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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the quarterly period ended OR | ||
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number:
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Accelerated Filer ☐ | |
Non-accelerated Filer ☐ | Smaller Reporting Company |
Emerging Growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of July 26, 2022, the total number of shares outstanding of the Registrant’s Class A Common Stock was
Amphenol Corporation
Index to Quarterly Report
on Form 10-Q
1
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
AMPHENOL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in millions)
June 30, | December 31, | ||||||
| 2022 |
| 2021 |
| |||
ASSETS | |||||||
Current Assets: | |||||||
Cash and cash equivalents | $ | | $ | | |||
Short-term investments |
| |
| | |||
Total cash, cash equivalents and short-term investments |
| |
| | |||
Accounts receivable, less allowance for doubtful accounts of $ |
| |
| | |||
Inventories |
| |
| | |||
Prepaid expenses and other current assets |
| |
| | |||
Total current assets |
| |
| | |||
Property, plant and equipment, less accumulated depreciation of $ | | | |||||
Goodwill | | | |||||
Other intangible assets, net |
| |
| | |||
Other long-term assets | | | |||||
Total Assets | $ | | $ | | |||
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY | |||||||
Current Liabilities: | |||||||
Accounts payable | $ | | $ | | |||
Accrued salaries, wages and employee benefits |
| |
| | |||
Accrued income taxes |
| |
| | |||
Accrued dividends | | | |||||
Other accrued expenses |
| |
| | |||
Current portion of long-term debt |
| |
| | |||
Total current liabilities |
| |
| | |||
Long-term debt, less current portion |
| |
| | |||
Accrued pension and postretirement benefit obligations |
| |
| | |||
Deferred income taxes | | | |||||
Other long-term liabilities |
| |
| | |||
Total Liabilities | | | |||||
Redeemable noncontrolling interest | | | |||||
Equity: | |||||||
Common stock | | | |||||
Additional paid-in capital |
| |
| | |||
Retained earnings |
| |
| | |||
Treasury stock, at cost | ( | ( | |||||
Accumulated other comprehensive loss |
| ( |
| ( | |||
Total stockholders’ equity attributable to Amphenol Corporation |
| |
| | |||
Noncontrolling interests |
| |
| | |||
Total Equity |
| |
| | |||
Total Liabilities, Redeemable Noncontrolling Interest and Equity | $ | | $ | | |||
See accompanying notes to condensed consolidated financial statements.
2
AMPHENOL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars and shares in millions, except per share data)
Three Months Ended | Six Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| |||||
Net sales | $ | | $ | | $ | | $ | | |||||
Cost of sales |
| |
| |
| |
| | |||||
Gross profit |
| |
| |
| |
| | |||||
Acquisition-related expenses |
| |
| |
| |
| | |||||
Selling, general and administrative expenses |
| |
| |
| |
| | |||||
Operating income |
| |
| |
| |
| | |||||
Interest expense |
| ( |
| ( |
| ( |
| ( | |||||
Other income (expense), net |
| |
| |
| |
| ( | |||||
Income from continuing operations before income taxes |
| |
| |
| |
| | |||||
Provision for income taxes |
| ( |
| ( |
| ( |
| ( | |||||
Net income from continuing operations | | | | | |||||||||
Less: Net income from continuing operations attributable to noncontrolling interests |
| ( |
| ( |
| ( |
| ( | |||||
Net income from continuing operations attributable to Amphenol Corporation |
| |
| |
| |
| | |||||
Income from discontinued operations attributable to Amphenol Corporation, net of income taxes of ($ | | | | | |||||||||
Net income attributable to Amphenol Corporation | $ | | $ | | $ | | $ | | |||||
Net income per common share attributable to Amphenol Corporation — Basic: | |||||||||||||
Continuing operations | $ | | $ | | $ | | $ | | |||||
Discontinued operations, net of income taxes | | | | | |||||||||
Net income attributable to Amphenol Corporation — Basic | $ | | $ | | $ | | $ | | |||||
Weighted average common shares outstanding — Basic |
| |
| |
| |
| | |||||
Net income per common share attributable to Amphenol Corporation — Diluted: | |||||||||||||
Continuing operations | $ | | $ | | $ | | $ | | |||||
Discontinued operations, net of income taxes | | | | | |||||||||
Net income attributable to Amphenol Corporation — Diluted | $ | | $ | | $ | | $ | | |||||
Weighted average common shares outstanding — Diluted |
| |
| |
| |
| | |||||
Note: Per share amounts may not add due to rounding.
See accompanying notes to condensed consolidated financial statements.
3
AMPHENOL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(dollars in millions)
Three Months Ended | Six Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| |||||
Net income from continuing operations | $ | | $ | | $ | | $ | | |||||
Add: Income from discontinued operations attributable to Amphenol Corporation, net of income taxes | | | | | |||||||||
Net income before allocation to noncontrolling interests | $ | | $ | | $ | | $ | | |||||
Total other comprehensive (loss) income, net of tax: | |||||||||||||
Foreign currency translation adjustments |
| ( |
| |
| ( |
| ( | |||||
Unrealized gain on hedging activities |
| |
| |
| |
| | |||||
Pension and postretirement benefit plan adjustment, net of tax of ($ |
| |
| |
| |
| | |||||
Total other comprehensive (loss) income, net of tax |
| ( |
| |
| ( |
| ( | |||||
Total comprehensive income |
| |
| |
| |
| | |||||
Less: Comprehensive income attributable to noncontrolling interests |
| ( |
| ( |
| ( |
| ( | |||||
Comprehensive income attributable to Amphenol Corporation | $ | | $ | | $ | | $ | | |||||
See accompanying notes to condensed consolidated financial statements.
4
AMPHENOL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(dollars in millions)
Six Months Ended June 30, |
| ||||||
| 2022 |
| 2021 |
| |||
Cash from operating activities: | |||||||
Net income from continuing operations | $ | | $ | | |||
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities from continuing operations: | |||||||
Depreciation and amortization |
| |
| | |||
Stock-based compensation expense |
| |
| | |||
Deferred income tax provision |
| | | ||||
Net change in components of working capital | ( | ( | |||||
Net change in other long-term assets and liabilities | ( | ( | |||||
Net cash provided by operating activities from continuing operations | | | |||||
Net cash used in operating activities from discontinued operations | | ( | |||||
Net cash provided by operating activities |
| |
| | |||
Cash from investing activities: | |||||||
Capital expenditures |
| ( |
| ( | |||
Proceeds from disposals of property, plant and equipment |
| |
| | |||
Purchases of investments |
| ( |
| ( | |||
Sales and maturities of investments |
| |
| | |||
Acquisitions, net of cash acquired |
| ( |
| ( | |||
Other, net | ( | ( | |||||
Net cash used in investing activities from continuing operations | ( | ( | |||||
Net cash used in investing activities from discontinued operations | | ( | |||||
Net cash used in investing activities |
| ( |
| ( | |||
Cash from financing activities: | |||||||
Proceeds from issuance of senior notes and other long-term debt |
| |
| | |||
Repayments of senior notes and other long-term debt |
| ( | ( | ||||
Proceeds from short-term borrowings | | | |||||
Repayments of short-term borrowings | ( | | |||||
Borrowings (repayments) under commercial paper programs, net | | | |||||
Payment of costs related to debt financing |
| ( |
| | |||
Payment of deferred purchase price related to acquisitions | | ( | |||||
Purchase of treasury stock |
| ( |
| ( | |||
Proceeds from exercise of stock options | | | |||||
Distributions to and purchases of noncontrolling interests | ( | ( | |||||
Dividend payments |
| ( |
| ( | |||
Net cash (used in) provided by financing activities from continuing operations | ( | | |||||
Net cash provided by financing activities from discontinued operations | | | |||||
Net cash (used in) provided by financing activities |
| ( |
| | |||
Effect of exchange rate changes on cash and cash equivalents |
| ( |
| ( | |||
Net increase (decrease) in cash and cash equivalents |
| |
| ( | |||
Cash and cash equivalents balance, beginning of period |
| |
| | |||
Cash and cash equivalents balance, end of period | $ | | $ | | |||
Less: Cash and cash equivalents included in Current assets held for sale, end of period |
| |
| | |||
Cash and cash equivalents balance of continuing operations, end of period | $ | | $ | | |||
Cash paid for: | |||||||
Interest | $ | | $ | | |||
Income taxes, net |
| |
| | |||
See accompanying notes to condensed consolidated financial statements.
5
AMPHENOL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(amounts in millions, except share and per share data, unless otherwise noted)
Note 1—Basis of Presentation and Principles of Consolidation
The Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021, the related Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2022 and 2021, and the related Condensed Consolidated Statements of Cash Flow for the six months ended June 30, 2022 and 2021, 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 and six months ended June 30, 2022 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, 2021 (the “2021 Annual Report”).
New Reportable Business Segments
Effective January 1, 2022, the Company aligned its businesses into
We have determined that the Company’s reporting units are the
Discontinued Operations
The Company reports a component of an entity or group of components of an entity as a discontinued operation and held for sale upon acquisition, if the Company has (i) executed a plan to sell the business as of the acquisition date or (ii) has begun to formulate a plan to sell the business and either currently meets or expects to meet the held for sale criteria within three months. An entity meets the held for sale criteria when (a) management, having the authority to approve the action, commits to a plan to sell the discontinued operation, the plan of which is unlikely to have any significant changes or to be withdrawn, (b) the completed sale is probable within
6
Note 2—New Accounting Pronouncements
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 transactions. In March 2020, in response to this transition, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 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 accounting principles generally accepted in the United States (“U.S. GAAP” or “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 No. 2021-01 Reference Rate Reform (Topic 848): Scope, 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. Effective November 30, 2021, the Revolving Credit Facility (as defined in Note 4 herein) no longer references LIBOR for interest rate determinations. Due to our current limited reliance on borrowings tied to LIBOR, the Company currently believes that the LIBOR transition will not have a material impact on its financial condition, results of operations or cash flows.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”), which amends ASC 805 by requiring acquiring entities to apply ASC 606 to recognize and measure contract assets and contract liabilities in a business combination. Under current GAAP, an acquirer generally recognizes such items at fair value on the acquisition date. The intent of ASU 2021-08 is to address diversity in practice and improve comparability for both the recognition and measurement of acquired revenue contracts by providing (i) guidance on how to determine whether a contract liability is recognized by the acquirer in a business combination and (ii) specific guidance on how to recognize and measure contract assets and contract liabilities from revenue contracts in a business combination. ASU 2021-08 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2022, and the amendments should be applied prospectively to business combinations occurring on or after the effective date of the amendments, with early adoption permitted. The Company is currently evaluating ASU 2021-08 and its potential impact on our consolidated financial statements.
