside the U.S.  It is not practicable to estimate the amount of tax that might be payable if undistributed earnings were to be repatriated as there is a significant amount of uncertainty with respect to the tax impact of the remittance of these earnings due to the fact that dividends received from numerous foreign subsidiaries may generate additional foreign tax credits, which could ultimately reduce the U.S. tax cost of the dividend.  These uncertainties are further complicated by the significant number of foreign tax jurisdictions and entities involved.  Deferred tax assets are regularly assessed for recoverability based on both historical and anticipated earnings levels and a valuation allowance is recorded when it is more likely than not that these amounts will not be recovered. The tax effects of an uncertain tax position taken or expected to be taken in income tax returns are recognized only if it is “more likely than not” to be sustained on examination by the taxing authorities, based on its technical merits as of the reporting date.  The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.  The Company includes estimated interest and penalties related to unrecognized tax benefits in the provision for income taxes.

 

The significant accounting policies are more fully described in Note 1 to the Company’s Consolidated Financial Statements.

 

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Disclosures about contractual obligations and commitments

 

The following table summarizes the Company’s known obligations to make future payments pursuant to certain contracts as of December 31, 2014, as well as an estimate of the timing in which such obligations are expected to be satisfied.

 

 

 

Payment Due By Period

 

Contractual Obligations
(dollars in millions)

 

Total

 

Less than
1 year

 

1-3
years

 

3-5
years

 

More than
5 years

 

Debt (1)

 

$

2,673.9

 

$

1.6

 

$

375.5

 

$

1,421.8

 

$

875.0

 

Interest related to senior notes

 

337.4

 

56.6

 

113.3

 

84.1

 

83.4

 

Operating leases

 

99.6

 

35.5

 

40.4

 

17.0

 

6.7

 

Purchase obligations

 

247.9

 

219.7

 

27.1

 

1.1

 

 

Accrued pension and post-employment benefit obligations (2)

 

48.9

 

15.3

 

8.5

 

8.4

 

16.7

 

Total (3)

 

$

3,407.7

 

$

328.7

 

$

564.8

 

$

1,532.4

 

$

981.8

 

 


(1)         The Company has excluded expected interest payments on the Revolving Credit Facility, Credit Agreement and commercial paper program from the above table, as this calculation is largely dependent on average debt levels the Company expects to have during each of the years presented.  The actual interest payments made related to the Company’s Revolving Credit Facility, Credit Agreement and commercial paper program in 2014 were $7.5.  Expected debt levels, and therefore expected interest payments, are difficult to predict, as they are significantly impacted by such items as future acquisitions, repurchases of treasury stock, dividend payments as well as payments or additional borrowing made to reduce or increase the underlying revolver balance.

 

(2)         Included in this table are estimated benefit payments expected to be made under the Company’s unfunded pension and post-retirement benefit plans. The Company also maintains several funded pension and post-retirement benefit plans, the most significant of which covers its U.S. employees. Over the past several years, there has been no minimum requirement for Company contributions to the U.S. Plans due to prior contributions made in excess of minimum requirements, however, the Company did make a voluntary contribution of approximately $15.0 in 2014.  An anticipated minimum required contribution of approximately $9.7 was included in the above table related to the U.S. Plans for 2015. It is not possible to reasonably estimate expected required contributions in the above table after 2015 since several assumptions are required to calculate minimum required contributions, such as the discount rate and expected returns on pension assets.

 

(3)         As of December 31, 2014, the Company has non-current liabilities of approximately $19.2 recognized in accordance with the Income Taxes topic of the Accounting Standards Codification.  These liabilities have been excluded from the above table due to the high degree of uncertainty regarding the timing of potential future cash flows; it is difficult to make a reasonably reliable estimate of the amount and period in which all of these liabilities might be paid.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

The Company, in the normal course of doing business, is exposed to a variety of risks, including market risks associated with foreign currency exchange rates and changes in interest rates.

 

Foreign Currency Exchange Rate Risk

 

The Company conducts business in many international currencies through its worldwide operations, and as a result is subject to foreign exchange exposure due to changes in exchange rates of the various currencies. Changes in exchange rates can positively or negatively affect the Company’s sales, gross margins and equity. The Company attempts to minimize currency exposure risk in a number of ways including producing its products in the same country or region in which the products are sold, thereby generating revenues and incurring expenses in the same currency, cost reduction and pricing actions, and working capital management.  However, there can be no assurance that these actions will be fully effective in managing currency risk, especially in the event of a significant and sudden decline in the value of any of the international currencies of the Company’s worldwide operations.

