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10-Q: AMPHENOL CORP /DE/

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(EDGAR Online via COMTEX) -- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(amounts in millions, except share and per share data, unless otherwise noted)

The following discussion and analysis of the results of operations and financial condition for the three months ended March 31, 2020 and 2019 has been derived from and should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes included herein for Amphenol Corporation (together with its subsidiaries, "Amphenol," the "Company," "we," "our," or "us"), which are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The following discussion and analysis also includes references to certain non-GAAP financial measures, which are defined in the "Non-GAAP Financial Measures" section below, including "Constant Currency Net Sales Growth" and "Organic Net Sales Growth". For purposes of the following discussion, the terms "constant currencies" and "organically" have the same meaning, respectively, as these aforementioned non-GAAP financial measures. Refer to "Non-GAAP Financial Measures" within this Item 2 for more information, including our reasons for including the non-GAAP financial measures and material limitations with respect to the usefulness of the measures.

Safe Harbor Statement

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which relate to future events and are subject to risks and uncertainties. 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," "could," "continue," "expect," "estimate," "forecast," "ongoing," "project," "seek," "predict," "target," "will," "intend," "plan," "optimistic," "potential," "guidance," "may," "should," or "would" and other words and terms of similar meaning.

Forward-looking statements by their nature address matters that are, to different degrees, uncertain, such as statements about expected earnings, revenues, growth, liquidity or other financial matters, together with any statements related in any way to the COVID-19 pandemic including its impact on the Company. Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the expectations may not be attained or there may be material deviation. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. There are risks and uncertainties that could cause actual results to differ materially from these forward-looking statements, which include, but are not limited to, the following: future risks and existing uncertainties associated with the COVID-19 pandemic, which continues to have a significant adverse impact on our operations including, depending on the specific location, full or partial shutdowns of our facilities as mandated by government decree, government actions limiting our ability to adjust certain costs, significant travel restrictions, "work-from-home" orders, limited availability of our workforce, supplier constraints, supply-chain interruptions, logistics challenges and limitations, and reduced demand from certain customers; uncertainties associated with a protracted economic slowdown that could negatively affect the financial condition of our customers; uncertainties and volatility in the global capital markets; political, economic, military and other risks in countries outside of the United States; the impact of general economic conditions, geopolitical conditions and U.S. trade policies, legislation, trade disputes, treaties and tariffs, including those affecting China, on the Company's business operations; risks associated with the improper conduct by any of our employees, customers, suppliers, distributors or any other business partners which could impair our business reputation and financial results and could result in our non-compliance with anti-corruption laws and regulations of the U.S. government and various foreign jurisdictions; changes in exchange rates of the various currencies in which the Company conducts business; the Company's ability to obtain a consistent supply of materials, at stable pricing levels; the Company's dependence on sales to the communications industry, which markets are dominated by large manufacturers and operators who regularly exert significant pressure on suppliers, including the Company; changes in defense expenditures in the military market, including the impact of reductions or changes in the defense budgets of U.S. and foreign governments; the Company's ability to compete successfully on the basis of technology innovation, product quality and performance, price, customer service and delivery time; the Company's ability to continue to conceive, design, manufacture and market new products and upon continuing market acceptance of its existing and future product lines; difficulties and unanticipated expenses in

