Item 1. Financial Statements
Item 1. Financial Statements
AMPHENOL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in millions)
March 31,
December 31,
2021
2020
Assets
Current Assets:
Cash and cash equivalents
$
2,327.6
$
1,702.0
Short-term investments
33.6
36.1
Total cash, cash equivalents and short-term investments
2,361.2
1,738.1
Accounts receivable, less allowance for doubtful accounts of $ 43.3 and $ 44.8 , respectively
1,931.8
1,951.6
Inventories
1,565.1
1,462.2
Prepaid expenses and other current assets
328.6
338.9
Total current assets
6,186.7
5,490.8
Property, plant and equipment, less accumulated depreciation of $ 1,767.5 and $ 1,738.6 , respectively
1,076.2
1,054.6
Goodwill
5,093.0
5,032.1
Other intangible assets, net
410.3
397.5
Other long-term assets
367.3
352.3
$
13,133.5
$
12,327.3
Liabilities & Equity
Current Liabilities:
Accounts payable
$
1,070.7
$
1,120.7
Accrued salaries, wages and employee benefits
191.9
195.4
Accrued income taxes
129.4
112.6
Accrued dividends
86.6
86.8
Other accrued expenses
542.9
558.5
Current portion of long-term debt
526.4
230.3
Total current liabilities
2,547.9
2,304.3
Long-term debt, less current portion
4,110.3
3,636.2
Accrued pension and postretirement benefit obligations
224.8
228.6
Deferred income taxes
314.8
299.1
Other long-term liabilities
414.0
407.2
Equity:
Common stock
0.6
0.6
Additional paid-in capital
2,105.7
2,068.1
Retained earnings
3,807.1
3,705.4
Treasury stock, at cost
( 117.4 )
( 111.1 )
Accumulated other comprehensive loss
( 335.0 )
( 278.1 )
Total shareholders’ equity attributable to Amphenol Corporation
5,461.0
5,384.9
Noncontrolling interests
60.7
67.0
Total equity
5,521.7
5,451.9
$
13,133.5
$
12,327.3
See accompanying notes to condensed consolidated financial statements.
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AMPHENOL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars and shares in millions, except per share data)
Three Months Ended
March 31,
2021
2020
Net sales
$
2,377.1
$
1,862.0
Cost of sales
1,649.6
1,302.2
Gross profit
727.5
559.8
Selling, general and administrative expenses
262.7
242.9
Operating income
464.8
316.9
Interest expense
( 28.6 )
( 28.8 )
Other (expense) income, net
( 0.3 )
1.1
Income before income taxes
435.9
289.2
Provision for income taxes
( 104.1 )
( 46.0 )
Net income
331.8
243.2
Less: Net income attributable to noncontrolling interests
( 2.2 )
( 1.1 )
Net income attributable to Amphenol Corporation
$
329.6
$
242.1
Net income per common share — Basic
$
0.55
$
0.41
Weighted average common shares outstanding — Basic
598.5
594.9
Net income per common share — Diluted
$
0.53
$
0.40
Weighted average common shares outstanding — Diluted
624.1
612.9
See accompanying notes to condensed consolidated financial statements .
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AMPHENOL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(dollars in millions)
Three Months Ended
March 31,
2021
2020
Net income
$
331.8
$
243.2
Total other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments
( 62.3 )
( 100.7 )
Unrealized gain on hedging activities
0.1
0.2
Pension and postretirement benefit plan adjustment, net of tax of ($ 1.6 ) and ($ 1.7 ), respectively
5.1
5.2
Total other comprehensive (loss) income, net of tax
( 57.1 )
( 95.3 )
Total comprehensive income
274.7
147.9
Less: Comprehensive income attributable to noncontrolling interests
( 2.0 )
—
Comprehensive income attributable to Amphenol Corporation
$
272.7
$
147.9
See accompanying notes to condensed consolidated financial statements .
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AMPHENOL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(dollars in millions)
Three Months Ended March 31,
2021
2020
Cash from operating activities:
Net income
$
331.8
$
243.2
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization
76.7
72.1
Stock-based compensation expense
19.1
15.4
Deferred income tax provision
14.2
13.4
Net change in components of working capital
( 114.6 )
43.8
Net change in other long-term assets and liabilities
( 6.2 )
( 3.6 )
Net cash provided by operating activities
321.0
384.3
Cash from investing activities:
Capital expenditures
( 78.4 )
( 60.8 )
Proceeds from disposals of property, plant and equipment
0.9
1.2
Purchases of short-term investments
( 46.2 )
( 12.0 )
Sales and maturities of short-term investments
48.5
17.7
Acquisitions, net of cash acquired
( 185.6 )
( 16.5 )
Other
( 2.4 )
—
Net cash used in investing activities
( 263.2 )
( 70.4 )
Cash from financing activities:
Proceeds from issuance of senior notes and other long-term debt
1.2
399.3
Repayments of senior notes and other long-term debt
( 0.8 )
( 0.3 )
Borrowings under credit facilities
—
1,567.4
Repayments under credit facilities
—
( 215.0 )
Borrowings (repayments) under commercial paper programs, net
811.9
( 250.4 )
Payment of costs related to debt financing
—
( 3.9 )
Proceeds from exercise of stock options
21.1
30.0
Distributions to and purchases of noncontrolling interests
( 7.6 )
( 8.1 )
Purchase of treasury stock
( 152.8 )
( 257.2 )
Dividend payments
( 86.8 )
( 74.4 )
Net cash provided by financing activities
586.2
1,187.4
Effect of exchange rate changes on cash and cash equivalents
( 18.4 )
( 20.2 )
Net change in cash and cash equivalents
625.6
1,481.1
Cash and cash equivalents balance, beginning of period
1,702.0
891.2
Cash and cash equivalents balance, end of period
$
2,327.6
$
2,372.3
Cash paid for:
Interest
$
28.1
$
22.0
Income taxes, net
75.2
64.2
See accompanying notes to condensed consolidated financial statements.
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AMPHENOL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(amounts in millions, except share and per share data)
Note 1—Basis of Presentation and Principles of Consolidation
The Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020, and each of the related Condensed Consolidated Statements of Income, Condensed Consolidated Statements of Comprehensive Income and Condensed Consolidated Statements of Cash Flow for the three months ended March 31, 2021 and 2020, include the accounts of Amphenol Corporation and its subsidiaries (“Amphenol,” the “Company,” “we,” “our,” or “us”). All material intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated financial statements included herein are unaudited. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, including normal recurring adjustments considered necessary for a fair presentation of the results, in conformity with accounting principles generally accepted in the United States of America. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year. These condensed consolidated financial statements and the related notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the “2020 Annual Report”).
