10-K 1 aph-20161231x10k.htm 10-K aph_Current_Folio_10K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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

 

For the Fiscal Year Ended December 31, 2016

 

or

 

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

 

Picture 1

 

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

(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 ☒  No ☐

 

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 ☐  No ☒

 

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 ☒  No ☐

 

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 ☒  No ☐

 

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.  ☒

 

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 ☒

 

Accelerated filer ☐

Non-accelerated filer ☐

 

Smaller reporting company ☐

 

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

 

The aggregate market value of Amphenol Corporation Class A Common Stock, $.001 par value, held by non-affiliates was approximately $15,415 million based on the reported last sale price of such stock on the New York Stock Exchange on June 30, 2016.

 

As of January 31, 2017, the total number of shares outstanding of Registrant’s Class A Common Stock was 307,664,328.

 

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.

 

 

 

 


 

 

 

 

 

 

 

 

 

INDEX

 

 

    

Page

 

 

 

 

 

PART I 

 

 

 

 

 

Item 1.

Business

 

 

 

General

 

 

 

Our Strategy

 

 

 

Markets

 

 

 

Customers and Geographies

 

 

 

Manufacturing

 

 

 

Research and Development

 

 

 

Intellectual Property

 

 

 

Raw Materials

 

 

 

Competition

 

 

 

Backlog

 

 

 

Employees

 

10 

 

 

Environmental Matters

 

10 

 

 

Available Information

 

10 

 

Item 1A.

Risk Factors

 

10 

 

Item 1B.

Unresolved Staff Comments

 

14 

 

Item 2.

Properties

 

15 

 

Item 3.

Legal Proceedings

 

15 

 

Item 4.

Mine Safety Disclosures

 

15 

 

 

 

 

 

PART II 

 

 

 

 

 

Item 5.

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

 

16 

 

Item 6.

Selected Financial Data

 

18 

 

Item 7.

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

 

19 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

34 

 

Item 8.

Financial Statements and Supplementary Data

 

35 

 

 

Report of Independent Registered Public Accounting Firm

 

35 

 

 

Consolidated Statements of Income

 

36 

 

 

Consolidated Statements of Comprehensive Income

 

37 

 

 

Consolidated Balance Sheets

 

38 

 

 

Consolidated Statements of Changes in Equity

 

39 

 

 

Consolidated Statements of Cash Flow

 

40 

 

 

Notes to Consolidated Financial Statements

 

41 

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

67 

 

Item 9A.

Controls and Procedures

 

67 

 

Item 9B.

Other Information

 

67 

 

 

 

 

 

PART III 

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

 

68 

 

Item 11.

Executive Compensation

 

68 

 

Item 12.

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

 

68 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

 

68 

 

Item 14.

Principal Accounting Fees and Services

 

68 

 

 

 

 

 

PART IV 

 

 

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

 

69 

 

Item 16.

Form 10-K Summary

 

69 

 

 

Signature of the Registrant

 

71 

 

 

Signatures of the Directors

 

71 

 

1

 


 

Cautionary Note Regarding Forward-Looking Statements

 

This Annual Report on Form 10-K contains certain statements made by the Company (as defined below) that are intended to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended.  All statements, other than statements of historical facts, that address activities, events or developments that the Company expects or anticipates will or may occur in the future, are forward-looking statements.  Forward-looking statements may be identified through the use of terms such as “expect”, “may”, “will”, “should”, “intend”, “plan”, “guidance” and other similar expressions generally intended to identify forward-looking statements.  Forward-looking statements are based on our management’s current beliefs, expectations and assumptions and on information currently available to our management.  Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those projected in the forward-looking statements described in this Annual Report on Form 10-K.  Significant risk factors or uncertainties that might cause or contribute to a material difference and may affect our operating and financial performance are described below under the caption “Risk Factors” in Part I, Item 1A and elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2016, and other Company filings with the Securities and Exchange Commission including Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.  There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to cause actual results to differ materially from those contained in any forward-looking statements we may make and affect our operating and financial performance.  Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.  Forward-looking statements set forth in this Annual Report on Form 10-K speak only as of the date hereof and the Company does not undertake any obligations to revise or update these statements whether as a result of new information, future events or otherwise, except as required by law.

 

 

PART I

 

Item 1. Business

 

General

 

Amphenol Corporation (together with its subsidiaries, “Amphenol”, the “Company”, “we”, “our”, or “us”) 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 worldwide sales of interconnect and sensor-related products were approximately $140 billion in 2016. 

 

Certain predecessor businesses of the Company were founded in 1932 and the Company was incorporated under the laws of the State of Delaware in 1987.  The Company’s Class A Common Stock began trading on the New York Stock Exchange in 1991.

 

The Company’s strategy is to provide our 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. The Company operates through two reporting segments: (i) Interconnect Products and Assemblies and (ii) Cable Products and Solutions.  The Interconnect Products and Assemblies segment primarily designs, manufactures 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 signals.  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, manufactures and markets cable, value-add products and components for use primarily in the broadband communications and information technology markets as well as certain applications in other markets.

 

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The table below provides a summary of our reporting segments, the 2016 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 2016 Net Sales:

 

94%

 

6%

 

 

 

 

 

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, busbars 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

    molded parts

    production-related products

    sensors and sensor-based products

    switches

 

Cable:

    coaxial cable

    power cable

    specialty cable

 

Value-Add Products:

    cable assemblies

 

Components:

    combiner/splitter products

    connector and connector systems

    fiber optic components

 

Information regarding the Company’s operations and assets by reporting segment, as well as the Company’s net sales and long-lived assets by geographic area, appears in Note 11 of the Notes to the Consolidated Financial Statements.

 

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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 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 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 where managers manage the Company’s assets as if they were their own.

 

·

Pursue strategic acquisitions and investments - The Company believes that the interconnect and sensor industry is highly fragmented and 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 2016, the Company invested approximately $1.3 billion to fund five acquisitions.  The acquisition in 2016 of FCI Asia Pte Ltd (“FCI”), the largest acquisition in our history (“FCI acquisition”), for an aggregate purchase price of approximately $1.2 billion, net of cash acquired, further strengthened our customer base and product offerings in the information technology and data communications, industrial, mobile networks, automotive and mobile devices markets.  The other 2016 acquisitions also strengthened our customer base and product offerings in those markets, as well as the broadband market. 

 

·

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

4


 

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, sensors and antennas for a growing array of automotive applications.  In addition, Amphenol has developed advanced technology solutions for hybrid-electric vehicles and is working with leading global customers to proliferate these advanced interconnect products into next-generation automobiles.  Sales into the automotive market represented approximately 18% of the Company’s net sales in 2016 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 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 6% of the Company’s net sales in 2016 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 commercial aerospace market.  In addition to connector and interconnect assembly products, the Company also provides rigid and flexible printed circuits as well as 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.  Sales into the commercial aerospace market represented approximately 5% of the Company’s net sales in 2016 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, sensors and antennas 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.

5


 

Sales into the industrial market represented approximately 18% of the Company’s net sales in 2016 with sales into the following primary end applications:

 

·

alternative and traditional energy generation

·

batteries and hybrid drive systems

·

factory and machine tool automation

·

geophysical

·

heavy equipment

·

instrumentation

·

internet of things

·

LED lighting

·

marine

·

medical equipment

·

power distribution

·

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 is a market leader 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, power and fiber optics technology.  Sales into the IT and datacom market represented approximately 21% of the Company’s net sales in 2016 with sales into the following primary end applications:

 

·

cloud computing and data centers

·

internet appliances

·

optical and copper networking equipment

·

servers

·

storage systems

·

transmission

 

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 vibration, pressure, humidity, nuclear radiation and rapid and severe temperature changes.  Amphenol provides an unparalleled product breadth, from military specification connectors to customized high-speed board level interconnects; from flexible to rigid printed circuit boards; and from backplane systems to completely integrated assemblies.  Amphenol is a technology leader, participating in major programs from the earliest inception across each phase of the production cycle.  Sales into the military market represented approximately 9% of the Company’s net sales in 2016 with sales into the following primary end applications:

 

·

avionics

·

communications

·

engines

·

ground vehicles and tanks

·

homeland security

·

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

6


 

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 14% of the Company’s net sales in 2016 with sales into the following primary end applications:

 

·

mobile and smart phones, including accessories

·

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

·

production-related products

·

wearable devices

 

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, 5G 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 networks market represented approximately 9% of the Company’s net sales in 2016 with sales into the following primary end applications:

 

·

cell site antenna systems

·

cellular base stations

·

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 our 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 the ability to meet certain quality, delivery and other 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 portfolio of products.  In addition, the Company has concentrated its efforts on service, procurement and manufacturing improvements designed to increase product quality and lower product lead-time and cost.  For a discussion of certain risks related to the Company’s sales to OEMs, refer to the risk factor titled “The Company is dependent on the communications industry, including information technology and data communications, wireless communications and broadband communications” 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 10% or more of the Company’s net sales for the years ended December 31, 2016 and 2014.  During the year ended December 31, 2015, aggregate sales to Apple Inc., including sales of products to EMS companies and subcontractors that the Company believes are manufacturing products on their behalf, accounted for approximately 11% of our net sales. 

 

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 14% of the Company’s net sales in 2016.  In addition to product design teams and customer collaboration arrangements, the Company uses key

7


 

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 and proprietary process technology for specialty and coaxial cable production and 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 approximately 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 and logistics 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.