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connection with purchasing and integrating newly acquired businesses, including the potential for the impairment of goodwill and other intangible assets; events beyond the Company's control that could lead to an inability to meet its financial covenants which could result in a default under the Company's revolving credit facility; the Company's ability to access the capital markets on favorable terms, including as a result of significant deterioration of general economic or capital market conditions, or as a result of a downgrade in the Company's credit rating; changes in interest rates; government contracting risks that the Company may be subject to, including laws and regulations governing performance of U.S. government contracts and related risks associated with conducting business with the U.S. government or its suppliers (both directly and indirectly); governmental export and import controls that certain of our products may be subject to, including export licensing, customs regulations, economic sanctions or other laws; cybersecurity threats or incidents that could arise on our information technology systems which could disrupt business operations and adversely impact our reputation and operating results and potentially lead to litigation and/or governmental investigations; changes in fiscal and tax policies, audits and examinations by taxing authorities, laws, regulations and guidance in the United States and foreign jurisdictions, including related interpretations of certain provisions of the U.S. Tax Cuts and Jobs Act of 2017 ("Tax Act"); any difficulties in protecting the Company's intellectual property rights; and litigation, customer claims, product recalls, governmental investigations, criminal liability or environmental matters including changes to laws and regulations to which the Company may be subject. In addition, the extent to which the COVID-19 pandemic will continue to impact our business and financial results going forward will be dependent on future developments such as the length and severity of the crisis, the potential resurgence of the crisis, future government actions in response to the crisis and the overall impact of the COVID-19 pandemic on the global economy and capital markets, among many other factors, all of which remain highly uncertain and unpredictable. Such forward-looking statements may also be impacted by, among other things, additional guidance under the Tax Act. While the Company completed its accounting of the Tax Act in the fourth quarter of 2018 based on the regulatory guidance issued at that time, the Department of Treasury's interpretive guidance initiatives are ongoing. Any future guidance on the Tax Act could impact our forward-looking statements.

A further description of these uncertainties and other risks can be found in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, 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 Coronavirus ("COVID-19") on our Operations, Financial Condition, Liquidity and Results of Operations

The COVID-19 pandemic has caused widespread disruptions to our Company in the first quarter of 2020. During the first quarter, these disruptions were primarily limited to our operations in China, which were closed for three weeks during January and February due to government mandates. As the virus spread to the rest of the world in March, most of our other operations outside of China were then also impacted. As of March 31, 2020, we were still experiencing significant disruptions, and at a minimum, we expect those disruptions to continue throughout the second quarter of 2020. These disruptions include, depending on the specific location, full or partial shutdowns of our facilities as mandated by government decree, government actions limiting our ability to adjust certain costs, significant travel restrictions, "work-from-home" orders, limited availability of our workforce, supplier constraints, supply-chain interruptions, logistics challenges and limitations, and reduced demand from certain customers. As noted below within this Item 2, the COVID-19 outbreak did have a negative impact on our first quarter 2020 results and we expect it to have an impact on our second quarter 2020 results. The extent of the impact on our second quarter 2020 results and beyond will be dependent on future developments such as the length and severity of the crisis, the potential resurgence of the crisis, future government actions in response to the crisis and the overall impact of the COVID-19 pandemic on the global economy and capital markets, among many other factors, all of which remain highly uncertain and unpredictable. Given this uncertainty, the Company is currently unable to quantify the expected impact of the COVID-19 pandemic on its future operations, financial condition, liquidity and results of operations. In addition, the COVID-19 pandemic could impact the health of our management team and other employees. The Company continues taking actions to help mitigate, as best we can, the impact of the COVID-19 pandemic on the health and well-being of our employees, the communities in which we operate and our partners, as well as the impact on our operations and business as a

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whole. However, there can be no assurance that the COVID-19 pandemic will not have a material and adverse impact on our operations, financial condition, liquidity and results of operations.

Results of Operations

Three months ended March 31, 2020 compared to the three months ended March 31, 2019

