Amphenol Corporation Form 10-Q Summary
Business context and reporting period
Quarterly report for the period ended September 30, 2021. Amphenol operates through two reportable segments: Interconnect Products and Assemblies, which represented approximately 96% of sales, and Cable Products and Solutions, which represented approximately 4%.
The company completed the acquisition of MTS Systems Corporation on April 7, 2021. MTS Sensors is included in continuing operations, while the MTS Test & Simulation business is classified as held for sale and reported as discontinued operations pending its planned sale to Illinois Tool Works.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | First nine months 2021 | First nine months 2020 |
|---|---|---|---|---|
| Net sales | $2,818.5 million | $2,323.4 million | $7,849.5 million | $6,172.9 million |
| Gross profit | $889.9 million | $734.9 million | $2,460.6 million | $1,898.5 million |
| Gross margin | 31.6% | 31.6% | 31.4% | 30.8% |
| Operating income | $571.2 million | $475.8 million | $1,512.2 million | $1,150.1 million |
| Operating margin | 20.3% | 20.5% | 19.3% | 18.6% |
| Net income attributable to Amphenol | $426.5 million | $346.6 million | $1,125.8 million | $846.4 million |
| Diluted EPS | $0.68 | $0.56 | $1.80 | $1.38 |
| Operating cash flow from continuing operations | Not provided for quarter | Not provided for quarter | $1,060.4 million | $1,151.0 million |
| Free cash flow | Not provided for quarter | Not provided for quarter | $788.6 million | $957.0 million |
Reported Q3 sales increased 21% year over year, including 20% growth in constant currencies and 13% organic growth. First-nine-month sales increased 27% in U.S. dollars, 25% in constant currencies and 19% organically. First-nine-month adjusted operating income was $1,567.6 million, or a 20.0% adjusted operating margin, excluding $55.4 million of acquisition-related expenses.
The Q3 effective tax rate was 22.2%, compared with 22.1% in the prior-year quarter. The nine-month effective tax rate was 21.2%, compared with 20.0% in 2020. Management reported an adjusted effective tax rate of 24.5% for both comparable periods after excluding specified discrete items and stock-option tax benefits.
Liquidity, debt and capital allocation
- Cash, cash equivalents and short-term investments were $1,302.5 million at September 30, 2021, compared with $1,738.1 million at December 31, 2020. Continuing-operations cash was $1,268.1 million.
- Total debt was $5,248.7 million, including $924.3 million of U.S. commercial paper. Long-term debt, net of current maturities, was $4,950.0 million.
- The company had no borrowings under its $2.5 billion revolving credit facility and was in compliance with applicable debt covenants. The facility matures in January 2024.
- Cash flow from continuing operations was $1,060.4 million, down from $1,151.0 million, primarily because working capital consumed $414.1 million. Inventories increased $490.3 million from year-end, partly because of supply-chain disruptions and acquired businesses.
- Capital expenditures were $274.2 million, and acquisitions used $1,531.0 million during the first nine months.
- The company issued $750.0 million of 2.200% senior notes due 2031 and used proceeds to repay commercial paper. It also redeemed $227.7 million of 3.125% senior notes due September 2021.
- Share repurchases totaled $491.0 million during the first nine months, and dividends paid totaled $260.0 million. The board subsequently increased the quarterly dividend rate from $0.145 to $0.20 per share, effective with fourth-quarter 2021 declarations.
Material changes versus the prior comparable period
- Sales growth was broad-based, led by industrial, automotive, information technology and data communications, mobile networks and military markets. Commercial aerospace remained materially depressed by COVID-19 effects, while mobile devices declined in Q3.
- Interconnect Products and Assemblies operating margin improved to 22.0% for the first nine months from 20.6%, benefiting from operating leverage and lower pandemic-related costs, partly offset by commodity and supply-chain pressures.
- Cable Products and Solutions operating margin declined to 6.1% for the first nine months from 9.4%, and to 3.8% in Q3 from 10.7%, due primarily to commodity, logistics and supply-chain pressures.
- Goodwill increased to $5,839.4 million from $5,032.1 million, primarily from MTS and other acquisitions. Other intangible assets increased to $603.6 million from $397.5 million.
- Net cash decreased $322.4 million, compared with a $529.3 million increase in the first nine months of 2020, reflecting acquisition spending, higher capital expenditures, working-capital investment and shareholder returns.
- The company completed a two-for-one stock split in March 2021; historical share and per-share information was retroactively adjusted.
Guidance, outlook, risks and unusual items
The filing does not provide a specific quantitative full-year revenue or earnings forecast. Management expects COVID-19-related disruptions to continue through at least the fourth quarter of 2021 and potentially into 2022 or later. Cited effects include supplier constraints, supply-chain interruptions, logistics limitations, facility restrictions and reduced demand in certain markets.
- The planned sale of MTS Test & Simulation is subject to regulatory approvals and customary closing conditions. The agreed-upon consideration is approximately $750 million, subject to post-closing adjustment. Timing and completion are not assured.
- Acquisition-related expenses reduced nine-month continuing-operations income by $44.6 million after tax, or $0.07 per diluted share.
- The company recorded $7.7 million of Q3 and $10.3 million of nine-month income from discontinued operations attributable to Amphenol related to MTS Test & Simulation.
- An ongoing U.S. Department of Defense Inspector General inquiry concerns certain Military and Aerospace Group products. The company continues to cooperate and cannot estimate the timing or outcome.
- A customer arbitration seeks approximately €90 million in alleged damages related to product specifications; the company disputes the claims and is defending the matter.
- Other principal risks include raw-material availability and pricing, foreign exchange, interest rates, tariffs and trade restrictions, customer concentration in communications, defense spending, acquisition integration, goodwill impairment, cybersecurity, taxes, export controls, litigation and environmental matters.
- The company reported no goodwill or intangible-asset impairment in the period and stated that legal, environmental and other disclosed contingencies are not expected to have a material adverse effect, although certain outcomes cannot currently be estimated.
Important facts for investors to verify
- Reconcile reported and adjusted earnings, particularly the $55.4 million acquisition-related expense and the $14.9 million discrete tax benefit.
- Monitor the significant increase in inventories and receivables, the resulting working-capital cash usage and the effect of supply-chain constraints on margins.
- Track commercial paper balances, near-term debt maturities and the redemption of the 4.00% senior notes due February 2022.
- Confirm the timing, regulatory status, proceeds and final accounting for the MTS Test & Simulation divestiture.
- Evaluate the sustainability of the 20% operating-margin level amid commodity, logistics, labor and supply-chain pressures, particularly in Cable Products and Solutions.
- Review the Department of Defense inquiry, customer arbitration and related legal disclosures as facts develop.
- Assess ongoing capital allocation among acquisitions, debt reduction, share repurchases and the increased dividend.