AMPHENOL CORP annual report, FY2018

Business Context and Reporting Period

Amphenol Corporation designs and manufactures electrical, electronic and fiber-optic connectors, interconnect systems, antennas, sensors, specialty cable and related products. This Form 10-K covers the fiscal year ended December 31, 2018; it is not a standalone quarterly filing, although fourth-quarter results are disclosed.

Interconnect Products and Assemblies: $7,781.9 million of 2018 sales, approximately 95% of consolidated sales.
Cable Products and Solutions: $420.1 million of 2018 sales, approximately 5% of consolidated sales.
Approximately 73% of sales were outside the United States, including approximately 32% from China. Apple-related sales, including sales through certain EMS providers, represented approximately 12% of 2018 sales.

Financial Performance and Key Metrics

Metric	2018	2017	Change
Net sales	$8,202.0 million	$7,011.3 million	+17%
Gross profit	$2,654.9 million	$2,309.9 million	+15%
Operating income	$1,686.9 million	$1,427.6 million	+18%
Operating margin	20.6%	20.4%	+20 basis points
Net income attributable to Amphenol	$1,205.0 million	$650.5 million	+85%
Diluted EPS	$3.85	$2.06	+87%
Operating cash flow	$1,112.7 million	$1,144.2 million	-3%
Free cash flow	$802.1 million	$917.6 million	-13%

Gross margin was approximately 32.4% in 2018 versus 32.9% in 2017. Adjusted operating margin increased to 20.7% from 20.4%. Adjusted net income increased 19% to $1,177.9 million, and adjusted diluted EPS increased 21% to $3.77, excluding acquisition-related expenses, discrete tax items and excess tax benefits from stock compensation.

Fourth-quarter 2018 sales were $2,224.7 million, operating income was $457.6 million, net income attributable to Amphenol was $338.1 million and diluted EPS was $1.09. Fourth-quarter results included an $8.5 million acquisition-related expense, a $14.5 million Tax Act accounting benefit and $5.7 million of excess tax benefits from stock-based compensation.

Liquidity, Debt and Capital Allocation

Cash, cash equivalents and short-term investments were $1,291.7 million at December 31, 2018, down from $1,753.7 million at December 31, 2017. Most cash was held outside the United States.
Total debt was $3,570.7 million, including $764.3 million classified as current. Outstanding commercial paper included $554.5 million under the U.S. program and approximately $68.8 million under the Euro program.
The Company had no borrowings under its $2.0 billion revolving credit facility at year-end and was in compliance with debt covenants. In January 2019, the facility was increased to $2.5 billion and extended to January 2024.
2018 financing uses included $935.2 million of share repurchases and $253.7 million of dividends. The quarterly dividend increased from $0.19 to $0.23 per share beginning in the second quarter.
The Company repurchased 10.6 million shares for $935.2 million during 2018. The 2018 authorization permits up to $2.0 billion of repurchases through April 2021; approximately $1,396.2 million remained available at January 31, 2019.
Capital expenditures were $310.6 million in 2018, compared with $226.6 million in 2017. Management expected 2019 capital expenditures to be approximately 3% to 4% of sales.

Material Changes Versus the Prior Comparable Period

Sales growth was 17% in reported dollars and constant currency and 14% organically. Interconnect sales grew 18% reported and 14% organically; Cable sales grew 4% reported and 6% organically.
Growth was led by mobile devices, industrial, automotive, information technology and data communications, military, mobile networks and commercial aerospace. Broadband communications declined slightly.
Operating leverage improved Interconnect margins to 22.5% from 22.3%. Cable margins declined to 12.5% from 13.4%, primarily due to higher commodity costs.
Reported net income and EPS benefited materially from the absence of the $398.5 million Tax Act charge recorded in 2017. The 2018 tax rate was 23.4%, compared with 51.1% in 2017; the adjusted rates were 25.5% and 26.5%, respectively.
Operating cash flow declined modestly because of approximately $87.0 million of Tax Act-related payments and an approximately $81.0 million voluntary pension contribution. Higher capital expenditures also reduced free cash flow.
Backlog increased to approximately $1.720 billion at year-end from $1.610 billion. Orders may generally be cancelled before shipment, and backlog may not reliably predict demand because portions of the business have short lead times.
The Company completed three acquisitions in 2018 for approximately $159 million. In January 2019, it acquired SSI Controls Technologies for approximately $400 million net of cash acquired, plus a performance-related contingent payment.

Guidance, Outlook, Risks and Unusual Items

Management stated that available cash, operating cash generation, credit availability and capital-market access were adequate to meet obligations for the next twelve months. No formal 2019 revenue or earnings guidance is provided in the filing text.
The Tax Act accounting was finalized in 2018, producing a $14.5 million benefit. The remaining transition tax is payable in installments through 2025; the filing reports $151.4 million of transition-tax obligations at year-end.
The Company adopted the revenue-recognition standard using the modified retrospective method. The opening retained-earnings increase was approximately $3.2 million, and the adoption did not materially affect 2018 results.
The Company expected to adopt the new lease standard in the first quarter of 2019, with approximately $180 million of operating lease right-of-use assets and lease liabilities expected on the balance sheet and no expected opening retained-earnings impact.
Material risks include global economic and geopolitical conditions, tariffs and trade restrictions, foreign-exchange volatility, China and other non-U.S. exposure, communications-industry concentration, customer concentration, commodity costs, competition, cybersecurity, intellectual-property and regulatory matters, acquisition integration, goodwill impairment and debt covenant compliance.
The Company disclosed a Department of Defense Office of Inspector General subpoena concerning certain Military and Aerospace Group products. The inquiry was in its early stages, and timing and outcome could not be estimated.
Goodwill was $4,103.2 million, or approximately 41% of total assets. No goodwill or intangible-asset impairment was recorded in 2018.
Deloitte & Touche LLP issued an unqualified opinion on the financial statements and internal control over financial reporting; management concluded controls were effective as of December 31, 2018.

Important Facts for Investors to Verify

Reconcile reported versus adjusted earnings, particularly the effects of the 2017 Tax Act charge, the 2018 Tax Act benefit, stock-compensation tax benefits and acquisition expenses.
Assess whether organic growth can continue in mobile devices, industrial, automotive, IT and data communications, and military markets while broadband and Cable margins remain pressured.
Review debt maturities, commercial-paper refinancing needs, covenant headroom and the January 2019 refinancing of the $750.0 million note maturity.
Evaluate cash deployment among acquisitions, share repurchases, dividends, capital expenditures, pension contributions and transition-tax payments.
Monitor exposure to China, tariffs, foreign currencies, commodity prices and communications-industry capital spending.
Follow the Department of Defense inquiry, tax audits and unrecognized tax benefits, which were approximately $141.8 million including interest and penalties.
Evaluate goodwill concentration and acquisition integration risk, including the January 2019 SSI acquisition.