 

As of December 31, 2014, the Company had five forward contracts of varying amounts that effectively fixed Euro, Great Britain Pound and U.S. dollar intercompany debt obligations into fixed Hong Kong dollar denominated obligations expiring

 

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at various times throughout 2015 concurrent with the underlying intercompany loans.  The fair value of the contracts at December 31, 2014 resulted in an asset of $11.0. A 10% change in foreign currency exchange rates at December 31, 2014 would not have a material effect on the value of hedge assets. The Company does not engage in purchasing forward exchange contracts for trading or speculative purposes.

 

Refer to Note 3 of the Consolidated Financial Statements for a discussion of derivative financial instruments.

 

Interest Rate Risk

 

The Company is subject to market risk from exposure to changes in interest rates based on the Company’s financing activities.  The Company manages its exposure to interest rate risk through a proportion of fixed and variable rate debt.  In 2014, the Company issued $750.0 principal amount of unsecured 2.55% senior notes due January 2019 at 99.846% of their face value, $375.0 principal amount of unsecured 1.55% senior notes due September 2017 at 99.898% of their face value and $375.0 principal amount of unsecured 3.125% senior notes due September 2021 at 99.912% of their face value.  The Company used all of the net proceeds to repay the outstanding $600.0 million 4.75% senior notes that were due in November 2014 and to repay amounts outstanding under its Revolving Credit Facility and Credit Agreement, which reduced the Company’s interest expense.

 

Throughout the year, the Company borrows under its Revolving Credit Facility, Credit Agreement and commercial paper program.  Borrowings under these agreements either bear interest at or trade at rates that fluctuate with a spread over LIBOR.  Therefore, when the Company borrows under these debt instruments, the Company is exposed to market risk related to changes in interest rates.  As of December 31, 2014, $671.0, or 25% of the Company’s outstanding borrowings, related mainly to its commercial paper program, were subject to floating interest rates, primarily due to changes in LIBOR.  At December 31, 2014, the Company’s average LIBOR rate was 0.38%.  A 10% change in the LIBOR interest rate at December 31, 2014 would not have a material effect on interest expense.  The Company does not expect changes in interest rates to have a material effect on income or cash flows in 2015, although there can be no assurances that interest rates will not change significantly.

 

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Table of Contents

 

Item 8. Financial Statements and Supplementary Data

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders of

Amphenol Corporation

Wallingford, Connecticut

 

We have audited the accompanying consolidated balance sheets of Amphenol Corporation and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flow for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15.  We also have audited the Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control. Our responsibility is to express an opinion on these financial statements and financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Amphenol Corporation and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

/s/ DELOITTE & TOUCHE LLP

 

Hartford, Connecticut

February 20, 2015

 

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AMPHENOL CORPORATION

Consolidated Statements of Income

(dollars in millions, except per share data)

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Net sales

 

$

5,345.5

 

$

4,614.7

 

$

4,292.1

 

Cost of sales

 

3,651.7

 

3,163.9

 

2,948.9

 

Gross profit

 

1,693.8

 

1,450.8

 

1,343.2

 

Acquisition-related expenses

 

14.1

 

6.0

 

2.0

 

Selling, general and administrative expenses

 

645.1

 

548.0

 

512.9

 

Operating income

 

1,034.6

 

896.8

 

828.3

 

 

 

 

 

 

 

 

 

Interest expense

 

(80.4

)

(63.6

)

(59.6

)

Other income, net

 

18.3

 

13.4

 

10.1

 

Income before income taxes

 

972.5

 

846.6

 

778.8

 

Provision for income taxes

 

(257.3

)

(207.9

)

(219.3

)

Net income

 

715.2

 

638.7

 

559.5

 

Less: Net income attributable to noncontrolling interests

 

(6.1

)

(3.0

)

(4.2

)

Net income attributable to Amphenol Corporation

 

$

709.1

 

$

635.7

 

$

555.3

 

 

 

 

 

 

 

 

 

Net income per common share — Basic

 

$

2.26

 

$

2.00

 

$

1.72

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding — Basic

 

313,136,791

 

318,185,574

 

323,044,160

 

 

 

 

 

 

 

 

 

Net income per common share — Diluted

 

$

2.21

 

$

1.96

 

$

1.69

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding — Diluted

 

320,430,140

 

324,548,998

 

327,894,222

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.45

 

$

0.305

 

$

0.21

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

AMPHENOL CORPORATION

Consolidated Statements of Comprehensive Income

(dollars in millions)

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Net income

 

$

715.2

 

$

638.7

 

$

559.5

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(80.9

)

9.8

 

26.1

 

Revaluation of derivatives

 

(1.2

)

(0.3

)

0.5

 

Purchase of non-controlling interest

 

 

0.3

 

 

Defined benefit plan liability adjustment

 

(69.2

)

52.7

 

(23.3

)