Note 3—Inventories
Inventories consist of:
June 30, | December 31, |
| |||||
| 2022 |
| 2021 |
| |||
Raw materials and supplies |
| $ | |
| $ | | |
Work in process |
| |
| | |||
Finished goods |
| |
| | |||
| $ | |
| $ | | ||
7
Note 4—Debt
The Company’s debt (net of any unamortized discount) consists of the following:
June 30, 2022 | December 31, 2021 |
| |||||||||||
Carrying | Approximate | Carrying | Approximate |
| |||||||||
| Amount |
| Fair Value |
| Amount |
| Fair Value |
| |||||
Revolving Credit Facility | $ | |
| $ | |
| $ | |
| $ | | ||
U.S. Commercial Paper Program |
| |
| |
| |
| | |||||
Euro Commercial Paper Program |
| |
| |
| |
| | |||||
Term Loan Credit Facility | | | | | |||||||||
| |
| |
| |
| | ||||||
| | | | ||||||||||
| | | | ||||||||||
| | | | ||||||||||
| | | | ||||||||||
| | | | ||||||||||
| | | | ||||||||||
Other debt |
| |
| |
| |
| | |||||
Less: unamortized deferred debt issuance costs |
| ( |
|
| ( |
| |||||||
Total debt |
| |
| |
| |
| | |||||
Less: current portion |
| | |
| |
| | ||||||
Total long-term debt | $ | |
| $ | |
| $ | |
| $ | | ||
Revolving Credit Facility
On November 30, 2021, the Company amended and restated its $
Term Loan Credit Facility
On April 19, 2022, the Company entered into a , $
8
Commercial Paper Programs
The Company has a commercial paper program (the “U.S. 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 maturities of the USCP Notes vary, but may not exceed
The Company and
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, as of June 30, 2022, the authorization from the Company’s Board of Directors (the “Board”) 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 $
U.S. Senior Notes
On September 14, 2021, the Company issued $
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 and the Euro Issuer’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
9
principal amount, plus accrued and unpaid interest, if any, to the date of redemption, and, with certain exceptions, a make-whole premium.
Euro Senior Notes
The Euro Issuer has
The fair value of each series of 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 Company’s Senior Notes impose certain obligations on the Company and prohibit various actions by the Company unless it satisfies certain financial requirements.
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- and long-term investments, and derivative instruments. Each of these assets and liabilities is discussed below, with the exception of debt instruments, pension plan assets, and the fair value of assets acquired and liabilities assumed as part of acquisition accounting, which are covered in Note 4, Note 10 and Note 11, respectively, herein, in addition to the Notes to Consolidated Financial Statements in the 2021 Annual Report. Substantially all of the Company’s short- and long-term investments consist of certificates of deposit, which are considered as Level 2 in the fair value hierarchy. Long-term investments, the vast majority of which have original maturities of
10
The Company reviews the fair value hierarchy classifications on a quarterly basis and determines the appropriate classification of such assets and liabilities subject to the fair value hierarchy standards based on, among other things, the ability to observe valuation inputs. The fair values of the Company’s financial and non-financial assets and liabilities subject to such standards as of June 30, 2022 and December 31, 2021 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) | |||||||||
June 30, 2022: | ||||||||||||
Short-term investments | $ | | $ | | $ | | $ | | ||||
Long-term investments | | | | | ||||||||
Forward contracts | | | | | ||||||||
Redeemable noncontrolling interest | ( | | | ( | ||||||||
Total | $ | | $ | | $ | | $ | ( | ||||
December 31, 2021: | ||||||||||||
Short-term investments | $ | | $ | | $ | | $ | | ||||
Forward contracts | ( | | ( | | ||||||||
Redeemable noncontrolling interest | ( | | | ( | ||||||||
Total | $ | | $ | | $ | ( | $ | ( | ||||
The Company utilizes foreign exchange forward contracts, hedging instruments accounted for as cash flow hedges, in the management of foreign currency exposures. In addition, the Company also enters into foreign exchange forward contracts, accounted for as net investment hedges, to hedge our exposure to variability in the U.S. dollar equivalent of the net investments in certain foreign subsidiaries. As of June 30, 2022, the fair value of such foreign exchange forward contracts in the table above consisted of (i)
Certain acquisitions may result in noncontrolling interest holders who, in certain cases, are entitled to a put option, giving them the ability to put some or all of their redeemable interest in the shares of the acquiree to the Company. Specifically, if exercised by the noncontrolling interest holder, Amphenol would be required to purchase some or all of the option holder’s redeemable interest, at a redemption price during specified time period(s) stipulated in the respective acquisition agreement. The redeemable noncontrolling interest as of June 30, 2022 and December 31, 2021 is related to the acquisition of Halo Technology Limited (“Halo”), which closed in December 2021, and based on the terms of the agreement, will remain in temporary equity until the put option is either exercised and the entire redeemable noncontrolling interest is fully settled or the put option expires. The redemption value of the redeemable noncontrolling interest is generally calculated using Level 3 unobservable inputs based on a multiple of earnings, which, for the redeemable NCI currently outstanding, approximates fair value. As such, the redemption value is classified as Level 3 in the fair value hierarchy, and is recorded as Redeemable noncontrolling interest on the Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021. Refer to Note 7 herein for a rollforward of the Redeemable noncontrolling interest for the three and six months ended June 30, 2022, as well as Note 1 of the Notes to Consolidated Financial Statements in the 2021 Annual Report for further discussion of the Company’s redeemable noncontrolling interest.
11
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.
Note 6—Income Taxes
Three Months Ended | Six Months Ended | ||||||||||||
| June 30, |
| June 30, | ||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||
Provision for income taxes | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Effective tax rate |
| % |
| % |
| % |
| % | |||||
For the three months ended June 30, 2022 and 2021, stock option exercise activity had the impact of decreasing our Provision for income taxes by $
The United States federal government enacted the Tax Cuts and Jobs Act (“Tax Act”) in December 2017. As a result, in 2017, the Company recorded 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 paid its fifth annual installment of the Transition Tax, net of applicable tax credits and deductions, in the second quarter of 2022, and will pay the balance of the Transition Tax, net of applicable tax credits and deductions, over the remainder of the
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 June 30, 2022, the amount of unrecognized tax benefits, including penalties and interest, which if recognized would impact the effective tax rate, was approximately $
Note 7—Stockholders’ Equity and Noncontrolling Interests
Net income from continuing operations attributable to noncontrolling interests is classified below net income from continuing operations. 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.
12
A rollforward of consolidated changes in equity and redeemable noncontrolling interest for the three months ended June 30, 2022 is as follows:
| Amphenol Corporation Stockholders | |||||||||||||||||||||||||||
| Accumulated | Redeemable | ||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional | Other | Non- | Non- | ||||||||||||||||||||||
| Shares | Shares | Paid-In | Retained | Comprehensive | controlling | Total | controlling | ||||||||||||||||||||
| (in millions) |
| Amount |
| (in millions) |
| Amount |
| Capital |
| Earnings |
| Loss |
| Interests |
| Equity |
| Interest | |||||||||
| ||||||||||||||||||||||||||||
Balance as of March 31, 2022 |
| |
| $ | |
| ( |
| $ | ( |
| $ | |
| $ | |
| $ | ( |
| $ | |
| $ | |
| $ | |
Net income |
|
| |
| |
| | | ||||||||||||||||||||
Other comprehensive income (loss) |
|
| ( |
| ( |
| ( | | ||||||||||||||||||||
Distributions to shareholders of noncontrolling interests |
|
| ( |
| ( | |||||||||||||||||||||||
Purchase of treasury stock |
| ( |
| ( |
| ( | ||||||||||||||||||||||
Retirement of treasury stock |
| ( | | |
| |
| ( |
| | ||||||||||||||||||
Stock options exercised |
| | | | |
| | ( |
| | ||||||||||||||||||
Dividends declared ($ |
|
| ( |
| ( | |||||||||||||||||||||||
Stock-based compensation expense |
|
| |
| | |||||||||||||||||||||||
Balance as of June 30, 2022 |
| | $ | | ( | $ | ( | $ | | $ | | $ | ( | $ | | $ | | $ | | |||||||||
A rollforward of consolidated changes in equity and redeemable noncontrolling interest for the six months ended June 30, 2022 is as follows:
| Amphenol Corporation Stockholders |
| ||||||||||||||||||||||||||
|
|
|
| Accumulated |
|
|
| Redeemable | ||||||||||||||||||||
| Common Stock | Treasury Stock | Additional | Other | Non- | Non- | ||||||||||||||||||||||
| Shares | Shares | Paid-In | Retained | Comprehensive | controlling | Total | controlling | ||||||||||||||||||||
| (in millions) |
| Amount |
| (in millions) |
| Amount |
| Capital |
| Earnings |
| Loss |
| Interests |
| Equity |
| Interest | |||||||||
| ||||||||||||||||||||||||||||
Balance as of December 31, 2021 |
| |
| $ | |
| ( |
| $ | ( |
| $ | |
| $ | |
| $ | ( |
| $ | |
| $ | |
| $ | |
Net income |
|
| |
| |
| | | ||||||||||||||||||||
Other comprehensive income (loss) |
|
| ( |
| ( |
| ( | | ||||||||||||||||||||
Purchase of noncontrolling interest |
| ( | ( | ( | ||||||||||||||||||||||||
Distributions to shareholders of noncontrolling interests |
|
| ( |
| ( | |||||||||||||||||||||||
Purchase of treasury stock |
| ( |
| ( |
| ( | ||||||||||||||||||||||
Retirement of treasury stock |
| ( | | |
| |
| ( |
| | ||||||||||||||||||
Stock options exercised |
| | | | |
| | ( |
| | ||||||||||||||||||
Dividends declared ($ |
|
| ( |
| ( | |||||||||||||||||||||||
Stock-based compensation expense |
|
| |
| | |||||||||||||||||||||||
Balance as of June 30, 2022 |
| |
| $ | |
| ( |
| $ | ( |
| $ | |
| $ | |
| $ | ( |
| $ | |
| $ | |
| $ | |
A rollforward of consolidated changes in equity for the three months ended June 30, 2021 is as follows:
Amphenol Corporation Stockholders | |||||||||||||||||||||||||
Accumulated | |||||||||||||||||||||||||
Common Stock | Treasury Stock | Additional | Other | Non- | |||||||||||||||||||||
| Shares | Shares | Paid-In | Retained | Comprehensive | controlling | Total | ||||||||||||||||||
| (in millions) |
| Amount |
| (in millions) |
| Amount |
| Capital |
| Earnings |
| Loss |
| Interests |
| Equity | ||||||||
Balance as of March 31, 2021 | |
| $ | |
| ( |
| $ | ( |
| $ | |
| $ | |
| $ | ( |