Stock Split
On January 27, 2021, the Company announced that its Board of Directors approved a two -for-one split of the Company’s Common Stock. The stock split was effected in the form of a stock dividend paid to shareholders of record as of the close of business on February 16, 2021. The additional shares were distributed on March 4, 2021, and the Company’s Common Stock began trading on a split-adjusted basis on March 5, 2021. As a result of the stock split, shareholders received one additional share of Amphenol Common Stock, $ 0.001 par value, for each share held as of the record date. There was no change in the number of authorized common shares of the Company as a result of the stock split.
All current and prior year data presented in the accompanying Condensed Consolidated Financial Statements and notes thereto in this Form 10-Q, including but not limited to, number of shares, share and per share activity, stock-based compensation data including stock options and restricted share units and related per share data, basic and diluted earnings per share, and dividends per share amounts, have been adjusted to reflect the effect of the stock split. As a result of the stock split, certain prior period amounts have been reclassified to conform to the current period presentation in the Condensed Consolidated Financial Statements and accompanying notes herein. The impact to the Condensed Consolidated Balance Sheets, as well as the rollforward of consolidated changes in equity included in Note 7 herein, was an increase of $ 0.3 to Common Stock, with an offsetting decrease in Additional paid-in capital, which has been retroactively adjusted for all periods presented.
Note 2—New Accounting Pronouncements
Recently Adopted Accounting Standards and Final SEC Rules
In December 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplified income tax accounting in various areas. The Company has evaluated and adopted ASU 2019-12 on January 1, 2021, which did not have a material impact on our consolidated financial statements.
In May 2020, the Securities and Exchange Commission (the “SEC”) issued a new rule regarding the financial statement requirements for acquisitions and dispositions of a business, which included, among other things, amending (i) certain criteria in the significance tests for acquired or to-be-acquired businesses, (ii) related pro forma financial information requirements, including its form and content, and (iii) related disclosure requirements, including the number of acquiree financial statement periods required to be presented in SEC filings. The final rule was effective for fiscal
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years beginning after December 31, 2020, with early application permitted. The Company evaluated and adopted this SEC final rule on January 1, 2021, which did not have a material impact on our condensed consolidated financial statements. Its impact on any future SEC filings will be dependent on the size of future business combinations.
Recently Issued Accounting Standards and Final SEC Rules Not Yet Adopted
The United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates the London Interbank Offered Rate (“LIBOR”), announced in July 2017 its intent to phase out the use of LIBOR by the end of 2021. In December 2020, the ICE Benchmark Administration published a consultation on its intention to extend the publication of certain U.S. dollar LIBOR (“USD LIBOR”) rates until June 30, 2023. Subsequently in March 2021, the FCA announced some USD LIBOR tenors (overnight, 1-month, 3-month, 6-month and 12-month) will continue to be published until June 30, 2023. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, identified the Secured Overnight Financing Rate (the “SOFR”) as its preferred benchmark alternative to USD LIBOR. The SOFR represents a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is calculated based on directly observable U.S. Treasury-backed repurchase transacti ons. In March 2020, in response to this transition, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued by reference rate reform, and addresses operational issues likely to arise in modifying contracts to replace discontinued reference rates with new rates. ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022. In January 2021, the FASB also issued ASU 2021-01 Reference Rate Reform (Topic 848): Scope (“ASU 2021-01”), which permits entities to elect certain optional expedients and exceptions when accounting for derivatives and certain hedging relationships affected by changes in interest rates and the transition. The Company is evaluating the potential impact of the replacement of LIBOR from both a risk management and financial reporting perspective. Our current portfolio of debt and financial instruments tied to LIBOR consists primarily of our Revolving Credit Facility (as defined below), which had no outstanding borrowings as of March 31, 2021. We do not currently believe that this transition will have a material impact on our financial condition, results of operations or cash flows.
In November 2020, the SEC issued a new rule that modernizes and simplifies various aspects and financial disclosure requirements in Regulation S-K, specifically related to Item 301 “Selected Financial Data” , Item 302 “Supplementary Financial Information” and Item 303 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”). The intent of this new rule is to (i) eliminate duplicative disclosures, (ii) enhance and promote more principles-based MD&A disclosures with the objective of making them more meaningful for investors, all while (iii) simplifying the compliance requirements and efforts for registrants, by providing them with the flexibility to present management’s perspective on the registrant’s financial condition and results of operations. While most of the changes involve reducing or eliminating previously required information and disclosures, the rule does expand the disclosure requirements surrounding certain aspects of the various items in Regulation S-K discussed above. The final rule was published in the Federal Register on January 11, 2021, is effective thirty days after its publication date, or February 10, 2021, and registrants are required to comply with this final rule in the registrant’s first fiscal year ending on or after the date that is 210 days after the publication date (August 9, 2021). The Company has evaluated this SEC final rule, and we plan to incorporate the requirements and amendments of this SEC rule, in its entirety, as part of our Form 10-K for the year ending December 31, 2021. The application of this new SEC rule is not expected to have a material impact on our future SEC filings.
Note 3—Inventories
Inventories consist of:
March 31,
December 31,
2021
2020
Raw materials and supplies
$
642.8
$
587.4
Work in process
453.7
410.7
Finished goods
468.6
464.1
$
1,565.1
$
1,462.2
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Note 4—Debt
The Company’s debt (net of any unamortized discount) consists of the following:
March 31, 2021
December 31, 2020
Carrying
Approximate
Carrying
Approximate
Amount
Fair Value
Amount
Fair Value
Revolving Credit Facility
$
—
$
—
$
—
$
—
U.S. Commercial Paper Program
811.0
811.0
—
—
Euro Commercial Paper Program
—
—
—
—
3.125 % Senior Notes due September 2021
227.7
230.1
227.7
231.6
4.00 % Senior Notes due February 2022
294.9
300.9
294.9
303.6
3.20 % Senior Notes due April 2024
349.8
373.0
349.8
378.1
2.050 % Senior Notes due March 2025
399.5
412.2
399.4
420.7
0.750 % Euro Senior Notes due May 2026
584.3
606.0
608.4
633.6
2.000 % Euro Senior Notes due October 2028
584.3
659.3
608.4
694.9
4.350 % Senior Notes due June 2029
499.6
566.7
499.6
608.4
2.800 % Senior Notes due February 2030
899.4
925.5
899.4
987.8
Other debt
12.2
12.2
6.7
6.7
Less unamortized deferred debt issuance costs
( 26.0 )
—
( 27.8 )
—
Total debt
4,636.7
4,896.9
3,866.5
4,265.4
Less current portion
526.4
534.8
230.3
234.2
Total long-term debt
$
4,110.3
$
4,362.1
$
3,636.2
$
4,031.2
Revolving Credit Facility
The Company has a $ 2,500.0 unsecured credit facility (the “Revolving Credit Facility”), which matures January 2024 and 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. At March 31, 2021 and December 31, 2020, there were no outstanding borrowings under the Revolving Credit Facility. The carrying value of any borrowings under the Revolving Credit Facility would approximate their fair value due primarily to their market interest rates and would be classified as Level 2 in the fair value hierarchy (Note 5). Any outstanding borrowings under the Revolving Credit Facility are classified as long-term debt in the accompanying Condensed Consolidated Balance Sheets. The Revolving Credit Facility requires payment of certain annual agency and commitment fees and requires that the Company satisfy certain financial covenants. At March 31, 2021, the Company was in compliance with the financial covenants under the Revolving Credit Facility .
