Amphenol Corporation (NYSE:APH) Q3 2023 Earnings Call Transcript

Amphenol Corporation (NYSE:APH) Q3 2023 Earnings Call Transcript October 25, 2023

Amphenol Corporation beats earnings expectations. Reported EPS is $0.78, expectations were $0.74.

Operator: Hello. And welcome to the third quarter Earnings Conference Call for Amphenol Corporation. Following today’s presentation, there will be a formal question-and-answer session. Until then, all lines will remain in a listen-only mode. At the request of the company, today’s conference is being recorded. If anyone has any objection, you may disconnect at this time. I would now like to introduce today’s conference host, Mr. Craig Lampo. Sir, you may begin.

Craig Lampo: Thank you very much. Good afternoon, everyone. This is Craig Lampo, Amphenol’s CFO, and I am here together with Adam Norwitt, our CEO. We would like to welcome you to our third quarter 2023 conference call. Our third quarter 2023 results were released this morning. I will provide some financial commentary and then Adam will give an overview of the business and current trends, and then we will take questions. As a reminder, during the call, we may refer to certain non-GAAP financial measures and make certain forward-looking statements. So please refer to the relevant disclosures in our press release for further information. The company closed the third quarter with sales of $3.199 billion in GAAP and adjusted diluted EPS of $0.83 and $0.78, respectively.

A close-up of a circuit board with components depicting the intricate electronic componentry products the company produces.

Third quarter sales were down 3% in U.S. dollars and low-income currencies and 5% organically compared to the third quarter of 2022. Sequentially sales were up 5% in U.S. dollars, local currencies, and organically. Adam will comment further on trends by market in a few minutes. Orders in the quarter were $3.164 billion, which was flat compared to the third quarter of 2022, and up 4% sequentially, resulting in a book-to-bill ratio of 0.99 to 1. GAAP operating income was $658 million in the third quarter of 2023, which included $9 million of acquisition-related transaction costs. Excluding these costs, adjusted operating income was $667 million. GAAP and adjusted operating margins were 20.6% and 20.8% respectively in the third quarter. On a GAAP basis, operating margin was down 10 basis points compared to the third quarter of 2022 and increased by 30 basis points sequentially.

On an adjusted basis, operating margin decreased by just 20 basis points compared to the third quarter of 2022, but increased by 40 basis points sequentially. This modest year-over-year decreased and adjusted operating margin was primarily due to the dilutive impact of recent acquisitions, which are currently operating well below the corporate average. On an organic basis, we were very pleased with our operating margin performance, which represented a smaller than typical downside conversion on the lower organic sales levels. This strong organic performance reflected the agility of our team in adjusting costs, as well as the continued benefit of pricing actions taken in the prior year. On a sequential basis, the increase in adjusted operating margin reflected strong conversion on the higher sales levels.

Our team continued to execute well on the quarter, and we are proud to have sustained these healthy levels of profitability despite the continued range of challenges around the world. Breaking down third quarter results by segment relative to the third quarter of 2022, sales in the harsh environment solution segment were $887 million, an increased by 12% in U.S. dollars and 7% organically. Segment operating margin was 26.9%. Sales in the Communication Solutions segment were $1.279 billion and declined by 16% in the U.S. dollars and organically. Segment operating margin was 22.1%. Sales in the interconnect and sensor system segment were $1.033 billion and increased by 5% in U.S. dollars and 1% organically. Segment operating margin was 18.3%.

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Q&A Session

The company’s GAAP effective tax rate for the third quarter was 18.2%, and the adjusted effective tax rate was 24.0%, which compared to 23.1% and 24.5% in the third quarter of 2022 respectively. GAAP diluted EPS was up 4% at $0.83 compared to $0.80 in the prior year period, and on an adjusted basis diluted EPS decreased 3% to $0.78 compared to $0.80 in the third quarter of 2022. This was an excellent result, especially considering the variety of challenges that the company continued to face during the quarter. Operating cash flow in the third quarter was $618 million or 128% of adjusted net income, and net of capital spending, our free cash flow, was $544 million or 112% of adjusted net income. We are pleased to continue to deliver such a strong cash flow yield.

From a working capital standpoint, inventory days, day sales outstanding, and payable days were 87, 70, and 52 days respectively, all within the normal levels. As mentioned in today’s earnings release, the company’s Board of Directors has approved a 5% increase in the company’s quarterly dividend to $0.22, effective for payments beginning in January of 2024. During the quarter, the company’s repurchased 1.7 million shares of common stock at an average price of approximately $86, and when combined with our normal quarterly dividend, total capital return to shareholders during the third quarter of 2023 was approximately $275 million. Total debt on September 30th was $4.3 billion, and net debt was $2.6 billion. Total liquidity at the end of the quarter was $5 billion, which included cash and short-term investments on hand of $1.7 billion, plus availability under existing credit facilities.