| $ | |
| $ | | |
Net income |
| |
| |
| | |||||||||||||||||||
Other comprehensive income (loss) |
| |
| |
| | |||||||||||||||||||
Distributions to shareholders of noncontrolling interests |
| ( |
| ( | |||||||||||||||||||||
Purchase of treasury stock | ( |
| ( |
| ( | ||||||||||||||||||||
Retirement of treasury stock |
| ( | | |
| |
| ( |
| | |||||||||||||||
Stock options exercised |
| | | | |
| | ( |
| | |||||||||||||||
Dividends declared ($ |
|
| ( |
| ( | ||||||||||||||||||||
Stock-based compensation expense |
| |
| | |||||||||||||||||||||
Balance as of June 30, 2021 | | $ | | ( | $ | ( | $ | | $ | | $ | ( | $ | | $ | | |||||||||
13
A rollforward of consolidated changes in equity for the six months ended June 30, 2021 is as follows:
Amphenol Corporation Stockholders | |||||||||||||||||||||||||
Accumulated | |||||||||||||||||||||||||
Common Stock | Treasury Stock | Additional | Other | Non- | |||||||||||||||||||||
Shares | Shares | Paid-In | Retained | Comprehensive | controlling | Total | |||||||||||||||||||
| (in millions) |
| Amount |
| (in millions) |
| Amount |
| Capital |
| Earnings |
| Loss |
| Interests |
| Equity | ||||||||
Balance as of December 31, 2020 |
| |
| $ | |
| ( |
| $ | ( |
| $ | |
| $ | |
| $ | ( |
| $ | |
| $ | |
Net income |
| |
| |
| | |||||||||||||||||||
Other comprehensive income (loss) |
| ( | |
| ( | ||||||||||||||||||||
Acquisitions resulting in noncontrolling interest |
| |
| | |||||||||||||||||||||
Purchase of noncontrolling interest | | ( | ( | ||||||||||||||||||||||
Distributions to shareholders of noncontrolling interests |
| ( |
| ( | |||||||||||||||||||||
Purchase of treasury stock | ( |
| ( |
| ( | ||||||||||||||||||||
Retirement of treasury stock |
| ( | | |
| |
| ( |
| | |||||||||||||||
Stock options exercised |
| | | | |
| | ( |
| | |||||||||||||||
Dividends declared ($ |
| ( |
| ( | |||||||||||||||||||||
Stock-based compensation expense |
|
| |
|
|
|
|
| | ||||||||||||||||
Balance as of June 30, 2021 |
| |
| $ | |
| ( |
| $ | ( |
| $ | |
| $ | |
| $ | ( |
| $ | |
| $ | |
Stock Repurchase Programs
On April 27, 2021, the Board authorized a stock repurchase program under which the Company may purchase up to $
On April 24, 2018, the Board authorized a stock repurchase program under which the Company could purchase up to $
14
Dividends
Contingent upon declaration by the Board, the Company pays a quarterly dividend on shares of its Common Stock. The following table summarizes the dividends declared and paid for the three and six months ended June 30, 2022 and 2021:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||
Dividends declared | $ | | $ | | $ | | $ | | |||||
Dividends paid (including those declared in the prior year) |
| |
| |
| |
| | |||||
On October 26, 2021, the Board approved an increase to its quarterly dividend rate from $
Note 8—Stock-Based Compensation
For the three months ended June 30, 2022 and 2021, the Company’s Income from continuing operations before income taxes was reduced for stock-based compensation expense of $
For the six months ended June 30, 2022 and 2021, the Company’s Income from continuing operations before income taxes was reduced for stock-based compensation expense of $
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”), which provided for the issuance of
15
Employee Option Plan generally vest ratably over a period of
Stock option activity for the three and six months ended June 30, 2022 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, 2022 |
| | $ | |
| $ | | ||||
Options granted |
| |
| | |||||||
Options exercised |
| ( |
| | |||||||
Options forfeited |
| ( |
| | |||||||
Options outstanding at March 31, 2022 |
| | | | |||||||
Options granted |
| |
| | |||||||
Options exercised |
| ( |
| | |||||||
Options forfeited |
| ( |
| | |||||||
Options outstanding at June 30, 2022 |
| | $ | |
| $ | | ||||
Vested and non-vested options expected to vest at June 30, 2022 |
| | $ | |
| $ | | ||||
Exercisable options at June 30, 2022 |
| | $ | |
| $ | | ||||
A summary of the status of the Company’s non-vested options as of June 30, 2022 and changes during the three and six months then ended is as follows:
|
| Weighted |
| |||
Average | ||||||
Fair Value at | ||||||
Options | Grant Date |
| ||||
Non-vested options at January 1, 2022 |
| | $ | | ||
Options granted |
| |
| | ||
Options vested |
| ( |
| | ||
Options forfeited |
| ( |
| | ||
Non-vested options at March 31, 2022 |
| | | |||
Options granted |
| |
| | ||
Options vested |
| ( |
| | ||
Options forfeited |
| ( |
| | ||
Non-vested options at June 30, 2022 |
| | $ | | ||
During the three and six months ended June 30, 2022 and 2021, the following activity occurred under the Company’s option plans:
| Three Months Ended |
| Six Months Ended |
| |||||||||
June 30, | June 30, | ||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||
Total intrinsic value of stock options exercised | $ | | $ | | $ | | $ | | |||||
Total fair value of stock options vested |
| |
| |
| |
| | |||||
As of June 30, 2022, the total compensation cost related to non-vested options not yet recognized was approximately $
The grant-date fair value of each option grant under the 2009 Employee Option Plan and the 2017 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.
16
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 Stock
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 Board. As of June 30, 2022, the number of restricted shares available for grant under the 2012 Directors Restricted Stock Plan was
Restricted share activity for the three and six months ended June 30, 2022 was as follows:
Weighted Average | ||||||||
Remaining | ||||||||
Restricted | Fair Value at | Amortization | ||||||
| Shares |
| Grant Date |
| Term (in years) |
| ||
Restricted shares outstanding at January 1, 2022 |
| | $ | | ||||
Restricted shares granted |
| |
| | ||||
Restricted shares outstanding at March 31, 2022 |
| | |
| ||||
Shares vested and issued |
| ( |
| | ||||
Restricted shares granted |
| |
| | ||||
Restricted shares outstanding at June 30, 2022 |
| | $ | |
| |||
As of June 30, 2022, the total compensation cost related to non-vested restricted shares not yet recognized was approximately $
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, including dilutive common shares, the dilutive effect of which relates to stock options. The following is a reconciliation of the basic weighted average common shares outstanding to diluted weighted average common shares outstanding, which were used to
17
calculate the earnings per share (basic and diluted) for the three and six months ended June 30, 2022 and 2021 (note that per share amounts may not add due to rounding):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
(dollars and shares in millions, except per share data) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Net income attributable to Amphenol Corporation stockholders: | |||||||||||||
Net income from continuing operations attributable to Amphenol Corporation | $ | | $ | | $ | | $ | | |||||
Income from discontinued operations attributable to Amphenol Corporation, net of income taxes of ($ | | | | | |||||||||
Net income attributable to Amphenol Corporation | $ | | $ | | $ | | $ | | |||||
Weighted average common shares outstanding — Basic |
| |
| |
| |
| | |||||
Effect of dilutive stock options |
| |
| |
| |
| | |||||
Weighted average common shares outstanding — Diluted |
| |
| |
| |
| | |||||
Net income per common share attributable to Amphenol Corporation — Basic: | |||||||||||||
Continuing operations | $ | | $ | | $ | | $ | | |||||
Discontinued operations, net of income taxes | | | | | |||||||||
Net income attributable to Amphenol Corporation — Basic | $ | | $ | | $ | | $ | | |||||
Net income per common share attributable to Amphenol Corporation — Diluted: | |||||||||||||
Continuing operations | $ | | $ | | $ | | $ | | |||||
Discontinued operations, net of income taxes | | | | | |||||||||
Net income attributable to Amphenol Corporation — Diluted | $ | | $ | | $ | | $ | | |||||
Excluded from the computations above were anti-dilutive common shares (primarily related to outstanding stock options) of
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 instead covered by various 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 and six months ended June 30, 2022 and 2021:
Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Service cost |
| $ | | $ | | $ | | $ | | |||
Interest cost |
| |
| |
| |
| | ||||
Expected return on plan assets |
| ( |
| ( |
| ( |
| ( | ||||
Amortization of prior service cost |
| |
| |
| |
| | ||||
Amortization of net actuarial losses |
| |
| |
| |
| | ||||
Net pension expense |
| $ | | $ | | $ | | $ | | |||
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 2022 is
18
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
Note 11—Acquisitions
2022 Acquisitions
In the second quarter of 2022, the Company completed
2021 Acquisitions
During the year ended December 31, 2021, the Company completed
Acquisition of MTS Systems Corporation and Sale of the Divested MTS Business
On
19
Prior to the closing of the MTS acquisition, the Company entered into a definitive agreement to sell MTS (including the MTS TS business, but excluding the MTS Sensors business) to Illinois Tool Works Inc. (“ITW”). Throughout this Quarterly Report on Form 10-Q, we refer to MTS (including the MTS TS business, but excluding the MTS Sensors business) as the “Divested MTS business”. On December 1, 2021, the Company completed the sale of the Divested MTS business to ITW for approximately $
The Divested MTS business met the “held for sale” criteria at its acquisition date and accordingly, the Company did not assign the Divested MTS business to any of its reportable business segments. The Company accounted for the operating results and related cash flows associated with the Divested MTS business as discontinued operations in the Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Cash Flow, respectively, as of the MTS acquisition date of April 7, 2021 through June 30, 2021, and ultimately, through December 1, 2021, the date of the sale of the Divested MTS business. For the three and six months ended June 30, 2021, the comprehensive income associated with discontinued operations was not material and was not separately presented in the Condensed Consolidated Statements of Comprehensive Income.
Upon the sale of the Divested MTS business in December 2021, the Company completed the acquisition accounting associated with the Divested MTS business, which was performed separately from the purchase price allocation of the retained MTS Sensors business. The proceeds from the sale of the Divested MTS business were included in Net cash provided by investing activities from discontinued operations in the Consolidated Statements of Cash Flow for the year ended December 31, 2021. The sale of the Divested MTS business did not result in any significant gain or loss recorded to discontinued operations in the Consolidated Statements of Income for the year ended December 31, 2021.