Total other comprehensive income (loss), net of tax

 

(151.3

)

62.5

 

3.3

 

Total comprehensive income

 

563.9

 

701.2

 

562.8

 

 

 

 

 

 

 

 

 

Less: Comprehensive income attributable to noncontrolling interests

 

(5.6

)

(3.5

)

(4.4

)

 

 

 

 

 

 

 

 

Comprehensive income attributable to Amphenol Corporation

 

$

558.3

 

$

697.7

 

$

558.4

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

AMPHENOL CORPORATION

Consolidated Balance Sheets

(dollars in millions, except per share data)

 

 

 

December 31,

 

 

 

2014

 

2013

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

968.9

 

$

886.8

 

Short-term investments

 

360.7

 

305.4

 

Total cash, cash equivalents and short-term investments

 

1,329.6

 

1,192.2

 

Accounts receivable, less allowance for doubtful accounts of $20.2 and $12.0, respectively

 

1,123.7

 

1,001.0

 

Inventories:

 

 

 

 

 

Raw materials and supplies

 

299.4

 

261.9

 

Work in process

 

282.8

 

265.2

 

Finished goods

 

283.4

 

265.5

 

 

 

865.6

 

792.6

 

Other current assets

 

185.2

 

171.8

 

Total current assets

 

3,504.1

 

3,157.6

 

Land and depreciable assets:

 

 

 

 

 

Land

 

25.5

 

23.2

 

Buildings and improvements

 

241.9

 

184.4

 

Machinery and equipment

 

1,172.9

 

1,128.8

 

 

 

1,440.3

 

1,336.4

 

Accumulated depreciation

 

(849.6

)

(804.0

)

 

 

590.7

 

532.4

 

Goodwill

 

2,616.7

 

2,289.1

 

Intangibles and other long-term assets

 

315.5

 

188.9

 

 

 

$

7,027.0

 

$

6,168.0

 

 

 

 

 

 

 

Liabilities & Equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

618.4

 

$

549.9

 

Accrued salaries, wages and employee benefits

 

109.9

 

104.9

 

Accrued income taxes

 

90.8

 

96.4

 

Other accrued expenses

 

186.2

 

157.3

 

Accrued dividends

 

38.7

 

 

Current portion of long-term debt

 

1.6

 

701.4

 

Total current liabilities

 

1,045.6

 

1,609.9

 

Long-term debt, less current portion

 

2,672.3

 

1,431.4

 

Accrued pension benefit obligations and other long-term liabilities

 

371.2

 

246.6

 

Commitments and contingent liabilities

 

 

 

 

 

Equity:

 

 

 

 

 

Class A Common Stock, $.001 par value; 500,000,000 shares authorized; 309,884,741 and 316,412,236 shares issued and outstanding at December 31, 2014 and 2013, respectively

 

0.3

 

0.3

 

Additional paid-in capital

 

659.4

 

489.8

 

Retained earnings

 

2,453.5

 

2,424.4

 

Accumulated other comprehensive loss

 

(205.8

)

(55.0

)

Total shareholders’ equity attributable to Amphenol Corporation

 

2,907.4

 

2,859.5

 

Noncontrolling interests

 

30.5

 

20.6

 

Total equity

 

2,937.9

 

2,880.1

 

 

 

 

 

 

 

 

 

$

7,027.0

 

$

6,168.0

 

 

See accompanying notes to consolidated financial statements.

 

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AMPHENOL CORPORATION

Consolidated Statements of Changes in Equity

(dollars and shares in millions)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

 

 

 

 

Common Stock

 

Paid in

 

Retained

 

Comprehensive

 

Treasury

 

Noncontrolling

 

Total

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Loss

 

Stock

 

Interests

 

Equity

 

Balance January 1, 2012

 

326

 

$

0.3

 

$

188.9

 

$

2,102.7

 

$

(120.1

)

$

 

$

13.0

 

$

2,184.8

 

Net income

 

 

 

 

 

 

 

555.3

 

 

 

 

 

4.2

 

559.5

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

3.1

 

 

 

0.2

 

3.3

 

Distributions to shareholders of noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

(5.2

)

(5.2

)

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

(380.1

)

 

 

(380.1

)

Retirement of treasury stock

 

(12

)

 

 

 

 

(380.1

)

 

 

380.1

 

 

 

 

Stock options exercised, including tax benefit

 

6

 

 

 

116.2

 

 

 

 

 

 

 

 

 

116.2

 

Dividends declared ($0.21 per common share)

 

 

 

 

 

 

 

(67.7

)

 

 

 

 

 

 

(67.7

)

Stock-based compensation

 

 

 

 

 

31.4

 

 

 

 

 

 

 

 

 