 

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.  For a discussion of certain risks attendant to the Company’s foreign operations, refer to 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 area as a percentage of the Company’s total net sales for the years ended December 31, 2016, 2015 and 2014 were as follows:

 

 

 

 

 

 

 

 

 

    

2016

 

2015

    

2014

United States

 

28%

 

30%

 

31%

China

 

30%

 

30%

 

27%

Other international locations

 

42%

 

40%

 

42%

Total

 

100%

 

100%

 

100%

 

Net sales by geographic area are based on the customer location to which the product is shipped.   For additional information regarding net sales by geographic area, refer to Note 11 of the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

 

Research and Development

 

The Company generally implements its product development strategy through product design teams and collaboration arrangements with customers, which often results 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.

8


 

 

At the end of 2016, our research, development, and engineering efforts were supported by approximately 2,400 employees and were performed primarily by individual operating units focused on specific markets and technologies.  The Company’s research and development expenses for the creation of new and improved products and processes were $166.1 million, $124.7 million and $114.8 million for 2016, 2015 and 2014, respectively, which are classified as selling, general and administrative expenses in our Consolidated Financial Statements.

 

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 the laws of various jurisdictions and the 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.

 

Raw Materials

 

The Company purchases a wide variety of raw materials for the manufacture of its products, including (i) precious metals such as gold and silver used in plating, (ii) aluminum, steel, copper, titanium and metal alloy products used for cable, contacts and connector shells, (iii) certain rare earth metals used in sensors and (iv) plastic materials used for cable and connector bodies and inserts and other molded parts. 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.  The Company does not anticipate any difficulties in obtaining raw materials necessary for production.  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.  For a discussion of certain risks related to raw materials, refer to the risk factor titled “The Company may experience difficulties in obtaining a consistent supply of materials at stable pricing levels” in Part I, Item 1A herein.

 

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.  Primary competitors within the Interconnect Products and Assemblies segment include TE Connectivity, Molex, Yazaki, Foxconn, Sensata, JST, Delphi, Hirose and JAE, among others.  Primary competitors within the Cable Products and Solutions segment include 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.  For a discussion of certain risks related to competition, refer to the risk factor titled “The Company encounters competition in substantially all areas of its business” in Part I, Item 1A herein.

 

Backlog

 

The Company estimates that its backlog of unfilled firm orders as of December 31, 2016 was approximately $1.319 billion compared with backlog of approximately $1.121 billion as of December 31, 2015.  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

9


 

(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, 2016, the Company had approximately 62,000 employees worldwide.  The Company believes that it has a good relationship with its unionized and non-unionized employees.  Refer to “Risk Factors” in Part I, Item 1A. herein for a discussion of certain risks related to employee relations.

 

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 adverse effect on the Company’s financial condition, results of operations or cash flows.

 

Available Information

 

The Company’s annual report on Form 10-K and all of the Company’s other filings with the Securities and Exchange Commission (“SEC”), such as quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, are available to view, free of charge, on the Company’s website, www.amphenol.com, as soon as reasonably practicable after they are filed electronically with, or furnished to, the SEC. Copies are also available without charge, from Amphenol Corporation, Investor Relations, 358 Hall Avenue, Wallingford, CT 06492.

 

 

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, operations, liquidity and financial condition.

 

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 50% of the Company’s 2016 net sales came from sales to the communications industry, including information technology and data communication, wireless communications and broadband communications, with 14% of the Company’s 2016 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 pressure on their suppliers, including the Company.  Furthermore, there has been a trend on the part of OEM customers to consolidate their lists of qualified suppliers to companies that have the ability to meet certain quality, delivery and other standards while maintaining competitive prices.  There can be no assurance that the Company will be able to meet these standards or maintain competitive pricing and therefore continue to compete successfully in the communications industry.  The Company’s failure to do so could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

Approximately 6% and 9% of the Company’s 2016 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

10


 

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 9% of the Company’s 2016 net sales came from sales to the military market. The Company participates in a broad spectrum of defense programs. The substantial majority of these sales are related to both U.S. and foreign military and defense programs. The Company’s military 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. or foreign government defense expenditures could have an adverse effect on the Company’s business, 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 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 2016 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 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.

 

The Company’s credit agreements contain certain covenants, which if breached, could have a material adverse effect on the Company.

 

The Credit Agreement, dated as of March 1, 2016, among the Company, certain subsidiaries of the Company and a syndicate of financial institutions (the “Revolving Credit Facility”), which also backstops the Company’s commercial paper program, 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.  As of December 31, 2016, the Company had outstanding borrowings under the Revolving Credit Facility and the commercial paper program of nil and $1,018.9 million, respectively.

 

The Company relies on the capital markets, and its inability to access those markets on favorable terms could adversely affect the Company’s results.

 

The Company has used the capital markets to invest in its business and make strategic acquisitions.  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 recently encountered any financing difficulties, the capital and credit markets have experienced significant volatility in the past.  Market conditions could make it more difficult to access capital to finance capital investments, acquisitions and other initiatives including dividends and share repurchases.  As such, this could have a material adverse effect on the Company’s business, financial condition, results of operations or

11


 

cash flows.  In addition, while the Company has not encountered any such issues to date, 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 would likely increase the Company’s cost of capital and make it more difficult for the Company to obtain new financing and access capital markets, which could also have a material adverse effect on the Company’s business, financial condition, results of operations or 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 and long-term debt. As of December 31, 2016, $1,024.4 million, or 34%, of the Company’s outstanding borrowings were subject to floating interest rates.

 

As of December 31, 2016, the Company had the following unsecured Senior Notes outstanding:

 

 

 

 

 

 

 

 

 

Principal

 

Fixed

 

 

 

 

Amount

 

Interest

 

 

 

 

(in millions)

 

Rate

 

Maturity

 

 

$

375.0

 

1.55

%  

September 2017

 

 

 

750.0

 

2.55

%  

January 2019

 

 

 

375.0

 

3.125

%  

September 2021

 

 

 

500.0

 

4.00

%  

February 2022

 

 

 

A 10% change in LIBOR or floating interest rates at December 31, 2016 would not have a 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 2017, although there can be no assurance that interest rates will not change significantly.

 

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 including possible currency devaluations. Changes in exchange rates can positively or negatively affect the Company’s sales, gross margins and equity. The Company manages 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 business, financial condition and results of operations.

 

12


 

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 2016, non-U.S. markets constituted approximately 72% of the Company’s net sales, with China constituting approximately 30% 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 the Company 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 have a material adverse effect on the Company’s business, financial condition, results of operations, or cash flows, including:

 

·

tariffs, trade barriers, trade disputes, trade sanctions, trade agreements or any other changes in trade policies or trade agreements;

·

regulations related to customs and import/export matters;

·

longer payment cycles;

·

tax issues, such as tax law changes, audits and 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;

·

credit risks and other challenges in collecting accounts receivable;

·

employment regulations and local labor conditions;

·

difficulties protecting intellectual property;

·

instability in economic or political conditions, including inflation, recession, foreign currency exchange restrictions and devaluations, and actual or anticipated military or political conflicts, particularly in emerging markets; 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 recent years, including the acquisition of FCI on January 8, 2016.  The Company anticipates that it will continue to pursue acquisition opportunities as part of its growth strategy.  The Company may experience difficulty and unanticipated expenses associated with integrating such acquisitions, and the acquisitions may not perform as expected.  At December 31, 2016, the total assets of the Company were $8,498.7 million, which included $3,678.8 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.

 

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 margins may decline.

 

Our business reputation and financial results may be impaired by improper conduct by any of our employees, customers, suppliers, distributors or any other business partners.

 

Several anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, generally prohibit companies from engaging in improper conduct for the purpose of obtaining, retaining or improving business.  Such acts may include, but are not limited to, bribery, conflicts of interest, fraud, kickbacks and money laundering.  While the Company’s internal controls and systems are designed to protect it from illegal acts committed by employees, customers, suppliers, distributors and other business partners that may violate U.S. or local jurisdictional laws, there are no guarantees that such internal controls and systems will always protect the Company from such acts.  Such violations or allegations could damage the Company’s reputation, lead to criminal or civil investigations in the U.S. or foreign

13


 

jurisdictions, and ultimately result in monetary or non-monetary penalties and/or significant legal and administrative fees.  Any significant violations of our standards of conduct by any of our employees, customers, suppliers, distributors or business partners could have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

The Company may be subject to litigation and other regulatory or legal proceedings.

 

The Company may be subject to litigation and other regulatory or legal proceedings that could adversely impact our financial position, results of operations, or cash flows, including but not limited to, claims related to employment, tax, intellectual property, environmental, sales practices, workers compensation, product warranty, product liability and acquisitions.  These lawsuits may include claims for compensatory, punitive or consequential damages, and could result in significant legal expenses.  While the Company does maintain insurance coverage to mitigate losses associated with some of these types of proceedings, the amount of insurance coverage may not be adequate to cover the total claims and liabilities.

 

Cybersecurity incidents on our information technology systems could disrupt business operations, resulting in adverse impacts to our reputation and operating results and potentially lead to litigation.

