Item 2. Management’s Discussion and Analysis
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(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, 2021 and 2020 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” or “GAAP”). Any references to the Company’s results in this Item 2 are specifically to our continuing operations only and exclude discontinued operations, unless otherwise noted. 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.
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. All current and prior year data impacted by the stock split and presented in this Item 2 and throughout this Form 10-Q herein, including number of shares and per share information, earnings per share and dividends per share amounts, among others, have been retroactively adjusted to reflect the effect of the stock split. Refer to Note 1 of the accompanying Notes to Condensed Consolidated Financial Statements for further information related to the stock split.
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. All statements that address events or developments that we expect or believe may or will occur in the future are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements, which address the Company’s expected business and financial performance and financial condition, as well as expectations regarding the anticipated timing and estimated expenses associated with the closing of certain acquisitions and divestitures, among other matters, may contain words and terms such as: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “look ahead,” “may,” “ongoing,” “optimistic,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” 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 (i) the coronavirus (“COVID-19”) pandemic, including its future impact on the Company or (ii) the expected closing of the divestiture of the MTS Test & Simulation (“MTS T&S”) business to Illinois Tool Works Inc. (“ITW”), which may not be completed in a timely manner or at all, each of which are discussed within this Form 10-Q. Although the Company believes the expectations reflected in all forward-looking statements, including those with regards to results of operations, liquidity, the Company’s effective tax rate, and other matters discussed herein, 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
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forward-looking statements, which include, but are not limited to, the following: future risks and existing uncertainties associated with adverse public health developments, including epidemics and pandemics such as the COVID-19 pandemic, which continues to disrupt our operations including, depending on the specific location, government regulations that inhibit our ability to operate certain of our facilities in the ordinary course and to adjust certain costs, travel restrictions, 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 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 ability to rely upon 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 of U.S. government contracts and related risks associated with conducting business with the U.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, malware, phishing, ransomware or other increasingly sophisticated attacks, that could impair our information technology systems and could disrupt business operations, result in a loss of or inability to access confidential information and critical business, financial or other data, and/or cause the release of highly sensitive confidential information and adversely impact our reputation and operating results and potentially lead to litigation and/or governmental investigations and fines; changes in fiscal and tax policies, audits and examinations by taxing authorities, laws, regulations and guidance in the United States and foreign jurisdictions; 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, any potential resurgence of the crisis including from the more transmissible Delta variant strain and any future strains that may arise, future government regulations and actions in response to the crisis, the timing, availability, effectiveness and adoption rates of vaccines, 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.
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 ended December 31, 2020, Quarterly Reports on Form 10-Q and the Company’s other reports filed with the Securities 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 COVID-19 on our Operations, Financial Condition, Liquidity and Results of Operations
The COVID-19 pandemic caused widespread disruptions to our Company during 2020, particularly during the first half of that year, and as of September 30, 2021, we continue to experience some disruptions, and at a minimum, we
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expect those disruptions to continue through the fourth quarter of 2021 and they could, potentially, extend into 2022 and beyond. These disruptions have included and may continue to include, depending on the specific location, government regulations that inhibit our ability to operate certain of our facilities in the ordinary course and to adjust certain costs, travel restrictions, supplier constraints, supply-chain interruptions, logistics challenges and limitations, and reduced demand from certain customers. In 2021, t here have been resurgences in COVID-19 cases in s everal regions around the world. 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, any potential resurgence of the crisis including from the more transmissible Delta variant strain and any future strains that may arise, future government regulations and actions in response to the crisis, the timing, availability, effectiveness and adoption rates of vaccines, 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. 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 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 September 30, 2021 compared to the three and nine months ended September 30, 2020
Net sales were $2,818.5 in the third quarter of 2021 compared to $2,323.4 in the third quarter of 2020, which represented an increase of 21% in U.S. dollars, 20% in constant currencies and 13% organically, over the respective prior year period. Net sales were $7,849.5 in the first nine months of 2021 compared to $6,172.9 in the first nine months of 2020, which represented an increase of 27% in U.S. dollars, 25% in constant currencies and 19% organically, over the respective prior year period. The increase in net sales in the third quarter and first nine months of 2021 was driven primarily by growth in several markets in the Interconnect Products and Assemblies segment, as described below.
