AMPHENOL CORPORATION (amounts in millions, except share and per share data,
unless otherwise noted)
The following discussion and analysis of the results of operations and financial
condition for the three and nine months ended September 30, 2020 and 2019 has
been derived from and should be read in conjunction with our unaudited condensed
consolidated financial statements and the accompanying notes included herein for
Amphenol Corporation (together with its subsidiaries, "Amphenol ," the "Company,"
"we," "our," or "us"), which are prepared in accordance with accounting
principles generally accepted in the United States of America ("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 meaning, respectively, as these
aforementioned non-GAAP financial measures. Refer to "Non-GAAP Financial
Measures" within this Item 2 for more information, including our reasons for
including the non-GAAP financial measures and material limitations with respect
to the usefulness of the measures.
Safe Harbor Statement
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, which
relate to future events and are subject to risks and uncertainties. The
forward-looking statements, which address the Company's expected business and
financial performance and financial condition, among other matters, may contain
words and terms such as: "anticipate," "could," "believe," "continue," "expect,"
"estimate," "forecast," "ongoing," "project," "seek," "predict," "target,"
"will," "intend," "plan," "look ahead," "optimistic," "potential," "guidance,"
"may," "should," or "would" and other words and terms of similar meaning.
Forward-looking statements by their nature address matters that are, to
different degrees, uncertain, such as statements about expected earnings,
revenues, growth, liquidity or other financial matters, together with any
forward-looking statements related in any way to the coronavirus ("COVID-19")
pandemic including its future impact on the Company. Although the Company
believes the expectations reflected in such forward-looking statements,
including those with regards to results of operations, liquidity or the
Company's effective tax rate, are based upon reasonable assumptions, the
expectations may not be attained or there may be material deviation. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date on which they are made. There are risks and
uncertainties that could cause actual results to differ materially from these
forward-looking statements, which include, but are not limited to, the
following: future risks and existing uncertainties associated with the COVID-19
pandemic, which continues to disrupt our operations, including, depending on the
specific location, government regulations that limit our ability to operate
certain of our facilities at full capacity and to adjust certain costs, travel
restrictions, "work-from-home" orders and the gradual transition back to the
workplace, supplier constraints, supply-chain interruptions, logistics
challenges and limitations, and reduced demand from certain customers;
uncertainties associated with a protracted economic slowdown that could
negatively affect the financial condition of our customers; uncertainties and
volatility in the global capital markets; political, economic, military and
other risks in countries outside of the United States ; the impact of general
economic conditions, geopolitical conditions and U.S. trade policies,
legislation, trade disputes, treaties and tariffs, including those affecting
China , on the Company's business operations; risks associated with the improper
conduct by any of our employees, customers, suppliers, distributors or any other
business partners which could impair our business reputation and financial
results and could result in our non-compliance with anti-corruption laws and
regulations of the U.S. government and various foreign jurisdictions; changes in
exchange rates of the various currencies in which the Company conducts business;
the Company's ability to obtain a consistent supply of materials, at stable
pricing levels; the Company's dependence on sales to the communications
industry, which markets are dominated by large manufacturers and operators who
regularly exert significant pressure on suppliers, including the Company;
changes in defense expenditures in the military market, including the impact of
reductions or changes in the defense budgets of U.S. and foreign governments;
the Company's ability to compete successfully on the basis of technology
innovation, product quality and performance, price, customer service and
delivery time; the Company's ability to continue to conceive, design,
manufacture and market new products and upon
25
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continuing market acceptance of its existing and future product lines; difficulties and unanticipated expenses in connection with purchasing and integrating newly acquired businesses, including the potential for the impairment of goodwill and other intangible assets; events beyond the Company's control that could lead to an inability to meet its financial covenants which could result in a default under the Company's revolving credit facility; the Company's ability to access the capital markets on favorable terms, including as a result of significant deterioration of general economic or capital market conditions, or as a result of a downgrade in the Company's credit rating; changes in interest rates; government contracting risks that the Company may be subject to, including laws and regulations governing performance ofU.S. government contracts and related risks associated with conducting business with theU.S. government or its suppliers (both directly and indirectly); governmental export and import controls that certain of our products may be subject to, including export licensing, customs regulations, economic sanctions or other laws; cybersecurity threats or incidents that could arise on our information technology systems which could disrupt business operations and adversely impact our reputation and operating results and potentially lead to litigation and/or governmental investigations; changes in fiscal and tax policies, audits and examinations by taxing authorities, laws, regulations and guidance inthe United States and foreign jurisdictions, including related interpretations of certain provisions of theU.S. Tax Cuts and Jobs Act of 2017 ("Tax Act"); any difficulties in protecting the Company's intellectual property rights; and litigation, customer claims, product recalls, governmental investigations, criminal liability or environmental matters including changes to laws and regulations to which the Company may be subject. In addition, the extent to which the COVID-19 pandemic will continue to impact our business and financial results going forward will be dependent on future developments such as the length and severity of the crisis, the potential resurgence of the crisis, future government regulations in response to the crisis and the overall impact of the COVID-19 pandemic on the global economy and capital markets, among many other factors, all of which remain highly uncertain and unpredictable. Such forward-looking statements may also be impacted by, among other things, additional guidance under the Tax Act. While the Company completed its accounting of the Tax Act in the fourth quarter of 2018 based on the regulatory guidance issued at that time, theDepartment of Treasury's interpretive guidance initiatives are ongoing. Any future guidance on the Tax Act could impact our forward-looking statements. A further description of these uncertainties and other risks can be found in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 , Quarterly Reports on Form 10-Q and the Company's other reports filed with theSecurities and Exchange Commission . These or other uncertainties may cause the Company's actual future results to be materially different from those expressed in any forward-looking statements. The Company undertakes no obligation to update or revise any forward-looking statements except as required by law.