 

Global cybersecurity threats to the Company could lead to unauthorized access to the Company’s information technology systems, products, customers, suppliers and third party service providers.  Cybersecurity incidents could potentially result in the disruption of our business operations and the misappropriation, destruction, or corruption of critical data and confidential or proprietary technological information.  Cybersecurity incidents could also result from unauthorized parties gaining access to our systems or information through fraud or other means of deceiving our employees, suppliers or third party service providers.  Despite the Company’s implementation of preventative security measures to prevent, detect, address and mitigate these threats, our infrastructure may still be susceptible to disruptions from a cybersecurity incident, security breaches, computer viruses, outages, systems failures, natural disasters or catastrophic events, any of which could include reputational damage and litigation with third parties, which could have a material adverse effect on our business, financial condition and results of operations. 

 

Changes in general economic conditions, geopolitical conditions, and other factors beyond the Company’s control may adversely impact our business and operating results.

 

The Company’s operations and performance depend significantly on global, regional and U.S. economic and geopolitical conditions.  The following factors could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows:

 

·

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

·

uncertainty about global, regional and U.S. economic or geopolitical conditions that result in postponement of spending, in response to tighter credit, financial market volatility and other factors;

·

the effects of significant changes in economic, 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;

·

changes in government policies and regulations affecting the Company or its significant customers;

·

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

·

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, floods, earthquakes, hurricanes or explosions;

·

increases in employment costs, particularly in low-cost regions in which the Company currently operates; and

·

changes in assumptions, such as discount rates, along with lower than expected investment returns and performance related to the Company’s benefit plans.

 

Item 1B. Unresolved Staff Comments

 

None.

14


 

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 and machinery and equipment are generally in good operating condition, are reasonably 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, 2016, the Company operated a total of approximately 390 plants, warehouses and offices of which (a) the locations in the U.S. had approximately 3.5 million square feet, of which approximately 1.7 million square feet were leased; (b) the locations outside the U.S. had approximately 15.0 million square feet, of which approximately 10.0 million square feet were leased; and (c) the square footage by segment was approximately 17.6 million square feet and approximately 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 has been named as a defendant in several legal actions arising from normal business activities.  Although the potential liability with respect to such legal actions cannot be reasonably estimated, such matters are not expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows.  Refer to “Risk Factors” in Part I, Item 1A herein for additional information regarding legal risks and uncertainties.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

15


 

PART II

 

Item 5.  Market for 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 (“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 the high and low closing sales prices for the Common Stock as reported on the New York Stock Exchange for each quarter of 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

2015

 

 

    

High

    

Low

    

High

    

Low

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

$

57.82

 

$

45.42

 

$

60.20

 

$

51.93

 

Second Quarter

 

 

60.11

 

 

55.08

 

 

59.54

 

 

55.37

 

Third Quarter

 

 

65.68

 

 

55.97

 

 

57.45

 

 

49.06

 

Fourth Quarter

 

 

68.83

 

 

63.05

 

 

55.49

 

 

50.03

 

 

The following graph compares the cumulative total return of Amphenol over a period of five years ending December 31, 2016 with the performance of the Standard & Poor’s 500 (“S&P 500”) Stock Index and the Dow Jones U.S. Electrical Components & Equipment Index.  This graph assumes that $100 was invested in the Common Stock of Amphenol and each index on December 31, 2011, reflects reinvested dividends and is 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.

 

cid:image005.png@01D288B7.5525F7B0

As of January 31, 2017, there were 37 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 shares of its Common Stock.  In the third quarter of 2015, the Board of Directors approved an increase in the quarterly dividend rate from $0.125 to $0.14 per share effective with dividends declared in the third quarter of 2015, and in October 2016, approved a further increase in the quarterly dividend rate from $0.14 to $0.16 per share effective with dividends declared

16


 

in the fourth quarter of 2016.  Total dividends declared during 2016, 2015 and 2014 were $178.8 million, $163.7 million and $140.6 million, respectively. Total dividends paid in 2016, 2015 and 2014 were $172.7 million, $159.3 million and $101.9 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.

 

Equity Compensation Plan Information

 

The following table summarizes the Company’s equity compensation plan information as of December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

Equity Compensation Plan Information

 

 

    

Number of securities to

    

Weighted average

    

Number of

 

 

 

be issued upon exercise

 

exercise price of

 

securities

 

 

 

of outstanding options,

 

outstanding options,

 

remaining available

 

Plan category

 

warrants and rights

 

warrants and rights

 

for future issuance

 

Equity compensation plans approved by security holders

 

32,283,296

 

$

44.15

 

12,355,179

 

Equity compensation plans not approved by security holders

 

 —

 

 

 —

 

 —

 

Total

 

32,283,296

 

$

44.15

 

12,355,179

 

 

Repurchase of Equity Securities

 

In January 2015, the Company’s Board of Directors authorized a stock repurchase program under which the Company could repurchase up to 10 million shares of Common Stock during the two-year period ended January 20, 2017 (the “2015 Stock Repurchase Program”).  During the year ended December 31, 2016, the Company repurchased 5.5 million shares of its common stock for approximately $325.8 million.  These treasury shares have been retired by the Company and common stock and retained earnings were reduced accordingly.  As of December 31, 2016, the Company had repurchased all of the shares authorized under the 2015 Stock Repurchase Program.  The table below reflects the Company’s stock repurchases for the year ended December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Total Number of

    

Maximum Number

 

 

 

Total

 

 

 

 

Shares Purchased as

 

of Shares that May

 

 

 

Number of

 

 

 

 

Part of Publicly

 

Yet Be Purchased

 

 

 

Shares

 

Average Price

 

Announced Plans or

 

Under the Plans or

 

Period

 

Purchased

 

Paid per Share

 

Programs

 

Programs

 

First Quarter - 2016

 

1,000,000

 

$

49.20

 

1,000,000

 

4,465,400

 

Second Quarter - 2016

 

1,000,000

 

 

59.18

 

1,000,000

 

3,465,400

 

Third Quarter - 2016

 

2,000,000

 

 

60.59

 

2,000,000

 

1,465,400

 

 

 

 

 

 

 

 

 

 

 

 

Fourth Quarter - 2016:

 

 

 

 

 

 

 

 

 

 

October 1 to October 31, 2016

 

248,500

 

 

65.52

 

248,500

 

1,216,900

 

November 1 to November 30, 2016

 

1,216,900

 

 

65.73

 

1,216,900

 

 —

 

December 1 to December 31, 2016

 

 —

 

 

 —

 

 —

 

 —

 

 

 

1,465,400

 

 

65.69

 

1,465,400

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

Total - 2016

 

5,465,400

 

$

59.62

 

5,465,400

 

 —

 

 

 

On January 24, 2017, the Company’s Board of Directors authorized a new stock repurchase program under which the Company may purchase up to $1.0 billion of the Company’s Common Stock during the two-year period ending January 24, 2019 in accordance with the requirements of Rule 10b-18 of the Exchange Act (the “2017 Stock Repurchase Program”).  As of February 10, 2017, the Company repurchased approximately 3.2 million shares of its common stock for $213.9 million under the 2017 Stock Repurchase Program.  The price and timing of any future purchases under the 2017 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, dividends, economic and market conditions and stock price. 

 

17


 

 

Item 6.  Selected Financial Data

 

The following table presents selected consolidated financial data that is derived from the Company’s audited Consolidated Financial Statements and that should be read in conjunction with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Consolidated Financial Statements and accompanying notes included herein.  The Company’s acquisitions during the five-year period below may affect the comparability of results.  Our consolidated financial information may not be indicative of our future performance. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars and shares 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

in millions, except per share data)

 

2016

 

2015

 

2014

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

6,286.4

 

$

5,568.7

 

$

5,345.5

 

$

4,614.7

 

$

4,292.1

 

 

Net income attributable to Amphenol Corporation

 

 

822.9

(1)

 

763.5

(2)

 

709.1

(3)

 

635.7

(4)

 

555.3

(5)

 

Net income per common share—Diluted

 

 

2.61

(1)

 

2.41

(2)

 

2.21

(3)

 

1.96

(4)

 

1.69

(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Condition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and short-term investments

 

$

1,173.2

 

$

1,760.4

 

$

1,329.6

 

$

1,192.2

 

$

942.5

 

 

Working capital

 

 

1,956.0

 

 

2,841.6

 

 

2,406.6

 

 

1,510.6

 

 

1,782.0

 

 

Total assets

 

 

8,498.7

 

 

7,458.4

 

 

6,985.9

 

 

6,150.1

 

 

5,203.1

 

 

Long-term debt, including current portion

 

 

3,010.7

 

 

2,813.5

 

 

2,656.2

 

 

2,122.2

 

 

1,695.6

 

 

Shareholders’ equity attributable to Amphenol Corporation

 

 

3,674.9

 

 

3,238.5

 

 

2,907.4

 

 

2,859.5

 

 

2,430.0

 

 

Weighted average shares outstanding—Diluted

 

 

315.2

 

 

316.5

 

 

320.4

 

 

324.5

 

 

327.9

 

 

Cash dividends declared per share

 

$

0.58

 

$

0.53

 

$

0.45

 

$

0.305

 

$

0.21

 

 


(1)

Includes acquisition-related expenses of $36.6 ($33.1 after-tax) primarily relating to the FCI and other 2016 acquisitions, including external transaction costs, amortization related to the value associated with acquired backlog and restructuring charges.  These items had the aggregate effect of decreasing Net income attributable to Amphenol Corporation and Net income per common share-Diluted by $33.1 and $0.11 per share, respectively.  Excluding the effect of these items, Adjusted Net Income attributable to Amphenol Corporation and Adjusted Diluted EPS, both non-GAAP financial measures defined in Part II, Item 7 herein, were $856.0 and $2.72 per share, respectively, for the year ended December 31, 2016.  