Net sales in the Interconnect Products and Assemblies segment (approximately 96% of net sales) in the third quarter of 2021 increased 21% in U.S. dollars, 20% in constant currencies and 13% organically, compared to the third quarter of 2020. The increase in the third quarter of 2021 was driven by growth in several markets, in particular by strong growth in the industrial, automotive, information technology and data communications, and mobile networks markets, and moderate growth in the military market, along with contributions from the Company’s acquisition program, all of which were slightly offset by a decline in the mobile devices market. Net sales in the Interconnect Products and Assemblies segment (approximately 96% of net sales) in the first nine months of 2021 increased 27% in U.S. dollars, 25% in constant currencies and 19% organically, compared to the first nine months of 2020. The increase in the first nine months of 2021 was driven by growth in most of our markets, in particular by strong growth in the automotive, industrial, information technology and data communications, and military markets, and moderate growth in the mobile devices and mobile networks markets, along with contributions from the Company’s acquisition program, all of which were slightly offset by a significant decline in the commercial aerospace market, which continued to be negatively impacted by the COVID-19 pandemic. The strong sales growth for the first nine months of 2021 in the Interconnect Products and Assemblies segment also reflected a recovery in certain markets from the negative impact resulting from the COVID-19 pandemic during the first nine months of 2020.
Net sales in the Cable Products and Solutions segment (approximately 4% of net sales) in the third quarter of 2021, which primarily serves the broadband communications market, increased 18% in U.S. dollars, 17% in constant currencies and 11% organically, compared to the third quarter of 2020. Net sales in the Cable Products and Solutions segment (approximately 4% of net sales) in the first nine months of 2021 increased 20% in U.S. dollars, 20% in constant currencies and 15% organically, compared to the first nine months of 2020. The increase in the third quarter of 2021 was primarily driven by increased demand from mobile network service providers, as well as the contribution from one acquisition in this segment that closed during the first quarter of 2021, partially offset by a reduction in demand from broadband operators. The increase in the first nine months of 2021 was primarily driven by increased market demand from broadband operators and mobile network service providers, coupled with the market recovery from the negative
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impact of the COVID-19 pandemic during the first nine months of 2020, as well as the contribution from one acquisition in this segment that closed during the first quarter of 2021.
The table below reconciles Constant Currency Net Sales Growth and Organic Net Sales Growth to the most directly comparable U.S. GAAP financial measures for the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020:
Percentage Growth (relative to same prior year period)
Net sales
Foreign
Constant
Organic
growth in
currency
Currency Net
Acquisition
Net Sales
U.S. Dollars (1)
impact (2)
Sales Growth (3)
impact (4)
Growth (3)
Three Months Ended September 30:
2021
2020
(GAAP)
(non-GAAP)
(non-GAAP)
(non-GAAP)
(non-GAAP)
Net sales:
Interconnect Products and Assemblies
$
2,699.2
$
2,221.9
21
%
1
%
20
%
7
%
13
%
Cable Products and Solutions
119.3
101.5
18
%
1
%
17
%
6
%
11
%
Consolidated
$
2,818.5
$
2,323.4
21
%
1
%
20
%
7
%
13
%
Nine Months Ended September 30:
Net sales:
Interconnect Products and Assemblies
$
7,520.5
$
5,899.4
27
%
2
%
25
%
6
%
19
%
Cable Products and Solutions
329.0
273.5
20
%
—
%
20
%
5
%
15
%
Consolidated
$
7,849.5
$
6,172.9
27
%
2
%
25
%
6
%
19
%
(1) Net sales growth in U.S. dollars is calculated based on Net sales as reported in the Condensed Consolidated Statements of Income and Note 14 of the accompanying financial statements. While the term “net sales growth in U.S. dollars” is not considered a U.S. GAAP financial measure, for purposes of 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.
(2) Foreign currency translation impact, a non-GAAP measure, represents the percentage impact on net sales resulting from foreign currency exchange rate changes in the current reporting period(s) compared to the same period(s) in the prior year. Such amount is calculated by subtracting current year net sales translated at average foreign currency exchange rates for the respective prior year period(s) 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.
(4) Acquisition impact, a non-GAAP measure, represents the percentage impact on net sales resulting from acquisitions that have closed during the prior twelve months that have not been included in the Company's consolidated results for the full current period(s) and/or prior comparable period(s) presented. Such net sales related to these acquisitions do not reflect the underlying growth of the Company on a comparative basis.
