Business Context and Reporting Period
Amphenol Corporation filed this unaudited Form 10-Q for the three months ended March 31, 2021, compared with the three months ended March 31, 2020. The company designs and manufactures interconnect, connector, cable, antenna, sensor and related products. Its reportable segments are Interconnect Products and Assemblies and Cable Products and Solutions.
The filing reflects a two-for-one stock split completed March 4, 2021; all share and per-share data were retroactively adjusted. The company had 597.6 million shares outstanding as of April 27, 2021.
Financial Performance and Position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $2,377.1 million | $1,862.0 million | +28% |
| Gross profit | $727.5 million | $559.8 million | +30% |
| Operating income | $464.8 million | $316.9 million | +47% |
| Operating margin | 19.6% | 17.0% | +260 basis points |
| Net income attributable to Amphenol | $329.6 million | $242.1 million | +36% |
| Diluted EPS | $0.53 | $0.40 | +33% |
| Net cash from operating activities | $321.0 million | $384.3 million | -16% |
| Free cash flow | $243.5 million | $324.7 million | -25% |
Gross margin was approximately 30.6% in Q1 2021 versus 30.1% in Q1 2020. SG&A increased to $262.7 million from $242.9 million, but declined to 11.1% of sales from 13.0%. The effective tax rate increased to 23.9% from 15.9%; the prior-year rate benefited from a $19.9 million discrete tax benefit related to non-U.S. tax refund settlements. Excluding specified tax items, adjusted effective tax rates were 24.5% in both periods.
- Interconnect Products and Assemblies sales increased 28% to $2,280.0 million, with 23% organic growth. Segment operating margin increased to 21.5% from 19.1%.
- Cable Products and Solutions sales increased 17% to $97.1 million, with 18% organic growth. Segment operating margin increased to 8.8% from 7.6%.
- China sales increased to $660.9 million from $417.7 million. United States sales increased 10% to $673.9 million.
- Cash, cash equivalents and short-term investments were $2,361.2 million at March 31, 2021, up from $1,738.1 million at year-end 2020.
- Total debt was $4,636.7 million, including $811.0 million of U.S. commercial paper, versus $3,866.5 million at December 31, 2020. Approximate net debt, calculated using cash, cash equivalents and short-term investments, was $2,275.5 million.
- The company had no borrowings under its $2.5 billion revolving credit facility and was in compliance with applicable debt covenants.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected recovery from the COVID-19-related weakness affecting Q1 2020, broad-based demand growth and acquisition contributions. Commercial aerospace remained significantly depressed.
- Operating leverage and lower COVID-19-related cost effects improved operating margins, partly offset by more challenging commodity and supply-chain conditions.
- Operating cash flow declined because working capital consumed $114.6 million, primarily from an $85.7 million inventory increase, compared with a $43.8 million working-capital benefit in Q1 2020.
- Investing cash use increased to $263.2 million, primarily because of $185.6 million spent on four acquisitions and $78.4 million of capital expenditures.
- Financing cash flow was $586.2 million, driven largely by $811.9 million of net commercial-paper borrowings, partly offset by $152.8 million of share repurchases and $86.8 million of dividends.
- The quarterly dividend increased to $0.145 per share from $0.125 per share. The company repurchased 2.4 million shares for $152.8 million during the quarter.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a broad full-year revenue or earnings guidance range. Management stated that COVID-19 disruptions were expected to continue at least through Q2 2021 and potentially through the full year or longer. Risks include facility restrictions, supplier and logistics interruptions, reduced customer demand, commodity costs, foreign exchange, tariffs and trade policy, cybersecurity, government contracting, acquisitions, debt refinancing and covenant compliance.
On April 7, 2021, after quarter-end, Amphenol completed the acquisition of MTS Systems for approximately $1.3 billion, net of cash acquired, and repaid approximately $355 million of assumed MTS senior notes. The transaction was funded with cash and commercial-paper borrowings. Management expected approximately $85 million of MTS acquisition-related costs, or approximately $0.12 per diluted share, in Q2 2021.
Amphenol agreed to sell the MTS Test & Simulation business to Illinois Tool Works for approximately $750 million, subject to regulatory and customary closing conditions. The business is expected to be treated as a discontinued operation and held for sale.
- The company planned to pay its fourth annual installment of the Tax Act transition tax in Q2 2021 and expects remaining payments through 2025.
- Unrecognized tax benefits were approximately $170.2 million; approximately $26.0 million could be resolved or expire over the following twelve months.
- A Department of Defense Inspector General subpoena concerning certain military and aerospace products remained ongoing, with timing and outcome not estimable.
- A customer arbitration claim sought approximately €80 million in damages related to alleged product-specification issues; the company denied liability and was defending the matter.
- Environmental-related lawsuits concerning the former Franklin, Indiana site were subject to seller indemnification, and management did not expect a material adverse effect.
- The company adopted ASU 2019-12 on income taxes without a material impact and did not expect the LIBOR transition to materially affect its financial condition, results or cash flows.
Important Facts for Investors to Verify
- Whether sales momentum and margin expansion continued after the COVID-19 recovery comparisons in Q1 2021.
- The effect of supply-chain constraints, commodity inflation and rising inventory days, which increased to 85 from 79 at year-end 2020.
- Post-closing leverage, interest expense, acquisition accounting and integration performance following the MTS acquisition.
- The timing and economics of the planned MTS Test & Simulation divestiture, including regulatory approval and discontinued-operation reporting.
- Cash flow conversion and working-capital normalization after the $114.6 million Q1 working-capital use.
- Upcoming debt maturities, including $227.7 million of senior notes due September 2021 and $295.0 million due February 2022.
- Resolution of the Department of Defense inquiry, customer arbitration and tax-audit exposures.
- Execution of the new $2.0 billion share-repurchase authorization approved April 27, 2021.