The retained MTS Sensors business is reported within our Interconnect and Sensor Systems segment. The Company has completed its analysis of the purchase price allocation of the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed, as part of the acquisition accounting associated with the MTS Sensors business. The final assessment of values for the MTS acquisition did not differ materially from previous preliminary assessments. The MTS acquisition resulted in the recognition of $
Acquisition of Halo Technology Limited
On
20
intangible assets acquired and liabilities assumed, as part of acquisition accounting. As of June 30, 2022, the Halo acquisition resulted in the recognition of $
Acquisition-related Expenses
During the three and six months ended June 30, 2021, the Company incurred $
Note 12—Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill by segment were as follows:
| Harsh |
| Interconnect |
|
| ||||||||
Environment | Communications | and Sensor |
| ||||||||||
Solutions | Solutions | Systems | Total |
| |||||||||
Goodwill at December 31, 2021 | $ | | $ | | $ | | $ | | |||||
Acquisition-related |
| |
| ( |
| ( |
| | |||||
Foreign currency translation |
| ( |
| ( |
| ( |
| ( | |||||
Goodwill at June 30, 2022 | $ | | $ | | $ | | $ | | |||||
The decrease in goodwill during the first six months of 2022 was primarily driven by foreign currency translation, partially offset by goodwill recognized from
Other than goodwill noted above, the Company’s intangible assets as of June 30, 2022 and December 31, 2021 were as follows:
June 30, 2022 | December 31, 2021 | ||||||||||||||||||
Weighted | Gross |
|
| Net |
| Gross |
|
| Net | ||||||||||
Average | Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | |||||||||||||
Life (years) | Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||
Customer relationships | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Proprietary technology |
| |
| | |
| |
| | | |||||||||
Backlog and other |
| |
| | |
| |
| | | |||||||||
Total intangible assets (definite-lived) | | | | | | | |||||||||||||
Trade names (indefinite-lived) | | | | | |||||||||||||||
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||
21
The increase in the gross carrying amount of intangible assets in the first six months of 2022 was primarily driven by certain customer relationships and acquired backlog recognized as a result of the acquisition accounting associated with recent acquisitions. Amortization expense for the three months ended June 30, 2022 and 2021 was approximately $
Note 13—Reportable Business Segments
New Reportable Business Segments
Effective January 1, 2022, the Company aligned its businesses into
The following are the Company’s
The Company has recast all relevant prior year period segment information in order to enable year-over-year segment comparisons in this Quarterly Report on Form 10-Q. 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 2021 Annual Report. The Company evaluates the performance of the segments and allocates resources to each of them based on, among other things, profit or loss from operations before certain corporate and other related items such as interest, stock-based compensation expense, income taxes, amortization related to certain intangible assets and nonrecurring gains and losses. The Company also incurs general corporate expenses and costs which are not allocated to the reportable business segments, but have been included in “Corporate / Other” in the following tables for
22
reconciliation purposes. Assets are reviewed by the CODM on a consolidated basis and therefore are not presented by reportable business segment.
Net sales by segment for the three and six months ended June 30, 2022 and 2021 are as follows:
| External |
| Intersegment | |||||||||
Three Months Ended June 30: | 2022 | 2021 | 2022 | 2021 | ||||||||
Harsh Environment Solutions |
| $ | | $ | | $ | | $ | | |||
Communications Solutions | | | | | ||||||||
Interconnect and Sensor Systems | | | | | ||||||||
Consolidated Net sales | $ | | $ | | $ | | $ | | ||||
Six Months Ended June 30: | ||||||||||||
Harsh Environment Solutions |
| $ | | $ | | $ | | $ | | |||
Communications Solutions | | | | | ||||||||
Interconnect and Sensor Systems | | | | | ||||||||
Consolidated Net sales | $ | | $ | | $ | | $ | | ||||
Segment operating income and the reconciliation of segment operating income to consolidated income from continuing operations before income taxes for the three and six months ended June 30, 2022 and 2021:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||
Segment operating income: | ||||||||||||
Harsh Environment Solutions | $ | | $ | | $ | | $ | | ||||
Communications Solutions | | | | | ||||||||
Interconnect and Sensor Systems | | | | | ||||||||
Total segment operating income | | | | | ||||||||
Corporate / Other: | ||||||||||||
Stock-based compensation expense | ( | ( | ( | ( | ||||||||
Acquisition-related expenses | | ( | | ( | ||||||||
Other operating expenses | ( | ( | ( | ( | ||||||||
Interest expense | ( | ( | ( | ( | ||||||||
Other income (expense), net | | | | ( | ||||||||
Income from continuing operations before income taxes | $ | | $ | | $ | | $ | | ||||
Depreciation and amortization expense by segment for the three and six months ended June 30, 2022 and 2021:
| Three Months Ended June 30, |
| Six Months Ended June 30, | |||||||||
2022 | 2021 | 2022 | 2021 | |||||||||
Harsh Environment Solutions |
| $ | | $ | | $ | | $ | | |||
Communications Solutions | | | | | ||||||||
Interconnect and Sensor Systems | | | | | ||||||||
Corporate / Other | | | | | ||||||||
Total | $ | | $ | | $ | | $ | | ||||
23
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 and six months ended June 30, 2022 and 2021, less than
The Company receives customer orders negotiated with multiple delivery dates that may extend across more than
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 June 30, 2022 and December 31, 2021, and related warranty expense for the three and six months ended June 30, 2022 and 2021, have not been and were not material in the accompanying Condensed Consolidated Financial Statements.
24
Disaggregation of Net Sales
The following tables show 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 and six months ended June 30, 2022 and 2021:
Harsh | ||||||||||||||||||||||||
Environment | Communications | Interconnect and | Total Reportable | |||||||||||||||||||||
Solutions | Solutions | Sensor Systems | Business Segments | |||||||||||||||||||||
Three Months Ended June 30, |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | 2022 |
| 2021 | |||||||||
Net sales by: | ||||||||||||||||||||||||
Sales channel: |
| |||||||||||||||||||||||
End customers and contract manufacturers | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | | $ | |
| $ | | ||
Distributors and resellers |
| |
| |
| |
| |
| |
| |
| |
| | ||||||||
$ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Geography: | ||||||||||||||||||||||||
United States | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
China |
| |
| |
| |
| |
| |
| | | | ||||||||||
Other foreign locations |
| |
| |
| |
| |
| |
| |
| | | |||||||||
$ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Harsh | ||||||||||||||||||||||||
Environment | Communications | Interconnect and | Total Reportable | |||||||||||||||||||||
Solutions | Solutions | Sensor Systems | Business Segments | |||||||||||||||||||||
Six Months Ended June 30, |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | 2022 |
| 2021 | |||||||||
Net sales by: | ||||||||||||||||||||||||
Sales channel: |
| |||||||||||||||||||||||
End customers and contract manufacturers | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | | $ | |
| $ | | ||
Distributors and resellers |
| |
| |
| |
| |
| |
| |
| |
| | ||||||||
$ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Geography: | ||||||||||||||||||||||||
United States | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
China |
| |
| |
| |
| |
| |
| | | | ||||||||||
Other foreign locations |
| |
| |
| |
| |
| |
| |
| | | |||||||||
$ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Net sales by geographic area are based on the customer location to which the product is shipped. It is impracticable to disclose net sales by product or group of products.
Note 15—Commitments and Contingencies
From time to time, the Company has been threatened with, or named as a defendant in, various legal or regulatory actions in the ordinary course of business. 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 or regulatory 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.
In August 2018, the Company received a subpoena from the U.S. Department of Defense, Office of the Inspector General (the “OIG”), 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. As of the date of this filing, the Company has responded to several production requests from the OIG, with the most recent being completed during the third quarter of
25
2021. The Company continues to communicate and cooperate with the OIG on this ongoing matter. The Company is currently unable to estimate the timing or outcome of this matter.
From December 2019 through October 2020, the Company was named as one of several defendants in
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 that the customer alleged did not meet certain agreed upon product specifications. During the second quarter of 2022, the Company settled this matter for an immaterial amount.
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.
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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 financial condition and results of operations for the three and six months ended June 30, 2022 and 2021 has been derived from and should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and the accompanying notes thereto included in Part I, Item 1 herein for Amphenol Corporation (together with its subsidiaries, “Amphenol,” the “Company,” “we,” “our” or “us”). The following discussion and analysis should also 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, 2021 (the “2021 Annual Report”). The Condensed Consolidated Financial Statements have been prepared in U.S. dollars, 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 non-GAAP financial measures and material limitations with respect to the usefulness of the measures.
Cautionary Note Regarding Forward-Looking Statements
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 “Exchange Act”). The forward-looking statements, which address the Company’s expected business and financial performance and financial condition, 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, effective tax rate or other matters, together with any forward-looking statements related in any way to the COVID-19 pandemic, including its future impact on the Company. Although the Company believes the expectations reflected in all forward-looking statements, including those we may make with regards to expected earnings, revenues, growth, 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 and investors 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 forward-looking statements, which include, but are not limited to, the following: political, economic, military and other risks related to operating in countries outside the United States, as well as changes in general economic conditions, geopolitical conditions, U.S. trade policies (including but not limited to sanctions) and other factors beyond the Company’s control; 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 government regulations that inhibit our ability to operate certain of our facilities in the ordinary course, travel restrictions, supplier constraints, supply chain interruptions, logistics challenges and limitations, labor disruptions and reduced demand from certain customers; uncertainties associated with an economic slowdown or recession that could negatively affect the financial condition of our customers and could result in reduced demand; risks associated with our inability to obtain certain raw materials and components in the current challenging supply chain environment, as well as inflationary risks, including the risk that the cost of certain of the Company’s raw materials and components is increasing; negative impacts caused by extreme weather conditions and natural catastrophic events,
27
including those caused by climate change and global warming; 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; risks associated with the Company’s dependence on attracting, recruiting, hiring and retaining skilled employees, including as part of our various management teams; 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; risks and difficulties in trying to compete successfully on the basis of technology innovation, product quality and performance, price, customer service and delivery time; 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 and other covenants, which could result in a default under the Company’s revolving credit facility or unsecured term loan credit facility; risks associated with the Company’s inability to access the global 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; cybersecurity threats, including but not limited to malware, phishing, credential harvesting, ransomware and other increasingly sophisticated attacks, that could impair our information technology systems and could disrupt business operations, result in the 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, any of which could adversely impact our reputation and operating results and potentially lead to litigation and/or governmental investigations and fines; government contracting risks that the Company may be subject to, including laws and regulations governing reporting obligations, performance of government contracts and related risks associated with conducting business with the U.S. and other foreign governments or their 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 and other laws; 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; 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; and incremental costs and other risks that may arise in connection with regulatory efforts to combat the negative effects of climate change.