Commercial Paper Programs
The Company has a commercial paper program pursuant to which the Company may issue short-term unsecured commercial paper notes (the “USCP Notes”) in one or more private placements in the United States (the “U.S. Commercial Paper Program”). The maturities of the USCP Notes vary, but may not exceed 397 days from the date of issue. The USCP Notes are sold under customary terms in the commercial paper market and may be issued at par or a discount therefrom, and bear varying interest rates on a fixed or floating basis. As of March 31, 2021, the amount of USCP Notes outstanding was $ 811.0 , with a weighted average interest rate of 0.20 % . On April 7, 2021, a combination of borrowings under the U.S. Commercial Paper Program and cash and cash equivalents on hand were used to fund the previously announced acquisition of MTS Systems Corporation (“MTS”). Refer to Note 16 herein for further discussion of the acquisition of MTS.
The Company and one of its wholly owned European subsidiaries (collectively, the “Euro Issuer”) also has a commercial paper program (the “Euro Commercial Paper Program” and, together with the U.S. Commercial Paper Program, the “Commercial Paper Programs”) pursuant to which the Euro Issuer may issue short-term unsecured commercial paper notes (the “ECP Notes” and, together with the USCP Notes, “Commercial Paper”), which are guaranteed by the Company and are to be issued outside of the United States. The maturities of the ECP Notes will
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vary, but may not exceed 183 days from the date of issue. The ECP Notes are sold under customary terms in the commercial paper market and may be issued at par or a discount therefrom or a premium thereto and bear varying interest rates on a fixed or floating basis. The ECP Notes may be issued in Euros, Sterling, U.S. dollars or other currencies. As of March 31, 2021, there were no ECP Notes outstanding. In addition, until March 22, 2021, the Company was able to issue ECP Notes through the Bank of England’s COVID Corporate Financing Facility (the “BOE Facility”). There were no outstanding borrowings at March 31, 2021 under the BOE Facility, which expired on March 22, 2021.
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 principal amount outstanding of USCP Notes, ECP Notes, and any other commercial paper or similar programs, along with outstanding amounts under the Revolving Credit Facility, at any time to $ 2,500.0 in the aggregate. In addition, the maximum aggregate principal amount outstanding of USCP Notes and ECP Notes at any time is $ 2,500.0 and $ 2,000.0 , respectively. The Commercial Paper Programs are rated A-2 by Standard & 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 Commercial Paper is classified as long-term debt in the accompanying Condensed Consolidated Balance Sheets since the Company has the intent and ability to refinance the Commercial Paper on a long-term basis using the Company’s Revolving Credit Facility. The Commercial Paper is actively traded and is therefore classified as Level 1 in the fair value hierarchy (Note 5). The carrying value of Commercial Paper borrowings approximates their fair value.
U.S. Senior 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”). The 2025 Senior Notes are unsecured and rank equally in right of payment with the Company’s other unsecured senior indebtedness. Interest on the 2025 Senior Notes is payable semiannually on March 1 and September 1 of each year, commencing on September 1, 2020. Prior to February 1, 2025, the Company may, at its option, redeem some or all of the 2025 Senior Notes at any time by paying the redemption price (which may include a make-whole premium), plus accrued and unpaid interest, if any, to, but not including, the date of redemption. If redeemed on or after February 1, 2025, the Company may, at its option, redeem some or all of the 2025 Senior Notes at any time by paying the redemption price equal to 100 % of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the date of redemption. 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.
All of the Company’s outstanding senior notes in the 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 U.S. Senior Notes is payable semiannually. The Company may, at its option, redeem some or all of any series of U.S. Senior Notes at any time subject to certain terms and conditions, which include paying 100 % of the principal amount, plus accrued and unpaid interest, if any, to the date of redemption, and, with certain exceptions, a make-whole premium. The fair value of each series of U.S. Senior Notes is based on recent bid prices in an active market and is therefore classified as Level 1 in the fair value hierarchy (Note 5). The remaining principal amounts outstanding associated with the Company’s 3.125 % Senior Notes due in September 2021 and 4.00 % Senior Notes due in February 2022 are each recorded, net of the related unamortized discount and debt issuance costs, within Current portion of long-term debt in the accompanying Condensed Consolidated Balance Sheets as of March 31, 2021. The U.S. Senior Notes contain certain financial and non-financial covenants. At March 31, 2021, the Company was in compliance with the financial covenants under its U.S. Senior Notes.
Euro Senior Notes
On May 4, 2020, the Euro Issuer issued € 500.0 (approximately $ 545.4 at date of issuance) principal amount of unsecured 0.750 % Senior Notes due May 4, 2026 at 99.563 % of face value (the “2026 Euro Notes” or the “ 0.750 % Euro Senior Notes”, collectively with the 2.000 % Euro Senior Notes due October 2028, the “Euro Notes”, and the Euro Notes collectively with the U.S. Senior Notes, the “Senior Notes”). The 2026 Euro Notes are unsecured and rank equally in
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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 the 2026 Euro Notes is payable annually on May 4 of each year, commencing on May 4, 2021. Prior to February 4, 2026, the Company may, at its option, redeem some or all of the 2026 Euro Notes at any time by paying the redemption price (which may include a make-whole premium), plus accrued and unpaid interest, if any, to, but not including, the date of redemption. If redeemed on or after February 4, 2026, the Company may, at its option, redeem some or all of the 2026 Euro Notes at any time by paying the redemption price equal to 100 % of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the date of redemption. The Company used the net proceeds from the 2026 Euro Notes to repay amounts outstanding under the Revolving Credit Facility.
The Company’s 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 Euro Notes is payable annually. The Company may, at its option, redeem some or all of any series of Euro Notes at any time subject to certain terms and conditions, which include paying 100 % of the principal amount, plus accrued and unpaid interest, if any, to, but not including, the date of redemption, and, with certain exceptions, a make-whole premium. The fair value of each series of Euro Notes is based on recent bid prices in an active market and is therefore classified as Level 1 in the fair value hierarchy (Note 5). The Euro Notes contain certain financial and non-financial covenants. At March 31, 2021, the Company was in compliance with the financial covenants under its Euro Notes .
Note 5—Fair Value Measurements
Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. These requirements establish market or observable inputs as the preferred source of values. Assumptions based on hypothetical transactions are used in the absence of market inputs. The Company does not have any non-financial instruments accounted for at fair value on a recurring basis.