Geographically, sales in the United States in the third quarter of 2021 increased 24% in U.S. dollars ($830.0 in 2021 versus $668.8 in 2020) and 14 % organically, compared to the third quarter of 2020. Sales in the United States in the first nine months of 2021 increased 23% in U.S. dollars ($2,283.0 in 2021 versus $1,854.0 in 2020) and 15% organically, compared to the first nine months of 2020. Foreign sales in the third quarter of 2021 increased 20% in U.S. dollars ($1,988.5 in 2021 versus $1,654.6 in 2020), 18% in constant currencies and 13% organically, compared to the third quarter of 2020. Foreign sales in the first nine months of 2021 increased 29% in U.S. dollars ($5,566.5 in 2021 versus $4,318.9 in 2020), 25% in constant currencies and 21% organically, compared to the first nine months of 2020. The comparatively weaker U.S. dollar for the third quarter and first nine months of 2021 had the effect of increasing sales by approximately $31.7 and $162.1, respectively, relative to the comparable periods in 2020.
Selling, general and administrative expenses increased to $318.7, or 11.3% of net sales, and $893.0, or 11.4% of net sales, for the third quarter and first nine months of 2021, respectively, compared 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. The decrease in selling, general and administrative expenses as a percentage of net sales in the first nine months of 2021 is primarily driven by higher sales during the first nine months of 2021, relative to the comparable period of 2020 which was more negatively impacted by the COVID-19 pandemic, slightly offset by the impact of the MTS Sensors business which currently has higher selling, general and administrative expenses as a percentage of net sales compared to the average of the Company. Administrative expenses represented approximately 4.6% and 4.5% of net sales for the third quarter and first nine months of 2021, respectively, and represented approximately 4.4% and 4.8% o f net sales for the third quarter and first nine months of 2020, respectively. Research and development expenses represented approximately 2.9% and 3.0% of net sales for the third quarter and first nine months of 2021, respectively, and represented approximately 3.0% and 3.1% of net sales for the third quarter and first nine months of 2020, respectively. Selling and marketing expenses represented approximately 3.8% and 3.9% of net sales for the third quarter and first nine months of 2021, respectively,
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and represented approximately 3.7% and 4.2% of net sales for the third quarter and first nine months of 2020, respectively.
Operating income was $571.2, or 20.3% of net sales, and $1,512.2, or 19.3% of net sales, for the third quarter and first nine months of 2021, respectively, compared to $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. Operating income for the first nine months of 2021 included $55.4 of acquisition-related expenses (separately presented in the Condensed Consolidated Statements of Income) primarily comprised of transaction, severance, restructuring and certain non-cash costs related to the acquisition of MTS Systems Corporation (“MTS”). For the nine months ended September 30, 2021, these acquisition-related expenses had the effect of decreasing net income from continuing operations by $44.6, 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, were $1,567.6, or 20.0% of net sales, for the nine months ended September 30, 2021. The increase in Adjusted Operating Income and Adjusted Operating Margin for the first nine months of 2021 relative to the comparable period in 2020 was primarily driven by the Interconnect Products and Assemblies segment, as discussed further below.
Operating income for the Interconnect Products and Assemblies segment for the third quarter and first nine months of 2021 was $603.3, or 22.4% of net sales, and $1,652.3, or 22.0% of net sales, respectively, compared to $498.4, or 22.4% of net sales, and $1,217.6, or 20.6% of net sales, for the third quarter and first nine months of 2020, respectively. The increase in operating margin for the Interconnect Products and Assemblies segment for the first nine months of 2021 relative to the comparable period in 2020 was primarily driven by normal operating leverage on the higher sales volumes combined with the benefit of a lower cost impact resulting from the COVID-19 pandemic compared to the first nine months of 2020, partially offset by the impact of the more challenging commodity and supply chain environment experienced to date in 2021.
Operating income for the Cable Products and Solutions segment for the third quarter and first nine months of 2021 was $4.6, or 3.8% of net sales, and $20.0, or 6.1% of net sales, respectively, compared to $10.9, or 10.7% of net sales, and $25.7, or 9.4% of net sales, for the third quarter and first nine months of 2020, respectively. The decrease in operating margin for the Cable Products and Solutions segment for the third quarter and first nine months of 2021 relative to the comparable periods in 2020 is primarily driven by the impact of the more challenging commodity, logistics and supply chain environment experienced to date in 2021.
Interest expense for the third quarter and first nine months of 2021 was $29.0 and $86.7, respectively, compared to $28.0 and $87.1 for the third quarter and first nine months of 2020, respectively. Refer to Note 4 of the Condensed Consolidated Financial Statements for further information related to the Company’s debt.