Impact of Coronavirus ("COVID-19") on our Operations, Financial Condition, Liquidity and Results of Operations
The COVID-19 pandemic has caused widespread disruptions to our Company during the first nine months of 2020, particularly during the first half of the year. During the first quarter, these disruptions were primarily limited to our operations inChina , which were closed for three weeks during January and February due to government mandates. As the virus spread to the rest of the world beginning in March and continuing throughout the second and third quarters of 2020, most of our other operations outside ofChina were then also impacted. As ofSeptember 30, 2020 , we continue to experience some disruptions, and at a minimum, we expect those disruptions to continue throughout the remainder of 2020. These disruptions have included and may continue to include, depending on the specific location, government regulations that limit our ability to operate certain of our facilities at full capacity and to adjust certain costs, travel restrictions, "work-from-home" orders and the gradual transition back to the workplace, supplier constraints, supply-chain interruptions, logistics challenges and limitations, and reduced demand from certain customers. As noted below within this Item 2, the COVID-19 pandemic did have a negative impact on our year-to-date financial results, primarily during the first six months of 2020, and it may continue to have a negative impact on our financial results for the fourth quarter of 2020 and beyond. The extent of any future impact will be dependent on future developments such as the length and severity of the crisis, the potential resurgence of the crisis, future government regulations in response to the crisis and the overall impact of the COVID-19 pandemic on the global economy and capital markets, among many other factors, all of which remain highly uncertain and unpredictable. Given this uncertainty, the Company is currently unable to quantify the potential impact of the COVID-19 pandemic on its future operations, financial condition, liquidity and results of operations. In addition, the COVID-19 pandemic could impact the health of our management team and other employees. The Company continues taking actions to mitigate, as best we can, the impact of the COVID-19 pandemic 26
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on the health and well-being of our employees, the communities in which we operate and our partners, as well as the impact on our operations and business as a whole. However, there can be no assurance that the COVID-19 pandemic will not have a material and adverse impact on our operations, financial condition, liquidity and results of operations. Results of Operations
Three and nine months ended
Net sales were$2,323.4 in the third quarter of 2020 compared to$2,100.6 in the third quarter of 2019, which represented an increase of 11% inU.S. dollars, 10% in constant currencies and 9% organically, over the respective prior year period. Net sales were$6,172.9 in the first nine months of 2020 compared to$6,074.4 in the first nine months of 2019, which represented an increase of 2% inU.S. dollars and 2% in constant currencies, while decreasing 1% organically, over the respective prior year period. The increase in net sales during the third quarter of 2020 relative to the comparable period in 2019 was driven primarily by strong growth in several markets in the Interconnect Products and Assemblies segment, as described below. The increase in net sales during the first nine months of 2020 relative to the comparable period in 2019 was driven primarily by strong growth in several markets (as discussed below), which was partially offset by the sudden and severe slowdown in certain of our markets resulting from the global outbreak of COVID-19, which also caused production limitations in many parts of the world during much of the first half of 2020. Net sales in the Interconnect Products and Assemblies segment (approximately 96% of net sales) in the third quarter of 2020 increased 11% inU.S. dollars, 10% in constant currencies and 9% organically, compared to the third quarter of 2019. This increase was driven by strong growth in the mobile devices, information technology and data communications, and industrial markets, slightly offset by a significant slowdown in the commercial aerospace market, which continued to be negatively impacted by the COVID-19 pandemic, and a moderation in the mobile networks market. Net sales in the Interconnect Products and Assemblies segment (approximately 96% of net sales) in the first nine months of 2020 increased 2% inU.S. dollars and 2% in constant currencies, while decreasing 1% organically, compared to the first nine months of 2019. This increase was primarily driven by strong growth in the information technology and data communications, industrial and mobile devices markets, offset in part by a significant decline in the automotive, mobile networks and commercial aerospace markets, all of which were negatively impacted by the COVID-19 pandemic. Net sales in the Cable Products and Solutions segment (approximately 4% of net sales) in the third quarter of 2020, which primarily serves the broadband communications market, increased 2% inU.S. dollars, 5% in constant currencies and 5% organically, compared to the third quarter of 2019. This increase was primarily driven by an increase in market demand at broadband operators. Net sales in the Cable Products and Solutions segment (approximately 4% of net sales) in the first nine months of 2020 decreased 4% inU.S. dollars, 1% in constant currencies and 1% organically, compared to the first nine months of 2019. 27 Table of Contents The table below reconciles Constant Currency Net Sales Growth and Organic Net Sales Growth to the most directly comparableU.S. GAAP financial measures for the three and nine months endedSeptember 30, 2020 compared to the three and nine months endedSeptember 30, 2019 : Percentage Growth (relative to same prior year period) Net sales Foreign Constant Organic growth in currency Currency Net Acquisition Net Sales U.S.
(GAAP) (non-GAAP) (non-GAAP) (non-GAAP) (non-GAAP)
Net sales:
Interconnect Products and Assemblies $ 2,221.9 $ 2,000.8 11% 1 % 10 % 1 % 9 % Cable Products and Solutions 101.5 99.8 2 % (3) % 5 % - % 5 % Consolidated$ 2,323.4 $ 2,100.6 11 % 1 % 10 % 1 % 9 % Nine Months EndedSeptember 30 : Net sales: Interconnect Products and Assemblies$ 5,899.4 $ 5,789.0 2
% - % 2 % 3 % (1) % Cable Products and Solutions 273.5 285.4 (4) % (3) % (1) % - % (1) % Consolidated$ 6,172.9 $ 6,074.4 2 % - % 2 % 3 % (1) %
Net sales growth in
in the Condensed Consolidated Statements of Income and Note 13 of the
accompanying financial statements. While the term "net sales growth in
this table, we derive the reported (GAAP) measure based on GAAP results,
which serves as the basis for the reconciliation to its comparable non-GAAP
financial measures.