The valuation techniques required are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 Quoted prices for identical instruments in active markets.
Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 Significant inputs to the valuation model are unobservable.
The Company believes that the assets or liabilities currently subject to such standards with fair value disclosure requirements are primarily debt instruments, pension plan assets, short-term investments, and derivative instruments. Each of these assets and liabilities is discussed below, with the exception of debt instruments and pension plan assets, which are covered in Note 4 and Note 10, respectively, herein, in addition to the Notes to Consolidated Financial Statements in the 2020 Annual Report. Substantially all of the Company’s short-term investments consist of certificates of deposit with original maturities of twelve months or less and as such, are considered as Level 1 in the fair value hierarchy as they are traded in active markets for identical assets. The carrying amounts of these instruments, the majority of which are in non-U.S. bank accounts, approximate their fair value. The Company’s derivative instruments primarily consist of foreign exchange forward contracts, which are valued using bank quotations based on market observable inputs such as forward and spot rates and are therefore classified as Level 2 in the fair value hierarchy. The
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impact of the credit risk related to these financial assets is immaterial. The fair values of the Company’s financial and non-financial assets and liabilities subject to such standards as of March 31, 2021 and December 31, 2020 are as follows:
Fair Value Measurements
Quoted Prices in
Significant
Significant
Active Markets
Observable
Unobservable
for Identical
Inputs
Inputs
Total
Assets (Level 1)
(Level 2)
(Level 3)
March 31, 2021:
Short-term investments
$
33.6
$
33.6
$
—
$
—
Forward contracts
( 10.8 )
—
( 10.8 )
—
Total
$
22.8
$
33.6
$
( 10.8 )
$
—
December 31, 2020:
Short-term investments
$
36.1
$
36.1
$
—
$
—
Forward contracts
( 2.7 )
—
( 2.7 )
—
Total
$
33.4
$
36.1
$
( 2.7 )
$
—
With the exception of the fair value of the assets acquired and liabilities assumed in connection with acquisition accounting, the Company does not have any other significant financial or non-financial assets and liabilities that are measured at fair value on a non-recurring basis.
As of March 31, 2021, the fair value of such forward contracts in the table above consisted of (i) two outstanding foreign exchange forward contracts accounted for as cash flow hedges, with each expiring in 2021, (ii) various outstanding foreign exchange forward contracts accounted for as net investment hedges and (iii) various outstanding foreign exchange forward contracts that are not designated as hedging instruments. The amounts recognized in Accumulated other comprehensive income (loss) associated with foreign exchange forward contracts and the amounts reclassified from Accumulated other comprehensive income (loss) to foreign exchange gain (loss), included in Cost of sales in the accompanying Condensed Consolidated Statements of Income during the three months ended March 31, 2021 and 2020, were not material. The fair values of the Company’s forward contracts are recorded within Prepaid expenses and other current assets, Other long-term assets, Other accrued expenses and Other long-term liabilities in the accompanying Condensed Consolidated Balance Sheets, depending on their value and remaining contractual period.
Note 6—Income Taxes
Three Months Ended
March 31,
2021
2020
Provision for income taxes
$
( 104.1 )
$
( 46.0 )
Effective tax rate
23.9
%
15.9
%
For the three months ended March 31, 2021 and 2020, stock option exercise activity had the impact of lowering our Provision for income taxes by $ 2.6 and $ 5.0 , respectively, and lowering our effective tax rate by 60 basis points and 170 basis points, respectively, due to the recognition of excess tax benefits within Provision for income taxes in the accompanying Condensed Consolidated Statements of Income. For the three months ended March 31, 2020, the effective tax rate also includes 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 lowering our Provision for income taxes and effective tax rate by $ 19.9 and 690 basis points, respectively.
On December 22, 2017, the United States federal government enacted the Tax Cuts and Jobs Act (“Tax Act”), marking a change from a worldwide tax system to a modified territorial tax system in the United States. As part of this change, the Tax Act, among other changes, provides for a transition tax (“Transition Tax”) related to the deemed repatriation of the accumulated unremitted earnings and profits of the Company’s foreign subsidiaries. The Company plans to pay its fourth annual installment of the Transition Tax, net of applicable tax credits and deductions, in the second quarter of 2021, and will pay the balance of the Transition Tax, net of applicable tax credits and deductions, over the remainder of the eight-year period ending 2025, as permitted under the Tax Act. The current and long-term portions
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of the Transition Tax are recorded in Accrued income taxes and Other long-term liabilities, respectively, on the Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020.
The Company operates in the U.S. and numerous foreign taxable jurisdictions, and at any point in time has numerous audits underway at various stages of completion. With few exceptions, the Company is subject to income tax examinations by tax authorities for the years 2017 and after. The Company is generally not able to precisely estimate the ultimate settlement amounts or timing until the close of an audit. The Company evaluates its tax positions and establishes liabilities for uncertain tax positions that may be challenged by tax authorities and may not be fully sustained, despite the Company’s belief that the underlying tax positions are fully supportable. As of March 31, 2021, the amount of unrecognized tax benefits, including penalties and interest, which if recognized would impact the effective tax rate, was approximately $ 170.2 . Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted for changing facts and circumstances, including the progress of tax audits and the closing of statutes of limitations. Based on information currently available, management anticipates that over the next twelve-month period, audit activity could be completed and statutes of limitations may close relating to existing unrecognized tax benefits of approximately $ 26.0 .
Note 7—Shareholders’ Equity and Noncontrolling Interests
Net income attributable to noncontrolling interests is classified below net income. Earnings per share is determined after the impact of the noncontrolling interests’ share in net income of the Company. In addition, the equity attributable to noncontrolling interests is presented as a separate caption within equity.
