Amphenol Corporation — Fiscal 2020 Form 10-K Summary
Business context and reporting period
Amphenol designs, manufactures and markets connectors, interconnect systems, antennas, sensors, sensor-based products and specialty cable. The filing covers the fiscal year ended December 31, 2020, with comparative results for 2019 and 2018. The company reports two segments: Interconnect Products and Assemblies, representing approximately 96% of 2020 sales, and Cable Products and Solutions, representing approximately 4%.
Amphenol serves automotive, industrial, information technology and data communications, mobile devices, military, aerospace, broadband communications and mobile network markets. Approximately 71% of 2020 sales were outside the United States, including approximately 30% from China. Apple-related sales, including products sold through EMS providers, represented approximately 11% of 2020 sales.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $8,598.9 million | $8,225.4 million | 5% |
| Gross profit | $2,664.1 million | $2,616.0 million | 2% |
| Operating income | $1,638.4 million | $1,619.2 million | 1% |
| Operating margin | 19.1% | 19.7% | Down 60 basis points |
| Net income attributable to Amphenol | $1,203.4 million | $1,155.0 million | 4% |
| Diluted EPS | $3.91 | $3.75 | 4% |
| Effective tax rate | 20.5% | 22.2% | Down 170 basis points |
| Operating cash flow | $1,592.0 million | $1,502.3 million | 6% |
| Free cash flow | $1,327.9 million | $1,214.7 million | 9% |
| Cash, equivalents and short-term investments | $1,738.1 million | $908.6 million | 91% |
| Total debt, including current portion | $3,866.5 million | $3,606.7 million | 7% |
Adjusted operating income was $1,649.9 million, or a 19.2% adjusted operating margin, compared with $1,644.6 million and 20.0% in 2019. Adjusted net income was $1,151.4 million and adjusted diluted EPS was $3.74, essentially unchanged from 2019. The 2020 results included $42.8 million of excess tax benefits from stock option exercises and a $19.9 million discrete tax benefit, partly offset by $11.5 million of acquisition-related expenses.
- Interconnect Products and Assemblies sales increased 5% to $8,229.9 million; operating income was $1,741.2 million and the segment margin was 21.2%, compared with 22.0% in 2019.
- Cable Products and Solutions sales decreased 4% to $369.0 million; operating income was $35.4 million and the segment margin was 9.6%, compared with 10.2% in 2019.
- Accounts receivable increased to $1,951.6 million and inventories increased to $1,462.2 million, primarily reflecting higher sales levels and currency translation.
- Capital expenditures were $276.8 million, compared with $295.0 million in 2019.
- The company declared $310.0 million of dividends and paid $297.6 million. The annual dividend increased to $1.04 per share from $0.96.
- Amphenol repurchased 6.0 million shares for $641.3 million during 2020; approximately $199.8 million remained available under the repurchase authorization at January 31, 2021.
Material changes versus the prior comparable period
- Sales growth was driven by industrial, information technology and data communications, and mobile device markets, partly offset by declines in commercial aerospace, mobile networks and automotive.
- Organic sales growth was 2% on a consolidated basis; constant-currency growth was 4%. Acquisitions contributed approximately 2 percentage points to reported sales growth.
- Commercial aerospace sales declined approximately $135.3 million, mobile network sales declined approximately $98.5 million and automotive sales declined approximately $86.0 million, principally due to COVID-19-related disruption and market conditions.
- Industrial sales increased approximately $246.4 million, information technology and data communications sales increased approximately $234.0 million, and mobile device sales increased approximately $179.9 million.
- Operating margin declined as COVID-19-related costs, lower volumes and unfavorable mix more than offset operating leverage from stronger second-half sales.
- Cash flow improved while acquisition spending fell sharply to $50.4 million from $937.4 million in 2019. The company completed two acquisitions in 2020 versus nine in 2019.
- Debt increased following the issuance of $400.0 million of 2.050% senior notes due 2025 and €500.0 million of 0.750% senior notes due 2026. The proceeds helped refinance 2020 maturities and repay revolving-credit borrowings.
Guidance, outlook, commentary, risks and unusual items
Management stated that COVID-19 disruptions were expected to continue at least through the first half of 2021 and potentially through the full year or longer. Risks include facility restrictions, supplier constraints, logistics interruptions, work-from-home measures and reduced customer demand. The filing does not provide a clear consolidated 2021 revenue or earnings forecast.
- 2021 capital expenditures were expected to be approximately 3% to 4% of net sales.
- Management believed liquidity was adequate for at least the next twelve months, based on cash, operating cash generation, credit availability and capital-market access.
- Amphenol agreed to acquire MTS Systems for approximately $1.7 billion, subject to regulatory, shareholder and other closing conditions. The transaction was expected to close by mid-2021 and was expected to be funded with cash and new borrowings.
- Amphenol subsequently agreed to sell MTS’s Test & Simulation business to Illinois Tool Works, subject to customary closing conditions and regulatory approvals.
- Two additional acquisitions totaling approximately $145 million were completed in January 2021.
- Backlog was approximately $2.380 billion at December 31, 2020, up from $1.978 billion, although the company cautioned that short lead times and cancellable orders limit backlog’s predictive value.
- Debt maturities include approximately $230.5 million in 2021 and $295.6 million in 2022. Nearly all outstanding borrowings were fixed-rate, and there were no borrowings under the revolving credit or commercial paper programs at year-end.
- Key risks include global economic and geopolitical conditions, China and trade restrictions, foreign-exchange volatility, raw-material availability and pricing, customer concentration, communications-market cyclicality, competition, cybersecurity, acquisitions, tax audits, government contracting and environmental litigation.
- The company had approximately $5.0 billion of goodwill and $397.5 million of other intangible assets at year-end. No impairment was recorded, but a significant deterioration in operating performance could result in material non-cash charges.
- The company was responding to a Department of Defense subpoena concerning certain military and aerospace products; the timing and outcome could not be estimated.
- Four Indiana environmental lawsuits were disclosed. The company stated that related costs and remediation expenses were reimbursed by the former owner under an indemnification agreement.
- Unrecognized tax benefits, including interest and penalties, were approximately $169.3 million at December 31, 2020; the filing identified tax positions potentially subject to resolution over the following twelve months.
- A two-for-one stock split was announced on January 27, 2021, with distribution expected on March 4, 2021.
Most important facts for an investor to verify
- Whether the MTS acquisition and subsequent Test & Simulation divestiture closed on the expected terms and timing, and the resulting effect on leverage and earnings.
- The pace and duration of COVID-19-related disruptions, particularly in automotive, aerospace, mobile networks and global manufacturing.
- Whether the 19.1% operating margin can stabilize or recover after pandemic-related costs and mix pressure.
- Available cash after the MTS transaction, the company’s ability to refinance the 2021 and 2022 maturities, and compliance with debt covenants.
- Organic growth trends by end market, especially information technology and data communications, industrial, mobile devices and China.
- Exposure to Apple, China, communications customers and distributor channels, including the effect of any customer demand or sourcing changes.
- Potential cash impacts from tax audits, unrecognized tax benefits, the Tax Act transition-tax installments, pension obligations and the disclosed legal matters.
- Reconciliation of reported results to adjusted measures, particularly the effect of discrete tax benefits and stock-option exercises on 2020 EPS.