Foreign currency translation impact, a non-GAAP measure, represents theimpact on net sales resulting from foreign currency exchange rate changes in
the current year period(s) compared to the same period(s) in the prior year. (2) Such amount is calculated by subtracting current year net sales translated at
average foreign currency exchange rates for the respective prior periods from
current year reported net sales, taken as a percentage of the respective
prior period net sales.
(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.
Acquisition impact, a non-GAAP measure, represents the impact on net sales
resulting from acquisitions closed since the beginning of the prior calendar (4) year, which were not included in the Company's results as of the comparable
prior year periods and which do not reflect the underlying growth of the
Company on a comparative basis.
Geographically, sales in the United States in the third quarter of 2020 were
flat in U.S. dollars ($668.8 in 2020 versus $667.9 in 2019) while decreasing 1%
organically, compared to the third quarter of 2019. Sales in the United States
in the first nine months of 2020 decreased 1% in U.S. dollars ($1,854.0 in 2020
versus $1,879.6 in 2019) and 6% organically, compared to the first nine months
of 2019. Foreign sales in the third quarter of 2020 increased 15% in U.S.
dollars ($1,654.6 in 2020 versus $1,432.7 in 2019), 14% in constant currencies
and 13% organically, compared to the third quarter of 2019. Foreign sales in the
first nine months of 2020 increased 3% in U.S. dollars ($4,318.9 in 2020 versus
$4,194.8 in 2019), 4% in constant currencies and 1% organically, compared to the
first nine months of 2019. The comparatively weaker U.S. dollar for the third
quarter of 2020 had the effect of increasing sales by approximately $17.0 ,
relative to the comparable period in 2019. The comparatively stronger U.S.
dollar for the first nine months of 2020 had the effect of decreasing sales by
approximately $23.3 , relative to the comparable period in 2019.
Selling, general and administrative expenses increased to $259.1 , or 11.2% of
net sales, and $748.4 , or 12.1% of net sales, for the third quarter and first
nine months of 2020, respectively, compared to $248.3 , or 11.8% of net sales,
and $722.5 , or 11.9% of net sales, for the third quarter and first nine months
of 2019, respectively. The decrease in selling, general and administrative
expenses as a percentage of net sales in the third quarter of 2020 is primarily
driven by higher sales during the third quarter, relative to the comparable
period of 2019. The increase in selling, general and administrative expenses as
a percentage of net sales in the first nine months of 2020 was primarily driven
by government actions imposed in response to the COVID-19 pandemic that limited
the Company's ability to adjust costs, specifically in the first half of 2020.
Administrative expenses represented approximately 4.4% and 4.8% of net sales for
the third quarter and first nine months of 2020, respectively, and represented
approximately 4.8% and 4.7% of net sales for the third quarter and first nine
months of 2019, respectively. Research and development expenses represented
approximately 3.0% and 3.1% of net sales for the third quarter and first nine
months of 2020, respectively, and represented approximately 2.8% and 2.9% of net
sales for the third quarter and first nine months of 2019, respectively. Selling
and marketing expenses represented approximately 3.7% and 4.2% of net sales for
the third quarter and first nine months of 2020, respectively, and represented
approximately 4.2% and 4.4% of net sales for the third quarter and first nine
months of 2019, respectively.
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Operating income was$475.8 , or 20.5% of net sales, and$1,150.1 , or 18.6% of net sales, for the third quarter and first nine months of 2020, respectively, compared to$413.6 , or 19.7% of net sales, and$1,189.4 , or 19.6% of net sales, for the third quarter and first nine months of 2019, respectively. Operating income for the first nine months of 2019 included$25.4 of acquisition-related expenses (separately presented in the Condensed Consolidated Statements of Income) comprised of the amortization of$15.7 related to the value associated with the acquired backlog from two acquisitions, as well as external transaction costs of$9.7 . For the nine months endedSeptember 30, 2019 , these acquisition-related expenses had the effect of decreasing net income by$21.0 , or$0.07 per share. 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, was$1,214.8 , or 20.0% of net sales, for the nine months endedSeptember 30, 2019 . Operating income for the Interconnect Products and Assemblies segment for the third quarter and first nine months of 2020 was$498.4 , or 22.4% of net sales, and$1,217.6 , or 20.6% of net sales, respectively, compared to$433.9 , or 21.7% of net sales, and$1,272.4 , or 22.0% of net sales, for the third quarter and first nine months of 2019, respectively. The increase in operating margin for the Interconnect Products and Assemblies segment for the third quarter of 2020 relative to the comparable period in 2019 is primarily driven by strong operating leverage on the higher sales volumes. The decrease in operating margin for the Interconnect Products and Assemblies segment for the first nine months of 2020 relative to the comparable period in 2019 was primarily driven by the significant incremental costs incurred during the first half of 2020 related to the COVID-19 pandemic. The incremental costs incurred related to the COVID-19 pandemic primarily impacted the first half of 2020. Operating income for the Cable Products and Solutions segment for the third quarter and first nine months of 2020 was$10.9 , or 10.7% of net sales, and$25.7 , or 9.4% of net sales, respectively, compared to$10.2 , or 10.2% of net sales, and$29.3 , or 10.3% of net sales, for the third quarter and first nine months of 2019, respectively. The increase in operating margin for the Cable Products and Solutions segment for the third quarter of 2020 relative to the comparable period in 2019 is driven primarily by operating leverage on the higher sales volumes. The decrease in operating margin for