 

(2)

Includes acquisition-related expenses of $5.7 ($5.7 after-tax) relating to acquisitions closed and announced in 2015.  These acquisition-related expenses had the effect of decreasing Net income attributable to Amphenol Corporation and Net income per common share-Diluted by $5.7 and $0.02 per share, respectively.  Excluding the effect of this item, Adjusted Net Income attributable to Amphenol Corporation and Adjusted Diluted EPS were $769.2 and $2.43 per share, respectively, for the year ended December 31, 2015.

 

(3)

Includes acquisition-related expenses of (a) $4.3 ($4.1 after-tax) relating to 2014 acquisitions and (b) $9.8 ($6.2 after-tax) relating to amortization of the acquired backlogs of completed acquisitions.   These items had the aggregate effect of decreasing Net income attributable to Amphenol Corporation and Net income per common share-Diluted by $10.3 and $0.04 per share, respectively.  Excluding the effect of these items, Adjusted Net Income attributable to Amphenol Corporation and Adjusted Diluted EPS were $719.4 and $2.25 per share, respectively, for the year ended December 31, 2014.

 

(4)

Includes (a) acquisition-related expenses of $6.0 ($4.6 after-tax) relating to 2013 acquisitions, (b) an income tax benefit of $3.6 due primarily to the favorable completion of prior year audits, and (c) an income tax benefit of $11.3 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, relating to the 2012 tax year was recorded as a benefit in the first quarter of 2013 at the date of reinstatement.  These items had the net effect of increasing Net income attributable to Amphenol Corporation and Net income per common share-Diluted by $10.3 and $0.03 per share, respectively.  Excluding the effect of these items, Adjusted Net Income attributable to Amphenol Corporation and Adjusted Diluted EPS were $625.4 and $1.93 per share, respectively, for the year ended December 31, 2013.

 

(5)

Includes (a) acquisition-related expenses of $2.0 ($2.0 after-tax) relating to 2012 acquisitions and (b) income tax costs of $11.3 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.  These items had the aggregate effect of decreasing Net income attributable to Amphenol Corporation and Net income per common share-Diluted by $13.3 and $0.04 per share, respectively.  Excluding the effect of these items, Adjusted Net Income attributable to Amphenol Corporation and Adjusted Diluted EPS were $568.6 and $1.73 per share, respectively, for the year ended December 31, 2012.

18


 

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

 

(dollars in millions, except per share data)

 

The following discussion and analysis of the results of operations for the three years ended December 31, 2016, 2015 and 2014 has been derived from and should be read in conjunction with the Consolidated Financial Statements included in Part II, Item 8, herein.  The Consolidated Financial Statements have been prepared in U.S. dollars, in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).  The following discussion and analysis also includes references to certain non-GAAP financial measures, which are defined in the “Non-GAAP Financial Measures” section below, including “Constant Currency Net Sales Growth” and “Organic Net Sales Growth”.  For purposes of the following discussion, the terms “constant currencies” and “organically” have the same meanings as these aforementioned non-GAAP financial measures.  Refer to “Non-GAAP Financial Measures” within this Item 7 for more information, including our reasons for including non-GAAP financial measures and material limitations with respect to the usefulness of the measures.

 

In addition to historical information, the following discussion and analysis also contains certain forward-looking statements that are subject to risks and uncertainties, including but not limited to the risk factors described in Item 1A herein, as well as the risks and uncertainties that exist with the use of forward-looking statements as described in the “Cautionary Note Regarding Forward-Looking Statements” section included herein at the beginning of this Annual Report on Form 10-K.

 

Overview

 

General

 

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 operates through two reporting segments: (i) Interconnect Products and Assemblies and (ii) Cable Products and Solutions.  In 2016, approximately 72% 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 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 original equipment manufacturer (“OEM”) customers to consolidate their lists of qualified suppliers to companies that have the ability to meet certain quality, delivery and other standards while maintaining 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.

 

Strategy

 

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 worldwide basis while maintaining continuing programs of productivity improvement and cost control.  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.

 

19


 

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 2016, the Company reported net sales, operating income and net income attributable to Amphenol Corporation of $6,286.4, $1,205.2 and $822.9, respectively, up 13%, 9% and 8%, respectively, from 2015.  Adjusted Operating Income and Adjusted Net Income attributable to Amphenol, as defined in the “Non-GAAP Financial Measures” section below and as reconciled in Part II, Item 6 and Item 7 herein, increased by 12% and 11%, respectively.  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 from operations.  The Company uses cash generated from operations to fund capital expenditures and acquisitions, repurchase shares of its common stock, pay dividends and reduce indebtedness.  In 2016, the Company generated operating cash flow of $1,077.6.

 

Results of Operations

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 

 

 

 

    

2016

    

 

2015

    

 

2014

 

 

Net sales

 

100.0

%  

 

100.0

%  

 

100.0

%

 

Cost of sales

 

67.5

 

 

68.1

 

 

68.3

 

 

Acquisition-related expenses

 

0.6

 

 

0.1

 

 

0.2

 

 

Selling, general and administrative expenses

 

12.7

 

 

12.0

 

 

12.1

 

 

Operating income

 

19.2

 

 

19.8

 

 

19.4

 

 

Interest expense

 

(1.1)

 

 

(1.2)

 

 

(1.5)

 

 

Other income, net

 

0.1

 

 

0.3

 

 

0.3

 

 

Income before income taxes

 

18.2

 

 

18.9

 

 

18.2

 

 

Provision for income taxes

 

(4.9)

 

 

(5.0)

 

 

(4.8)

 

 

Net income

 

13.3

 

 

13.9

 

 

13.4

 

 

Net income attributable to noncontrolling interests

 

(0.2)

 

 

(0.2)

 

 

(0.1)

 

 

Net income attributable to Amphenol Corporation

 

13.1

%  

 

13.7

%  

 

13.3

%

 

 

2016 Compared to 2015

 

Net sales were $6,286.4 for the year ended December 31, 2016 compared to $5,568.7 for the year ended December 31, 2015, an increase of 13% in U.S. dollars, 14% in constant currencies and 2% organically (excluding both currency and acquisition impacts) over the prior year.  Net sales in the Interconnect Products and Assemblies segment (approximately 94% of net sales) increased 13% in U.S. dollars, 14% in constant currencies and 2% organically in 2016, compared to 2015.  The sales growth was driven primarily by growth in the information technology and data communications, industrial, automotive, mobile networks and military markets, with contributions from both the Company’s acquisitions as well as organic strength, partially offset by a decline in sales in the mobile devices market and a slight decline in the commercial aerospace market.  Net sales to the information technology and data communications market increased (approximately $404.0), reflecting the benefits of FCI and other acquisitions as well as growth in products for data centers, including server, networking and storage-related applications.  Net sales to the industrial market increased (approximately $183.9) reflecting the benefit of acquisitions including FCI as well as sales strength in hybrid bus and truck, factory automation and heavy equipment, which was partially offset by sales declines in products sold into oil and gas exploration and alternative energy applications.  Net sales to the automotive market increased (approximately $118.3), driven by both an expansion of our products across a diversified range of vehicles and new onboard electronics as well as contributions from acquisitions.  Net sales to the mobile networks market increased (approximately $114.9), primarily due to contributions from acquisitions including FCI as well as increased sales to

20


 

mobile network service providers and OEMs.  Net sales to the military market increased (approximately $24.0), driven primarily by increased sales into avionics packaging and military airframe applications.  Net sales to the mobile devices market decreased (approximately $158.8) primarily due to declining sales of products incorporated into tablets, smartphones and production-related products, partially offset by growth in sales of products incorporated into new wearable technologies.  Net sales to the commercial aerospace market slightly decreased (approximately $2.5) due to decreases in commercial helicopter and business jet demand which offset the growth associated with new airplane platforms.  Net sales in the Cable Products and Solutions segment (approximately 6% of net sales), which is primarily in the broadband communications market, increased 10% in U.S. dollars, 12% in constant currencies and 9% organically in 2016, compared to 2015, primarily due to the sales increase in the broadband communications market and contributions from an acquisition made during the third quarter of 2016.

 

The table below reconciles Constant Currency Net Sales Growth and Organic Net Sales Growth to the most directly comparable U.S. GAAP financial measures, by segment and consolidated, for the years ended December 31, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage Growth (relative to prior year)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

Foreign

 

Constant

 

 

 

Organic

 

 

 

 

 

growth in

 

currency

 

Currency Net

 

Acquisition

 

Net Sales

 

 

 

 

 

 

 

 

 

U.S. Dollars (1)

 

impact (2)

 

Sales Growth (3)

 

impact (4)

 

Growth (3)

 

 

  

2016

   

2015

   

(GAAP)

 

(non-GAAP)

 

(non-GAAP)

 

(non-GAAP)

 

(non-GAAP)

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interconnect Products and Assemblies

 

$

5,922.3

 

$

5,239.1

 

13

%  

 

(1)

%  

 

14

%  

 

12

%  

 

2

%  

 

Cable Products and Solutions

 

 

364.1

 

 

329.6

 

10

%  

 

(2)

%  

 

12

%  

 

3

%  

 

9

%  

 

Consolidated

 

$

6,286.4

 

$

5,568.7

 

13

%  

 

(1)

%  

 

14

%  

 

12

%  

 

2

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)

Net sales growth in U.S. dollars is calculated based on Net sales as reported in the Consolidated Statements of Income and Note 11 of the accompanying financial statements.