A further description of these uncertainties and other risks can be found in the 2021 Annual Report, 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 has affected our offices and manufacturing facilities throughout the world, as well as the facilities of our suppliers, customers and our customers’ contract manufacturers. The COVID-19 pandemic caused widespread disruptions to our Company during the first half of 2020, and to a lesser extent, those disruptions continued throughout the remainder of 2020, all of 2021 and into 2022. As of June 30, 2022, we continue to experience some disruptions, and at a minimum, we expect disruptions to continue for the remainder of 2022 and potentially beyond. These disruptions have included and may continue to include government regulations that inhibit our ability to operate certain of our facilities in the ordinary course, travel restrictions, supplier constraints, supply chain interruptions, logistics challenges and limitations, labor disruptions and reduced demand from certain customers. More recently, during most of the first half of 2022, COVID-19 outbreaks in China resulted in new government-imposed lockdowns in certain regions, which impacted the ability of several of our operations and manufacturing facilities to operate in the ordinary course. 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, the impact of any additional resurgences from known or new variants, current and future government regulations and actions in response to the crisis, the timing, availability, effectiveness and adoption rates of vaccines and treatments, and the overall impact of
28
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. There can be no assurance that the COVID-19 pandemic will not have a material and adverse effect on our business, operations, financial condition, liquidity and results of operations in the future.
New Reportable Business Segments
Effective January 1, 2022, the Company aligned its businesses into the following three newly formed reportable business segments, which have replaced our historic reportable business segments:
This new alignment reinforces the Company’s entrepreneurial culture and the clear accountability of each of our business unit general managers, while enhancing the scalability of Amphenol’s business for the future. The Company began reporting under its new reportable segments in connection with its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022. As part of this Quarterly Report on Form 10-Q, the Company has included the recasting of relevant prior year period segment information in order to enable year-over-year segment comparisons. Refer to Note 13 of the Notes to Condensed Consolidated Financial Statements, as well as the 2021 Annual Report, for further details related to the Company’s change in its reportable business segments effective January 1, 2022.
Results of Operations
Three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021
Net sales were $3,136.8 in the second quarter of 2022 compared to $2,653.9 in the second quarter of 2021, which represented an increase of 18% in U.S. dollars, 21% in constant currencies and 18% organically, over the respective prior year period. Net sales were $6,088.6 in the first six months of 2022 compared to $5,031.0 in the first six months of 2021, which represented an increase of 21% in U.S. dollars, 23% in constant currencies and 18% organically, over the respective prior year period. The increases in net sales in the second quarter and first six months of 2022 were driven by robust growth across all three reportable business segments, as described below. From a market standpoint, the increases in net sales were driven by double-digit organic growth across several markets, including the automotive, information technology and data communications, industrial, broadband communications, and commercial aerospace markets and moderate growth in the mobile devices and mobile networks markets, along with contributions from the Company’s acquisition program.
Net sales in the Harsh Environment Solutions segment (approximately 25% of net sales) in the second quarter of 2022 increased 14% in U.S. dollars, 17% in constant currencies and 16% organically, compared to the second quarter of 2021. Net sales in the Harsh Environment Solutions segment in the first six months of 2022 increased 15% in U.S. dollars, 17% in constant currencies and 16% organically, compared to the first six months of 2021. The increases in the second quarter and first six months of 2022 were driven primarily by strong organic growth in the industrial, automotive,
29
and commercial aerospace markets and moderate growth in the information technology and data communications market, partially offset by a decline in the mobile networks market.
Net sales in the Communications Solutions segment (approximately 44% of net sales) in the second quarter of 2022 increased 24% in U.S. dollars, 25% in constant currencies and 19% organically, compared to the second quarter of 2021. Net sales in the Communications Solutions segment in the first six months of 2022 increased 26% in U.S. dollars, 27% in constant currencies and 20% organically, compared to the first six months of 2021. The increases in the second quarter and first six months of 2022 were driven by strong organic growth across several markets, including the information technology and data communications, automotive, broadband communications, industrial, and mobile networks markets, moderate growth in the mobile devices market, and contributions from the Company’s acquisition program.
Net sales in the Interconnect and Sensor Systems segment (approximately 31% of net sales) in the second quarter of 2022 increased 15% in U.S. dollars, 20% in constant currencies and 19% organically, compared to the second quarter of 2021. The increase in the second quarter of 2022 was driven primarily by strong organic growth in the automotive and information technology and data communications markets, along with moderate growth in the industrial and military markets. Net sales in the Interconnect and Sensor Systems segment in the first six months of 2022 increased 20% in U.S. dollars, 23% in constant currencies and 16% organically, compared to the first six months of 2021. The increase in the first six months of 2022 was driven primarily by strong organic growth in the automotive, information technology and data communications, and industrial markets, along with contributions from the Company’s acquisition program, partially offset by a decline in the mobile networks market.
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The tables below reconcile Constant Currency Net Sales Growth and Organic Net Sales Growth to the most directly comparable U.S. GAAP financial measures, by segment, geography and consolidated, for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021:
Percentage Growth (relative to same prior year period) (1) | |||||||||||||||||||||
Net sales | Foreign | Constant | Organic | ||||||||||||||||||
growth in | currency | Currency Net | Acquisition | Net Sales | |||||||||||||||||
U.S. Dollars (2) | impact (3) | Sales Growth (4) | impact (5) | Growth (4) | |||||||||||||||||
Three Months Ended June 30, |
| 2022 |
| 2021 |
| (GAAP) | (non-GAAP) | (non-GAAP) | (non-GAAP) | (non-GAAP) | |||||||||||
Net sales by: | |||||||||||||||||||||
Segment: | |||||||||||||||||||||
Harsh Environment Solutions | $ | 790.4 |
| $ | 696.3 | 14 | % | (3) | % | 17 | % | 1 | % | 16 | % | ||||||
Communications Solutions | 1,378.5 | 1,115.3 | 24 | % | (2) | % | 25 | % | 6 | % | 19 | % | |||||||||
Interconnect and Sensor Systems |
| 967.9 |
| 842.3 | 15 | % | (5) | % | 20 | % | 1 | % | 19 | % | |||||||
Consolidated | $ | 3,136.8 | $ | 2,653.9 | 18 | % | (3) | % | 21 | % | 3 | % | 18 | % | |||||||
Geography (6): |
|
| |||||||||||||||||||
United States | $ | 1,041.6 |
| $ | 779.1 | 34 | % | — | % | 34 | % | 7 | % | 27 | % | ||||||
Foreign |
| 2,095.2 |
| 1,874.8 | 12 | % | (4) | % | 16 | % | 1 | % | 14 | % | |||||||
Consolidated | $ | 3,136.8 | $ | 2,653.9 | 18 | % | (3) | % | 21 | % | 3 | % | 18 | % | |||||||
Six Months Ended June 30, | |||||||||||||||||||||
Net sales by: |
|
| |||||||||||||||||||
Segment: | |||||||||||||||||||||
Harsh Environment Solutions | $ | 1,518.0 |
| $ | 1,324.3 | 15 | % | (2) | % | 17 | % | 1 | % | 16 | % | ||||||
Communications Solutions | 2,698.6 | 2,143.3 | 26 | % | (1) | % | 27 | % | 7 | % | 20 | % | |||||||||
Interconnect and Sensor Systems |
| 1,872.0 |
| 1,563.4 | 20 | % | (4) | % | 23 | % | 7 | % | 16 | % | |||||||
Consolidated | $ | 6,088.6 | $ | 5,031.0 | 21 | % | (2) | % | 23 | % | 5 | % | 18 | % | |||||||
Geography (6): |
|
| |||||||||||||||||||
United States | $ | 1,955.5 |
| $ | 1,453.0 | 35 | % | — | % | 35 | % | 11 | % | 24 | % | ||||||
Foreign |
| 4,133.1 |
| 3,578.0 | 16 | % | (3) | % | 18 | % | 3 | % | 15 | % | |||||||
Consolidated | $ | 6,088.6 | $ | 5,031.0 | 21 | % | (2) | % | 23 | % | 5 | % | 18 | % | |||||||
| (1) | Percentages in this table were calculated using actual, unrounded results; therefore, the sum of the components may not add due to rounding. |
| (2) | Net sales growth in U.S. dollars is calculated based on Net sales as reported in the Condensed Consolidated Statements of Income and Note 13 of the Notes to Condensed Consolidated 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. |
| (3) | 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 respective period(s) in the prior year. Such amount is calculated by subtracting net sales for the current reporting period(s) translated at average foreign currency exchange rates for the respective prior year period(s) from net sales for the current reporting period(s), taken as a percentage of the respective prior year period(s) net sales. |
| (4) | Constant Currency Net Sales Growth and Organic Net Sales Growth are non-GAAP financial measures as defined in the “Non-GAAP Financial Measures” section of this Item 2. |
| (5) | Acquisition impact, a non-GAAP measure, represents the percentage impact on net sales resulting from acquisitions 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. Acquisition impact is calculated as a percentage of the respective prior year period(s) net sales. |
| (6) | Net sales by geographic area are based on the customer location to which the product is shipped. |
The comparatively stronger U.S. dollar for the second quarter of 2022 had the effect of decreasing sales by approximately $82.7, relative to the comparable period in 2021. The comparatively stronger U.S. dollar for the first six months of 2022 had the effect of decreasing sales by approximately $110.5, relative to the comparable period in 2021.
Selling, general and administrative expenses increased to $355.4, or 11.3% of net sales, and $692.1, or 11.4% of net sales, for the second quarter and first six months of 2022, respectively, compared to $311.6, or 11.7% of net sales, and $574.3, or 11.4% of net sales, for the second quarter and first six months of 2021, respectively. The decrease in selling, general and administrative expenses as a percentage of net sales in the second quarter of 2022 is primarily driven by higher sales during the second quarter of 2022, relative to the comparable period of 2021. Administrative expenses represented approximately 4.7% and 4.6% of net sales for the second quarter and first six months of 2022, respectively, and represented approximately 4.6% and 4.4% of net sales for the second quarter and first six months of 2021, respectively. Research and development expenses represented approximately 2.6% and 2.7% of net sales for the second quarter and first six months of 2022, respectively, and represented approximately 3.1% of net sales for both the second
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quarter and first six months of 2021. Selling and marketing expenses represented approximately 4.0% and 4.1% of net sales for the second quarter and first six months of 2022, respectively, and represented approximately 4.1% and 3.9% of net sales for the second quarter and first six months of 2021, respectively.
Operating income was $648.8, or 20.7% of net sales, and $1,238.6, or 20.3% of net sales, for the second quarter and first six months of 2022, respectively, compared to $476.2, or 17.9% of net sales, and $941.0, or 18.7% of net sales, for the second quarter and first six months of 2021, respectively. Operating income for the second quarter and first six 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 three and six months ended June 30, 2021, the 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 $531.6, or 20.0% of net sales, and $996.4, or 19.8% of net sales, for the three and six months ended June 30, 2021, respectively. The increases in Adjusted Operating Income and Adjusted Operating Margin for the second quarter and first six months of 2022 relative to the comparable periods in 2021 were primarily driven by normal operating leverage on the higher sales volumes, combined with the benefit of ongoing pricing actions, partially offset by the continued impact of the more challenging cost environment.