the Cable Products and Solutions segment for the first nine months of 2020 relative to the comparable period in 2019 was driven by lower volumes as well as the negative impact of the COVID-19 pandemic on our ability to produce products and adjust certain costs, primarily during the first half of 2020. Interest expense for the third quarter and first nine months of 2020 was$28.0 and$87.1 , respectively, compared to$29.7 and$89.5 for the third quarter and first nine months of 2019, respectively. Refer to Note 4 of the Condensed Consolidated Financial Statements for further information related to the Company's debt. Loss on early extinguishment of debt for the third quarter and first nine months of 2019 was$14.3 . The loss on early extinguishment of debt incurred during the third quarter of 2019 was related to refinancing-related costs, specifically premiums and fees incurred associated with the early extinguishment of certain redeemed principal amounts of the 3.125% Senior Notes and 4.00% Senior Notes (collectively, the "Tendered Notes") as a result of the tender offers inSeptember 2019 . Refer to Note 4 of the accompanying Condensed Consolidated Financial Statements and the Liquidity and Capital Resources section within this Item 2 for further information related to the Tendered Notes. Provision for income taxes for the third quarter and first nine months of 2020 was at an effective tax rate of 22.1% and 20.0%, respectively. Provision for income taxes for the third quarter and first nine months of 2019 was at an effective tax rate of 24.5% and 22.9%, respectively. For the third quarter and first nine months of 2020 and 2019, the excess tax benefits resulting from stock option exercise activity had the impact of decreasing the effective tax rate and increasing earnings per share by the amounts noted in the tables below. For the first nine months of 2020, the effective tax rate was also impacted by a discrete tax benefit related to the settlements of refund claims in certain non-U.S. jurisdictions and the resulting adjustments to deferred taxes, which had the impact of decreasing the effective tax rate and increasing earnings per share by the amounts noted in the tables below. The effective tax rate for the third quarter of 2019 was further impacted by the tax effect of the refinancing-related costs associated with the early extinguishment of debt, while the effective tax rate for the first nine months of 2019 was further impacted by the tax effects of both the acquisition-related expenses and the refinancing-related costs associated with the early extinguishment of debt, all as noted in the tables below. Excluding the effect of these items, the Adjusted Effective Tax Rate, a non-GAAP financial measure as defined in the "Non-GAAP Financial Measures" section below within this Item 2, for the three and nine 29 Table of Contents months endedSeptember 30, 2020 and 2019 was 24.5% for all periods, as reconciled in the tables below to the comparable effective tax rate based on GAAP results. Refer to Note 6 of the Condensed Consolidated Financial Statements for further information related to income taxes. Net income attributable toAmphenol Corporation and Net income per common share-Diluted ("Diluted EPS") were$346.6 and$1.12 , respectively, for the third quarter of 2020, compared to$280.3 and$0.92 , respectively, for the third quarter of 2019. Excluding the effect of the aforementioned items discussed above, Adjusted Net Income attributable toAmphenol Corporation and Adjusted Diluted EPS, non-GAAP financial measures as defined in the "Non-GAAP Financial Measures" section below within this Item 2, were$335.9 and$1.09 , respectively, for the third quarter of 2020, compared to$291.2 and$0.95 , respectively, for the third quarter of 2019. Net income attributable toAmphenol Corporation and Diluted EPS were$846.4 and$2.76 , respectively, for the first nine months of 2020, compared to$836.3 and$2.72 , respectively, for the first nine months of 2019. Excluding the effect of the aforementioned items discussed above, Adjusted Net Income attributable toAmphenol Corporation and Adjusted Diluted EPS were$798.4 and$2.61 , respectively, for the first nine months of 2020, compared to$848.5 and$2.76 , respectively, for the first nine months of 2019. The following tables reconcile Adjusted Operating Income, Adjusted Operating Margin, Adjusted Net Income attributable toAmphenol Corporation , Adjusted Effective Tax Rate and Adjusted Diluted EPS (all defined in the "Non-GAAP Financial Measures" section below) to the most directly comparableU.S. GAAP financial measures for the three and nine months endedSeptember 30, 2020 and 2019: Three Months Ended September 30, 2020 2019 Net Income Net Income attributable Effective attributable Effective Operating Operating to Amphenol Tax Diluted Operating Operating to Amphenol Tax Diluted Income Margin (1) Corporation Rate (1) EPS Income Margin (1) Corporation Rate (1) EPS Reported (GAAP)$ 475.8 20.5 %$ 346.6 22.1 %$ 1.12 $ 413.6 19.7 %$ 280.3 24.5 %$ 0.92 Loss on early extinguishment of debt - - - - - - - 12.5 (0.4) 0.04 Excess tax benefits related to stock-based compensation - - (10.7) 2.4 (0.03) - - (1.6) 0.4 (0.01) Adjusted (non-GAAP)$ 475.8 20.5 %$ 335.9 24.5 %$ 1.09 $ 413.6 19.7 %$ 291.2 24.5 %$ 0.95 Nine Months Ended September 30, 2020 2019 Net Income Net Income attributable Effective attributable Effective Operating Operating to Amphenol Tax Diluted Operating Operating to Amphenol Tax Diluted Income Margin (1) Corporation Rate (1) EPS Income Margin (1) Corporation Rate (1) EPS Reported (GAAP)$ 1,150.1 18.6 %$ 846.4 20.0 %$ 2.76 $ 1,189.4 19.6 %$ 836.3 22.9 %$ 2.72 Acquisition-related expenses - - - - - 25.4 0.4 21.0 (0.2) 0.07 Loss on early extinguishment of debt - - - - - - - 12.5 (0.1) 0.04 Excess tax benefits related to stock-based compensation - - (28.1) 2.6 (0.09) - - (21.3) 1.9 (0.07) Discrete tax item - - (19.9) 1.9 (0.06) - - - - - Adjusted (non-GAAP)$ 1,150.1 18.6 %$ 798.4 24.5 %$ 2.61 $ 1,214.8 20.0 %$ 848.5 24.5 %$ 2.76
While the terms "operating margin" and "effective tax rate" are not
(1) considered
derive the reported (GAAP) measures based on GAAP results, which serve as the
basis for the reconciliation to their comparable non-GAAP financial measure.