Provision for income taxes for the third quarter and first nine months of 2021 was at an effective tax rate of 22.2% and 21.2%, respectively. 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. For the third quarter and first nine months of 2021 and 2020, 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 2021, the effective tax rate was further impacted by the tax effect of acquisition-related expenses and the discrete tax benefit related to the settlement of uncertain tax positions in certain non-U.S. jurisdictions, each of which had the impact on the effective tax rate and 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 a non-U.S. jurisdiction 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. 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 months ended September 30, 2021 and 2020 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 from continuing operations attributable to Amphenol Corporation and Net income (from continuing operations) per common share attributable to Amphenol Corporation - Diluted (“Diluted EPS”) were $418.8 and $0.67,
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respectively, for the third quarter of 2021, compared to $346.6 and $0.56, respectively, for the third quarter of 2020. Excluding the effect of the aforementioned items discussed above, Adjusted Net Income from continuing operations attributable to Amphenol Corporation and Adjusted Diluted EPS, non-GAAP financial measures as defined in the “Non-GAAP Financial Measures” section below within this Item 2, were $406.5 and $0.65, respectively, for the third quarter of 2021, compared to $335.9 and $0.55, respectively, for the third quarter of 2020. Net income from continuing operations attributable to Amphenol Corporation and Diluted EPS were $1,115.5 and $1.79, respectively, for the first nine months of 2021, compared to $846.4 and $1.38, respectively, for the first nine months of 2020. Excluding the effect of the aforementioned items discussed above, Adjusted Net Income from continuing operations attributable to Amphenol Corporation and Adjusted Diluted EPS were $1,110.9 and $1.78, respectively, for the first nine months of 2021, compared to $798.4 and $1.30, respectively, for the first nine months of 2020.
The following tables reconcile Adjusted Operating Income, Adjusted Operating Margin, Adjusted Net Income from continuing operations attributable to Amphenol Corporation, Adjusted Effective Tax Rate and Adjusted Diluted EPS (all on a continuing operations basis only, as defined in the “Non-GAAP Financial Measures” section below) to the most directly comparable U.S. GAAP financial measures for the three and nine months ended September 30, 2021 and 2020:
Three Months Ended September 30,
2021
2020
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)
$
571.2
20.3
%
$
418.8
22.2
%
$
0.67
$
475.8
20.5
%
$
346.6
22.1
%
$
0.56
Excess tax benefits related to stock-based compensation
—
—
(12.3)
2.3
(0.02)
—
—
(10.7)
2.4
(0.02)
Adjusted (non-GAAP) (2)
$
571.2
20.3
%
$
406.5
24.5
%
$
0.65
$
475.8
20.5
%
$
335.9
24.5
%
$
0.55
Nine Months Ended September 30,
2021
2020
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)
$
1,512.2
19.3
%
$
1,115.5
21.2
%
$
1.79
$
1,150.1
18.6
%
$
846.4
20.0
%
$
1.38
Acquisition-related expenses
55.4
0.7
44.6
(0.2)
0.07
—
—
—
—
—
Excess tax benefits related to stock-based compensation
—
—
(34.3)
2.4
(0.05)
—
—
(28.1)
2.6
(0.05)
Discrete tax item
—
—
(14.9)
1.0
(0.02)
—
—
(19.9)
1.9
(0.03)
Adjusted (non-GAAP) (2)
$
1,567.6
20.0
%
$
1,110.9
24.5
%
$
1.78
$
1,150.1
18.6
%
$
798.4
24.5
%
$
1.30
Note: All data in the tables above are on a continuing operations basis only and exclude results associated with discontinued operations.
(1) While the terms “operating margin” and “effective tax rate” are not considered U.S. GAAP financial measures, for purposes of this table, we derive the reported (GAAP) measures based on GAAP results, which serve as the basis for the reconciliation to their comparable non-GAAP financial measures.
(2) All percentages and per share amounts in this table were calculated using actual, unrounded results; therefore, the sum of the components may not add due to rounding.
Discontinued Operations
Following the acquisition of MTS, the Company concluded that the MTS T&S business met the discontinued operations reporting criteria as of the MTS acquisition date of April 7, 2021 in light of our definitive agreement to sell the MTS T&S business to ITW. As a result, the financial results of the MTS T&S business are reported as discontinued operations for the three and nine months ended September 30, 2021. Income from discontinued operations attributable to Amphenol Corporation, net of income taxes, was $7.7 and $10.3 for the third quarter and first nine months of 2021, respectively. Income from discontinued operations relates to the results associated with the MTS T&S business that was acquired as part of the MTS acquisition. The Company will continue to account for the MTS T&S business as discontinued operations until the business is sold to ITW upon the receipt of all required regulatory approvals and the satisfaction of other customary closing conditions, which we expect to occur within one year of the date of the acquisition of MTS. The Company will incur certain transaction fees and other professional and external costs
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associated with the planned sale of the MTS T&S business. Refer to Note 12 of the Notes to Condensed Consolidated Financial Statements for further details related to the planned divestiture of the MTS T&S business.