31.4

 

Balance December 31, 2012

 

320

 

0.3

 

336.5

 

2,210.2

 

(117.0

)

 

12.2

 

2,442.2

 

Net income

 

 

 

 

 

 

 

635.7

 

 

 

 

 

3.0

 

638.7

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

61.7

 

 

 

0.5

 

62.2

 

Purchase of noncontrolling interests

 

 

 

 

 

0.7

 

 

 

0.3

 

 

 

(1.0

)

 

Acquisitions resulting in noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

10.3

 

10.3

 

Distributions to shareholders of noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

(4.4

)

(4.4

)

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

(324.7

)

 

 

(324.7

)

Retirement of treasury stock

 

(8

)

 

 

 

 

(324.7

)

 

 

324.7

 

 

 

 

Stock options exercised, including tax benefit

 

4

 

 

 

116.5

 

 

 

 

 

 

 

 

 

116.5

 

Dividends declared ($0.305 per common share)

 

 

 

 

 

 

 

(96.8

)

 

 

 

 

 

 

(96.8

)

Stock-based compensation

 

 

 

 

 

36.1

 

 

 

 

 

 

 

 

 

36.1

 

Balance December 31, 2013

 

316

 

0.3

 

489.8

 

2,424.4

 

(55.0

)

 

20.6

 

2,880.1

 

Net income

 

 

 

 

 

 

 

709.1

 

 

 

 

 

6.1

 

715.2

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

(150.8

)

 

 

(0.5

)

(151.3

)

Acquisitions resulting in noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

7.9

 

7.9

 

Distributions to shareholders of noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

(3.6

)

(3.6

)

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

(539.4

)

 

 

(539.4

)

Retirement of treasury stock

 

(11

)

 

 

 

 

(539.4

)

 

 

539.4

 

 

 

 

Stock options exercised, including tax benefit

 

5

 

 

 

128.2

 

 

 

 

 

 

 

 

 

128.2

 

Dividends declared ($0.45 per common share)

 

 

 

 

 

 

 

(140.6

)

 

 

 

 

 

 

(140.6

)

Stock-based compensation

 

 

 

 

 

41.4

 

 

 

 

 

 

 

 

 

41.4

 

Balance December 31, 2014

 

310

 

$

0.3

 

$

659.4

 

$

2,453.5

 

$

(205.8

)

$

 

$

30.5

 

$

2,937.9

 

 

See accompanying notes to consolidated financial statements.

 

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AMPHENOL CORPORATION

Consolidated Statements of Cash Flow

(dollars in millions)

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

2012

 

Cash from operating activities:

 

 

 

 

 

 

 

Net income

 

$

715.2

 

$

638.7

 

$

559.5

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

168.1

 

136.5

 

121.8

 

Stock-based compensation expense

 

41.4

 

36.1

 

31.4

 

Excess tax benefits from stock-based payment arrangements

 

(32.3

)

(21.0

)

(21.6

)

Net change in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(111.5

)

(37.1

)

(123.9

)

Inventory

 

(51.6

)

(8.0

)

(45.9

)

Other current assets

 

(10.0

)

(18.4

)

(0.1

)

Accounts payable

 

66.8

 

6.9

 

99.4

 

Accrued income taxes

 

38.1

 

30.8

 

34.1

 

Other accrued liabilities

 

49.2

 

(0.6

)

27.4

 

Accrued pension and post-employment benefits

 

(1.5

)

8.5

 

0.3

 

Other long-term assets

 

8.8

 

(1.6

)

(7.7

)

Other

 

0.2

 

(1.7

)

 

Net cash provided by operating activities

 

880.9

 

769.1

 

674.7

 

 

 

 

 

 

 

 

 

Cash from investing activities:

 

 

 

 

 

 

 

Purchases of land and depreciable assets

 

(209.1

)

(158.4

)

(129.1

)

Proceeds from disposal of land and depreciable assets

 

5.6

 

3.7

 

4.8

 

Purchases of short-term investments

 

(721.0

)

(741.1

)

(379.6

)

Sales and maturities of short-term investments

 

660.8

 

687.4

 

261.8

 

Acquisitions, net of cash acquired

 

(518.2

)

(484.9

)

(251.5

)

Net cash used in investing activities

 

(781.9

)

(693.3

)

(493.6

)

 

 

 

 

 

 

 

 

Cash from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of senior notes

 

1,498.1

 

 

498.7

 

Long-term borrowings under credit facilities

 

2,945.9

 

1,041.4

 

819.6

 

Repayments of long-term debt

 

(3,904.0

)

(620.3

)

(988.8

)

Payment of costs related to debt financing

 

(11.1

)

(2.8

)

(4.3

)

Purchase and retirement of treasury stock

 