Liquidity and Capital Resources
As of
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States. As of
As a result of the Tax Act, onDecember 31, 2017 , the Company indicated an intention to repatriate most of its pre-2018 accumulated earnings and recorded the foreign andU.S. state and local tax costs related to the repatriation. The associated tax payments are due as the repatriations are made. The Company intends to distribute certain post-2017 foreign earnings and has accrued foreign andU.S. state and local taxes, if applicable, on those earnings as appropriate as ofSeptember 30, 2020 , and intends to indefinitely reinvest all remaining post-2017 foreign earnings. The Company intends to evaluate future earnings for distribution, and accrue for those distributions where appropriate, and to indefinitely reinvest all other foreign earnings. In addition, the Transition Tax on the deemed repatriation of the accumulated unremitted earnings and profits of foreign subsidiaries will be paid, net of applicable tax credits and deductions, in annual installments until 2025, as permitted under the Tax Act. The Company's primary sources of liquidity are internally generated cash flow, our cash, cash equivalents and short-term investments on hand, the Commercial Paper Programs, and the Revolving Credit Facility. The Company believes that its cash, cash equivalents and short-term investment position on hand, ability to generate future cash flow from operations, availability under its credit facilities, and access to capital markets (including the issuances of the 2025 Senior Notes inFebruary 2020 and the 2026 Euro Notes inMay 2020 , each as defined and discussed further within this Item 2), provide adequate liquidity to meet its obligations for at least the next twelve months. The Company's primary ongoing cash requirements will be for operating and capital expenditures, product development activities, repurchases of its Common Stock, dividends, debt service, payments associated with the Transition Tax (which is payable in annual installments until 2025), taxes due upon the repatriation of foreign earnings (which will be payable upon the repatriation of such earnings), and funding of pension obligations. The Company's debt service requirements consist primarily of principal and interest on the Company's Senior Notes, and to the extent of any amounts outstanding, the Revolving Credit Facility and the Commercial Paper Programs (all as defined below). The Company may also use cash to fund all or part of the cost of acquisitions. Cash Flow Summary
The following table summarizes the Company's cash flows from operating,
investing and financing activities for the nine months ended
Nine Months Ended September 30,
2020 2019
Net cash provided by operating activities $ 1,151.0 $ 1,078.2
Net cash used in investing activities (262.5) (1,111.0)
Net cash used in financing activities (384.2) (246.4)
Effect of exchange rate changes on cash and cash equivalents 25.0 (30.8)
Net change in cash and cash equivalents $ 529.3 $ (310.0)
Operating Activities
The ability to generate cash from operating activities is one of the Company's
fundamental financial strengths. Net cash provided by operating activities
("Operating Cash Flow") was $1,151.0 in the first nine months of 2020 compared
to $1,078.2 in the first nine months of 2019. The increase in Operating Cash
Flow for the first nine months of 2020 compared to the first nine months of 2019
is primarily due to a decrease in the components of working capital.
In the first nine months of 2020, the components of working capital as presented
on the accompanying Condensed Consolidated Statements of Cash Flow decreased
$38.6 , excluding the impact of acquisitions and foreign currency translation,
due to increases in accounts payable of $191.7 and accrued liabilities,
including income taxes, of $80.6 , partially offset by increases in accounts
receivable of $126.4 , inventories of $65.2 , and prepaid expenses and other
current assets of $42.1 . In the first nine months of 2019, the components of
working capital as presented on the accompanying Condensed Consolidated
Statements of Cash Flow increased $27.1 , excluding the impact of acquisitions
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and foreign currency translation, primarily due to decreases in accounts payable
of $75.9 and accrued liabilities, including income taxes, of $74.4 , partially
offset by a decrease in accounts receivable of $129.6 .
The following describes the significant changes in the amounts as presented on
the accompanying Condensed Consolidated Balance Sheets at September 30, 2020 as
compared to December 31, 2019 . Accounts receivable increased $143.9 to $1,880.3 ,
primarily due to higher sales in the third quarter of 2020 relative to the
fourth quarter of 2019 as well as the effect of translation from exchange rate
changes at September 30, 2020 compared to December 31, 2019 ("Translation").
Days sales outstanding at September 30, 2020 and December 31, 2019 were
approximately 72 and 73 days, respectively. Inventories increased $80.9 to
$1,391.0 , primarily to support higher sales levels, along with the effect of
Translation. Inventory days at September 30, 2020 and December 31, 2019 were 79
and 80 days, respectively. Prepaid expenses and other current assets increased
$53.4 to $309.5 , primarily due to increases in certain prepaid expenses and
other current receivables. Property, plant and equipment, net, increased $37.9
to $1,036.9 , primarily due to capital expenditures of $204.8 and Translation,
partially offset by depreciation of $176.1 . Goodwill increased $88.4 to
$4,955.5 , primarily as a result of goodwill recognized related to two
acquisitions that closed in 2020, along with Translation. Other intangible
assets, net decreased $33.8 to $408.2 , primarily due to the amortization related
to the Company's intangible assets during the first nine months of 2020,
partially offset by Translation. Accounts payable increased $209.1 to $1,075.9 ,
primarily as a result of increased purchasing activity resulting from higher
sales levels, along with Translation. Payable days at September 30, 2020 and
December 31, 2019 were approximately 61 and 53 days, respectively. Total accrued
expenses, including accrued income taxes, increased $47.3 to $909.9 , primarily
as a result of an increase in accrued salaries and wages and other accrued
expenses, along with the impact of acquisitions, partly offset by the contingent
consideration payment (related to the SSI acquisition) of $75.0 in June 2020 and
the deferred purchase price payment in the third quarter of $16.2 , along with a
decrease in accrued income taxes, primarily resulting from certain tax payments.