Operating income for the Harsh Environment Solutions segment for the second quarter and first six months of 2022 was $206.5, or 26.1% of net sales, and $389.7, or 25.7% of net sales, respectively, compared to $181.0, or 26.0% of net sales, and $339.3, or 25.6% of net sales, for the second quarter and first six months of 2021, respectively. The slight increases in operating margin for the Harsh Environment Solutions segment for the second quarter and first six months of 2022 relative to the comparable periods in 2021 were primarily driven by normal operating leverage on the higher sales volumes, combined with the benefit of ongoing pricing actions, largely offset by the continued impact of the more challenging cost environment.
Operating income for the Communications Solutions segment for the second quarter and first six months of 2022 was $303.0, or 22.0% of net sales, and $585.6, or 21.7% of net sales, respectively, compared to $235.1, or 21.1% of net sales, and $439.6, or 20.5% of net sales, for the second quarter and first six months of 2021, respectively. The increases in operating margin for the Communications Solutions segment for the second quarter and first six months of 2022 relative to the comparable periods in 2021 were primarily driven by normal operating leverage on the higher sales volumes, combined with the benefit of ongoing pricing actions, partially offset by the continued impact of the more challenging cost environment.
Operating income for the Interconnect and Sensor Systems segment for the second quarter and first six months of 2022 was $177.5, or 18.3% of net sales, and $337.5, or 18.0% of net sales, respectively, compared to $150.5, or 17.9% of net sales, and $285.5, or 18.3% of net sales, for the second quarter and first six months of 2021, respectively. The increase in operating margin for the Interconnect and Sensor Systems segment for the second quarter of 2022 relative to the comparable period in 2021 was primarily driven by normal operating leverage on the higher sales volumes, combined with the benefit of ongoing pricing actions, partially offset by the continued impact of the more challenging cost environment. The decrease in operating margin for the Interconnect and Sensor Systems segment for the first six months of 2022 relative to the comparable period in 2021 was primarily driven by the continued impact of the more challenging cost environment along with the impact of the Company’s 2021 acquisitions, in particular the MTS Sensors business which closed in April 2021 and currently operates at a lower operating margin compared to the average of the Interconnect and Sensor Systems segment, all of which was partially offset by normal operating leverage on the higher sales volumes.
Interest expense for the second quarter and first six months of 2022 was $30.5 and $58.6, respectively, compared to $29.1 and $57.7 for the second quarter and first six months of 2021, respectively. Refer to Note 4 of the Notes to Condensed Consolidated Financial Statements for further information related to the Company’s debt.
Provision for income taxes for the second quarter and first six months of 2022 was at an effective tax rate of 23.3% and 23.5%, respectively. Provision for income taxes for the second quarter and first six months of 2021 was at an
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effective tax rate of 17.5% and 20.6%, respectively. For the second quarter and first six months of 2022 and 2021, 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 second quarter and first six 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. 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 six months ended June 30, 2022 and 2021 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 Notes to 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 $472.5 and $0.76, respectively, for the second quarter of 2022, compared to $367.2 and $0.59, respectively, for the second quarter of 2021. 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 $465.0 and $0.75, respectively, for the second quarter of 2022, compared to $377.6 and $0.61, respectively, for the second quarter of 2021. Net income from continuing operations attributable to Amphenol Corporation and Diluted EPS were $898.2 and $1.44, respectively, for the first six months of 2022, compared to $696.7 and $1.12, respectively, for the first six months of 2021. Excluding the effect of the aforementioned items discussed above, Adjusted Net Income from continuing operations attributable to Amphenol Corporation and Adjusted Diluted EPS were $886.9 and $1.42, respectively, for the first six months of 2022, compared to $704.4 and $1.13, respectively, for the first six months of 2021.
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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 six months ended June 30, 2022 and 2021:
Three Months Ended June 30, | ||||||||||||||||||||||||||
2022 | 2021 | |||||||||||||||||||||||||
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) | $ | 648.8 |
| 20.7 | % | $ | 472.5 |
| 23.3 | % | $ | 0.76 | $ | 476.2 |
| 17.9 | % | $ | 367.2 |
| 17.5 | % | $ | 0.59 | ||
Acquisition-related expenses | — | — | — | — | — | 55.4 | 2.1 | 44.6 | (0.6) | 0.07 | ||||||||||||||||
Excess tax benefits related to stock-based compensation | — | — | (7.5) | 1.2 | (0.01) | — | — | (19.3) | 4.3 | (0.03) | ||||||||||||||||
Discrete tax item | — | — | — | — | — | — | — | (14.9) | 3.3 | (0.02) | ||||||||||||||||
Adjusted (non-GAAP) (2) | $ | 648.8 | 20.7 | % | $ | 465.0 | 24.5 | % | $ | 0.75 | $ | 531.6 | 20.0 | % | $ | 377.6 | 24.5 | % | $ | 0.61 | ||||||
Six Months Ended June 30, | ||||||||||||||||||||||||||
2022 | 2021 | |||||||||||||||||||||||||
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) | $ | 1,238.6 |
| 20.3 | % | $ | 898.2 |
| 23.5 | % | $ | 1.44 | $ | 941.0 |
| 18.7 | % | $ | 696.7 |
| 20.6 | % | $ | 1.12 | ||
Acquisition-related expenses | — | — | — | — | — | 55.4 | 1.1 | 44.6 | (0.3) | 0.07 | ||||||||||||||||
Excess tax benefits related to stock-based compensation | — | — | (11.3) | 1.0 | (0.02) | — | — | (22.0) | 2.5 | (0.04) | ||||||||||||||||
Discrete tax item | — | — | — | — | — | — | — | (14.9) | 1.7 | (0.02) | ||||||||||||||||
Adjusted (non-GAAP) (2) | $ | 1,238.6 | 20.3 | % | $ | 886.9 | 24.5 | % | $ | 1.42 | $ | 996.4 | 19.8 | % | $ | 704.4 | 24.5 | % | $ | 1.13 | ||||||
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. |
Liquidity and Capital Resources
As of June 30, 2022 and December 31, 2021, the Company had cash, cash equivalents and short-term investments of $1,334.4 and $1,241.4, respectively, with the majority of the Company’s cash, cash equivalents and short-term investments on hand located outside of the United States.
The Company’s primary sources of liquidity are internally generated cash provided by operating activities, our cash, cash equivalents and short-term investments on hand, as well as availability under the U.S. Commercial Paper Program, the Euro Commercial Paper Program, the Revolving Credit Facility, and the recently executed two-year, $750.0 unsecured delayed draw loan credit agreement (“2022 Term Loan”) (all of which are defined and discussed further below within this Item 2). The Company believes that these sources of liquidity, along with access to capital markets, provide adequate liquidity to meet both its short-term (next twelve months) and reasonably foreseeable long-term requirements and obligations.
The Company’s primary ongoing cash requirements will be for operating and working capital needs, capital expenditures, product development activities, repurchases of our Common Stock, dividends, debt service, payments associated with the one-time tax on the deemed repatriation of all of the Company’s pre-2018 accumulated unremitted earnings and profits of foreign subsidiaries (“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), funding of pension obligations, and other contractual obligations and commitments included in Item 7 of the 2021 Annual Report.
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The Company may also use cash to fund all or part of the cost of future acquisitions. 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, Commercial Paper Programs and the recent 2022 Term Loan (all as defined below).
The Company has previously indicated an intention to repatriate most of its pre-2022 accumulated earnings and has accrued the foreign and U.S. state and local taxes, if applicable, on those earnings, as appropriate. The associated tax payments are due as the repatriations are made. The Company intends to indefinitely reinvest the remaining pre-2022 foreign earnings. As of June 30, 2022, the Company has accrued the foreign and U.S. state and local taxes associated with the foreign earnings that we intend to repatriate. The Company intends to evaluate future earnings for repatriation, and will accrue for those distributions where appropriate, and to indefinitely reinvest all other foreign earnings. In addition, the Transition Tax will be paid, net of applicable tax credits and deductions, in annual installments until 2025, as permitted under the Tax Act.
Cash Flow Summary
The following table summarizes the Company’s cash flows from operating, investing and financing activities for the six months ended June 30, 2022 and 2021, as reflected in the Condensed Consolidated Statements of Cash Flow:
Six Months Ended June 30, | ||||||
| 2022 |
| 2021 | |||
Net cash provided by operating activities from continuing operations | $ | 893.3 | $ | 732.0 | ||
Net cash used in investing activities from continuing operations |
| (377.3) |
| (1,721.3) | ||
Net cash (used in) provided by financing activities from continuing operations |
| (439.1) |
| 613.0 | ||
Net cash change from discontinued operations | — | (19.7) | ||||
Effect of exchange rate changes on cash and cash equivalents |
| (58.8) |
| (9.1) | ||
Net increase (decrease) in cash and cash equivalents | $ | 18.1 | $ | (405.1) | ||
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 $893.3 in the first six months of 2022 compared to $732.0 in the first six months of 2021. The increase in Operating Cash Flow for the first six months of 2022 compared to the first six months of 2021 is primarily due to the increase in net income from continuing operations, partially offset by a higher usage of cash related to the change in working capital.
In the first six months of 2022, the components of working capital as presented on the accompanying Condensed Consolidated Statements of Cash Flow increased $229.3, excluding the impact of acquisitions and foreign currency translation, primarily due to increases in inventories of $218.8 and accounts receivable of $194.0, partially offset by increases in accounts payable of $104.8 and accrued liabilities, including income taxes, of $48.7, and a decrease in prepaid expenses and other current assets of $30.0. In the first six months of 2021, the components of working capital as presented on the accompanying Condensed Consolidated Statements of Cash Flow increased $194.9, excluding the impact of acquisitions and foreign currency translation, primarily due to increases in inventories of $165.4, accounts receivable of $42.4 and prepaid expenses and other current assets of $15.0 and a decrease in accrued liabilities, including income taxes, of $24.6, partially offset by an increase in accounts payable of $52.5.