Liquidity and Capital Resources
As of September 30, 2021 and December 31, 2020, the Company had cash, cash equivalents and short-term investments of $1,302.5 and $1,738.1, respectively, with the majority of such funds located outside of the United States. On April 7, 2021, the Company used a combination of cash and cash equivalents on hand and borrowings under its U.S. Commercial Paper Program (defined below) to fund the acquisition of MTS.
As a result of the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”), on December 31, 2017, the Company indicated an intention to repatriate most of its pre-2018 accumulated earnings and recorded the foreign and U.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 and U.S. state and local taxes, if applicable, on those earnings as appropriate as of September 30, 2021, 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 (each as defined and discussed further within this Item 2). 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 recent issuance of the Company’s $750.0 principal amount of unsecured 2.200% Senior Notes due September 15, 2031 (the “2031 Senior Notes”) in September 2021, as well as recent borrowings under the U.S. Commercial Paper Program that were used to both partially fund the acquisition of MTS and to redeem in full the Company’s 3.125% Senior Notes due September 15, 2021 (the “3.125% Senior Notes”)), 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, as was the case with the recent acquisition of MTS.
Cash Flow Summary
The following table summarizes the Company’s cash flows from operating, investing and financing activities for the nine months ended September 30, 2021 and 2020, as reflected in the Condensed Consolidated Statements of Cash Flow:
Nine Months Ended September 30,
2021
2020
Net cash provided by operating activities from continuing operations
$
1,060.4
$
1,151.0
Net cash used in investing activities from continuing operations
(1,810.0)
(262.5)
Net cash provided by (used in) financing activities from continuing operations
438.4
(384.2)
Net cash change from discontinued operations
4.3
—
Effect of exchange rate changes on cash and cash equivalents
(15.5)
25.0
Net (decrease) increase in cash and cash equivalents
$
(322.4)
$
529.3
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Due to the immateriality of the Company’s discontinued operations associated with the MTS T&S business discussed in Note 12 of the Notes to Condensed Consolidated Financial Statements, the following discussion related to the Company’s cash flows is on a continuing operations basis only, unless otherwise noted.
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 from continuing operations (“Operating Cash Flow”) was $ 1,060.4 in the first nine months of 2021 compared to $1,151.0 in the first nine months of 2020. The decrease in Operating Cash Flow for the first nine months of 2021 compared to the first nine months of 2020 is primarily due to a higher usage of cash related to the change in working capital, partially offset by an increase in net income from continuing operations.
In the first nine months of 2021, the components of working capital as presented on the accompanying Condensed Consolidated Statements of Cash Flow increased $414.1, excluding the impact of acquisitions and foreign currency translation, primarily due to increases in inventories of $358.3, accounts receivable of $186.9 and prepaid expenses and other current assets of $50.5, partially offset by increases in accounts payable of $152.9 and accrued liabilities, including income taxes, of $28.7. 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.
The following describes the significant changes in the amounts as presented on the accompanying Condensed Consolidated Balance Sheets at September 30, 2021 as compared to December 31, 2020. Accounts receivable increased $ 252.9 to $2,204.5, primarily due to higher sales in the third quarter of 2021 relative to the fourth quarter of 2020, along with the impact of the MTS acquisition and the other five acquisitions (collectively, the “2021 acquisitions”) that closed during the first nine months of 2021, partially offset by the effect of translation from exchange rate changes (“Translation”) at September 30, 2021 compared to December 31, 2020. Days sales outstanding at September 30, 2021 and December 31, 2020 were 70 days and 72 days, respectively. Inventories increased $ 490.3 to $1,952 .5, primarily due to higher sales in addition to the impact of recent supply chain disruptions experienced during the first nine months of 2021, along with the impact of our 2021 acquisitions, which carry more days of inventory than the Company average, partially offset by Translation. Inventory days at September 30, 2021 and December 31, 2020 were 91 days and 79 days, respectively. Prepaid expenses and other current assets increased $53.2 to $392.1, primarily due to increases in certain prepaid expenses and other current receivables as well as the impact of the 2021 acquisitions. Property, plant and equipment, net, increased $ 120.8 to $1,175.4, primarily due to capital expenditures of $274.2 and the impact of the 2021 acquisitions, partially offset by depreciation of $208.9 and Translation. Goodwill increased $807.3 to $5,839.4, resulting from goodwill recognized related to the 2021 acquisitions, primarily from the MTS acquisition, partially offset by Translation. Other intangible assets, net increased $206.1 to $603.6, primarily due to the recognition of certain intangible assets related to the 2021 acquisitions, primarily from the MTS acquisition, partially offset by amortization. Other long-term assets increased $35.6 to $387.9, primarily due to an increase in operating lease right-of-use assets resulting from both leases assumed from the 2021 acquisitions as well as new and renewed lease agreements entered into during the first nine months of 2021. Accounts payable increased $179.3 to $1,300.0, primarily due to increased purchasing activity related to higher sales levels, along with the impact of the 2021 acquisitions, partially offset by Translation. Payable days at September 30, 2021 and December 31, 2020 were 61 days. Total accrued expenses, including accrued income taxes, increased $125.6 to $1,078.9, primarily as a result of the MTS acquisition and the other 2021 acquisitions, along with an increase in accrued salaries and wages and other accrued expenses, partially offset by a decrease in accrued income taxes, primarily resulting from certain tax payments. Other long-term liabilities, including deferred tax liabilities, increased $154.5 to $860.8, primarily as a result of an increase in deferred tax liabilities resulting from the MTS acquisition.