(2)

Foreign currency translation impact, a non-GAAP measure, represents the impact on net sales resulting from foreign currency exchange rate changes in the current year period(s) compared to the prior year.  Such amount is calculated by translating current year net sales at average foreign currency exchange rates for the respective prior year.

(3)

Constant Currency Net Sales Growth and Organic Net Sales Growth are non-GAAP financial measures as defined in the "Non-GAAP Financial Measures" section.

(4)

Acquisition impact, a non-GAAP measure, represents the impact on net sales resulting from acquisitions closed during the years presented, which were not included in the Company’s results as of the comparable prior year and which do not reflect the underlying growth of the Company on a comparative basis.

 

Geographically, net sales in the U.S. in 2016 increased approximately 3% ($1,740.7 in 2016 versus $1,696.3 in 2015) compared to 2015.  International sales in 2016 increased approximately 17% in U.S. dollars ($4,545.7 in 2016 versus $3,872.4 in 2015), 19% in constant currencies and 5% organically, compared to 2015 with strength in both Asia and Europe.  The comparatively stronger U.S. dollar in 2016 had the effect of decreasing net sales by approximately $61.3 when compared to foreign currency translation rates in 2015.

 

Gross profit margin as a percentage of net sales was 32.5% in 2016 compared to 31.9% in 2015.  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 reflecting the benefit of higher volumes and cost reduction actions as well as the impact of the FCI acquisition, which had higher gross margins than the average of the Company.

 

Selling, general and administrative expenses were $798.2 or 12.7% of net sales for 2016, compared to $669.1 or 12.0% of net sales for 2015.  The increase is driven primarily by the impact of the FCI acquisition, which has higher selling, general and administrative expenses as a percentage of net sales than the average of the Company.  Administrative expenses increased approximately $41.2 in 2016 primarily related to the impact of the FCI acquisition and increases in the amortization of acquisition-related identified intangible assets and stock-based compensation expense and represented approximately 4.9% of net sales in 2016 and 4.8% of net sales in 2015.  Research and development expenses increased approximately $41.4 in 2016 primarily related to the impact of the FCI acquisition and represented approximately 2.6% of net sales in 2016 and 2.2% of net sales in 2015. Selling and marketing expenses increased approximately $46.5 in 2016 primarily related to the impact of the FCI acquisition and an increase in sales volume and represented approximately 5.1% of net sales in 2016 and 5.0% of net sales in 2015.

 

Operating income was $1,205.2 or 19.2% of net sales in 2016, compared to $1,104.7 or 19.8% of net sales in 2015.  Operating income for 2016 includes $36.6 of acquisition-related expenses, which included external transaction costs, amortization related to the value associated with acquired backlog and post-closing restructuring charges related to the FCI acquisition, as well as transaction costs associated with other acquisitions.  Operating income for 2015 includes $5.7

21


 

of acquisition-related expenses, which included professional and transaction-related fees and other external expenses related to acquisitions closed and announced in 2015.  These acquisition-related expenses are separately presented in the Consolidated Statements of Income.  For the years ended December 31, 2016 and 2015, these expenses had an impact on net income of $33.1, or $0.11 per share, and $5.7, or $0.02 per share, respectively.  Excluding the effect of these acquisition-related expenses, Adjusted Operating Income and Adjusted Operating Margin, as defined in the “Non-GAAP Financial Measures” section below, were $1,241.8 or 19.8% of net sales in 2016 and $1,110.4 or 19.9% in 2015.  The decrease in Adjusted Operating Margin for 2016 compared to 2015, relates to the decrease in operating margin for the Interconnect Products and Assemblies segment.  Operating income for the Interconnect Products and Assemblies segment in 2016 was $1,280.3 or 21.6% of net sales, compared to $1,158.3 or 22.1% of net sales in 2015.  The slight decrease in operating income margin is driven by the impact of the FCI acquisition, which had a lower operating margin than the average of the Interconnect Products and Assemblies segment for the full year period.  In addition, the operating income for the Cable Products and Solutions segment in 2016 was $52.8 or 14.5% of net sales, compared to $40.3 or 12.2% of net sales in 2015.  The increase in operating income margin for the Cable Products and Solutions segment in 2016 compared to 2015 was primarily as a result of strong operating execution on additional volume, along with the benefit from the favorable impact from commodities.

 

The table below reconciles Adjusted Operating Income and Adjusted Operating Margin to the most directly comparable U.S. GAAP financial measures for the years ended December 31, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2016

 

2015

 

 

Operating

 

Operating

 

Operating

 

Operating

 

 

income

 

margin

 

income

 

margin

Reported (GAAP)

 

$

1,205.2

 

19.2

%  

 

$

1,104.7

 

19.8

%  

Acquisition-related expenses

 

 

36.6

 

0.6

%  

 

 

5.7

 

0.1

%  

Adjusted (non-GAAP)

 

$

1,241.8

 

19.8

%  

 

$

1,110.4

 

19.9

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense was $72.6 in 2016 compared to $68.3 in 2015.  The increase is primarily attributable to the impact of higher average debt levels in 2016 which primarily resulted from the Company’s dividend and stock buyback programs.

 

Other income, net, decreased to $8.5 in 2016 compared to $16.4 in 2015, primarily related to lower interest income on lower cash equivalents and short-term investments, which resulted from the funding of the acquisition of FCI in January 2016 with cash, cash equivalents and short-term investments held outside of the United States.

 

The provision for income taxes was at an effective rate of 27.0% in 2016 and 26.6% in 2015.  The effective tax rate for 2016 and 2015 included the effect of acquisition-related expenses incurred during each year, which had the impact of increasing the effective tax rate by 50 basis points and 10 basis points, respectively.  For additional details related to the reconciliation between the U.S. statutory federal tax rate and the Company’s effective tax rate for these years, refer to Note 4 of the Notes to the Consolidated Financial Statements.

 

2015 Compared to 2014

 

Net sales were $5,568.7 for the year ended December 31, 2015 compared to $5,345.5 for the year ended December 31, 2014, an increase of 4% in U.S. dollars, 8% in constant currencies and 3% organically (excluding both currency and acquisition impacts) over the prior year.  Net sales in the Interconnect Products and Assemblies segment (approximately 94% of net sales) increased 5% in U.S. dollars, 8% in constant currencies and 3% organically in 2015, compared to 2014.  The sales growth was driven by increases in the automotive, mobile devices, industrial and information technology and data communications equipment markets, with contributions from both organic growth and the Company’s acquisition program; partially offset by decreases in sales in the mobile networks, commercial aerospace and military markets.  Net sales to the automotive market increased (approximately $190.9), driven both by acquisitions and an expansion of our products across a diversified range of vehicles and onboard electronics.  Net sales to the mobile devices market increased (approximately $116.5) primarily due to growth in next generation laptops, mobile device accessories and production-related products.  Net sales to the industrial market increased (approximately $43.0) reflecting the benefit of acquisitions as well as growth in industrial battery and hybrid vehicle applications and in alternative energy applications, offset by significant declines in products sold into oil and gas exploration.  Net sales to the information technology and data communications market increased (approximately $17.6), primarily due to the growth in products for server, web and data center applications, partially offset by declines in storage-related

22


 

applications.  Net sales to the mobile networks market decreased (approximately $101.7), primarily due to a decrease in worldwide mobile network build-outs.  Net sales to the commercial aerospace market decreased (approximately $21.5), primarily due to decreases in commercial helicopter and business jet demand.  Net sales to the military market decreased slightly (approximately $3.8).  Net sales in the Cable Products and Solutions segment (approximately 6% of net sales), which is primarily in the broadband communications market, decreased 7% in U.S. dollars and 2% in both constant currencies and organically in 2015, compared to 2014 primarily due to a slowdown in spending by cable operators and the effect of ongoing operator consolidations in the broadband market.

 

The table below reconciles Constant Currency Net Sales Growth and Organic Net Sales Growth to the most directly comparable U.S. GAAP financial measures, by segment and consolidated, for the years ended December 31, 2015 and 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage Growth (relative to prior year)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

Foreign

 

Constant

 

 

 

Organic

 

 

 

 

 

growth in

 

currency

 

Currency Net

 

Acquisition

 

Net Sales

 

 

 

 

 

 

 

 

 

U.S. Dollars (1)

 

impact (2)

 

Sales Growth (3)

 

impact (4)

 

Growth (3)

 

 

  

2015

   

2014

   

(GAAP)

 

(non-GAAP)

 

(non-GAAP)

 

(non-GAAP)

 

(non-GAAP)

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interconnect Products and Assemblies

 

$

5,239.1

 

$

4,992.6

 

5

%  

 

(3)

%  

 

8

%  

 

5

%  

 

3

%  

 

Cable Products and Solutions

 

 

329.6

 

 

352.9

 

(7)

%  

 

(5)

%  

 

(2)

%  

 

0

%  

 

(2)

%  

 

Consolidated

 

$

5,568.7

 

$

5,345.5

 

4

%  

 

(4)

%  

 

8

%  

 

5

%  

 

3

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)

Net sales growth in U.S. dollars is calculated based on Net sales as reported in the Consolidated Statements of Income and Note 11 of the accompanying financial statements.