The following describes the significant changes in the amounts as presented on the accompanying Condensed Consolidated Balance Sheets at June 30, 2022 as compared to December 31, 2021. Accounts receivable increased $116.8 to $2,571.6, primarily due to slightly higher sales in the second quarter of 2022 relative to the fourth quarter of 2021, along with the impact of one acquisition that closed during the second quarter of 2022 (the “2022 Acquisition”), partially offset by the effect of translation from exchange rate changes (“Translation”) at June 30, 2022 compared to December 31, 2021. Days sales outstanding at June 30, 2022 and December 31, 2021 were 72 days and 71 days, respectively. Inventories increased $149.6 to $2,043.7, which was primarily driven by the impact of the ongoing supply chain disruptions that we continued to experience during the first six months of 2022, along with the impacts of higher sales and the 2022 Acquisition, partially offset by Translation. Inventory days at June 30, 2022 and December 31, 2021
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were 86 days and 80 days, respectively. Property, plant and equipment, net, decreased $20.2 to $1,155.1, primarily due to depreciation of $144.2 and Translation, partially offset by capital expenditures of $169.2. Goodwill decreased $101.8 to $6,275.0, primarily driven by Translation, partially offset by goodwill recorded resulting from the 2022 Acquisition. Other intangible assets, net decreased $5.7 to $751.2, primarily due to amortization associated with the Company’s current intangible assets along with the effect of Translation, partially offset by the recognition of certain intangible assets related to recent acquisitions. Other long-term assets increased $82.6 to $493.8, primarily due to the purchase of long-term certificates of deposit investments, along with an increase in operating lease right-of-use assets resulting from new and renewed lease agreements entered into during the first six months of 2022. Accounts payable increased $60.9 to $1,372.9, primarily due to increased purchasing activity related to higher sales levels in the second quarter of 2022 relative to the fourth quarter of 2021, along with the effect of the 2022 Acquisition, partially offset by Translation. Payable days at June 30, 2022 and December 31, 2021 were 58 days and 56 days, respectively. Total accrued expenses, including accrued income taxes, increased $48.6 to $1,179.7, primarily as a result of increases in accrued income taxes and other accrued expenses, partially offset by a decrease in accrued salaries, wages and employee benefits and Translation. Accrued pension and postretirement benefit obligations decreased $17.4 to $176.0, primarily due to Translation.
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, if any, as discussed in more detail in Note 10 of the Notes to Condensed Consolidated Financial Statements.
In addition to Operating Cash Flow, 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 six months ended June 30, 2022 and 2021. The increase in Free Cash Flow was driven by an increase in Operating Cash Flow, as described above, and to a lesser extent, a decrease in capital expenditures. The following table is on a continuing operations basis only and excludes any cash flows related to discontinued operations:
Six Months Ended June 30, | ||||||
| 2022 |
| 2021 | |||
Operating Cash Flow (GAAP) |
| $ | 893.3 |
| $ | 732.0 |
Capital expenditures (GAAP) | (169.2) | (183.3) | ||||
Proceeds from disposals of property, plant and equipment (GAAP) |
| 2.8 |
| 1.6 | ||
Free Cash Flow (non-GAAP) | $ | 726.9 | $ | 550.3 | ||
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 purchases (sales and maturities) of short- and long-term investments, and acquisitions.
Net cash used in investing activities from continuing operations was $377.3 in the first six months of 2022, compared to $1,721.3 in the first six months of 2021. In the first six months of 2022, net cash used in investing activities from continuing operations was driven primarily by capital expenditures (net of disposals) of $166.4, net purchases of short-term investments of $80.2, the use of $74.5 to fund acquisitions, and net purchases of long-term investments of $55.7. In the first six 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 $181.7, partially offset by net sales and maturities of short-term investments of $2.6.
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.
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Net cash used in financing activities from continuing operations was $439.1 in the first six months of 2022, compared to net cash provided by financing activities from continuing operations of $613.0 in the first six months of 2021. For the first six months of 2022, net cash used in financing activities from continuing operations was driven primarily by (i) repurchases of the Company’s Common Stock of $389.9, (ii) dividend payments of $239.3, (iii) repayments of $20.1 related to short-term debt, (iv) repayments of $4.9 related to long-term debt, and (v) distributions to and purchases of noncontrolling interests of $4.0, partially offset by (a) net borrowings of $130.7 primarily under the U.S. Commercial Paper Program, (b) proceeds of $46.6 primarily related to short-term borrowings, and (c) cash proceeds of $42.2 from the exercise of stock options. For the first six months of 2021, net cash provided by financing activities from continuing operations was driven primarily by (i) net borrowings of $1,402.7 comprised primarily of borrowings under the U.S. Commercial Paper Program, most of the proceeds of which were used for the MTS acquisition and (ii) cash proceeds of $103.3 from the exercise of stock options, partially offset by (a) debt repayments of $387.1, primarily related to the repayment of the then-outstanding MTS senior notes, (b) repurchases of the Company’s Common Stock of $320.1, (c) dividend payments of $173.4, (d) distributions to and purchases of noncontrolling interests of $8.3, and (e) payments of $4.1 associated with the deferred purchase price related to acquisitions.
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, the 2022 Term Loan, and senior notes as part of its overall cash management strategy.
On November 30, 2021, the Company amended and restated its $2,500.0 unsecured revolving credit facility (the “Revolving Credit Facility”). As a result, the Revolving Credit Facility no longer references LIBOR for interest rate determinations. The Revolving Credit Facility maintains the lenders’ aggregate commitments under the facility at $2,500.0. The Revolving Credit Facility matures in November 2026 and gives the Company the ability to borrow, in various currencies, at a spread that varies, based on the Company’s debt rating, over certain currency-specific benchmark rates, which benchmark rates in the case of U.S. dollar borrowings are either the base rate or the adjusted term Secured Overnight Financing Rate (“SOFR”). The Company may utilize the Revolving Credit Facility for general corporate purposes. As of June 30, 2022 and December 31, 2021, 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. On June 30, 2022, the Company was in compliance with the financial covenants under the Revolving Credit Facility.
On April 19, 2022, the Company entered into a two-year, $750.0 unsecured delayed draw term loan credit agreement (the “2022 Term Loan”), which is scheduled to mature on April 19, 2024. The 2022 Term Loan was undrawn at closing and may be drawn on up to five occasions over the life of the facility. The 2022 Term Loan may be repaid at any time without premium or penalty, and, once repaid, cannot be reborrowed. When drawn upon, the proceeds from the 2022 Term Loan are expected to be used for general corporate purposes. Interest rates under the 2022 Term Loan are based on a spread over either the base rate or the adjusted term SOFR, which spread varies based on the Company’s debt rating. As of June 30, 2022, there were no outstanding borrowings under the 2022 Term Loan. The 2022 Term Loan requires payment of certain commitment fees and requires that the Company satisfy certain financial covenants, which financial covenants are the same as those under the Revolving Credit Facility. On June 30, 2022, the Company was in compliance with the financial covenants under the 2022 Term Loan.
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. The Company utilizes borrowings under the U.S. Commercial Paper Program for general corporate purposes, which recently has included fully or partially funding acquisitions, as well as to repay certain outstanding senior notes. The amount of USCP Notes outstanding as of June 30, 2022 was $923.2, with a weighted average interest rate of 1.98%. As of December 31, 2021, the amount of USCP Notes outstanding was $795.2, with a weighted average interest rate of 0.29%.
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The Company and one of its wholly owned European subsidiaries (the “Euro Issuer”) also have 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 June 30, 2022 and December 31, 2021, 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 (the “Board”) 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, based on the Board’s authorization described above, 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.
As of June 30, 2022, the Company has outstanding senior notes (the “Senior Notes”) as follows:
Principal |
| Interest |
| ||
Amount |
| Rate | Maturity | ||
$ | 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 $750.0 principal amount of unsecured 2.200% Senior Notes due September 15, 2031 (the “2031 Senior Notes”). The Company used the net proceeds from the 2031 Senior Notes to repay certain outstanding borrowings under the U.S. Commercial Paper Program.
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 and the Euro Issuer’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.
The Euro Issuer has two outstanding senior notes in Europe (collectively, the “Euro Notes” and, together with the U.S. Senior Notes, the “Senior Notes”), each of which were issued with a principal amount of €500.0, with one series of the Euro Notes maturing in May 2026 and the other in October 2028. The Euro Notes are unsecured and rank equally in right of payment with the Company’s and 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 either series of Euro Notes at any time, subject to certain terms and conditions.
The Company’s Senior Notes impose certain obligations on the Company and prohibit various actions by the Company unless it satisfies certain financial requirements. On June 30, 2022, the Company was in compliance with all requirements under its Senior Notes. Refer to Note 4 of the Notes to Condensed Consolidated Financial Statements for further information related to the Company’s debt.
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On April 27, 2021, the Board 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 27, 2024 (the “2021 Stock Repurchase Program”) in accordance with the requirements of Rule 10b-18 of the Exchange Act. During the three and six months ended June 30, 2022, the Company repurchased 2.7 million and 5.3 million shares of its Common Stock for $186.0 and $389.9, respectively, under the 2021 Stock Repurchase Program. Of the total repurchases made during the first six months of 2022, 0.3 million shares, or $21.0, were retained in Treasury stock at the time of repurchase. The remaining 5.0 million shares, or $368.9, have been retired by the Company. During the three months ended June 30, 2021, the Company repurchased 1.7 million shares of its Common Stock for $116.3 under the 2021 Stock Repurchase Program, all the shares of which were retired by the Company. From July 1, 2022 to July 26, 2022, the Company repurchased 0.7 million additional shares of its Common Stock for $48.0 under the 2021 Stock Repurchase Program, and, as of July 27, 2022, the Company has remaining authorization to purchase up to $1,104.2 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 options exercised by employees, cash requirements for acquisitions, dividends paid, economic and market conditions and the price of the Company’s Common Stock.
On April 24, 2018, the Board 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 Exchange Act. During the three and six months ended June 30, 2021, the Company repurchased 0.8 million and 3.1 million shares of its Common Stock for $51.0 and $203.8, respectively, 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 was terminated. Of the total repurchases made during the first six 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.
Contingent upon declaration by the Board, 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 six months ended June 30, 2022 and 2021:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 | 2022 |
| 2021 | ||||||
Dividends declared per share | $ | 0.20 | $ | 0.145 | $ | 0.40 | $ | 0.29 | ||||
Dividends declared | $ | 119.1 | $ | 86.6 | $ | 238.6 | $ | 173.2 | ||||
Dividends paid (including those declared in the prior year) |
| 119.5 |
| 86.6 |
| 239.3 |
| 173.4 | ||||
On October 26, 2021, the Board approved an 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 Board.
LIBOR Transition
In July 2017, the United Kingdom's Financial Conduct Authority (the “FCA”), which regulates the London Interbank Offered Rate (“LIBOR”), announced 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 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 transactions. In March 2020, in response to this transition, the Financial Accounting Standards Board (“FASB”) issued accounting guidance providing certain 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
39
discontinued by reference rate reform, and addresses operational issues likely to arise in modifying contracts to replace discontinued reference rates with new rates. In January 2021, the FASB issued further clarifying guidance surrounding derivatives, as it relates to this transition. Effective November 30, 2021, the Revolving Credit Facility no longer references LIBOR for interest rate determinations. Due to our current limited reliance on borrowings tied to LIBOR, the Company currently believes that the LIBOR transition will not have a material impact on its financial condition, results of operations or cash flows.
