Amphenol Corporation 2016 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2016, filed February 17, 2017. Amphenol designs and manufactures electrical, electronic and fiber-optic connectors, interconnect systems, antennas, sensors and specialty cable. Operations are reported through Interconnect Products and Assemblies and Cable Products and Solutions. The filing includes fourth-quarter 2016 data but is not a quarterly filing.
- Interconnect Products and Assemblies represented approximately 94% of 2016 net sales; Cable Products and Solutions represented approximately 6%.
- Approximately 72% of sales and 90% of employees were outside the United States; China represented approximately 30% of sales.
- The company served customers in approximately 70 countries and operated approximately 390 plants, warehouses and offices with approximately 62,000 employees.
Financial performance, cash flow, margins, debt and liquidity
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $6,286.4 million | $5,568.7 million | +13% |
| Gross profit | $2,040.0 million | $1,779.5 million | +15% |
| Gross margin | 32.5% | 31.9% | +60 basis points |
| Operating income | $1,205.2 million | $1,104.7 million | +9% |
| Operating margin | 19.2% | 19.8% | -60 basis points |
| Net income attributable to Amphenol | $822.9 million | $763.5 million | +8% |
| Diluted EPS | $2.61 | $2.41 | +8% |
| Operating cash flow | $1,077.6 million | $1,030.5 million | +5% |
- Reported sales growth was 14% in constant currencies and 2% organically. Acquisitions contributed approximately 12 percentage points and currency translation reduced growth by approximately 1 percentage point.
- Adjusted operating income was $1,241.8 million and adjusted operating margin was 19.8%, compared with $1,110.4 million and 19.9% in 2015. Adjusted net income was $856.0 million and adjusted diluted EPS was $2.72.
- Sales growth was strongest in information technology and data communications, industrial, automotive, mobile networks and military markets. Mobile-device sales declined approximately $158.8 million, while commercial aerospace sales declined slightly.
- Backlog increased to approximately $1.319 billion at December 31, 2016, from $1.121 billion at December 31, 2015. Management cautions that backlog may not predict demand because certain orders can be cancelled and communications-related orders generally have short lead times.
- Cash, cash equivalents and short-term investments were $1,173.2 million, down from $1,760.4 million. Working capital was $1,956.0 million, down from $2,841.6 million.
- Capital expenditures were $190.8 million, net cash used in acquisitions was $1,305.1 million, and cash used in investing activities was $1,612.7 million.
- Total debt was $3,010.7 million, including $1,018.9 million of commercial paper. The company had no borrowings under its $2.0 billion revolving credit facility at year-end.
- Senior notes included $375.0 million due September 2017, $750.0 million due January 2019, $375.0 million due September 2021 and $500.0 million due February 2022. Approximately 34% of outstanding borrowings were subject to floating rates.
- Dividends declared increased to $0.58 per share from $0.53, and the company repurchased 5.5 million shares for $325.8 million during 2016.
Material changes versus the prior comparable period
- The company acquired FCI Asia Pte Ltd on January 8, 2016, for approximately $1,178.6 million net of cash acquired. FCI expanded exposure to information technology and data communications, industrial, mobile networks, automotive and mobile-device markets.
- The company funded five acquisitions for approximately $1.3 billion in 2016. Goodwill increased by $985.9 million to $3,678.8 million, primarily from acquisitions.
- Acquisition-related expenses increased to $36.6 million from $5.7 million, reducing 2016 net income by $33.1 million, or $0.11 per diluted share.
- Gross margin improved, but reported operating margin declined because FCI had lower operating margins than the company average and selling, general and administrative expenses rose to 12.7% of sales from 12.0%.
- Operating cash flow increased $47.1 million, but cash balances declined substantially because of acquisition funding, share repurchases, dividends, capital expenditures and currency effects.
- Commercial paper outstanding increased from $823.9 million to $1,018.9 million, while current debt increased to $375.2 million because of the September 2017 senior-note maturity.
- The company entered into a new $2.0 billion revolving credit facility maturing in March 2021, replacing a $1.5 billion facility.
Guidance, outlook, management commentary, risks and unusual items
- Management stated that cash on hand, operating cash generation, available credit and capital-market access should provide adequate liquidity for the next twelve months, including repayment of the $375.0 million senior notes due in September 2017.
- 2017 capital expenditures were expected to be approximately $200 million to $240 million. The filing does not provide a specific 2017 revenue or earnings outlook.
- Management expects approximately $25.0 million of pension-plan contributions in 2017 and approximately $25.0 million of amortization-related intangible expense in 2017? The filing separately reports estimated intangible amortization of approximately $47.5 million in 2017; the pension contribution estimate is approximately $25.0 million.
- Key risks include dependence on communications markets, rapid technology changes and new-product acceptance, customer pricing pressure, competition, reductions in defense spending, foreign currency volatility, geopolitical and trade risks, raw-material pricing and availability, acquisition integration, goodwill impairment, cybersecurity incidents, litigation and regulatory proceedings.
- Approximately $4,182.5 million of foreign earnings were designated for permanent reinvestment outside the United States; potential tax costs of repatriation were not practicably estimable.
- Unrecognized tax benefits, including interest and penalties, were approximately $138.7 million at year-end, compared with $20.6 million in 2015. The timing and ultimate settlement remain uncertain.
- Defined benefit plans were underfunded by approximately $277.3 million at year-end, compared with $252.8 million in 2015. The company recognized no goodwill or other significant asset impairments in 2016.
- Legal proceedings arose in the ordinary course of business; potential liability could not be reasonably estimated, but management did not expect a material adverse effect.
- Deloitte & Touche LLP reported that the consolidated financial statements and internal control over financial reporting were fairly presented and effective as of December 31, 2016.
Most important facts for investors to verify
- Whether FCI and the other 2016 acquisitions deliver the expected organic growth, margin improvement and cash returns.
- The company’s ability to refinance or repay the $375.0 million senior notes due in September 2017 without restricting acquisitions, dividends or repurchases.
- Commercial-paper balances, covenant compliance and the availability of the revolving credit facility under changing market conditions.
- Exposure to communications, mobile-device and China markets, including customer concentration and cyclical capital spending.
- Reconciliation of reported results to adjusted results, particularly the $36.6 million of acquisition-related expenses.
- Goodwill and intangible-asset balances, integration progress and sensitivity to potential impairment.
- Foreign earnings reinvestment, unrecognized tax benefits and potential changes in international tax or repatriation rules.
- Organic sales trends, backlog conversion and the effect of currency movements, raw-material costs and pricing actions on margins.