There is no current requirement for cash contributions to any of the Company's
defined benefit pension plans in the U.S. , and the Company plans to evaluate
annually, based on actuarial calculations and the investment performance of the
pension plans' assets, the timing and amount of cash contributions in the
future, as discussed in more detail in Note 10 of the notes to the condensed
consolidated financial statements.
In addition to cash flow from operating activities, the Company also considers
Free Cash Flow, a non-GAAP financial measure defined in the "Non-GAAP Financial
Measures" section below, as a key metric in measuring the Company's ability to
generate cash. The following table reconciles Free Cash Flow to its most
directly comparable U.S. GAAP financial measure for the nine months ended
September 30, 2020 and 2019. The increase in Free Cash Flow is driven by the
increase in Operating Cash Flow, as described above, and to a lesser extent, a
decrease in capital expenditures.
Nine Months Ended September 30,
2020 2019
Operating Cash Flow (GAAP) $ 1,151.0 $ 1,078.2
Capital expenditures (GAAP) (204.8) (223.0)
Proceeds from disposals of property, plant and
equipment (GAAP) 10.8 7.1
Free Cash Flow (non-GAAP) $ 957.0 $ 862.3
Investing Activities
Cash flows from investing activities consist primarily of cash flows associated
with capital expenditures, proceeds from disposals of property, plant and
equipment, net sales and maturities (purchases) of short-term investments,and acquisitions. Net cash used in investing activities was$262.5 in the first nine months of 2020, compared to$1,111.0 in the first nine months of 2019. In the first nine months of 2020, net cash used in investing activities was driven primarily by capital expenditures (net of disposals) of$194.0 , the use of$50.3 to fund acquisitions, and net purchases of short-term investments of$18.2 . In the first nine months of 2019, net cash used in investing activities was driven primarily by the 32 Table of Contents
use of
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-term debt, repurchases of common stock, proceeds from stock option exercises, dividend payments, and distributions to and purchases of noncontrolling interests.
Net cash used in financing activities was$384.2 in the first nine months of 2020, compared to$246.4 in the first nine months of 2019. For the first nine months of 2020, net cash used in financing activities was driven primarily by repurchases of the Company's common stock of$459.2 , the repayment of the Company's 2.20%U.S. Senior Notes dueApril 2020 and other debt of$402.9 , net repayments related to the Company's commercial paper programs of$385.9 , dividend payments of$223.0 , payment related to acquisition-related contingent consideration of$75.0 , payment associated with the deferred purchase price related to an acquisition of$16.2 , distributions to and purchases of noncontrolling interests of$11.5 , payments of costs of$8.7 related to debt financing primarily associated with the 2025 Senior Notes and 2026 Euro Notes (each as defined below), and net repayments under the Company's credit facilities of$0.7 , partially offset by the net cash proceeds from both theFebruary 2020 issuance of the 2025 Senior Notes and theMay 2020 issuance of the 2026 Euro Notes of$942.3 and cash proceeds from the exercise of stock options of$256.6 . For the first nine months of 2019, net cash used in financing activities was driven primarily by the aggregate repayments of certain of the Company's senior notes and other long-term debt (primarily the 2.55%U.S. Senior Notes dueJanuary 2019 and the early extinguishment of the Tendered Notes inSeptember 2019 ) of$1,111.2 , repurchases of the Company's common stock of$558.7 , dividend payments of$205.5 , distributions to and purchases of noncontrolling interests of$25.0 , payments of costs of$14.9 related to debt financing primarily associated with the 2029 Senior Notes, the Revolving Credit Facility, and the 2030 Senior Notes (each as defined below), and premiums and fees paid of$13.4 related to the early extinguishment of the Tendered Notes, partially offset by aggregate net cash proceeds from the issuances of the 2029 Senior Notes and the 2030 Senior Notes of$1,398.8 , cash proceeds from the exercise of stock options of$146.3 , and net borrowings related to the Company's commercial paper programs of$137.2 . 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's debt financing includes the use of commercial paper programs, its Revolving Credit Facility and senior notes as part of its overall cash management strategy. OnJanuary 15, 2019 , the Company amended its$2,000.0 unsecured credit facility with a$2,500.0 unsecured credit facility (the "Revolving Credit Facility"). The Revolving Credit Facility, which maturesJanuary 2024 , gives the Company the ability to borrow, in various currencies, at a spread over LIBOR. The Company may utilize the Revolving Credit Facility for general corporate purposes. AtSeptember 30, 2020 , there were no outstanding 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. AtSeptember 30, 2020 , the Company was in compliance with the financial covenants under the Revolving Credit Facility. Pursuant to the terms of theU.S. commercial paper program, the Company issues short-term unsecured commercial paper notes (the "USCP Notes") in one or more private placements inthe United States (the "U.S. Commercial Paper Program"). There were no USCP Notes outstanding as ofSeptember 30, 2020 . Pursuant to the terms of the euro-commercial paper program (the "Euro Commercial Paper Program" and, together with theU.S. Commercial Paper Program, the "Commercial Paper Programs"), the Company and one of its wholly owned European subsidiaries (the "Euro Issuer") issues short-term unsecured commercial paper notes (the "ECP Notes" and, together with the USCP Notes, the "Commercial Paper"), which are guaranteed by the Company and are to be issued outside ofthe United States . The ECP Notes may be issued in Euros, Sterling,U.S. dollars or other currencies. In addition, effectiveApril 14, 2020 , a subsidiary of the Company is able to issue ECP Notes through theBank of England's COVID Corporate Financing Facility (the "BOE Facility"). The BOE Facility will be available untilMarch 22, 2021 . As ofSeptember 30, 2020 , there were no ECP Notes outstanding. 