(2)

Foreign currency translation impact, a non-GAAP measure, represents the impact on net sales resulting from foreign currency exchange rate changes in the current year period(s) compared to the prior year.  Such amount is calculated by translating current year net sales at average foreign currency exchange rates for the respective prior year.

(3)

Constant Currency Net Sales Growth and Organic Net Sales Growth are non-GAAP financial measures as defined in the "Non-GAAP Financial Measures" section.

(4)

Acquisition impact, a non-GAAP measure, represents the impact on net sales resulting from acquisitions closed during the years presented, which were not included in the Company’s results as of the comparable prior year and which do not reflect the underlying growth of the Company on a comparative basis.

 

Geographically, net sales in the U.S. in 2015 increased approximately 1% ($1,696.3 in 2015 versus $1,673.5 in 2014) compared to 2014.  International sales for 2015 increased approximately 5% in U.S. dollars and approximately 10% in constant currencies ($3,872.4 in 2015 versus $3,672.0 in 2014) compared to 2014 with strength in both Asia and Europe.  The comparatively stronger U.S. dollar in 2015 had the effect of decreasing net sales by approximately $190.3 when compared to foreign currency translation rates in 2014.

 

Gross profit margin as a percentage of net sales was 31.9% in 2015 compared to 31.7% in 2014.  The increase in gross profit margin as a percentage of net sales relates primarily to higher gross profit margins in the Interconnect Products and Assemblies segment reflecting the benefit of higher volumes and cost reduction actions.

 

Selling, general and administrative expenses were $669.1 or 12.0% of net sales for 2015, compared to $645.1 or 12.1% of net sales for 2014.  Administrative expenses increased approximately $9.6 in 2015 primarily related to increases in the amortization of acquisition-related identified intangible assets and stock-based compensation expense and represented approximately 4.8% of net sales in both 2015 and 2014.  Research and development expenses increased approximately $9.9 in 2015 reflecting an overall increase in expenses for new product development and represented approximately 2.2% of net sales in 2015 and 2.1% of net sales in 2014.  Selling and marketing expenses increased approximately $4.5 in 2015 primarily related to the increase in sales volume and represented approximately 5.0% of net sales in 2015 and 5.1% of net sales in 2014.

 

Operating income was $1,104.7 or 19.8% of net sales in 2015, compared to $1,034.6 or 19.4% of net sales in 2014.  Operating income for 2015 includes $5.7 of acquisition-related expenses (separately presented in the Consolidated Statements of Income) related to professional fees and other external expenses for acquisitions that were closed and announced in 2015.  Operating income for 2014 includes $14.1 of acquisition-related expenses, which included professional and transaction-related fees and other external expenses related to acquisitions closed in 2014, as well as the amortization of the value associated with acquired backlog related to acquisitions that closed in 2013 and 2014.  For the years ended December 31, 2015 and 2014, these expenses had an impact on net income of $5.7, or $0.02 per share, and $10.2, or $0.04 per share, respectively.  Excluding the effect of these expenses, Adjusted Operating Income and Adjusted Operating Margin, as defined in the “Non-GAAP Financial Measures” section below, were $1,110.4 or 19.9% of net sales in 2015 and $1,048.7 or 19.6% of net sales in 2014.  The increase in Adjusted Operating

23


 

Margin in 2015 compared to 2014 relates to the increase in operating margin for the Interconnect Products and Assemblies segment.  Operating income for the Interconnect Products and Assemblies segment for 2015 was $1,158.3 or 22.1% of net sales, compared to $1,088.0 or 21.8% of net sales in 2014.  This increase in operating income margin is driven primarily by the positive impact of higher gross profit margins as well as a reduction of selling, general and administrative expenses as a percentage of net sales, as described above.  In addition, the operating income for the Cable Products and Solutions segment for 2015 was $40.3 or 12.2% of net sales, compared to $43.7 or 12.4% of net sales for 2014.  The decrease in operating income margin for the Cable Products and Solutions segment for 2015 compared to 2014 was primarily as a result of lower volumes.

 

The table below reconciles Adjusted Operating Income and Adjusted Operating Margin to the most directly comparable U.S. GAAP financial measures for the years ended December 31, 2015 and 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2015

 

2014

    

 

 

Operating

 

Operating

 

Operating

 

Operating

 

 

 

income

 

margin

 

income

 

margin

 

Reported (GAAP)

 

$

1,104.7

 

19.8

%  

 

$

1,034.6

 

19.4

%  

 

Acquisition-related expenses

 

 

5.7

 

0.1

%  

 

 

14.1

 

0.2

%  

 

Adjusted (non-GAAP)

 

$

1,110.4

 

19.9

%  

 

$

1,048.7

 

19.6

%  

 

 

Interest expense was $68.3 for 2015 compared to $80.4 for 2014.  The decrease is primarily attributable to the benefit of lower average borrowing rates resulting from the commercial paper program that was initiated in late 2014, and a senior note issuance in the third quarter of 2014 which replaced a higher rate note maturity.  This benefit more than offset the impact of higher average debt levels which resulted from the Company’s stock buyback program as well as acquisition activity.

 

Other income, net, decreased to $16.4 in 2015 compared to $18.3 in 2014, primarily related to lower interest income on cash, cash equivalents and short-term investments.

 

The provision for income taxes was at an effective rate of 26.6% in 2015 and 26.5% in 2014.  The effective tax rate for 2015 included the effect of acquisition-related expenses incurred during each year, which had the impact of increasing the effective tax rate by 10 basis points.  Acquisition-related expenses incurred during 2014 did not have an impact on the effective tax rate for that year.  For additional details related to the reconciliation between the U.S. statutory federal tax rate and the Company’s effective tax rate for these years, refer to Note 4 of the Notes to the Consolidated Financial Statements.

 

Liquidity and Capital Resources

 

At December 31, 2016 and 2015, the Company had cash, cash equivalents and short-term investments of $1,173.2 and $1,760.4, respectively.  On January 8, 2016, the Company used approximately $1,178.6 of its cash, cash equivalents and short-term investments, net of cash acquired, to fund the FCI acquisition.  The vast majority of the Company’s cash, cash equivalents and short-term investments on hand as of December 31, 2016 was located outside of the U.S.  The Company does not currently intend to repatriate any of its cash, cash equivalents and short-term investments, but rather to permanently reinvest such funds outside the U.S.  However, any repatriation of funds would result in the need to accrue and pay income taxes.

 

Cash Flow Summary

 

The following table summarizes the Company’s cash flows from operating, investing and financing activities for the years ended December 31, 2016, 2015 and 2014, as reflected in the Consolidated Statements of Cash Flow:

 

 

 

 

 

 

 

 

 

 

 

 

    

2016

    

2015

    

2014

Net cash provided by operating activities

 

$

1,077.6

 

$

1,030.5

 

$

880.9

Net cash used in investing activities

 

 

(1,612.7)

 

 

(27.3)

 

 

(781.9)

Net cash (used in) provided by financing activities

 

 

(133.5)

 

 

(180.1)

 

 

14.1

Effect of exchange rate changes on cash and cash equivalents

 

 

(34.0)

 

 

(54.8)

 

 

(31.0)

Net change in cash and cash equivalents

 

$

(702.6)

 

$

768.3

 

$

82.1

24


 

 

Operating Activities

 

The ability to generate cash from operating activities has been one of the Company’s fundamental financial strengths.  Cash flow provided by operating activities was $1,077.6 for 2016 compared to $1,030.5 for 2015. The increase in cash flow provided by operating activities for 2016 compared to 2015 is primarily related to an increase in net income, higher non-cash charges resulting from the increase in depreciation and amortization related to the FCI acquisition, and a higher decrease in the net components of working capital, which were partially offset by a higher usage of cash related to the change in long-term assets and liabilities.  Cash flow provided by operating activities was $1,030.5 for 2015 compared to $880.9 for 2014. The increase in cash flow provided by operating activities for 2015 compared to 2014 is primarily due to an increase in net income and an overall decrease in the net components of working capital, compared to the increase in net working capital in 2014.