(539.4

)

(324.7

)

(380.1

)

Proceeds from exercise of stock options

 

97.8

 

95.1

 

95.5

 

Excess tax benefits from stock-based payment arrangements

 

32.3

 

21.0

 

21.6

 

Distributions to and purchases of noncontrolling interests

 

(3.6

)

(4.4

)

(5.2

)

Dividend payments

 

(101.9

)

(96.8

)

(70.1

)

Net cash provided by (used in) financing activities

 

14.1

 

108.5

 

(13.1

)

Effect of exchange rate changes on cash and cash equivalents

 

(31.0

)

11.7

 

7.7

 

Net change in cash and cash equivalents

 

82.1

 

196.0

 

175.7

 

Cash and cash equivalents balance, beginning of year

 

886.8

 

690.8

 

515.1

 

Cash and cash equivalents balance, end of year

 

$

968.9

 

$

886.8

 

$

690.8

 

 

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

Interest

 

$

67.4

 

$

60.4

 

$

48.6

 

Income taxes

 

209.6

 

176.8

 

189.7

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

AMPHENOL CORPORATION

Notes to Consolidated Financial Statements

(dollars in millions, except per share data)

 

Note 1Summary of Significant Accounting Policies

 

Business

 

Amphenol Corporation (together with its subsidiaries, “Amphenol” or the “Company”) is one of the world’s largest designers, manufacturers and marketers of electrical, electronic and fiber optic connectors, interconnect systems, antennas, sensors and sensor-based products and coaxial and high-speed specialty cable. The Company sells its products to customer locations worldwide.

 

The Company operates through two reportable business segments:

 

·                  Interconnect Products and Assemblies — The Interconnect Product and Assemblies segment primarily designs, manufacturers and markets a broad range of connector and connector systems, value-add products and other products, including antennas and sensors, used in a broad range of applications in a diverse set of end markets.

 

·                  Cable Products and Solutions - The Cable Products and Solutions segment primarily designs, manufacturers and markets cable, value-added products and components for use primarily in the broadband communications and information technology markets as well as certain applications in other markets.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made by management include the fair value of acquired assets and liabilities, stock-based compensation, pension obligations, derivative instruments, accounting for income taxes, inventories, goodwill and other matters that affect the consolidated financial statements and related disclosures. Actual results could differ from those estimates.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. The results of companies acquired are included in the Consolidated Financial Statements from the effective date of acquisition.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of cash and liquid investments with an original maturity of less than three months. The carrying amounts approximate fair values of those instruments, the majority of which are in non-U.S. bank accounts.

 

Short-term Investments

 

Short-term investments consist primarily of certificates of deposit with original maturities of twelve months or less. The carrying amounts approximate fair values of those instruments, the majority of which are in non-U.S. bank accounts.

 

Accounts Receivable

 

Accounts receivable is stated at net realizable value. The Company regularly reviews accounts receivable balances and adjusts the receivable reserves as necessary whenever events or circumstances indicate the carrying value may not be recoverable.

 

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Table of Contents

 

Inventories

 

Inventories are stated at the lower of standard cost, which approximates average cost, or market. The principal components of cost included in inventories are materials, direct labor and manufacturing overhead. The Company regularly reviews inventory quantities on hand and evaluates the realizability of inventories and adjusts the carrying value as necessary based on forecasted product demand.

 

Depreciable Assets

 

Property, plant and equipment are carried at cost less accumulated depreciation. Depreciation is recorded on a straight-line basis over the respective asset lives determined on a composite basis by asset group or on a specific item basis using the estimated useful lives of such assets, which range from 3 to 12 years for machinery and equipment and 20 to 40 years for buildings. Leasehold building improvements are depreciated over the shorter of the lease term or estimated useful life. The Company periodically reviews fixed asset lives. Depreciation expense is included in both Cost of sales and Selling, general and administrative expense in the Consolidated Statements of Income based on the specific categorization and use of the underlying asset being depreciated. The Company assesses the impairment of property and equipment subject to depreciation, whenever events or changes in circumstances indicate the carrying value may not be recoverable. Factors the Company considers important, which could trigger an impairment review, include significant changes in the manner of our use of the asset, significant changes in historical trends in operating performance, significant changes in projected operating performance, and significant negative economic trends. There have been no significant impairments recorded as a result of such reviews during any of the periods presented.