A rollforward of consolidated changes in equity for the three months ended March 31, 2021 is as follows:
Amphenol Corporation Shareholders
Accumulated
Common Stock
Treasury Stock
Other
Shares
Shares
Additional
Retained
Comprehensive
Noncontrolling
Total
(in millions)
Amount
(in millions)
Amount
Paid-In Capital
Earnings
Loss
Interests
Equity
Balance as of December 31, 2020
600.7
$
0.6
( 2.0 )
$
( 111.1 )
$
2,068.1
$
3,705.4
$
( 278.1 )
$
67.0
$
5,451.9
Net income
329.6
2.2
331.8
Other comprehensive income (loss)
( 56.9 )
( 0.2 )
( 57.1 )
Acquisitions resulting in noncontrolling interest
1.8
1.8
Purchase of noncontrolling interest
2.5
( 7.3 )
( 4.8 )
Distributions to shareholders of noncontrolling interests
( 2.8 )
( 2.8 )
Purchase of treasury stock
( 2.4 )
( 152.8 )
( 152.8 )
Retirement of treasury stock
( 2.1 )
—
2.1
133.0
( 133.0 )
—
Stock options exercised
0.6
—
0.2
13.5
16.0
( 8.3 )
21.2
Dividends declared ($ 0.145 per common share)
( 86.6 )
( 86.6 )
Stock-based compensation expense
19.1
19.1
Balance as of March 31, 2021
599.2
$
0.6
( 2.1 )
$
( 117.4 )
$
2,105.7
$
3,807.1
$
( 335.0 )
$
60.7
$
5,521.7
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A rollforward of consolidated changes in equity for the three months ended March 31, 2020 is as follows:
Amphenol Corporation Shareholders
Accumulated
Common Stock
Treasury Stock
Other
Shares
Shares
Additional
Retained
Comprehensive
Noncontrolling
Total
(in millions)
Amount
(in millions)
Amount
Paid-In Capital
Earnings
Loss
Interests
Equity
Balance as of December 31, 2019
597.4
$
0.6
( 1.6 )
$
( 70.8 )
$
1,683.0
$
3,348.4
$
( 430.9 )
$
65.9
$
4,596.2
Cumulative effect of adoption of credit loss standard (ASU 2016-13)
( 3.8 )
( 3.8 )
Net income
242.1
1.1
243.2
Other comprehensive income (loss)
( 94.2 )
( 1.1 )
( 95.3 )
Purchase of noncontrolling interest
( 2.1 )
( 5.2 )
( 7.3 )
Distributions to shareholders of noncontrolling interests
( 0.8 )
( 0.8 )
Purchase of treasury stock
( 5.4 )
( 257.2 )
( 257.2 )
Retirement of treasury stock
( 5.4 )
—
5.4
257.2
( 257.2 )
—
Stock options exercised
1.2
—
0.2
12.3
24.0
( 7.0 )
29.3
Dividends declared ($ 0.125 per common share)
( 74.0 )
( 74.0 )
Stock-based compensation expense
15.4
15.4
Balance as of March 31, 2020
593.2
$
0.6
( 1.4 )
$
( 58.5 )
$
1,720.3
$
3,248.5
$
( 525.1 )
$
59.9
$
4,445.7
On April 24, 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 ending April 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 ended March 31, 2021, the Company repurchased 2.4 million shares of its Common Stock for $ 152.8 under the 2018 Stock Repurchase Program. Of the total repurchases during the first three months of 2021, 0.3 million shares, or $ 19.8 , have been retained in Treasury stock at time of repurchase; the remaining 2.1 million shares, or $ 133.0 , have been retired by the Company. During the three months ended March 31, 2020, the Company repurchased 5.4 million shares of its Common Stock for $ 257.2 under the 2018 Stock Repurchase Program. All of the repurchases during the first three months of 2020 were retired by the Company. In April 2021, the Company repurchased 0.8 million additional shares of its Common Stock for $ 51.0 , which completed the 2018 Stock Repurchase Program.
On April 27, 2021, the Company’s Board of Directors authorized a new 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 ending April 27, 2024 (the “2021 Stock Repurchase Program”) in accordance with the requirements of Rule 10b-18 of the Exchange Act. As of April 27, 2021, the Company has no t repurchased any shares of its Common Stock under the 2021 Stock Repurchase Program. The price and timing of any future purchases under the 2021 Stock Repurchase Program will depend on a number of factors such as levels of cash generation from operations, the volume of stock option exercises by employees, cash requirements for acquisitions, dividends paid, economic and market conditions and the price of the Company’s common stock.
Contingent upon declaration by the Company’s Board of Directors, the Company generally pays a quarterly dividend on shares of its Common Stock. The following table summarizes the dividends declared and paid for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31,
2021
2020
Dividends declared
$
86.6
$
74.0
Dividends paid (including those declared in the prior year)
86.8
74.4
On October 20, 2020, the Company’s Board of Directors approved an increase to its quarterly dividend rate from $ 0.125 per share to $ 0.145 per share effective with dividends declared in the fourth quarter of 2020 and contingent upon declaration by the Company’s Board of Directors.
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Note 8—Stock-Based Compensation
For the three months ended March 31, 2021 and 2020, the Company’s Income before income taxes was reduced for stock-based compensation expense of $ 19.1 and $ 15.4 , respectively. In addition, for the three months ended March 31, 2021 and 2020, the Company recognized aggregate income tax benefits of $ 4.5 and $ 6.8 , respectively, in Provision for income taxes in the accompanying Condensed Consolidated Statements of Income associated with stock-based compensation. These aggregate income tax benefits during the three months ended March 31, 2021 and 2020 include excess tax benefits of $ 2.6 and $ 5.0 , respectively, from option exercises.
The impact associated with recognizing excess tax benefits from option exercises in the provision for income taxes on our consolidated financial statements could result in significant fluctuations in our effective tax rate in the future, since the provision for income taxes will be impacted by the timing and intrinsic value of future stock-based compensation award exercises.
Stock-based compensation expense includes the estimated effects of forfeitures, which are adjusted over the requisite service period to the extent actual forfeitures differ or are expected to differ from such estimates. Changes in estimated forfeitures are recognized in the period of change and impact the amount of expense to be recognized in future periods. The expense incurred for stock-based compensation plans is included in Selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Income.
Stock Options
In May 2017, the Company adopted the 2017 Stock Purchase and Option Plan for Key Employees of Amphenol and Subsidiaries (the “2017 Employee Option Plan”). A committee of the Company’s Board of Directors has been authorized to grant stock options pursuant to the 2017 Employee Option Plan. At the time of its adoption, the number of shares of the Company’s Class A Common Stock (“Common Stock”) reserved for issuance under the 2017 Employee Option Plan was 60,000,000 shares (as approved by the Company’s Board of Directors). As of March 31, 2021, there were 10,101,120 shares of Common Stock available for the granting of additional stock options under the 2017 Employee Option Plan. The Company also continues to maintain the 2009 Stock Purchase and Option Plan for Key Employees of Amphenol and Subsidiaries, as amended (the “2009 Employee Option Plan”). No additional stock options will be granted under the 2009 Employee Option Plan. Options granted under the 2017 Employee Option Plan and the 2009 Employee Option Plan generally vest ratably over a period of five years from the date of grant and are generally exercisable over a period of ten years from the date of grant.