Net sales were $1,862.0 in the first quarter of 2020 compared to $1,958.5 in the first quarter of 2019, which represented a decrease of 5% in U.S. dollars, 4% in constant currencies and 9% organically, over the same respective prior year period. Net sales in the Interconnect Products and Assemblies segment (approximately 96% of net sales) in the first quarter of 2020 decreased 5% in U.S. dollars, 4% in constant currencies and 9% organically, compared to the first quarter of 2019. The decrease in net sales during the first quarter of 2020 was driven primarily by the sudden and severe slowdown in many of our markets resulting from the global outbreak of the COVID-19 pandemic, resulting from our limited ability to produce in China during a three-week period in January and February, along with production limitations imposed in other parts of the world during the month of March. Specifically, the decline in net sales in the Interconnect Products and Assemblies segment was driven by moderations in the mobile devices, mobile networks and information technology and data communications markets as well as the automotive and industrial markets, all of which were negatively impacted by the COVID-19 pandemic, offset in part by strong growth in the military market along with contributions from the Company's acquisition program. Net sales in the Cable Products and Solutions segment (approximately 4% of net sales) in the first quarter of 2020, which primarily serves the broadband communications market, decreased 13% in U.S. dollars, 11% in constant currencies and 11% organically, compared to the first quarter of 2019. The decrease in net sales in the Cable Products and Solutions segment was driven by the negative impact during the quarter of the global outbreak of the COVID-19 pandemic on our ability to produce and market demand.

The table below reconciles Constant Currency Net Sales Growth and Organic Net Sales Growth to the most directly comparable U.S. GAAP financial measures for the three months ended March 31, 2020 compared to the three months ended March 31, 2019:







                                                                                          Percentage Growth (relative to same prior year period)
                                                                             Net sales           Foreign           Constant                              Organic
                                                                             growth in          currency         Currency Net         Acquisition       Net Sales
                                                                          U.S. Dollars (1)     impact (2)      Sales Growth (3)       impact (4)       Growth (3)
        Three Months Ended March 31:             2020         2019             (GAAP)          (non-GAAP)         (non-GAAP)          (non-GAAP)       (non-GAAP)
        Net sales:
        Interconnect Products and Assemblies   $ 1,779.0    $ 1,862.7            (5) %            (1) %               (4) %              5 %                (9) %
        Cable Products and Solutions                83.0         95.8           (13) %            (2) %              (11) %              - %               (11) %
        Consolidated                           $ 1,862.0    $ 1,958.5            (5) %            (1) %               (4) %              5 %                (9) %
        


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 accompanying financial statements. While the term "net sales growth in U.S.

Foreign currency translation impact, a non-GAAP measure, represents the impact on net sales resulting from foreign currency exchange rate changes in the current year period(s) compared to the same period(s) in the prior year.

(3) Constant Currency Net Sales Growth and Organic Net Sales Growth are non-GAAP financial measures as defined in the "Non-GAAP Financial Measures" section.

Acquisition impact, a non-GAAP measure, represents the impact on net sales resulting from acquisitions closed since the beginning of the prior calendar

Geographically, sales in the United States in the first quarter of 2020 increased approximately 6% in U.S. dollars ($615.4 in 2020 versus $578.9 in 2019), while decreasing 3% organically, compared to the first quarter of 2019. Foreign sales in the first quarter of 2020 decreased approximately 10% in U.S. dollars ($1,246.6 in 2020 versus $1,379.6 in 2019), 8% in constant currencies and 11% organically, compared to the first quarter of 2019. The comparatively stronger U.S. dollar for the first quarter of 2020 had the effect of decreasing sales by approximately $18.7 compared to the same respective period in 2019.

Selling, general and administrative expenses increased to $242.9, or 13.0% of net sales, for the first quarter of 2020, compared to $235.1, or 12.0% of net sales, for the first quarter of 2019. The increase in selling, general and

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administrative expenses as a percentage of net sales is primarily driven by lower sales during the first quarter of 2020 compared to the first quarter of 2019 and by government actions imposed in response to the COVID-19 pandemic that limited the Company's ability to adjust payroll-related costs. Administrative expenses represented approximately 5.2% of net sales for the first quarter of 2020 and represented approximately 4.5% of net sales for the first quarter of 2019. Research and development expenses represented approximately 3.1% of net sales for the first quarter of 2020 and represented approximately 3.0% of net sales for the first quarter of 2019. Selling and marketing expenses represented approximately 4.8% of net sales for the first quarter of 2020 and represented approximately 4.5% of net sales for the first quarter of 2019.