33 Table of Contents Amounts available under the Commercial Paper Programs may be borrowed, repaid and re-borrowed from time to time. In conjunction with the Revolving Credit Facility, the authorization from the Company's Board of Directors limits the maximum aggregate principal amount outstanding of USCP Notes, ECP Notes, and any other commercial paper, euro-commercial paper or similar programs at any time to$2,500.0 . In addition, the maximum aggregate principal amount outstanding of USCP Notes at any time is$2,500.0 . The maximum aggregate principal amount outstanding of ECP Notes at any time is$2,000.0 . The Commercial Paper Programs are rated A-2 byStandard & Poor's and P-2 by Moody's and are currently backstopped by the Revolving Credit Facility, as amounts undrawn under the Company's Revolving Credit Facility are available to repay Commercial Paper, if necessary. Net proceeds of the issuances of Commercial Paper are expected to be used for general corporate purposes. 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. OnMarch 20, 2020 , the Company, through one of its wholly owned foreign subsidiaries, borrowed$100.0 (the maximum borrowing capacity) on an uncommitted line of credit, at a variable LIBOR-based interest rate, initially set at 1.92%. This line of credit, which is guaranteed by the Company and carries an interest rate of LIBOR plus 80 basis points, expires onDecember 19, 2020 . Borrowings under this line of credit arrangement were used for general corporate purposes. Prior to maturity, onMay 5, 2020 , the Company repaid, in full, the outstanding borrowing on this uncommitted line of credit, using cash and cash equivalents on hand. As ofSeptember 30, 2020 , the Company has outstanding senior notes (the "Senior Notes") as follows: Principal Interest Amount Rate Maturity$ 227.7 3.125 % September 2021 295.0 4.00 % February 2022 350.0 3.20 % April 2024 400.0 2.050 % March 2025 500.0 4.350 % June 2029 900.0 2.80 % February 2030 € 500.0 0.750 % May 2026 (Euro Notes)
500.0 2.00 % October 2028 (Euro Notes)
On February 20, 2020 , the Company issued $400.0 principal amount of unsecured
2.050% Senior Notes due March 1, 2025 at 99.829% of face value (the "2025 Senior
Notes"). On April 1, 2020 , the Company used the net proceeds from the 2025
Senior Notes to repay the $400.0 principal amount of unsecured 2.20% Senior
Notes due April 1, 2020 upon maturity.
On September 4, 2019 , the Company commenced tender offers (the "Tender Offers")
to purchase for cash any and all of the Company's outstanding (i) $375.0
principal amount of 3.125% Senior Notes due September 2021 (the "2021 Senior
Notes") and (ii) $500.0 principal amount of 4.00% Senior Notes due February 2022
(the "2022 Senior Notes"). On September 11, 2019 , as a result of the Tender
Offers, the Company accepted for payment $147.3 aggregate principal amount of
the 2021 Senior Notes and $205.0 aggregate principal amount of the 2022 Senior
Notes for 101.9% and 104.5% of par value, respectively (collectively, the
"Tendered Notes"), plus accrued and unpaid interest to, but not including, the
settlement date of the Tender Offers. The total consideration for the Tendered
Notes was $368.8 , which in addition to the Tendered Notes, included $13.4 of
premiums and fees paid related to the early extinguishment of debt and $3.1 of
accrued interest. The remaining principal amounts associated with the 2021
Senior Notes and 2022 Senior Notes, which were not redeemed as a result of the
Tender Offers, remain outstanding as of September 30, 2020 .
On September 10, 2019 , the Company issued $900.0 principal amount of unsecured
2.800% Senior Notes due February 15, 2030 at 99.920% of face value (the "2030
Senior Notes"). In September 2019 , the Company used the net proceeds from the
2030 Senior Notes to fund the cash consideration payable in the Tender Offers,
with the remaining net proceeds being used for general corporate purposes,
including to partially reduce outstanding borrowings related to the U.S.
Commercial Paper Program.
34
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In
All of the Company's outstanding senior notes inthe United States (the "U.S. Senior Notes") are unsecured and rank equally in right of payment with the Company's other unsecured senior indebtedness. Interest on each series of theU.S. Senior Notes is payable semiannually. The Company may, at its option, redeem some or all of any series of theU.S. Senior Notes, subject to certain terms and conditions. OnMay 4, 2020 , the Euro Issuer issued €500.0 (approximately$545.4 at date of issuance) principal amount of unsecured 0.750% Senior Notes dueMay 4, 2026 at 99.563% of face value (the "2026 Euro Notes" and collectively with the 2028 Euro Notes, the "Euro Notes"). The Company used the net proceeds from the 2026 Euro Notes to repay amounts outstanding under its Revolving Credit Facility. The Euro Notes are unsecured and rank equally in right of payment with the Euro Issuer's other unsecured senior indebtedness, and are fully and unconditionally guaranteed on a senior unsecured basis by the Company. Interest on each series of the Euro Notes is payable annually. The Company may, at its option, redeem some or all of any series of the Euro Notes, subject to certain terms and conditions.
The Company's Senior Notes contain certain financial and non-financial covenants. Refer to Note 4 of the Condensed Consolidated Financial Statements for further information related to the Company's debt.