Stock option activity for the three months ended March 31, 2021 was as follows:
Weighted
Average
Aggregate
Weighted
Remaining
Intrinsic
Average
Contractual
Value
Options
Exercise Price
Term (in years)
(in millions)
Options outstanding at January 1, 2021
67,985,648
$
37.58
6.79
$
1,890.4
Options granted
215,080
64.69
Options exercised
( 757,598 )
28.12
Options forfeited
( 31,160 )
42.37
Options outstanding at March 31, 2021
67,411,970
$
37.77
6.57
$
1,901.0
Vested and non-vested options expected to vest at March 31, 2021
64,076,188
$
37.47
6.50
$
1,826.2
Exercisable options at March 31, 2021
30,329,950
$
31.94
5.10
$
1,032.0
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A summary of the status of the Company’s non-vested options as of March 31, 2021 and changes during the three months then ended is as follows:
Weighted
Average
Fair Value at
Options
Grant Date
Non-vested options at January 1, 2021
36,989,300
$
6.43
Options granted
215,080
12.11
Options vested
( 91,200 )
3.88
Options forfeited
( 31,160 )
5.77
Non-vested options at March 31, 2021
37,082,020
$
6.46
During the three months ended March 31, 2021 and 2020, the following activity occurred under the Company’s option plans:
Three Months Ended
March 31,
2021
2020
Total intrinsic value of stock options exercised
$
28.9
$
45.2
Total fair value of stock options vested
0.4
0.6
As of March 31, 2021, the total compensation cost related to non-vested options not yet recognized was approximately $ 165.2 with a weighted average expected amortization period of 3.25 years.
The grant-date fair value of each option grant under the 2009 Employee Option Plan and the 2017 Employee Option Plan is estimated using the Black-Scholes option pricing model. The grant-date fair value of each share grant is determined based on the closing share price of the Company’s Common Stock on the date of the grant. The fair value is then amortized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. Use of a valuation model for option grants requires management to make certain assumptions with respect to selected model inputs. Expected share price volatility is calculated based on the historical volatility of the Common Stock and implied volatility derived from related exchange traded options. The average expected life is based on the contractual term of the option and expected exercise and historical experience. The risk-free interest rate is based on U.S. Treasury zero-coupon issuances with a remaining term equal to the expected life assumed at the date of grant. The expected annual dividend per share is based on the Company’s dividend rate.
Restricted Shares
In 2012, the Company adopted the 2012 Restricted Stock Plan for Directors of Amphenol Corporation (the “2012 Directors Restricted Stock Plan”). The 2012 Directors Restricted Stock Plan is administered by the Company’s Board of Directors. As of March 31, 2021, the number of restricted shares available for grant under the 2012 Directors Restricted Stock Plan was 163,342 . Restricted shares granted under the 2012 Directors Restricted Stock Plan generally vest on the first anniversary of the grant date. Grants under the 2012 Directors Restricted Stock Plan entitle the holder to receive shares of the Company’s Common Stock without payment.
Restricted share activity for the three months ended March 31, 2021 was as follows:
Weighted Average
Remaining
Restricted
Fair Value at
Amortization
Shares
Grant Date
Term (in years)
Restricted shares outstanding at January 1, 2021
26,350
$
45.55
0.38
Restricted shares granted
—
—
Restricted shares outstanding at March 31, 2021
26,350
$
45.55
0.13
As of March 31, 2021, the total compensation cost related to non-vested restricted shares not yet recognized was approximately $ 0.2 (with a weighted average expected amortization period of 0.13 years).
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Note 9—Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing net income attributable to Amphenol Corporation by the weighted average number of common shares outstanding. Diluted EPS is computed by dividing net income attributable to Amphenol Corporation by the weighted average number of outstanding common shares and dilutive common shares, the dilutive effect of which relates to stock options. A reconciliation of the basic weighted average common shares outstanding to diluted weighted average common shares outstanding, along with the earnings per share (basic and diluted) for the three months ended March 31, 2021 and 2020 is as follows:
Three Months Ended March 31,
(dollars and shares in millions, except per share data)
2021
2020
Net income attributable to Amphenol Corporation shareholders
$
329.6
$
242.1
Basic weighted average common shares outstanding
598.5
594.9
Effect of dilutive stock options
25.6
18.0
Diluted weighted average common shares outstanding
624.1
612.9
Earnings per share attributable to Amphenol Corporation shareholders:
Basic
$
0.55
$
0.41
Diluted
$
0.53
$
0.40
Excluded from the computations above were anti-dilutive common shares (primarily related to outstanding stock options) of 0.1 million and 6.2 million for the three months ended March 31, 2021 and 2020, respectively.
Note 10—Benefit Plans and Other Postretirement Benefits
The Company and certain of its domestic subsidiaries have defined benefit pension plans (the “U.S. Plans”), which cover certain U.S. employees and which represent the majority of the plan assets and benefit obligations of the aggregate defined benefit plans of the Company. The U.S. Plans’ benefits are generally based on years of service and compensation and are generally noncontributory. The majority of U.S. employees are not covered by the U.S. Plans and are covered by defined contribution plans. Certain foreign subsidiaries have defined benefit plans covering their employees (the “Foreign Plans” and, together with the U.S. Plans, the “Plans”). The following is a summary, based on the most recent actuarial valuations of the Company’s net cost for pension benefits, of the Plans for the three months ended March 31, 2021 and 2020:
Pension Benefits
Three Months Ended March 31:
2021
2020
Service cost
$
1.9
$
2.0
Interest cost
2.8
4.2
Expected return on plan assets
( 7.8 )
( 9.3 )
Amortization of prior service cost
0.5
0.5
Amortization of net actuarial losses
6.2
6.2
Net pension expense
$
3.6
$
3.6
Based on the Company’s current investment strategy for its U.S. Plans, the Company’s expected long-term rate of return assumption to determine net periodic pension expense for 2021 is 6.0 % . There is no current requirement for cash contributions to any of the U.S. Plans, and the Company plans to evaluate annually, based on actuarial calculations and the investment performance of the Plans’ assets, the timing and amount of cash contributions in the future.
The Company offers various defined contribution plans for certain U.S. and foreign employees. Participation in these plans is based on certain eligibility requirements. The Company matches employee contributions to the U.S. defined contribution plans up to a maximum of 6 % of eligible compensation. During the three months ended March 31, 2021 and 2020, the Company provided matching contributions to the U.S. defined contribution plans of approximately $ 4.4 and $ 3.4 , respectively.
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Note 11—Acquisitions
2021 Acquisitions
During the first three months of 2021, the Company completed four acquisitions for approximately $ 185.6 , net of cash acquired. Three of the acquisitions have been included in the Interconnect Products and Assemblies segment, while one acquisition has been included in the Cable Products and Solutions segment. The Company is in the process of completing its analyses of the fair value of the assets acquired and liabilities assumed. The Company anticipates that the final assessments of values will not differ materially from the preliminary assessments. The operating results of the 2021 acquisitions have been included in the Condensed Consolidated Statements of Income since their respective dates of acquisition. Pro forma financial information related to these acquisitions has not been presented, since these acquisitions were not material, either individually or in the aggregate, to the Company’s financial results.
On April 7, 2021, the Company completed the previously announced acquisition of MTS Systems Corporation (“MTS”). Refer to Note 16 herein for further details related to the MTS acquisition, as well as the planned divestiture of the MTS Test & Simulation business.
