Amphenol Corporation — FY2017 Form 10-K Summary
Business context and reporting period
Amphenol designs, manufactures and markets electrical, electronic and fiber-optic connectors, interconnect systems, antennas, sensors, specialty cable and related assemblies. The filing covers the fiscal year ended December 31, 2017; the source also provides fourth-quarter information, but this is an annual Form 10-K rather than a quarterly filing.
- Interconnect Products and Assemblies: 94% of 2017 sales; operating income of $1,475.2 million.
- Cable Products and Solutions: 6% of 2017 sales; operating income of $54.2 million.
- Approximately 72% of sales were outside the United States, including approximately 30% in China. No customer represented at least 10% of sales in 2017 or 2016.
- 2017 backlog was approximately $1.610 billion, versus $1.319 billion at December 31, 2016, although backlog may not be indicative of future demand because orders can generally be cancelled and some markets have short lead times.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $7,011.3 million | $6,286.4 million | +12% |
| Gross profit | $2,309.9 million | $2,040.0 million | +13% |
| Gross margin | 32.9% | 32.5% | +40 bps |
| Operating income | $1,427.6 million | $1,205.2 million | +18% |
| Operating margin | 20.4% | 19.2% | +120 bps |
| Net income attributable to Amphenol | $650.5 million | $822.9 million | -21% |
| Diluted EPS | $2.06 | $2.61 | -21% |
| Operating cash flow | $1,144.2 million | $1,077.6 million | +6% |
| Free cash flow | $917.6 million | $886.8 million | +3% |
Reported earnings were significantly affected by a provisional $398.5 million Tax Cuts and Jobs Act charge recorded in the fourth quarter. Excluding the Tax Act charge, excess stock-compensation tax benefits and acquisition-related expenses, adjusted net income increased to $986.1 million from $856.0 million and adjusted diluted EPS increased to $3.12 from $2.72. Adjusted operating margin was 20.4%, compared with 19.8% in 2016.
- Cash, cash equivalents and short-term investments were $1,753.7 million, up from $1,173.2 million.
- Total debt was $3,542.6 million, versus $3,010.7 million; commercial paper outstanding was $1,175.4 million.
- The $2.0 billion revolving credit facility matures in March 2021, had no borrowings at year-end and was in covenant compliance.
- Approximately 33% of borrowings carried floating rates, primarily commercial paper; 67% was fixed-rate debt.
- Capital expenditures were $226.6 million, and management expected 2018 capital expenditures of approximately 3% to 4% of sales.
- The company repurchased 8.4 million shares for $618.0 million and declared $213.7 million of dividends in 2017.
Material changes versus the prior comparable period
- Sales growth was 12% in reported and constant-currency terms and 8% organically, compared with 13% reported growth and 2% organic growth in 2016.
- Interconnect sales increased 12%, including 9% organic growth. Cable sales increased 11%, including 1% organic growth.
- Growth was led by industrial, automotive, information technology and data communications, mobile devices, military and commercial aerospace. Mobile networks declined approximately $20.3 million due primarily to lower operator capital spending.
- Gross and operating margins improved, primarily from higher volumes and operational execution in the Interconnect segment. Cable segment operating margin declined to 13.4% from 14.5%, primarily because of higher commodity costs.
- Interest expense increased to $92.3 million from $72.6 million because of higher average debt and interest rates.
- 2017 acquisitions totaled approximately $266 million for five acquisitions comprising seven businesses, compared with approximately $1.3 billion in 2016, including the $1.2 billion FCI acquisition.
- Goodwill increased to $4,042.6 million from $3,678.8 million, primarily from 2017 acquisitions and currency translation. No goodwill impairment was recorded.
- Working capital increased to $3,076.6 million from $1,956.0 million, with accounts receivable and inventories rising to $1,598.6 million and $1,106.9 million, respectively.
Guidance, outlook, risks and unusual items
- The company stated that liquidity was adequate for the next twelve months and foreseeable future, including repayment of the $750.0 million of 2.55% senior notes due January 2019.
- The company planned to repatriate a significant portion of offshore cash in 2018. The Tax Act transition tax is payable over eight years beginning in 2018; taxes related to repatriation of certain earnings will be paid as those earnings are repatriated.
- The Tax Act accounting was provisional under SAB 118 and had not been completed at the filing date. Final amounts could differ materially from the estimates.
- Key operating risks include exposure to communications markets, global economic and geopolitical conditions, China and other non-U.S. markets, foreign exchange, commodity prices, customer pricing pressure, competition, new-product acceptance, acquisitions and goodwill impairment.
- Debt risks include reliance on commercial paper, refinancing requirements, floating-rate exposure and compliance with credit-facility covenants.
- The company disclosed risks related to cybersecurity, environmental compliance, litigation, tax audits and unrecognized tax benefits. Legal proceedings were not expected to have a material adverse effect, although certain potential liabilities could not be reasonably estimated.
- Defined-benefit pension obligations were underfunded by approximately $243.8 million at year-end, and 2018 plan contributions were estimated at approximately $90.0 million, including an approximately $80.0 million voluntary U.S. contribution made in January 2018.
Important facts for investors to verify
- Reconcile reported 2017 earnings and EPS with adjusted results, particularly the $398.5 million provisional Tax Act charge and the $66.6 million stock-compensation tax benefit.
- Review the final 2018 accounting for the Tax Act, including transition-tax payments, repatriation taxes and any subsequent adjustments.
- Assess refinancing and liquidity capacity ahead of the January 2019 $750.0 million senior-note maturity and monitor commercial-paper balances.
- Evaluate whether organic growth, margins and backlog remain resilient after separating acquisition and foreign-currency effects.
- Monitor working-capital expansion, especially receivables and inventory, relative to sales growth and operating cash flow.
- Review acquisition integration, goodwill of $4.0 billion and the potential for future impairment charges.
- Assess sensitivity to communications-industry capital spending, commodity costs, foreign exchange, China exposure, cybersecurity incidents and tax audits.