Operating income was $316.9, or 17.0% of net sales, for the first quarter of 2020 compared to $376.2, or 19.2% of net sales, for the first quarter of 2019. Operating income for the first quarter of 2019 included $16.5 of acquisition-related expenses (separately presented in the Condensed Consolidated Statements of Income) comprised of the amortization of $12.5 related to the value associated with acquired backlog (resulting from the SSI acquisition) during the period, as well as external transaction costs of $4.0. For the three months ended March 31, 2019, these acquisition-related expenses had the effect of decreasing net income by $13.2, or $0.04 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, was $392.7, or 20.1% of net sales, for the three months ended March 31, 2019. Operating income for the Interconnect Products and Assemblies segment for the first quarter of 2020 was $339.8, or 19.1% of net sales, compared to $410.0, or 22.0% of net sales, for the first quarter of 2019. The decrease in operating margin for the Interconnect Products and Assemblies segment for the first quarter of 2020 compared to the same period in 2019 was somewhat larger than our typical reduction in profitability given the corresponding sales decline. This larger than typical decrease was due to the impact of the COVID-19 pandemic, which led to an extended shutdown in China during a three-week period in January and February and significant disruption to production and productivity in other parts of the world during the month of March. As noted above, many government actions imposed in response to the COVID-19 pandemic also limited the Company's ability to adjust payroll-related costs. The operating margin in the quarter was also negatively impacted, to a lesser extent, by 2019 acquisitions which currently have, on average, a lower operating margin than the average of the Interconnect Products and Assemblies segment for such period. Operating income for the Cable Products and Solutions segment for the first quarter of 2020 was $6.3, or 7.6% of net sales, compared to $10.5, or 10.9% of net sales, for the first quarter of 2019. The decrease in operating margin for the Cable Products and Solutions segment for the first quarter of 2020 compared to the same respective period in 2019 was primarily driven by lower volumes as well as the negative impact of the COVID-19 pandemic on our ability to produce products.

Interest expense for the first quarter of 2020 was $28.8 compared to $29.7 for the first quarter of 2019. The decrease in interest expense is primarily due to lower average interest rates, primarily related to the Company's U.S. commercial paper borrowings and the aggregate portfolio of outstanding senior notes, which was partially offset by overall higher average debt levels.

Provision for income taxes for the first quarter of 2020 was at an effective tax rate of 15.9%, compared to 22.8% for the first quarter of 2019. For the first quarter of 2020, the effective tax rate was impacted by a discrete tax benefit related to the settlements of refund claims in certain non-U.S. jurisdictions and the resulting adjustments to deferred taxes, which had the impact of decreasing the effective tax rate and increasing earnings per share by the amounts noted in the tables below. For the first quarter of 2020 and 2019, the excess tax benefits resulting from stock option exercise activity had the impact of lowering the effective tax rate and increasing earnings per share by the amounts noted in the tables below, while the effective tax rate for the first quarter of 2019 was further impacted by the tax effect of acquisition-related expenses, as noted in the table 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 months ended March 31, 2020 and 2019 was 24.5% for both periods, as reconciled in the tables below to the comparable effective tax rate based on GAAP results. Refer to Note 6 of the Condensed Consolidated Financial Statements for further information related to income taxes.

Net income attributable to Amphenol Corporation and Net income per common share-Diluted ("Diluted EPS") were $242.1 and $0.79, respectively, for the first quarter of 2020, compared to $267.5 and $0.87, respectively, for the first quarter of 2019. Excluding the effect of the aforementioned items discussed above, Adjusted Net Income attributable to

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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 $217.2 and $0.71, respectively, for the first quarter of 2020, compared to $273.9 and $0.89, respectively, for the first quarter of 2019.