2020 Acquisitions
During the year ended December 31, 2020, the Company completed two acquisitions, which are included in the Interconnect Products and Assemblies segment, for approximately $ 50.4 , net of cash acquired. While the Company has completed the acquisition accounting for one of the acquisitions in 2020, the Company is in the process of completing the analyses of the fair value of the assets acquired and liabilities assumed for the other 2020 acquisition. The Company anticipates that the final assessments of values will not differ materially from the preliminary assessments. Pro forma financial information related to these acquisitions has not been presented, since these acquisitions were not material, either individually or in the aggregate, to the Company’s financial results.
Note 12—Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill by segment were as follows:
Interconnect
Cable
Products and
Products and
Assemblies
Solutions
Total
Goodwill at December 31, 2020
$
4,874.5
$
157.6
$
5,032.1
Acquisition-related
96.5
11.6
108.1
Foreign currency translation
( 47.2 )
—
( 47.2 )
Goodwill at March 31, 2021
$
4,923.8
$
169.2
$
5,093.0
Other than goodwill noted above, the Company’s intangible assets as of March 31, 2021 and December 31, 2020 were as follows:
March 31, 2021
December 31, 2020
Weighted
Gross
Net
Gross
Net
Average
Carrying
Accumulated
Carrying
Carrying
Accumulated
Carrying
Life (years)
Amount
Amortization
Amount
Amount
Amortization
Amount
Customer relationships
9
$
479.9
$
321.1
$
158.8
$
456.6
$
313.6
$
143.0
Proprietary technology
11
156.0
90.9
65.1
156.2
88.1
68.1
Backlog and other
2
49.7
49.4
0.3
49.7
49.4
0.3
Total intangible assets (definite-lived)
9
685.6
461.4
224.2
662.5
451.1
211.4
Trade names (indefinite-lived)
186.1
186.1
186.1
186.1
$
871.7
$
461.4
$
410.3
$
848.6
$
451.1
$
397.5
The increase in the gross carrying amount of intangible assets in the first quarter of 2021 was driven by certain customer relationships recognized as a result of the acquisition accounting associated with our first quarter 2021 acquisitions. Amortization expense for the three months ended March 31, 2021 and 2020 was approximately $ 12.3 and
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$ 12.9 , respectively. As of March 31, 2021, amortization expense relating to the Company’s current intangible assets estimated for the remainder of 2021 is approximately $ 37.0 and for each of the next five fiscal years is approximately $ 42.0 in 2022, $ 39.3 in 2023, $ 33.6 in 2024, $ 24.2 in 2025 and $ 23.1 in 2026.
Note 13—Reportable Business Segments
The Company has two reportable business segments: (i) Interconnect Products and Assemblies and (ii) Cable Products and Solutions. The Company organizes its reportable business segments based upon similar economic characteristics and business groupings of products, services, and customers, and do not include any aggregated operating segments. These reportable business segments are determined based upon how the Company operates its businesses, assesses operating performance, makes resource allocation decisions, and communicates results, outlook and strategy to our Board of Directors and shareholders. The Interconnect Products and Assemblies segment primarily designs, manufactures and markets a broad range of connector and connector systems, value-add products and other products, including antennas and sensors, used in a broad range of applications in a diverse set of end markets. The Cable Products and Solutions segment primarily designs, manufactures and markets cable, value-add products and components for use primarily in the broadband communications and information technology markets as well as certain applications in other markets. The accounting policies of the segments are the same as those for the Company as a whole and are described herein and in Note 1 of the Notes to Consolidated Financial Statements in the 2020 Annual Report. The Company evaluates the performance of the segments and allocates resources to them based on, among other things, profit or loss from operations before interest, headquarters’ expense allocations, stock-based compensation expense, income taxes, amortization related to certain intangible assets and nonrecurring gains and losses.
The segment results for the three months ended March 31, 2021 and 2020 are as follows:
Interconnect Products
Cable Products
and Assemblies
and Solutions
Corporate / Other (1)
Total Consolidated
Three Months Ended March 31:
2021
2020
2021
2020
2021
2020
2021
2020
Net sales:
External
$
2,280.0
$
1,779.0
$
97.1
$
83.0
$
—
$
—
$
2,377.1
$
1,862.0
Intersegment
17.8
8.4
11.7
8.9
—
—
29.5
17.3
Segment operating income
489.4
339.8
8.5
6.3
497.9
346.1
(1) Corporate / Other is not a reportable business segment; the reconciliation of segment operating income to consolidated results is included in the table below.
A reconciliation of segment operating income to consolidated income before income taxes for the three months ended March 31, 2021 and 2020 is summarized as follows:
Three Months Ended March 31,
2021
2020
Segment operating income
$
497.9
$
346.1
Stock-based compensation expense
( 19.1 )
( 15.4 )
Other operating expenses
( 14.0 )
( 13.8 )
Interest expense
( 28.6 )
( 28.8 )
Other (expense) income, net
( 0.3 )
1.1
Income before income taxes
$
435.9
$
289.2
Note 14—Revenue Recognition
Revenues consist of product sales to either end customers and their appointed contract manufacturers (including original equipment manufacturers) or to distributors, and the vast majority of our sales are recognized at a point-in-time under the core principle of recognizing revenue when control transfers to the customer. With limited exceptions, the Company recognizes revenue at the point in time when we ship or deliver the product from our manufacturing facility to our customer, when our customer accepts and has legal title of the goods, and where the Company has a present right to payment for such goods. For the three months ended March 31, 2021 and 2020, less than 5 % of our net sales were recognized over time, where the associated contracts relate to the sale of goods with no alternative use as they are only
18
Table of Contents
sold to a single customer and whose underlying contract terms provide the Company with an enforceable right to payment, including a reasonable profit margin, for performance completed to date, in the event of customer termination. Since we typically invoice our customers at the same time that we satisfy our performance obligations, contract assets and contract liabilities related to our contracts with customers recorded in the Company’s Condensed Consolidated Balance Sheets were not significant as of March 31, 2021 and December 31, 2020. These amounts are recorded in the accompanying Condensed Consolidated Balance Sheets within Prepaid expenses and other current assets or Other accrued expenses as of March 31, 2021 and December 31, 2020.
The Company receives customer orders negotiated with multiple delivery dates that may extend across more than one reporting period until the contract is fulfilled, the end of the order period is reached, or a pre-determined maximum order value has been reached. Orders typically fluctuate from quarter to quarter based on customer demand and general business conditions. It is generally expected that a substantial portion of our remaining performance obligations will be fulfilled within three months , and nearly all of our performance obligations are fulfilled within one year . Since our performance obligations are part of contracts that generally have original durations of one year or less, we have not disclosed the aggregate amount of transaction prices associated with unsatisfied or partially unsatisfied performance obligations as of March 31, 2021.
While the Company typically offers standard product warranty coverage which provides assurance that our products will conform to the contractually agreed-upon specifications for a limited period from the date of shipment, the Company’s warranty liabilities as of March 31, 2021 and December 31, 2020, and related warranty expense for the three months ended March 31, 2021 and 2020, have not been and were not material in the accompanying Condensed Consolidated Financial Statements.