 

In 2016, the components of working capital as presented on the accompanying Consolidated Statements of Cash Flow decreased $51.2, excluding the impact of acquisitions and foreign currency translation, due primarily to increases in accrued income taxes, other accrued liabilities, and accounts payable of $91.7, $61.9, and $47.8, respectively, and a decrease in other current assets of $29.9, partially offset by increases in accounts receivable and inventories of $165.9 and $14.2, respectively.  In 2015, the components of working capital as presented on the accompanying Consolidated Statements of Cash Flow decreased $46.9, excluding the impact of acquisitions and foreign currency translation, due primarily to decreases in other current assets of $47.7 and increases in accrued liabilities of $44.2, offset by increases in accounts receivable and inventory of $22.3 and $5.2, respectively, and decreases in accounts payable of $17.5.  In 2014, the components of working capital increased $18.9, excluding the impact of acquisitions and foreign currency translation, 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 following describes the significant changes in the amounts as presented on the accompanying Consolidated Balance Sheets at December 31, 2016 compared to December 31, 2015. Accounts receivable increased $244.7 to $1,349.3 primarily due to the impact of the FCI and other 2016 acquisitions as well as an increase in sales volume, partially offset by the effect of translation from exchange rate changes at December 31, 2016 compared to December 31, 2015 (“Translation”). Days sales outstanding at December 31, 2016 and 2015 were 73 and 71, respectively.  Inventories increased $77.1 to $928.9, primarily due to the impact of the FCI and other 2016 acquisitions, partially offset by Translation. Inventory days at December 31, 2016 and 2015 were 76 and 79, respectively. Land and depreciable assets, net, increased $101.9 to $711.4, primarily due to the impact of the FCI and other 2016 acquisitions, as well as capital expenditures of $190.8, partially offset by depreciation of $157.8, disposals and Translation.  Goodwill increased $985.9 to $3,678.8 primarily as a result of goodwill recognized during the year related to four acquisitions in the Interconnect Products and Assemblies segment, including FCI, and one acquisition in the Cable Products and Solutions segment, partially offset by Translation.  Intangibles, net and other long-term assets increased $211.3 to $517.3 primarily as a result of the identifiable intangible assets of $263.0 recognized related to the FCI and other 2016 acquisitions, partially offset by amortization of $54.6 and Translation.  Accounts payable increased $90.4 to $678.2, primarily as a result of the impact of the FCI and other 2016 acquisitions, partially offset by Translation.  Payable days at December 31, 2016 and 2015 were 55 and 54, respectively.  Total accrued expenses increased $161.5 to $581.8, primarily as a result of the impact of the FCI and other 2016 acquisitions.  Accrued pension and postretirement benefit obligations increased $25.9 to $288.4 primarily as a result of the impact of the FCI acquisition.  Other long-term liabilities increased $120.6 to $216.5 primarily as a result of the impact of the FCI and other 2016 acquisitions, specifically related to an increase in contingent tax liabilities and deferred tax liabilities.

 

In 2016, the Company made aggregate cash contributions to its defined benefit pension plans of approximately $26.2, the majority of which was to its U.S. defined benefit pension plans. The timing and amount of cash contributions in subsequent years will depend on a number of factors, including the investment performance of the plan assets.

 

Investing Activities

 

Cash flows from investing activities consist primarily of cash flows associated with capital expenditures (purchases of land and depreciable assets), proceeds from disposals of land and depreciable assets, net sales and maturities (purchases) of short-term investments, and acquisitions. 

 

25


 

Net cash used in investing activities was $1,612.7 in 2016, compared to $27.3 in 2015 and $781.9 in 2014.  In 2016, cash used in investing activities was driven primarily by the use of $1,305.1 in cash to fund acquisitions during the year, most significantly the acquisition of FCI for $1,178.6, capital expenditures (net of disposals) of $183.7 and net purchases of short-term investments of $123.9.  In 2015, cash used in investing activities was driven primarily by the use of $199.8 in cash to fund acquisitions during the year and capital expenditures (net of disposals) of $163.4, partially offset by net sales and maturities of short-term investments of $335.9.  In 2014, cash used in investing activities was driven primarily by the use of $518.2 in cash to fund acquisitions during the year, capital expenditures (net of disposals) of $203.5 and net purchases of short-term investments of $60.2. 

 

Financing Activities

 

Cash flows from financing activities consist primarily of cash flows associated with borrowings and repayments of the Company’s credit facilities and other long-debt, repurchases of common stock, proceeds from the exercise of stock options including the related excess tax benefits, dividend payments and distributions to noncontrolling interests. 

 

Net cash used in financing activities was $133.5 in 2016, compared to $180.1 in 2015.  In 2016, cash used in financing activities was driven primarily by repurchases of the Company’s common stock of $325.8, dividend payments of $172.7, payments to shareholders of noncontrolling interests of $6.8 and payments of costs related to the refinancing of our revolving credit facility of $3.0, partially offset by cash proceeds from the exercise of stock options including the related excess tax benefits of $191.6 and increased net borrowings of $183.2.  In 2015, cash used in financing activities of $180.1 was driven primarily by repurchases of the Company’s common stock of $248.9, dividend payments of $159.3 and payments to shareholders of noncontrolling interests of $6.1, partially offset by increased net borrowings of $153.6 and cash proceeds from the exercise of stock options including the related excess tax benefits of $80.6.  In 2014, cash provided by financing activities of $14.1 was driven primarily by increased net borrowings of $540.0 and cash proceeds from the exercise of stock options including the related excess tax benefits of $130.1, partially offset by repurchases of the Company’s common stock of $539.4, dividend payments of $101.9, payments of costs related to debt financing of $11.1 and payments to shareholders of noncontrolling interests of $3.6. 

 

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 been, and continues to be, able to borrow funds at reasonable interest rates.  The Company’s debt financing includes the use of the commercial paper program, the revolving credit facility and senior notes as part of its overall cash management strategy. 

 

On March 1, 2016, the Company replaced its $1,500.0 unsecured credit facility with a new $2,000.0 unsecured credit facility (the “Revolving Credit Facility”).  The Revolving Credit Facility, which matures March 2021, increases the aggregate commitments by $500.0 and gives the Company the ability to borrow at a spread over LIBOR.  The Company intends to utilize the Revolving Credit Facility for general corporate purposes.  At December 31, 2016, there were no borrowings under the Revolving Credit Facility.  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, 2016, the Company was in compliance with the financial covenants under the Revolving Credit Facility. 

 

In September 2014, the Company entered into a commercial paper program (“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 is rated A-2 by Standard & Poor’s and P-2 by Moody’s and is backstopped by the Revolving Credit Facility.  Effective April 1, 2016, the maximum aggregate principal amount of the commercial paper notes that may be outstanding at any time under the Commercial Paper Program was increased by $500.0 from $1,500.0 to $2,000.0.  The amount of commercial paper notes outstanding as of December 31, 2016 was $1,018.9.  Additionally, in 2014, the Company issued three separate unsecured senior notes with an aggregate $1,500.0 principal amount, the proceeds of which were used to repay the $600.0 4.75% notes which matured during the year and borrowings under the Company’s revolving credit facilities.  Fees and expenses related to the issuance of the Revolving Credit Facility in 2016 was $3.0.  The fees and expenses related to the issuance of the commercial paper and senior notes in 2014 was $11.1.  Such issuance fees and expenses are 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.

 

26


 

As of December 31, 2016, the Company has outstanding senior notes (the “Senior Notes”) as follows:

 

 

 

 

 

 

 

 

Principal

    

Interest

    

 

 

Amount

 

Rate

 

Maturity

 

$

375.0

 

1.55

%  

September 2017

 

 

750.0

 

2.55

%  

January 2019

 

 

375.0

 

3.125

%  

September 2021

 

 

500.0

 

4.00

%  

February 2022

 

 

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 of 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.  The 1.55% Senior Notes are due in September 2017 and are therefore recorded, net of the related unamortized discount and debt issuance costs, within Current portion of long-term debt in the accompanying Consolidated Balance Sheets as of December 31, 2016.

 

Refer to Note 2 of the Notes to the Consolidated Financial Statements for further information related to the Company’s debt.

 

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

 

In January 2015, the Board of Directors authorized a stock repurchase program under which the Company could repurchase up to 10 million shares of its Common Stock during the two-year period ended January 20, 2017 (the “2015 Stock Repurchase Program”).  During the years ended December 31, 2016 and 2015, the Company repurchased 5.5 million and 4.5 million shares of its common stock for $325.8 and $248.9, respectively.  These treasury shares have been retired by the Company and common stock and retained earnings were reduced accordingly.  At December 31, 2016, the Company had repurchased all of the shares authorized under the 2015 Stock Repurchase Program. 

 

On January 24, 2017, the Company’s Board of Directors authorized a new stock repurchase program under which the Company may purchase up to $1,000.0 of the Company’s Common Stock during the two-year period ending January 24, 2019 in accordance with the requirements of Rule 10b-18 of the Exchange Act (the “2017 Stock Repurchase Program”).  As of February 10, 2017, the Company repurchased approximately 3.2 million shares of its common stock for $213.9 under the 2017 Stock Repurchase Program.  The price and timing of any future purchases under the 2017 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, dividends, economic and market conditions and stock price. 

 

Contingent upon declaration by the Board of Directors, the Company generally pays a quarterly dividend on shares of Common Stock.  In the third quarter of 2015, the Board of Directors approved an increase in the quarterly dividend rate from $0.125 to $0.14 per share effective with dividends declared in the third quarter of 2015, and in October 2016, approved a further increase in the quarterly dividend rate from $0.14 to $0.16 per share effective with dividends declared in the fourth quarter of 2016.  Total dividends declared during 2016, 2015 and 2014 were $178.8, $163.7 and $140.6, respectively. Total dividends paid in 2016, 2015 and 2014 were $172.7, $159.3 and $101.9, 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 Facility, and the Commercial Paper Program.

 

Liquidity and Cash Requirements

 

The Company’s primary sources of liquidity are internally generated cash flow, the Commercial Paper Program, the Revolving Credit Facility, and its cash, cash equivalents and short-term investments on hand. The Company believes that its cash, cash equivalents and short-term investment position on hand, ability to generate future cash flow from

27


 

operations, availability under its credit facilities, and access to capital markets provide adequate liquidity to meet its obligations for the next twelve months, including the repayment of its 1.55% Senior Notes due in September 2017.