The following table reconciles Adjusted Operating Income, Adjusted Operating Margin, Adjusted Net Income attributable to Amphenol Corporation, Adjusted Effective Tax Rate and Adjusted Diluted EPS (all defined in the "Non-GAAP Financial Measures" section below) to the most directly comparable U.S. GAAP financial measures for the three months ended March 31, 2020 and 2019:







                                                                                         Three Months Ended March 31,
                                                                 2020                                                                   2019
                                                                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)           $     316.9          17.0 %  $       242.1         15.9 %  $   0.79    $     376.2          19.2 %  $       267.5         22.8 %  $   0.87
        Acquisition-related
        expenses                            -             -                -            -           -           16.5           0.9             13.2        (0.2)        0.04
        Excess tax benefits
        related to stock-based
        compensation                        -             -            (5.0)          1.7      (0.02)              -             -            (6.8)          1.9      (0.02)
        Discrete tax item                   -             -           (19.9)          6.9      (0.06)              -             -                -            -           -
        Adjusted (non-GAAP)       $     316.9          17.0 %  $       217.2         24.5 %  $   0.71    $     392.7          20.1 %  $       273.9         24.5 %  $   0.89
        


While the terms "operating margin" and "effective tax rate" are not

Liquidity and Capital Resources

The COVID-19 pandemic created significant economic uncertainty and volatility in the credit and capital markets during March 2020. In response, out of an abundance of caution, in late March 2020, the Company borrowed $1,255.6 under its $2,500.0 Revolving Credit Facility. In addition, due to the significant volatility in the commercial paper markets, the Company has reduced its reliance on those markets and, as such, approximately half of the proceeds from the Revolving Credit Facility was used or will be used to repay amounts due under our Commercial Paper Programs as they mature. As a result, at March 31, 2020, the Company had cash, cash equivalents and short-term investments of $2,383.6, of which approximately $1,363.3 was located in the United States. On April 1, 2020, the Company used $400.0 of its cash and cash equivalents to fund the $400.0 repayment of the 2.20% Senior Notes due April 1, 2020 upon maturity.

On April 22, 2020, a subsidiary of the Company borrowed �200.0 ($248.2 at date of issuance) through the Bank of England's COVID Corporate Financing Facility. The facility will operate for at least twelve months. The Company intends to use all of the proceeds from this borrowing to repay amounts outstanding under its Revolving Credit Facility.

As of December 31, 2019, the Company had cash, cash equivalents and short-term investments of $908.6, with the majority of such funds located outside of the United States.

As a result of the Tax Act, on December 31, 2017, the Company indicated an intention to repatriate most of its pre-2018 accumulated earnings and recorded the foreign and U.S. state and local tax costs related to the repatriation. The associated tax payments are due as the repatriations are made. The Company intends to distribute certain post-2017 foreign earnings and has accrued foreign and U.S. state and local taxes, if applicable, on those earnings as appropriate as of March 31, 2020, and intends to indefinitely reinvest all remaining post-2017 foreign earnings. The Company intends to evaluate future earnings for distribution, and accrue for those distributions where appropriate, and to indefinitely reinvest all other foreign earnings. In addition, the Transition Tax on the deemed repatriation of the accumulated unremitted earnings and profits of foreign subsidiaries will be paid, net of applicable tax credits and deductions, in annual installments until 2025, as permitted under the Tax Act.

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The Company's primary sources of liquidity are internally generated cash flow, our cash, cash equivalents and short-term investments on hand, the Commercial Paper Programs, and the Revolving Credit Facility. The Company believes that its cash, cash equivalents and short-term investment position on hand, ability to generate future cash flow from operations, availability under its credit facilities, and access to capital markets (including the recent issuance of the 2025 Senior Notes in February 2020, along with borrowings under the Company's Revolving Credit Facility, as discussed further within this Item 2), provide adequate liquidity to meet its obligations for at least the next twelve months.

The Company's primary ongoing cash requirements will be for operating and . . .

Apr 24, 2020

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