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 Condensed Consolidated Financial Statements.
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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, 2021 and 2020. The decrease in Free Cash Flow was primarily driven by a decrease in Operating Cash Flow, as described above, and to a lesser extent, an increase in capital expenditures. The following table is on a continuing operations basis only and excludes any cash flows related to discontinued operations:
Nine Months Ended September 30,
2021
2020
Operating Cash Flow (GAAP)
$
1,060.4
$
1,151.0
Capital expenditures (GAAP)
(274.2)
(204.8)
Proceeds from disposals of property, plant and equipment (GAAP)
2.4
10.8
Free Cash Flow (non-GAAP)
$
788.6
$
957.0
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 from continuing operations was $1,810.0 in the first nine months of 2021, compared to $262.5 in the first nine months of 2020. In the first nine months of 2021, net cash used in investing activities from continuing operations was driven primarily by the use of $1,531.0 to fund acquisitions and capital expenditures (net of disposals) of $271.8, partially offset by net sales and maturities of short-term investments of $1.3. 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.
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 provided by financing activities from continuing operations was $438.4 in the first nine months of 2021, compared to net cash used in financing activities from continuing operations of $384.2 in the first nine months of 2020. For the first nine months of 2021, net cash provided by financing activities from continuing operations was driven primarily by (i) net borrowings of $925.0 primarily under the U.S. Commercial Paper Program, the majority of the proceeds of which were used for the MTS acquisition and to redeem the 3.125% Senior Notes, (ii) net cash proceeds of $749.9, primarily related to the September 2021 issuance of the 2031 Senior Notes, and (iii) cash proceeds of $180.9 from the exercise of stock options, partially offset by (a) debt repayments of $616.2, primarily related to the repayment of the assumed outstanding MTS senior notes in the second quarter of 2021 as well as the redemption of the 3.125% Senior Notes in the third quarter of 2021, (b) repurchases of the Company’s Common Stock of $491.0, (c) dividend payments of $260.0, (d) cash transfer of $28.7 made by the Company’s continuing operations to its discontinued operations in order to fund the September 2021 payment of contingent consideration assumed as part of MTS’s acquisition accounting, (e) distributions to and purchases of noncontrolling interests of $11.3, (f) payments of $6.1 related to debt financing costs associated with the 2031 Senior Notes, and (g) payments of $4.1 associated with the deferred purchase price related to acquisitions. For the first nine months of 2020, net cash used in financing activities was driven primarily by (i) repurchases of the Company’s Common Stock of $459.2, (ii) debt repayments of $402.9 related to the Company’s 2.20% U.S. Senior Notes due April 2020 and other debt, (iii) net repayments of $385.9 related to the Company’s commercial paper programs, (iv) dividend payments of $223.0, (v) payment of $75.0 related to acquisition-related contingent consideration, (vi) payment of $16.2 associated with the deferred purchase price related to an acquisition, (vii) distributions to and purchases of noncontrolling interests of $11.5, (viii) payments of $8.7 related to
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debt financing costs primarily associated with the 2025 Senior Notes and 2026 Euro Notes (each as defined below), and (ix) net repayments of $0.7 under the Company’s credit facilities, partially offset by the (a) net cash proceeds of $942.3 from both the February 2020 issuance of the 2025 Senior Notes and the May 2020 issuance of the 2026 Euro Notes and (b) cash proceeds of $256.6 from the exercise of stock options.
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, the Revolving Credit Facility and senior notes as part of its overall cash management strategy.
