AMPHENOL CORP /DE/

Amphenol is a lessee of buildings, office space, automobiles and equipment throughout the world, nearly all of which are classified as operating leases expiring at various dates.  The Company determines if an arrangement qualifies as a lease at lease inception.  The Company adopted Topic 842 effective January 1, 2019.  Operating lease liabilities are recorded based on the present value of the future lease payments over the lease term, assessed as of the commencement date.  The Company’s real estate leases, which are comprised primarily of manufacturing facilities, warehouses and sales offices, represent the vast majority of our operating lease liabilities and generally have a lease term between 2 and 12 years.  The remaining leases consist primarily of machinery and equipment used in production, office equipment and vehicles, each with various lease terms.  The vast majority of our leases are comprised of fixed lease payments, with a small percentage of the Company’s real estate leases including lease payments tied to a rate or index which may be subject to variability.  Certain real estate leases also include executory costs such as common area maintenance (non-lease component), as well as property insurance and property taxes (non-components). As a practical expedient permitted under Topic 842, we have elected to account for the lease and non-lease components as a single lease component for our real estate leases.  Lease payments, which may include lease components, non-lease components and

Substantially all of our lease agreements do not specify an implicit borrowing rate, and as such, the Company utilizes its incremental borrowing rate by lease term, in order to calculate the present value of our future lease payments.  The discount rate represents a risk-adjusted rate on a secured basis, and is the rate at which the Company would borrow funds to satisfy the scheduled lease liability payment streams commensurate with the lease term.  On January 1, 2019, the discount rate used on existing leases at adoption was determined based on the remaining lease term using available data as of that date.  For new or renewed leases starting in 2019, the discount rate is determined using available data at lease commencement and based on the lease term including any reasonably certain renewal periods.

Some of our lease agreements, primarily related to real estate, include options for the Company to either renew (extend) or early terminate the lease.  Leases with renewal options allow the Company to extend the lease term typically between 1 and 6 years. Renewal options are reviewed at lease commencement to determine if such options are reasonably certain of being exercised, which could impact the lease term.  When determining if a renewal option is reasonably certain of being exercised, the Company considers several factors, including but not limited to, the significance of leasehold improvements incurred on the property, whether the asset is difficult to replace, or specific characteristics unique to the particular lease that would make it reasonably certain that we would exercise such option.  In most cases, the Company has concluded that renewal and early termination options are not reasonably certain of being exercised by the Company (and thus not included in our ROU asset and lease liability) unless there is an economic, financial or business reason to do so. 

For the three months ended March 31, 2019, total operating lease cost was $24.0, which includes an immaterial amount of variable lease cost, and is recorded in Cost of sales and Selling, general and administrative expenses, dependent on the nature of the leased asset.  Other than variable lease cost, operating lease cost is recognized on a straight-line basis over the lease term.  The following summarizes: (i) the future minimum undiscounted lease payments under non-cancelable leases for the remainder of 2019 as well as each of the next five years and thereafter, incorporating the practical expedient to account for lease and non-lease components as a single lease component for our existing real estate leases, (ii) a reconciliation of the undiscounted lease payments to the present value of the lease liabilities recognized, and (iii) the lease-related account balances on our Condensed Consolidated Balance Sheets, all as of March 31, 2019:

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 which could impact existing or future issuances of debt; 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; 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 (“Tax Act”); any difficulties in protecting the Company’s intellectual property rights, including but not limited to patents, trade secret laws, trademarks, confidentiality procedures and contractual commitments; and litigation or environmental matters including changes to laws and regulations that the Company may be subject to.

The following describes the significant changes in the amounts as presented on the accompanying Condensed Consolidated Balance Sheets at March 31, 2019 as compared to December 31, 2018.  Accounts receivable decreased $129.9 to $1,661.9, primarily due to lower sales in the first quarter of 2019 relative to the fourth quarter of 2018, partially offset by the effect of translation from exchange rate changes at March 31, 2019 compared to December 31, 2018 (“Translation”) and the impact of the SSI acquisition in the Interconnect Products and Assemblies segment that

closed in January 2019.  Days sales outstanding at March 31, 2019 and December 31, 2018 were approximately 78 and 73 days, respectively. Inventories decreased $9.4 to $1,224.4, primarily due to lower inventory levels resulting from lower sales activity, partially offset by Translation and the impact of the SSI acquisition.  Inventory days at March 31, 2019 and December 31, 2018 were 84 and 74 days, respectively.  Property, plant and equipment, net, increased $56.2 to $932.0, primarily due to capital expenditures of $74.5 and the impact of the SSI acquisition, partially offset by depreciation of $59.4.  Goodwill increased $336.7 to $4,439.9, primarily as a result of goodwill recognized related to the SSI acquisition, which was partially offset by Translation.  Intangibles, net and other long-term assets increased $214.4 to $708.7, primarily due to (i) the adoption of the new lease standard (“Topic 842”) described in Note 15 of the accompanying Condensed Consolidated Financial Statements, which resulted in the recognition of $179.6 of operating lease right-of-use assets as of March 31, 2019 and (ii) the recognition of certain intangible assets related to the SSI acquisition, partially offset by (iii) the amortization of $24.8 related to the Company’s intangible assets.  Accounts payable decreased $93.4 to $797.1, primarily due to less purchasing activity resulting from lower sales activity, partially offset by the impact from the SSI acquisition and Translation.  Payable days at March 31, 2019 and December 31, 2018 were approximately 55 and 53 days, respectively.  Total accrued expenses, including accrued income taxes, increased $49.6 to $846.1, primarily as a result of the adoption of Topic 842, which resulted in the recognition of $62.7 of current operating lease liabilities as of March 31, 2019, which was partially offset by certain tax payments.  Other long-term liabilities increased $114.6 to $391.8, primarily as a result of the adoption of Topic 842, which resulted in the recognition of approximately $117.4 of long-term operating lease liabilities as of March 31, 2019.