InApril 2018 , the Company's Board of Directors authorized a stock repurchase program under which the Company may purchase up to$2,000.0 of the Company's Common Stock during the three-year period endingApril 24, 2021 (the "2018 Stock Repurchase Program") in accordance with the requirements of Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). During the three months endedSeptember 30, 2020 , the Company repurchased 1.9 million shares of its Common Stock for$201.9 , while during the nine months endedSeptember 30, 2020 , the Company repurchased 4.6 million shares of its Common Stock for$459.2 , all under the 2018 Stock Repurchase Program. Of the total repurchases during the first nine months of 2020, 1.0 million shares, or$110.3 , have been retained inTreasury stock at time of repurchase; the remaining 3.6 million shares, or$348.9 , have been retired by the Company. During the three months endedSeptember 30, 2019 , the Company repurchased 1.7 million shares of its Common Stock for$150.0 , while during the nine months endedSeptember 30, 2019 , the Company repurchased 6.1 million shares of its Common Stock for$558.7 , all under the 2018 Stock Repurchase Program. Of the total repurchases during the first nine months of 2019, 1.0 million shares, or$87.6 , were retained inTreasury stock at time of repurchase; the remaining 5.1 million shares, or$471.1 , were retired by the Company. FromOctober 1, 2020 throughOctober 20, 2020 , the Company repurchased approximately 0.1 million additional shares of its Common Stock for$6.0 , leaving$379.9 available to purchase under the 2018 Stock Repurchase Program. The price and timing of any future purchases under the 2018 Stock Repurchase Program will depend on a number of factors such as levels of cash generation from operations, the level of uncertainty relating to the COVID-19 pandemic, the volume of stock option exercises by employees, cash requirements for acquisitions, dividends, economic and market conditions and stock price. Contingent upon declaration by the Board of Directors, the Company generally pays a quarterly dividend on shares of its Common Stock. The following table summarizes the declared quarterly dividends per share as well as the dividends declared and paid for the three and nine months endedSeptember 30, 2020 and 2019: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Dividends declared per share$ 0.25 $ 0.25 $ 0.75 $ 0.71 Dividends declared$ 74.7 $ 74.0 $ 223.2 $ 210.8 Dividends paid (including those declared in the prior year) 74.6 68.3 223.0 205.5
OnJuly 23, 2019 , the Company's Board of Directors approved an increase to its quarterly dividend rate from$0.23 to$0.25 per share effective with dividends declared in the third quarter of 2019, and then onOctober 20, 2020 , approved 35 Table of Contents
a further increase to its quarterly dividend rate to
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. Non-GAAP Financial Measures In addition to assessing the Company's financial condition, results of operations, liquidity and cash flows in accordance withU.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 period-over-period comparative results, in addition to the reasons noted below. Non-GAAP financial measures related to operating income, operating margin, net income attributable toAmphenol Corporation , effective tax rate and diluted EPS exclude income and expenses that are not directly related to the Company's operating performance during the periods presented. Items excluded in the presentation of such non-GAAP financial measures in any period may consist of, without limitation, acquisition-related expenses, refinancing-related costs and certain discrete tax items including but not limited to (i) the excess tax benefits related to stock-based compensation and (ii) the impact of significant changes in tax law. Non-GAAP financial measures related to net sales exclude the impact related to foreign currency exchange and acquisitions. 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 relatedU.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 withU.S. GAAP. The reconciliations of these non-GAAP financial measures to the most directly comparableU.S. GAAP financial measures for the three and nine months endedSeptember 30, 2020 and 2019 are included in "Results of Operations" and "Liquidity and Capital Resources" within this Item 2:
Adjusted Diluted EPS is defined as diluted earnings per share (as reported in
accordance with
tax effects that are not directly related to the Company's operating
? performance during the periods presented. Adjusted Diluted EPS is calculated as
Adjusted Net Income attributable to
divided by the weighted average outstanding diluted shares as reported in the
Condensed Consolidated Statements of Income. Adjusted Effective Tax Rate is defined as Provision for income taxes, as
reported in the Condensed Consolidated Statements of Income, expressed as a
? percentage of Income before income taxes, as reported in the Condensed
Consolidated Statements of Income, each excluding the income and expenses and
their specific tax effects that are not directly related to the Company's
operating performance during the periods presented.
Adjusted Net Income attributable to
income attributable to
? Consolidated Statements of Income, excluding income and expenses and their
specific tax effects that are not directly related to the Company's operating
performance during the periods presented.
Adjusted Operating Income is defined as Operating income, as reported in the
? Condensed Consolidated Statements of Income, excluding income and expenses that
are not directly related to the Company's operating performance during the
periods presented.
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Adjusted Operating Margin is defined as Adjusted Operating Income (as defined
? above) expressed as a percentage of Net sales (as reported in the Condensed
Consolidated Statements of Income). Constant Currency Net Sales Growth is defined as the period-over-period
percentage change in net sales growth, excluding the impact of changes in
foreign currency exchange rates.
? related to foreign currency translation fluctuations. As such, management
evaluates the Company's sales performance based on actual sales growth in
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.
Free Cash Flow is defined as (i) Net cash provided by operating activities
("Operating Cash Flow" - as reported in accordance with
capital expenditures (as reported in accordance with
proceeds from disposals of property, plant and equipment (as reported in
? accordance with
Consolidated Statements of Cash Flow. Free Cash Flow is an important liquidity
measure for the Company, as we believe it is useful for management and
investors to assess our ability to generate cash, as well as to assess how much
cash can be used to reinvest in the growth of the Company or to return to
shareholders through either stock repurchases or dividends.
Organic Net Sales Growth is defined as the period-over-period percentage change
in net sales growth resulting from operating volume and pricing changes, and
excludes the impact of (i) changes in foreign currency exchange rates, which
directly impact the Company's operating results and are outside the control of
the Company and (ii) acquisitions closed since the beginning of the prior
? calendar year, which were not included in the Company's results as of the
comparable prior year periods 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
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.
Critical Accounting Policies and Estimates
The Company's disclosures of its critical accounting policies, which are contained in its 2019 Annual Report, have not materially changed since that report was filed.
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