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. As of September 30, 2021 and December 31, 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. At September 30, 2021, the Company was in compliance with the financial covenants under the Revolving Credit Facility.
Pursuant to the terms of the U.S. commercial paper program, 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 maximum aggregate principal amount outstanding of USCP Notes at any time is $2,500.0. 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 acquisition of MTS Systems Corporation. In addition, in the third quarter of 2021, the Company used borrowings under the U.S. Commercial Paper Program to redeem the 3.125% Senior Notes, of which $227.7 aggregate principal amount was outstanding. The amount of USCP Notes outstanding as of September 30, 2021 was $924.3, with a weighted average interest rate of 0.19%. As of December 31, 2020, there were no USCP Notes outstanding.
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 ECP Notes may be issued in Euros, Sterling, U.S. dollars or other currencies. The maximum aggregate principal amount outstanding of ECP Notes at any time is $2,000.0. As of September 30, 2021 and December 31, 2020, there were no ECP Notes outstanding.
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. 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 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.
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As of September 30, 2021, the Company has outstanding senior notes (the “Senior Notes”) as follows:
Principal
Interest
Amount
Rate
Maturity
$
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
750.0
2.200
%
September 2031
€
500.0
0.750
%
May 2026 (Euro Notes)
500.0
2.00
%
October 2028 (Euro Notes)
On September 14, 2021, the Company issued the 2031 Senior Notes at 99.634% of face value. The Company used the net proceeds from the 2031 Senior Notes to repay certain outstanding borrowings under the U.S. Commercial Paper Program.
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.
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, subject to certain terms and conditions. The remaining principal amount outstanding associated with the Company’s 4.00% Senior Notes (“2022 Senior Notes”) due in February 2022 is 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 September 30, 2021. On October 1, 2021, the Company issued a notice of full redemption to the holders of the 2022 Senior Notes, which will be redeemed at par value on November 1, 2021.
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” and collectively with the Euro Notes due October 2028, the “Euro Notes”). The Company used the net proceeds from the 2026 Euro Notes to repay amounts outstanding under the 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 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.
In April 2018, the Company’s Board of Directors authorized a stock repurchase program under which the Company could 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 first nine months of 2021, the Company repurchased 3.1 million shares of its Common Stock for $203.8 under the 2018 Stock Repurchase Program. As a result of these purchases, the Company completed all purchases authorized under the 2018 Stock Repurchase Program and, therefore, the 2018 Stock Repurchase Program has terminated. Of the total repurchases made during the first nine months of 2021, 0.3 million shares, or $19.8, were retained in Treasury stock at the time of repurchase; the remaining 2.8 million shares, or $184.0, were retired by the Company. During the three and nine months ended September 30, 2020, the Company repurchased 3.7 million and 9.1 million shares of its Common Stock for $201.9 and $459.2, respectively, under the 2018 Stock
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Repurchase Program. Of the total repurchases made during the first nine months of 2020, 2.0 million shares, or $110.3, were retained in Treasury stock at the time of repurchase; the remaining 7.1 million shares, or $348.9, were retired by the Company.
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. During the three and nine months ended September 30, 2021, the Company repurchased 2.3 million and 4.1 million shares of its Common Stock for $170.9 and $287.2, respectively, under the 2021 Stock Repurchase Program. All of the shares repurchased under the 2021 Stock Repurchase Program during the nine months ended September 30, 2021 have been or will be retired by the Company. From October 1, 2021 to October 26, 2021, the Company repurchased 0.6 million additional shares of its Common Stock for $46.1 under the 2021 Stock Repurchase Program, and has remaining authorization to purchase up to $1,666.6 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 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 ended September 30, 2021 and 2020:
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Dividends declared per share
$
0.145
$
0.125
$
0.435
$
0.375
Dividends declared
$
86.7
$
74.7
$
259.9
$
223.2
Dividends paid (including those declared in the prior year)
86.6
74.6
260.0
223.0
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 then on October 26, 2021, approved a further increase to its quarterly dividend rate from $0.145 per share to $0.20 per share effective with dividends declared in the fourth quarter of 2021, contingent upon declaration by the Company’s Board of Directors.
Acquisitions and Divestitures
During the first nine months of 2021, the Company completed six acquisitions, all but one of which is included within the Interconnect Products and Assemblies segment, for approximately $1,531.0, net of cash acquired. These 2021 acquisitions were not material, either individually or in the aggregate, to the Company.