 

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, as it did with the 2016 acquisition of FCI.  The Company expects that capital expenditures in 2017 will be in a range of approximately $200.0 to $240.0. 

 

FCI Acquisition

 

On January 8, 2016, pursuant to a Purchase Agreement dated July 17, 2015 and as amended on December 31, 2015, the Company acquired all of the share capital of FCI for an aggregate purchase price of approximately $1,178.6, net of cash acquired, which was funded by cash, cash equivalents and short-term investments on hand that were held outside of the United States.

 

Refer to Note 9 of the Notes to the Consolidated Financial Statements for further discussion of the FCI acquisition.

 

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 adverse 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.  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 communications related markets, implementing price increases 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 including possible currency devaluations. 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.  For further discussion of foreign exchange exposures, risks and uncertainties, refer to the risk factor titled “The Company’s results may be negatively affected by foreign currency exchange rates” in Part I, Item 1A herein.

 

Non-GAAP Financial Measures

 

In addition to assessing the Company’s financial condition, results of operations, liquidity and cash flows in accordance with U.S. GAAP, management utilizes certain non-GAAP financial measures defined below as part of its internal reviews for purposes of monitoring, evaluating and forecasting the Company’s financial performance, communicating operating results to the Company's Board of Directors and assessing related employee compensation measures.  Management believes that these non-GAAP financial measures may be helpful to investors in assessing the Company’s overall financial performance, trends and year-over-year comparative results, in addition to the reasons noted below.  Non-GAAP financial measures exclude income and expenses that are not directly related to the Company's operating performance during the years presented.  Items excluded from non-GAAP financial measures in any period may consist of, without limitation, acquisition-related expenses, certain discrete tax items and refinancing-related costs

28


 

that may arise during such periods.  The non-GAAP financial information contained herein is included for supplemental purposes only and should not be considered in isolation, as a substitute for or superior to the related U.S. GAAP financial measures.  In addition, these non-GAAP financial measures are not necessarily the same or comparable to similar measures presented by other companies, as such measures may be calculated differently or may exclude different items. 

 

The non-GAAP financial measures defined below should be read in conjunction with the Company’s financial statements presented in accordance with U.S. GAAP.  The reconciliations of these non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures for the years ended December 31, 2016, 2015 and 2014 are included in “Results of Operations”:

 

·

Adjusted Operating Income is defined as Operating income, as reported in the Consolidated Statements of Income, excluding income and expenses that are not directly related to the Company's operating performance during the years presented.     

 

·

Adjusted Operating Margin is defined as Adjusted Operating Income (as defined above) expressed as a percentage of Net sales (as reported in the Consolidated Statements of Income).

 

·

Constant Currency Net Sales Growth is defined as the year-over-year percentage change in net sales growth, excluding the impact of changes in foreign currency exchange rates.  Our results are subject to volatility related to foreign currency translation fluctuations.  As such, management evaluates the Company’s sales performance based on actual sales growth in U.S. dollars, as well as Organic Net Sales Growth (defined below) and Constant Currency Net Sales Growth, and believes that such information is useful to investors to assess the underlying sales trends.

 

·

Organic Net Sales Growth is defined as the year-over-year percentage change in net sales growth resulting from operating volume and pricing changes, and excludes the impact of 1) changes in foreign currency exchange rates, which directly impact the Company’s operating results and are outside the control of the Company and 2) acquisitions closed during the years presented, which were not included in the Company’s results as of the comparable prior years and which do not reflect the underlying growth of the Company on a comparative basis.  Management evaluates the Company’s sales performance based on actual sales growth in U.S. dollars, as well as Constant Currency Net Sales Growth (defined above) and Organic Net Sales Growth, and believes that such information is useful to investors to assess the underlying sales trends.

 

In addition, the following two non-GAAP financial measures, defined below, are reconciled to the most directly comparable U.S. GAAP financial measures in Part II, Item 6 herein, for each of the years presented therein.

 

·

Adjusted Net Income attributable to Amphenol is defined as Net Income attributable to Amphenol Corporation, as reported in the Consolidated Statements of Income, excluding income and expenses and their related tax effects, that are not directly related to the Company's operating performance during the years presented.

 

·

Adjusted Diluted EPS is defined as diluted earnings per share (as reported in accordance with GAAP), excluding income and expenses and their related tax effects, that are not directly related to the Company's operating performance during the years presented.  Adjusted Diluted EPS is calculated as Adjusted Net Income attributable to Amphenol, as defined above, divided by the weighted average outstanding diluted shares as reported in the Company’s Consolidated Statements of Income. 

 

Recent Accounting Pronouncements

 

Refer to Note 1 of the Notes to the Company’s Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.

 

Pensions

 

The Company and certain of its subsidiaries in the United States 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

29


 

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 the International Plans (together, the “Plans”) approximated $24.2, $31.0 and $22.4 in 2016, 2015 and 2014, 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 of 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 weighted average discount rate for the U.S. Plans on this basis was 3.93% and 4.11% at December 31, 2016 and 2015, respectively.  The decrease in the discount rate for the U.S. Plans resulted in an increase in the benefit obligation of approximately $10.7 at December 31, 2016.  The weighted average discount rate for the International Plans was 2.28% and 3.14% at December 31, 2016 and 2015, respectively.  The decrease in the discount rate for the International Plans did not have a material impact on the benefit obligation at December 31, 2016.  At December 31, 2015, the Company elected to further refine its approach for calculating its service and interest costs beginning in 2016 by applying a split discount rate approach under which specific spot rates along the selected yield curve are applied to the relevant projected cash flows as the Company believes this method more precisely measures its obligations.  The mortality assumptions used by the Company reflect commonly used mortality tables and improvement scales for each plan and increased life expectancies for plan participants.

 

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 consideration of 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 8.5%, 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 approximately 60% with equity managers (with an expected long-term rate of return of approximately 8.5%) and 40% with fixed income managers (with an expected long-term rate of return of approximately 6.0%).  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 net periodic benefit cost of the U.S. Plans for the years ended December 31, 2016 and 2015 was 7.75% and 8.00%, respectively.  The Company's expected weighted average long-term rate of return assumption to determine the net periodic benefit cost of the International Plans for the years ended December 31, 2016 and 2015 was 4.29% and 5.47%, respectively.

 

The Company made cash contributions to the Plans of $26.2, $24.1 and $23.8 in 2016, 2015 and 2014, respectively. The total liability for accrued pension and postretirement benefit obligations under the Company’s pension and postretirement benefit plans increased in 2016 to $290.9 ($4.0 of which is included in other accrued expenses primarily representing required contributions to be made during 2017 for unfunded foreign plans) from $266.0 in 2015 primarily due to a decrease in the discount rate. The Company estimates that, based on current actuarial calculations, it will make aggregate cash contributions to the Plans in 2017 of approximately $25.0, the majority of which will be to the U.S. Plans.  The timing and amount of cash contributions in subsequent years will depend on a number of factors including the investment performance of the Plans’ assets.

 

The Company offers various defined contribution plans for certain 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 to its U.S. defined contribution plans of approximately $5.0, $4.2 and $3.8 in 2016, 2015 and 2014, respectively.

 

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

 

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, title passes and the risks and rewards of ownership pass to the customer, provided the earning process is complete and revenue is measurable.  Such recognition generally occurs when the products reach the shipping point, the sales price is fixed and determinable, and collection is reasonably assured. 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 6% of net sales in 2016), 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 expenses.

 

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 evaluation for the impairment of goodwill for the Company’s two reporting units on an annual basis or more frequently if an event occurs or circumstances change that would indicate that a reporting unit’s carrying amount may be impaired.  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 2015, the Company changed its annual assessment date for goodwill impairment to be as of July 1, rather than June 30, which had no impact on the outcome of the assessment.

 

In 2016, the Company utilized the option to first assess qualitative factors to determine whether it was necessary to perform the two-step quantitative goodwill impairment assessment.  As part of this assessment, the Company reviews qualitative factors, which include but are not limited to, economic, market and industry conditions, as well as the financial performance of each reporting unit.  In accordance with applicable guidance, an entity is not required to calculate the fair value of a reporting unit if, after assessing these qualitative factors, the Company determines that it is more likely than not that its reporting unit’s carrying value is less than its fair value.  As of July 1, 2016, the Company determined that it was more likely than not that the fair value of its reporting units was greater than their carrying amounts.

 

In 2015, the Company exercised its option to bypass the qualitative assessment and performed the first step of the two-step quantitative goodwill impairment assessment for each reportable business segment.  As part of the quantitative assessment, the Company estimated the fair value of each of its reportable business segments using a market approach.  The Company believed this approach provided the best indicator of fair value, by utilizing market prices and other relevant metrics for comparable publicly traded companies with similar operating and investment characteristics and recent transactions of similar businesses within the industry.  Significant estimates and assumptions were used in the Company’s goodwill impairment assessment including revenue and profitability projections, determination of appropriate publicly traded market comparison companies, and comparable revenue and earnings multiples derived from

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comparable publicly traded companies and from recent acquisitions within our industry.  As part of our quantitative approach, the Company evaluated whether it was reasonably likely that changes to management’s estimates and assumptions would have a material impact on the results of the goodwill impairment assessment.  As of July 1, 2015, we determined that the fair value of each of the Company’s reportable business segments was substantially in excess of their respective carrying amounts, and therefore, no goodwill impairment resulted from the assessment.