 

Goodwill

 

The Company performs its annual evaluation for the impairment of goodwill for the Company’s reporting units as of each June 30. The Company has defined its reporting units as the two reportable business segments “Interconnect Products and Assemblies” and “Cable Products and Solutions”, as the components of these reportable business segments have similar economic characteristics. In 2014, the Company utilized the option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. In accordance with applicable guidance, an entity is not required to calculate the fair value of a reporting unit unless the Company determines, based on a qualitative assessment of events and circumstances, that it is more likely than not that its fair value is less than its carrying amount. As of June 30, 2014, the Company has determined that it is more likely than not that the fair value of its reporting units is greater than their carrying amounts. The Company has not recognized any goodwill impairment in 2014, 2013 or 2012 in connection with its annual impairment test.

 

Intangible Assets

 

Intangible assets are included in Intangibles and other long-term assets and consist primarily of proprietary technology, customer relationships and license agreements and are generally amortized over the estimated periods of benefit. The Company assesses the impairment of long-lived assets, other than goodwill, including identifiable intangible assets subject to amortization, whenever significant events or significant changes in circumstances indicate the carrying value may not be recoverable. Factors the Company considers important, which could trigger an impairment review, include significant changes in the manner of the use of the asset, changes in historical trends in operating performance, significant changes in projected operating performance, and significant negative economic trends. There have been no impairments recorded during any of the periods presented as a result of such reviews.

 

Revenue Recognition

 

The Company’s primary source of revenues is from product sales to its customers. Revenue from sales of the Company’s products is recognized at the time the goods are delivered and title passes, provided the earning process is complete and revenue is measurable. Delivery is determined by the Company’s shipping terms, which are primarily freight on board (“FOB”) shipping point. Revenue is recorded at the net amount to be received after deductions for estimated discounts, allowances and returns. These estimates and related reserves are determined and adjusted as needed based upon historical experience, contract terms and other related factors.

 

The shipping costs for the majority of the Company’s sales are paid directly by the Company’s customers. In the broadband communications market (approximately 7% of net sales in 2014), the Company pays for shipping costs to the majority of its customers. Shipping costs are also paid by the Company for certain customers in the Interconnect Products and Assemblies segment. Amounts billed to customers related to shipping costs are immaterial and are included in net sales.

 

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Table of Contents

 

Shipping costs incurred to transport products to the customer which are not reimbursed are included in Selling, general and administrative expense.

 

Retirement Pension Plans

 

Costs for retirement pension plans include current service costs and amortization of prior service costs over the average working life expectancy. It is the Company’s policy to fund current pension costs taking into consideration minimum funding requirements and maximum tax deductible limitations. The expense of retiree medical benefit programs is recognized during the employees’ service with the Company. The recognition of expense for retirement pension plans and medical benefit programs is significantly impacted by estimates made by management such as discount rates used to value certain liabilities, expected return on assets, mortality projections and future health care costs. The Company uses third-party specialists to assist management in appropriately measuring the expense associated with pension and other post-retirement plan benefits.

 

Stock-Based Compensation

 

The Company accounts for its option and restricted share awards based on the fair value of the award at the date of grant and recognizes compensation expense over the service period that the awards are expected to vest. The Company recognizes expense for stock-based compensation with graded vesting on a straight-line basis over the vesting period of the entire award. Stock-based compensation expense includes the estimated effects of forfeitures, and estimates of forfeitures are adjusted over the requisite service period to the extent actual forfeitures differ, or are expected to differ from such estimates.  Changes in estimated forfeitures are recognized in the period of change and also impact the amount of expense to be recognized in future periods. The Company’s income before income taxes was reduced by $41.4 ($30.3 after tax), $36.1 ($26.4 after tax) and $31.4 ($22.7 after tax) for the years ended December 31, 2014, 2013 and 2012, respectively, related to the expense incurred for stock-based compensation plans, which is included in Selling, general and administrative expenses in the accompanying Consolidated Statements of Income.

 

The fair value of stock options has been estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

 

 

2014

 

2013

 

2012

 

Risk free interest rate

 

1.6

%

0.9

%

0.8

%

Expected life

 

4.6 years

 

4.6 years

 

4.6 years

 

Expected volatility

 

21.0

%

28.0

%

30.0

%

Expected dividend yield

 

1.0

%

1.0

%

0.8

%

 

Income Taxes

 

Deferred income taxes are provided for revenue and expenses which are recognized in different periods for income tax and financial statement reporting purposes.  At December 31, 2014, the cumulative amount of undistributed earnings of foreign affiliated companies was approximately $3,337.  Deferred income taxes are not provided on undistributed earnings of foreign affiliated companies as it is the Company’s intention to reinvest these earnings permanently outside the U.S.  It is not practicable to estimate the amount of tax that might be payable if undistributed earnings were to be repatriated as there is a significant amount of uncertainty with respect to the tax impact of the remittance of these earnings due to the fact that dividends received from numerous foreign subsidiaries may generate additional foreign tax credits, which could ultimately reduce the U.S. tax cost of the dividend.  These uncertainties are further complicated by the significant number of foreign tax jurisdictions and entities involved.  Deferred tax assets are regularly assessed for recoverability based on both historical and anticipated earnings levels and a valuation allowance is recorded when it is more likely than not that these amounts will not be recovered. The tax effects of an uncertain tax position taken or expected to be taken in income tax returns are recognized only if it is “more likely than not” to be sustained on examination by the taxing authorities, based on its technical merits as of the reporting date.  The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.  The Company includes estimated interest and penalties related to unrecognized tax benefits in the provision for income taxes.