Acquisition of MTS and Planned Divestiture of MTS T&S Business
On April 7, 2021, pursuant to a definitive agreement dated December 9, 2020, by and among the Company and MTS, the Company completed the 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. The MTS acquisition was funded through a combination of borrowings under the U.S. Commercial Paper Program and cash and cash equivalents on hand. In addition to the purchase price, the Company also assumed MTS’s then-outstanding $350.0 principal amount of senior notes due August 15, 2027, which the Company repaid and settled shortly after the closing for approximately $387.3, which included accrued interest and a make-whole premium incurred as a result of the early extinguishment of the senior notes. 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 further expands the Company’s range of sensor and sensor-based products across a wide array of industries and is reported as part of our continuing operations and within our Interconnect Products and Assemblies segment. In the second quarter of 2021, the Company
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incurred $55.4 ($44.6 after-tax, or $0.07 per diluted share) of acquisition-related expenses, primarily comprised of transaction, severance, restructuring and certain non-cash costs related to the MTS acquisition.
On January 19, 2021 and prior to the closing of the MTS acquisition, the Company entered into a definitive agreement to sell the MTS T&S business to Illinois Tool Works Inc. (“ITW”). The agreed-upon sale price is approximately $750, excluding any outstanding net debt assumed by Amphenol related to the MTS T&S business and subject to post-closing adjustment. The Company expects to close on the sale of the MTS T&S business upon the receipt of all required regulatory approvals and the satisfaction of other customary closing conditions, which is expected to be within one year of the date of the acquisition of MTS. The MTS T&S business meets the “held for sale” accounting criteria, and its results and related cash flows are reported as discontinued operations, effective as of the MTS acquisition date, in the accompanying Condensed Consolidated Financial Statements. Such classification as discontinued operations will continue until the MTS T&S business is sold to ITW as currently anticipated. The Company did not assign the MTS T&S business to either of our two reportable business segments due to its planned sale. The Company will incur certain transaction fees and other professional and external costs associated with the planned sale of the MTS T&S business. Amphenol will not have any continuing involvement with the MTS T&S business after the date of its divestiture.
For further discussion of the Company’s 2021 acquisitions, including MTS, refer to Note 11 of the Notes to Condensed Consolidated Financial Statements. For further details related to the Company’s discontinued operations as well as the planned divestiture of the MTS T&S business, refer to Note 12 of the Notes to Condensed Consolidated Financial Statements.
Environmental Matters
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. For more information on certain environmental matters, refer to Note 16 of the Notes to Condensed Consolidated Financial Statements.
Non-GAAP Financial Measures
In addition to assessing the Company’s financial condition, results of operations, liquidity and cash flows in accordance with U.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 from continuing operations attributable to Amphenol Corporation, effective tax rate and diluted EPS from continuing operations 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 of foreign currency exchange rates and acquisitions. Non-GAAP financial measures and their most directly comparable U.S. GAAP financial measures presented within this Item 2 are on a continuing operations basis only and exclude any results associated with discontinued operations. 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 related U.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.
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The non-GAAP financial measures defined below should be read in conjunction with the Company’s financial statements presented in accordance with U.S. GAAP. The reconciliations of these non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures for the three and nine months ended September 30, 2021 and 2020 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 from continuing operations (as reported in accordance with U.S. GAAP), 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 Diluted EPS is calculated as Adjusted Net Income from continuing operations attributable to Amphenol Corporation, as defined below, 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 from continuing operations before income taxes, as reported in the Condensed Consolidated Statements of Income, each 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 Net Income from continuing operations attributable to Amphenol Corporation is defined as Net income from continuing operations attributable to Amphenol Corporation, as reported in the Condensed 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.
● 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. The Company’s results are subject to volatility related to foreign currency translation fluctuations. As such, management evaluates the Company’s sales performance based on actual sales growth in U.S. 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 from continuing operations (“Operating Cash Flow” - as reported in accordance with U.S. GAAP) less (ii) capital expenditures (as reported in accordance with U.S. GAAP), net of proceeds from disposals of property, plant and equipment (as reported in accordance with U.S. GAAP), all of which are derived from the Condensed 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 (described above), which is outside the control of the Company, and (ii) acquisitions, both of which are taken as a percentage of the respective prior period(s) net sales. The acquisition impact represents the percentage impact on net sales resulting from acquisitions that have closed during the prior twelve months that have not been included in the Company's consolidated results for the full current period(s) and/or prior comparable period(s) presented. Such net sales related to these acquisitions 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 U.S. dollars, as well as Constant 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.
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Critical Accounting Policies and Estimates
The Company’s disclosures of its critical accounting policies, which are contained in its 2020 Annual Report, have not materially changed since that report was filed.
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.