Amphenol Corporation — Q2 2021 Form 10-Q Summary
Business context and reporting period
Quarterly period ended June 30, 2021; results are unaudited and presented against the three and six months ended June 30, 2020. Amphenol operates primarily through Interconnect Products and Assemblies, which generated approximately 96% of second-quarter sales, and Cable Products and Solutions, which generated approximately 4%.
The company completed six acquisitions during the first half of 2021, including MTS Systems Corporation on April 7, 2021. MTS Sensors is included in continuing operations; the MTS Test & Simulation business is classified as held for sale and discontinued operations.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $2,653.9 million | $1,987.5 million | $5,031.0 million | $3,849.5 million |
| Gross profit | $843.2 million | $603.8 million | $1,570.7 million | $1,163.6 million |
| Gross margin | 31.8% | 30.4% | 31.2% | 30.2% |
| Operating income | $476.2 million | $357.4 million | $941.0 million | $674.3 million |
| Operating margin | 17.9% | 18.0% | 18.7% | 17.5% |
| Net income attributable to Amphenol | $369.8 million | $257.7 million | $699.3 million | $499.8 million |
| Diluted EPS | $0.59 | $0.42 | $1.12 | $0.82 |
| Operating cash flow from continuing operations | Not provided for quarter | Not provided for quarter | $732.0 million | $752.4 million |
| Free cash flow | Not provided for quarter | Not provided for quarter | $550.3 million | $626.0 million |
Reported second-quarter sales increased 34% in U.S. dollars, 30% in constant currencies and 22% organically. First-half sales increased 31% in U.S. dollars, 27% in constant currencies and 22% organically. Adjusted operating income was $531.6 million, or 20.0% of sales, in the second quarter and $996.4 million, or 19.8% of sales, in the first half, excluding $55.4 million of acquisition-related expenses.
At June 30, 2021, cash, cash equivalents and short-term investments totaled $1,242.6 million, compared with $1,738.1 million at December 31, 2020. Total debt was $5,236.3 million, including $1,401.0 million of U.S. commercial paper; current debt was $526.1 million. The $2,500.0 million revolving credit facility had no borrowings, and the company was in compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Sales growth reflected strong demand and recovery across automotive, industrial, military, information technology and data communications markets, along with acquisition contributions. Commercial aerospace remained pressured by COVID-19, and mobile devices declined moderately in the second quarter.
- Interconnect Products and Assemblies operating margin rose to 22.0% in the second quarter from 20.0%, benefiting from volume leverage and lower COVID-related costs, partly offset by commodity and supply-chain pressures.
- Cable Products and Solutions operating margin fell to 6.1% from 9.4%, primarily due to commodity and supply-chain pressures.
- SG&A declined to 11.7% of second-quarter sales from 12.4% and to 11.4% for the first half from 12.7%, reflecting operating leverage and the effect of higher sales.
- Operating cash flow from continuing operations declined to $732.0 million from $752.4 million because working capital consumed $194.9 million, compared with a $70.8 million working-capital benefit in the prior-year period. Inventory increased $309.2 million from year-end, partly due to supply-chain disruptions and acquisitions.
- Investing cash outflows increased substantially to $1,721.3 million, primarily because of $1,531.0 million spent on acquisitions and $183.3 million of capital expenditures.
- Financing activities provided $613.0 million, primarily from commercial paper borrowings, partially offset by debt repayments, $320.1 million of share repurchases and $173.4 million of dividends.
Guidance, outlook, commentary, risks and unusual items
- No specific full-year revenue or earnings guidance is provided in the filing. Management states that COVID-19-related disruptions were expected to continue at least through the third quarter of 2021 and could extend through the full year or beyond.
- Key COVID-19 effects include facility restrictions, supplier constraints, supply-chain interruptions, logistics challenges, travel restrictions and potential reductions in customer demand. The filing specifically cites uncertainty surrounding resurgent cases, including the Delta variant.
- The MTS T&S business is expected to be sold to Illinois Tool Works for approximately $750 million, subject to regulatory approvals, customary closing conditions and post-closing adjustments. The company expected closing within one year of the MTS acquisition date.
- MTS acquisition accounting remained preliminary. The transaction generated $740.3 million of goodwill, $54.0 million of indefinite-lived tradename assets and $183.4 million of definite-lived intangible assets associated with MTS Sensors.
- Acquisition-related expenses were $55.4 million, or $44.6 million after tax, and reduced second-quarter and first-half diluted EPS by approximately $0.07.
- The effective tax rate was 17.5% in the second quarter and 20.6% for the first half. Results benefited from stock-option exercise tax benefits and a $14.9 million discrete tax benefit related to settlement of uncertain tax positions.
- Near-term debt maturities include $227.7 million of 3.125% senior notes due September 2021 and $295.0 million of 4.00% senior notes due February 2022. Commercial paper is backstopped by the revolving credit facility.
- The company faces risks from raw-material availability and pricing, supply-chain disruptions, foreign currency, interest rates, tariffs and trade policies, customer concentration in communications, acquisitions and goodwill integration, cybersecurity, tax audits and governmental contracting.
- Legal matters include an ongoing Department of Defense subpoena, environmental-related lawsuits associated with a former Indiana site, and arbitration involving a customer claim seeking approximately €80 million. Management does not expect the disclosed matters to have a material adverse effect, although outcomes may remain uncertain.
Important facts for investors to verify
- Whether COVID-19, supply-chain constraints and commodity inflation persist beyond the third quarter and affect margins, working capital or customer demand.
- The timing, regulatory approval and final proceeds from the planned MTS T&S divestiture.
- The final purchase-price allocation for MTS and other acquisitions, including potential changes to goodwill, intangible assets and deferred taxes.
- The company’s ability to refinance or repay the September 2021 and February 2022 maturities while maintaining commercial-paper access and covenant compliance.
- Whether elevated inventories and receivables convert into cash and whether free cash flow recovers from the first-half decline.
- The financial impact of the ongoing legal, environmental, arbitration, tax and governmental-investigation matters.
- The effect of the $2.0 billion 2021 share-repurchase authorization, dividends and future acquisition spending on liquidity and leverage.