Disaggregation of Net Sales
The following table shows our net sales disaggregated into categories the Company considers meaningful to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors for the three months ended March 31, 2021 and 2020:
Interconnect Products
Cable Products
Total Reportable
and Assemblies
and Solutions
Business Segments
Three Months Ended March 31,
2021
2020
2021
2020
2021
2020
Net sales by:
Sales channel:
End customers and contract manufacturers
$
1,931.0
$
1,488.6
$
82.3
$
66.1
$
2,013.3
$
1,554.7
Distributors and resellers
349.0
290.4
14.8
16.9
363.8
307.3
$
2,280.0
$
1,779.0
$
97.1
$
83.0
$
2,377.1
$
1,862.0
Geography:
United States
$
621.7
$
571.4
$
52.2
$
44.0
$
673.9
$
615.4
China
657.7
416.9
3.2
0.8
660.9
417.7
Other foreign locations
1,000.6
790.7
41.7
38.2
1,042.3
828.9
$
2,280.0
$
1,779.0
$
97.1
$
83.0
$
2,377.1
$
1,862.0
Net sales by geographic area are based on the customer location to which the product is shipped.
Note 15—Commitments and Contingencies
The Company has been named as a defendant in several legal actions arising from normal business activities. The Company records a loss contingency liability when a loss is considered probable and the amount can be reasonably estimated. Although the potential liability with respect to certain of such legal actions cannot be reasonably estimated, none of such matters is expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s legal costs associated with defending itself are recorded to expense as incurred.
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In August 2018, the Company received a subpoena from the U.S. Department of Defense, Office of the Inspector General, requesting documents pertaining to certain products manufactured by the Company’s Military and Aerospace Group that are purchased or used by the U.S. government. This matter is ongoing and the Company is cooperating with the request. The Company is currently unable to estimate the timing or outcome of the matter.
From December 2019 through October 2020, the Company has been named as one of several defendants in four separate lawsuits filed in the State of Indiana . The lawsuits relate to a manufacturing site in Franklin, Indiana (the “Site”) where the Company has been conducting an environmental clean-up effort under the direction of the United States Environmental Protection Agency (the “EPA”). The Site was shut down in 1983, more than three years before the Company acquired the Site as part of a larger acquisition that led to the establishment of the Company’s business in 1987 (the “Acquisition”). In connection with the Acquisition, the Company agreed, and has continued, to work closely with the EPA regarding the ongoing clean-up effort at the Site, subject to an indemnity from the seller (the “Seller”). In 1989, the Company sold the property where the Site is located. The lawsuits collectively seek, among other things, compensation for personal injuries and for past, present and future medical expenses, compensation for loss of property values near the Site and costs related to medical monitoring for individuals living close to the Site, in each case arising from alleged exposure to hazardous chemicals. The Company denies any wrongdoing and is defending each of the above described lawsuits. All the costs incurred relating to these lawsuits are reimbursed by the Seller based on the Seller’s indemnification obligations entered into in connection with the Acquisition (the “1987 Indemnification Agreement”). In addition, the environmental investigation, remediation and monitoring activities undertaken by the Company relating to the Site are reimbursed under the 1987 Indemnification Agreement. As a result, the Company does not believe that the costs associated with these lawsuits or the resolution of the related environmental matters will have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows.
In March 2021, a non-material customer of the Company filed a formal request for arbitration against the Company relating to a product sold to such customer which the customer alleges did not meet the agreed upon product specification. The customer is pursuing breach of warranty claims against the Company, among other assertions, and is seeking damages relating to its estimated costs of replacing the product. While the customer has claimed damages of approximately € 80 , the arbitrator will have discretion to determine the actual amount of damages as well as the apportionment of responsibility between the parties. The Company has denied that its product caused the damages, that its product did not meet the agreed upon specifications and that the claimed damages are appropriate, and is vigorously defending itself in the arbitration.
Certain operations of the Company are subject to environmental laws and regulations that 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.
Note 16—Subsequent Events
Acquisition of MTS Systems Corporation
On December 9, 2020 , Amphenol announced that the Company entered into a definitive agreement under which Amphenol would acquire MTS Systems Corporation (Nasdaq: MTSC) (“MTS”) for $ 58.50 per share in cash. In the first quarter of 2021, the acquisition of MTS was approved by MTS’s shareholders. MTS is a leading global supplier of precision sensors, advanced test systems and motion simulators. MTS was historically organized into two business segments: Sensors (“MTS Sensors”) and Test & Simulation (“MTS T&S”). The MTS Sensors segment represents a highly complementary offering of high-technology, harsh environment sensors sold into diverse end markets and applications. The MTS Sensors business will further expand the Company’s range of sensor and sensor-based products across a wide array of industries and will be reported as part of our continuing operations and within our Interconnect Products and Assemblies segment. On January 19, 2021, the Company entered into an agreement to sell the MTS T&S business to Illinois Tool Works Inc. (“ITW”) (NYSE: ITW). Further details related to the planned divestiture of the MTS T&S business are included below.
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On April 7, 2021 , the Company completed its acquisition of MTS for a purchase price of approximately $ 1,300 , net of cash acquired and including the repayment of certain outstanding debt and liabilities at closing. In addition to the purchase price, the Company also assumed MTS’s then outstanding senior notes due August 15, 2027, which the Company repaid and settled shortly after the closing, including accrued interest, for approximately $ 355 . The MTS acquisition was funded through a combination of borrowings under the U.S. Commercial Paper Program, as discussed in Note 4 herein, and cash and cash equivalents on hand.
The Company is in the early stages of preparing its acquisition accounting related to MTS, which is currently incomplete due to the proximity of the acquisition’s closing date to the date of this quarterly report. The Company has begun its preliminary analysis associated with allocating the purchase price to the related tangible and identifiable intangible assets acquired and liabilities assumed, based upon their estimated fair values.
Anticipated Divestiture of MTS T&S Business
On January 19, 2021, the Company entered into an agreement to sell the MTS T&S business to ITW. The agreed-upon sale price is approximately $ 750 , subject to certain post-closing adjustments and excluding transaction-related expenses, and the closing is subject to the receipt of all required regulatory approvals and the satisfaction of other customary closing conditions.
Since the MTS T&S business was (i) part of the recent MTS acquisition and (ii) has never been nor will ever be considered part of our continuing operations, the Company expects to report the operating results and related cash flows of the MTS T&S business as a discontinued operation, effective as of the MTS acquisition date. Accordingly, the Company will not assign the MTS T&S business to either of our two reportable business segments due to its anticipated sale later in 2021. The MTS T&S business will meet the “held for sale” accounting criteria and the respective assets and liabilities will be classified as such and measured at fair value less costs to sell as of the date of the MTS acquisition.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.