 

Foreign Currency Translation

 

The financial position and results of operations of the Company’s significant foreign subsidiaries are measured using local currency as the functional currency. Assets and liabilities of such subsidiaries have been translated at current exchange rates and related revenues and expenses have been translated at weighted average exchange rates. The aggregate effect of translation adjustments is included as a component of Accumulated other comprehensive income (loss) within equity.

 

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Table of Contents

 

Transaction gains and losses related to operating assets and liabilities are included in Selling, general and administrative expense.

 

Research and Development

 

Costs incurred in connection with the development of new products and applications are expensed as incurred. Research and development expenses for the creation of new and improved products and processes were $114.8, $103.4 and $92.5, for the years 2014, 2013 and 2012, respectively, and are included in Selling, general and administrative expense.

 

Environmental Obligations

 

The Company recognizes the potential cost for environmental remediation activities when site assessments are made, remediation efforts are probable and related amounts can be reasonably estimated; potential insurance reimbursements are not recorded. The Company assesses its environmental liabilities as necessary and appropriate through regular reviews of contractual commitments, site assessments, feasibility studies and formal remedial design and action plans.

 

Net Income per Common Share

 

Basic income per common share is based on the net income attributable to Amphenol Corporation for the year divided by the weighted average number of common shares outstanding. Diluted income per common share assumes the exercise of outstanding dilutive stock options using the treasury stock method. The Company effected a two-for-one stock split in the form of a stock dividend, payable to stockholders of record as of October 2, 2014, which was paid on October 9, 2014. The share and per share information included herein has been retroactively restated to reflect the effect of the stock split for all periods presented.

 

Derivative Financial Instruments

 

Derivative financial instruments, which are periodically used by the Company in the management of its interest rate and foreign currency exposures, are accounted for as cash flow hedges.  Gains and losses on derivatives designated as cash flow hedges resulting from changes in fair value are recorded in Accumulated other comprehensive income (loss), and subsequently reflected in Selling, general and administrative expense on the Consolidated Statements of Income in a manner that matches the timing of the actual income or expense of such instruments with the hedged transaction. Any ineffective portion of the change in the fair value of designated hedging instruments is included in the Consolidated Statements of Income.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for such goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract(s); (3) determine the transaction price(s); (4) allocate the transaction price(s) to the performance obligations in the contract(s); and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance also requires advanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016 with early adoption not permitted. The amendments may be applied retrospectively to each period presented or with the cumulative effect recognized as of the date of initial application. The Company is currently evaluating ASU 2014-09.

 

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), amending FASB Accounting Standards Subtopic 205-40 to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Specifically, the amendments (1) provide a definition of the term “substantial doubt,” (2) require an evaluation every reporting period, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that financial statements are issued. ASU 2014-15 is effective for fiscal years ending after December 15, 2016, and for annual periods and interim periods

 

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Table of Contents

 

thereafter. The Company is currently evaluating ASU 2014-15 and does not anticipate a material impact on its consolidated financial statements.

 

Note 2—Long-Term Debt

 

Long-term debt consists of the following:

 

 

 

 

 

December 31, 2014

 

December 31, 2013

 

 

 

Maturity

 

Carrying
Amount

 

Approximate
Fair Value (1)

 

Carrying
Amount

 

Approximate
Fair Value (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

$1,500.0 Revolving Credit Facility

 

July 2018

 

$

 

$

 

$

927.3

 

$

927.3

 

$200.0 Credit Agreement

 

May 2015

 

 

 

100.0

 

100.0

 

$1,500 Commercial Paper Program (less unamortized discount of $0.4 at December 31, 2014)

 

July 2018

 

671.0

 

671.0

 

 

 

4.75% Senior Notes (less unamortized discount of $0.2 at December 31, 2013)

 

November 2014

 

 

 

599.8

 

621.0

 

4.00% Senior Notes (less unamortized discount of $0.9 and $1.0 at December 31, 2014 and 2013, respectively)

 

February 2022

 

499.1

 

524.5

 

499.0

 

491.0

 

2.55% Senior Notes (less unamortized discount of $0.9 at December 31, 2014)

 

January 2019

 

749.1

 