Third quarter of 2023 EBITDA was $784 million, and at the end of the third quarter of 2023, our net leverage ratio was 0.8 times. We are very pleased that the company’s financial condition remains extremely strong by any measure. I will now turn the call over to Adam, who will provide some commentary on current market trends.

Adam Norwitt: Well, Craig, thank you very much, and I’d like to extend my welcome to everybody on the phone here today, and I hope that you’re all having an enjoyable fall so far. It’s a pleasure here in Wallingford to see the beautiful orange and red hues out of our windows. As Craig mentioned, I’m going to highlight our third quarter achievements, then discuss our trends and progress across our diversified end markets, and then I’ll comment on our outlook for the fourth quarter and for the full year of 2023. Turning to the third quarter, our results in the third quarter were better than expected. As we exceeded the high end of our guidance in sales and adjusted diluted earnings per share, sales declined by 3% in U.S. dollars and local currencies, reaching just under $3.2 billion, with growth in the commercial air, military, and automotive end markets, as well as contributions from our acquisitions, which were more than offset by moderations in the mobile networks, mobile devices, IT Datacom, broadband, and industrial end markets.

On an organic basis, sales declined by 5%, but sales did increase sequentially by 5% from second quarter levels. We’re pleased that the company booked orders of $3.164 billion, and that represented a book-to-bill of 0.99 to 1. I’m especially encouraged that our orders in the third quarter did exceed prior year levels, and that’s an encouraging sign going forward. Profitability was very strong in the quarter. We generated adjusted operating margins of 20.8%, and that was down just 20 basis points from prior year. Sequentially our margins improved by 40 basis points, and as Craig already mentioned, these operating margins in the third quarter reflected just outstanding execution by our global management team, who continued to manage dynamically and effectively, even in the face of moderating sales.

Adjusted diluted EPS in the quarter was $0.78, and that declined just 3% from prior year, and increased by a strong 8% on a sequential basis. Then finally, we’re very pleased with the company’s cash flow generation in the quarter with operating and free cash flow of $618 million and $544 million respectively in the third quarter, clear demonstrations of the high quality of Amphenol’s earnings. I come out of this quarter extremely proud of the Amphenol’s team, and I’ll just say that our results this quarter once again reflect the discipline and agility of our entrepreneurial organization as we continue to perform well amidst the dynamic and challenging environment. Our acquisition team has been extremely busy this year so far, and I’m really pleased that since our last earnings call, we’ve closed on three acquisitions, Connor Manufacturing, Q Microwave, and XMA Corporation.

In addition, we’ve signed an agreement to acquire PCTEL. Since its headquarters in Illinois, Connor is a global manufacturer of power interconnect products, including especially high voltage bus bars for the automotive and industrial markets with annual sales of approximately $100 million. Based in California, Q Microwave is a designer and manufacturer of mission critical radio frequency components utilized in military platforms with annual sales of approximately $20 million. And based in New Hampshire, XMA is also a provider of RF components for the military as well as the IT Datacom market with annual sales of approximately $15 million. We’re very pleased that we signed a definitive agreement to acquire PCTEL. PCTEL is a leading global provider of antennas for a broad array of markets, as well as purpose-built industrial IoT products and testing measurement solutions.

We expect the PCTEL transaction to close by early 2024. I’m very excited to welcome the Conner, Q Microwave, and XMA teams to Amphenol, and I certainly look forward to welcoming the PCTEL team once that deal closes. Most importantly, I remain confident that our acquisition program will continue to create great value for the company. In fact, our ability to identify and execute upon acquisitions and then to successfully bring these companies into our entrepreneurial organization, this remains a core competitive advantage for Amphenol. Now, turning to our serve markets, we’re very pleased that the company’s end-market exposure remains highly diversified, balanced, and broad, and that creates great value for the company, particularly amidst these dynamic times.

So, turning to each of our serve markets, the military market represented 11% of our sales in the quarter. Sales grew from prior year by a very strong 26% in U.S. dollars and 22% organically, and this was really driven by broad base strength across virtually every segment of the military market. Sequentially, our sales grew by 3%, which was better than our expectations coming into the quarter. And as we look into the fourth quarter, we expect sales to remain roughly at these robust third quarter levels, and for the full year 2023, we expect a high-teens increase in sales from prior year. With the acquisition last quarter of both Q Microwave and XMA, we further broadened our industry leading RF product offering into this important defense market.

And in general, we remain encouraged by the company’s strengthened position across the defense industry, where we continue to offer the market’s widest range of high technology interconnect products. Amidst today’s dynamic geopolitical environment, countries around the world are expanding their investments in both current and next generation defense technologies, thereby increasing the long-term demand potential for Amphenol. We’re going to continue to accelerate our new product development while also increasing our capacity, and thus are well-positioned to support this increased demand long into the future. The commercial aerospace market represented 4% of our sales in the quarter, had another really strong quarter with sales increasing by a very robust 40% from prior year and 37% organically.