Acquisitions and Divestitures
In the second quarter of 2022, the Company completed one acquisition for approximately $74.5, net of cash acquired, which has been included in the Harsh Environment Solutions segment. This acquisition, which was funded through a combination of borrowings under the U.S. Commercial Paper Program and cash on hand, was not material to the Company’s financial results.
During 2021, the Company completed seven acquisitions for $2,225.4, net of cash acquired, while also completing the divestiture of the Divested MTS business, as defined and discussed below. One of the acquisitions was included in the Harsh Environment Solutions segment, three acquisitions were included in the Communications Solutions segment and three acquisitions were included in the Interconnect and Sensor Systems segment. The 2021 acquisitions were not material, either individually or in the aggregate, to the Company.
Acquisition of MTS
On April 7, 2021, pursuant to a definitive agreement dated December 9, 2020, by and among the Company and MTS Systems Corporation (“MTS”), the Company completed the acquisition of MTS for a total enterprise value of approximately $1,700, net of cash acquired and including the repayment of all outstanding debt and certain liabilities. The MTS acquisition was funded through a combination of borrowings under the U.S. Commercial Paper Program and cash on hand. At closing, the Company paid approximately $1,300, net of cash acquired, for 100% of the common stock of MTS, including certain liabilities settled at closing, which was reflected within Net cash used in investing activities from continuing operations in the Consolidated Statements of Cash Flow for the year ended December 31, 2021. In addition, the Company also assumed MTS’s then-outstanding $350.0 principal amount of senior notes due August 15, 2027, which were 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 was historically organized into two business segments: Sensors (“MTS Sensors”) and Test Simulation (“MTS TS”). The retained MTS Sensors business is reported within our Interconnect and Sensor Systems segment. In the second quarter of 2021, the Company incurred $55.4 ($44.6 after-tax, or $0.07 per diluted share) of acquisition-related expenses, comprised primarily of transaction, severance, restructuring and certain non-cash purchase accounting costs related to the MTS acquisition.
Sale of the Divested MTS Business
On January 19, 2021 and prior to the closing of the MTS acquisition, the Company entered into a definitive agreement to sell MTS (including the MTS TS business, but excluding the MTS Sensors business) to Illinois Tool Works Inc. (“ITW”). Throughout this Quarterly Report on Form 10-Q, we refer to MTS (including the MTS TS business, but excluding the MTS Sensors business) as the “Divested MTS business”. As a result of the agreement to sell the Divested MTS business to ITW, the Divested MTS business met the “held for sale” criteria at its acquisition date, and accordingly, the Company did not assign the Divested MTS business to any of its reportable business segments. The Company accounted for the operating results and related cash flows associated with the Divested MTS business as discontinued operations in the Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Cash Flow, respectively, as of the MTS acquisition date of April 7, 2021 through June 30, 2021, and ultimately, through December 1, 2021, the date of the sale of the Divested MTS business. Income from discontinued operations attributable to Amphenol Corporation, net of income taxes, was $2.6 for both the second quarter and first six months of 2021, and $21.4 for the year ended December 31, 2021. On December 1, 2021, the Company completed the sale of the Divested MTS business for approximately $750, net of cash divested and excluding related transaction fees and expenses. The proceeds from the sale of the Divested MTS business were included in Net cash provided by investing activities from discontinued operations in the Consolidated Statements of Cash Flow for the year ended December 31,
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2021. Amphenol has no continuing involvement with the Divested MTS business now that its sale has been consummated. After giving effect to the sale of the Divested MTS business as well as the repayment of the aforementioned MTS senior notes as part of the MTS acquisition, the Company paid approximately $950, net of cash acquired and excluding related transaction fees and expenses, for the retained MTS Sensors business.
Acquisition of Halo Technology Limited
On December 1, 2021, the Company completed the acquisition of approximately 97% of the common stock of Halo Technology Limited (“Halo”) for a purchase price of approximately $694, net of cash acquired. The sellers retained a noncontrolling interest of less than 3% in Halo, which includes redeemable features that are outside the control of the Company and therefore, has been classified as temporary equity on the Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021, as discussed in more detail in Note 5 of the accompanying Notes to Condensed Consolidated Financial Statements, as well as Note 1 of the Notes to Consolidated Financial Statements in the 2021 Annual Report. The acquisition was funded with cash on hand. The operating results for Halo have been included in the Company’s Condensed Consolidated Statements of Income since the acquisition date. Halo is reported within our Communications Solutions segment.
Refer to Note 11 of the Notes to Condensed Consolidated Financial Statements, as well as the 2021 Annual Report, for further discussion of the Company’s acquisitions, as well as its discontinued operations and the completed divestiture of the Divested MTS business in 2021.
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 15 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 Board 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 six months ended June 30, 2022 and 2021 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 stockholders 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 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 and estimates, which are discussed in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of its 2021 Annual Report, have not materially changed since that report was filed.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
(amounts in millions)
The Company, in the normal course of doing business, is exposed to a variety of risks, including market risks associated with foreign currency exchange rates and changes in interest rates. The Company does not have any significant concentration with any one counterparty. There has been no material change in the Company’s assessment of its sensitivity to foreign currency exchange rate risk since its presentation set forth in Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk in its 2021 Annual Report. From time to time, the Company may borrow under the Revolving Credit Facility and Commercial Paper Programs. Any borrowings under the Euro Commercial Paper Program and Revolving Credit Facility, in addition to the outstanding borrowings under the Company’s Euro Notes, as discussed in Note 4 of the accompanying Notes to Condensed Consolidated Financial Statements, are and may continue to be denominated in foreign currencies, and there can be no assurance that the Company can successfully manage changes in exchange rates, including in the event of a significant and sudden decline in the value of any of the foreign currencies for which such borrowings are made. In addition, any borrowings under the Revolving Credit Facility bear interest at rates that fluctuate with a spread that varies, based on the Company’s debt rating, over certain currency-specific benchmark rates, which benchmark rates in the case of U.S. dollar borrowings are either the base rate or the adjusted term Secured Overnight Financing Rate (“SOFR”). Similarly, any borrowings under the new two-year, $750.0 unsecured delayed draw term loan credit agreement (the “2022 Term Loan”) entered into by the Company in April of 2022, bear interest at rates that fluctuate with a spread that varies, based on the Company’s debt rating, over either the base rate or the adjusted term SOFR. Any borrowings under the Commercial Paper Programs are subject to floating interest rates. Therefore, when the Company borrows under these debt instruments, the Company is exposed to market risk related to changes in interest rates. As of June 30, 2022, outstanding borrowings under the U.S. Commercial Paper Program were at a weighted average floating interest rate of 1.98%, while there were no outstanding borrowings under the Revolving Credit Facility, 2022 Term Loan and Euro Commercial Paper Program. The Company does not expect changes in interest rates to have a material effect on income or cash flows in 2022, although there can be no assurances that interest rates will not change significantly.
Item 4. Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. These disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Information required with respect to legal proceedings in this Part II, Item 1 is incorporated herein by reference and included in Note 15 of the Notes to Condensed Consolidated Financial Statements contained in Part I, Item 1 in this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
There have been no material changes to the Company’s risk factors as disclosed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Repurchase of Equity Securities
On April 27, 2021, the Company’s Board of Directors authorized a stock repurchase program under which the Company may purchase up to $2.0 billion of its 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”). During the three months ended June 30, 2022, the Company repurchased 2.7 million shares of its Common Stock for $186.0 million under the 2021 Stock Repurchase Program. All of the shares repurchased during the second quarter of 2022 under the 2021 Stock Repurchase Program have been retired by the Company. From July 1, 2022 to July 26, 2022, the Company repurchased 0.7 million additional shares of its Common Stock for $48.0 million under the 2021 Stock Repurchase Program, and, as of July 27, 2022, the Company has remaining authorization to purchase up to $1,104.2 million 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 options exercised by employees, cash requirements for acquisitions, dividends paid, economic and market conditions and the price of the Company’s Common Stock.
The table below reflects the Company’s stock repurchases for the three months ended June 30, 2022:
Total Number of | Maximum Dollar |
| |||||||||
(dollars in millions, except price per share) | Shares Purchased as | Value of Shares |
| ||||||||
Total Number | Average | Part of Publicly | that May Yet be |
| |||||||
of Shares | Price Paid | Announced Plans or | Purchased Under the |
| |||||||
Period |
| Purchased |
| per Share |
| Programs |
| Plans or Programs |
| ||
April 1 to April 30, 2022 |
| 826,113 |
| $ | 72.63 |
| 826,113 |
| $ | 1,278.1 | |
May 1 to May 31, 2022 |
| 900,301 |
| 69.96 |
| 900,301 |
|
| 1,215.2 | ||
June 1 to June 30, 2022 |
| 936,237 |
| 67.29 |
| 936,237 |
| $ | 1,152.2 | ||
Total |
| 2,662,651 |
| $ | 69.85 |
| 2,662,651 |
| |||
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
3.1 | |||
3.2 | |||
4.1 | |||
4.2 | |||
4.3 | |||
4.4 | |||
4.5 | |||
4.6 | |||
4.7 | |||
4.8 | |||
4.9 | |||
10.1 | |||
10.2 | Form of 2017 Stock Option Agreement (filed as Exhibit 10.1 to the Form 8-K filed on May 19, 2017).†* | ||
10.3 | |||
10.4 | |||
10.5 | |||
10.6 | |||
10.7 | |||
10.8 | |||
10.9 | |||
10.10 | |||
10.11 | |||
10.12 | |||
10.13 | |||
10.14 | |||
10.15 | |||
10.16 | |||
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10.17 | ||
10.18 | ||
10.19 | ||
10.20 | ||
10.21 | ||
10.22 | ||
10.23 | ||
10.24 | ||
10.25 | ||
10.26 | ||
10.27 | ||
10.28 | ||
10.29 | ||
10.30 | ||
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101.INS | Inline XBRL Instance Document – the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.** | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document.** | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document.** | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document.** | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document.** | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document.** | |
104 | Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101).** | |
† Management contract or compensatory plan or arrangement.
* Incorporated herein by reference as stated.
** Filed herewith.
*** Furnished herewith.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AMPHENOL CORPORATION | ||
By: | /s/ Craig A. Lampo | |
Craig A. Lampo | ||
Authorized Signatory | ||
| ||
Date: July 29, 2022 |
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