754.9

 

 

 

1.55% Senior Notes (less unamortized discount of $0.3 at December 31, 2014)

 

September 2017

 

374.7

 

373.0

 

 

 

3.125% Senior Notes (less unamortized discount of $0.3 at December 31, 2014)

 

September 2021

 

374.7

 

375.3

 

 

 

Notes payable to foreign banks and other debt

 

2015-2019

 

5.3

 

5.3

 

6.7

 

6.7

 

 

 

 

 

2,673.9

 

2,704.0

 

2,132.8

 

2,146.0

 

Less current portion

 

 

 

1.6

 

1.6

 

701.4

 

722.6

 

Total long-term debt

 

 

 

$

2,672.3

 

$

2,702.4

 

$

1,431.4

 

$

1,423.4

 

 


(1)               Fair values of Senior Notes are based on recent bid prices in an active market, therefore classified as Level 1 in the fair value hierarchy (Note 3).

 

Credit Facilities and Commercial Paper

 

The Company has a $1,500.0 unsecured credit facility (the “Revolving Credit Facility”) with a maturity date of July 2018 and the ability to borrow at a spread over LIBOR. The Company also has a $200.0 unsecured credit facility (the “Credit Agreement”) which is renewable annually. The average interest rate on the Revolving Credit Facility as of December 31, 2014 and 2013 was nil and 1.50%, respectively, and on the Credit Agreement as of December 31, 2014 and 2013 was nil and 1.16%, respectively. The carrying value of the borrowings under the Revolving Credit Facility approximated their fair value due primarily to their market interest rates and the carrying value of the Credit Agreement borrowings approximated their fair value due to their relative short-term maturity and market interest rate and are therefore both classified as Level 2 in the fair value hierarchy (Note 3).

 

In September 2014, the Company entered into a commercial paper program (the “Program”) pursuant to which the Company issues short-term unsecured commercial paper notes (“Commercial Paper”) in one or more private placements. Amounts available under the Program are borrowed, repaid and re-borrowed from time to time. The maturities of the Commercial Paper vary, but may not exceed 397 days from the date of issue. The Commercial Paper is sold under customary terms in the commercial paper market and may be issued at a discount from par, or, alternatively, may be sold at par and bear varying interest rates on a fixed or floating basis. The Program was rated A-2 by Standard & Poor’s and P-2 by Moody’s and is backstopped by the Revolving Credit Facility. The maximum aggregate principal amount of the commercial paper notes outstanding under the Program at any time is $1,500.0. The Commercial Paper is classified as long-term debt in the accompanying Consolidated Balance Sheets since the Company has the intent and ability to refinance the Commercial Paper on a long-term basis using the Revolving Credit Facility. The carrying value of Commercial Paper borrowings approximated their fair value given that the Commercial Paper is actively traded. As such, the Commercial Paper is classified as Level 1 in the fair value hierarchy (Note 3). The average interest rate on the Commercial Paper as of December 31, 2014 was 0.38%.

 

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Table of Contents

 

The Company incurred costs related to the issuance of the Commercial Paper and Senior Notes of $11.1, which are capitalized and will be amortized to interest expense over the respective terms of the debt.

 

Senior Notes

 

The senior notes are unsecured and rank equally in right of payment with the Company’s other unsecured senior indebtedness. Interest on each series of the Senior Notes is payable semiannually. The Company may, at its option, redeem some or all of any series Senior Notes at any time by paying 100% of the principal amount, plus accrued and unpaid interest, if any, to the date of repurchase, and if redeemed prior to the date of maturity, a make-whole premium.

 

In January 2014, the Company issued $750.0 principal amount of unsecured 2.55% Senior Notes due January 2019 (the “2.55% Senior Notes”) at 99.846% of their face value. Net proceeds from the sale of the 2.55% Senior Notes were used to repay borrowings under the Company’s Revolving Credit Facility.

 

In September 2014, the Company issued $375.0 principal amount of unsecured 1.55% Senior Notes due September 2017 at 99.898% of their face value (the “1.55% Senior Notes”) and $375.0 principal amount of unsecured 3.125% Senior Notes due September 2021 at 99.912% of their face value (the “3.125% Senior Notes” and together with the 1.55% Senior Notes, “the Notes”). The Company used all of the net proceeds from the Notes to repay the outstanding $600.0 4.75% Senior Notes that were due in November 2014 and to repay amounts outstanding under its Revolving Credit Facility and Credit Agreement.

 

The maturity of the Company’s debt over each of the next five years ending December 31 and thereafter, is as follows:

 

2015

 

$

1.6

 

2016

 

0.6

 

2017

 

374.9

 

2018

 

672.7

 

2019

 

749.1

 

Thereafter