Amphenol Corporation (NYSE:APH) Q4 2023 Earnings Call Transcript

Amphenol Corporation (NYSE:APH) Q4 2023 Earnings Call Transcript January 24, 2024

Amphenol Corporation beats earnings expectations. Reported EPS is $0.827, expectations were $0.77. Amphenol Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the Fourth 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 objections, you may disconnect at this time. I would now introduce your conference host, Mr. Craig Lampo, you may begin.

Craig Lampo: Thank you very much. Good afternoon, everyone. This is Craig Lampo, Amphenol’s CFO, and I’m here together with Adam Norwitt, our CEO. We would like to wish everyone a Happy New Year, and welcome you to our fourth quarter of 2023 conference call. Our fourth quarter and full year 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. 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 fourth quarter with sales of $3,327 million and record adjusted diluted EPS of $0.82.

Fourth quarter sales were up 3% in U.S. dollars, 2% in local currencies and down 1% organically compared to the fourth quarter of 2022. Sequentially, sales were up 4% in U.S. dollars, 4% in local currencies and 2% organically. Adam will comment further on trends by market in a few minutes. For the full year of 2023, sales were $12,555,000,000 down 50 basis points in U.S. dollars, flat in local currencies and down 3% organically compared to 2022. Orders in the quarter were $3,164,000,000, up 10% compared to the fourth quarter of 2022 and flat sequentially, resulting in a book-to-bill ratio of 0.95:1. For the full year, orders were $12,267,000,000, down 5% compared to 2022, resulting in a book-to-bill of 0.98:1. GAAP operating income and operating margin was $690 million and 20.7%, respectively, in the fourth quarter of 2023 which increased 10 basis points compared to both the fourth quarter of 2022 and the third quarter of 2023.

Adjusted operating income was $706 million, which excluded $16 million in acquisition-related costs. Adjusted operating margin was 21.2% during the fourth quarter and a new quarterly record for the company. On an adjusted basis, operating margin increased by 30 basis points compared to the fourth quarter of 2022 and increased by 40 basis points sequentially. The year-over-year increase in adjusted operating margin was primarily driven by strong operating leverage on slightly higher sales levels as well as the benefit of pricing actions. These benefits were partially offset by the dilutive impact of recent acquisitions, most of which are currently operating below the corporate average. For the full year of 2023, GAAP operating income was $2.56 billion, which included $35 million of acquisition-related costs and excluding these costs, adjusted operating income was $2.594 million.

For the full year of 2023, GAAP operating margin was 20.4% and adjusted operating margin was a strong 20.7%, consistent with our previous annual record margins achieved in 2022 and 2018. On a GAAP basis, operating margin decreased 10 basis points compared to 2022. Compared to 2022, adjusted operating margin was flat, which primarily was driven by strong operational performance as well as the benefit of pricing actions, partially offset by the dilutive impact of acquisitions. This was an impressive margin performance given the slight sales decline we experienced in 2023. Our team continued to execute well in the quarter, and we are proud to have sustained these healthy levels of profitability, despite the continued range of challenges around the world.

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Q&A Session

Breaking down fourth quarter results by segment. Relative to the fourth quarter of 2022, sales in the Harsh Environment Solutions segment were $900 million and increased by 13% in U.S. dollars and 6% organically. Segment operating margin was 26.5%. Sales in the Communications Solutions segment were $1.345 billion and declined by 6% in U.S. dollars and 7% organically. Segment operating margin was 23.1%. Sales in Interconnect and Sensor Systems segment were $1.082 billion and increased by 7% in U.S. dollars and 2% organically. Segment operating margin was 18.5%. Breaking down full year results by segment relative to 2022, sales in the Harsh Environment Solutions segment were $3.531 billion, an increase by 14% in U.S. dollars and 9% organically, and segment operating margin was 26.7%.

Sales in the Communications Solutions segment were $4.913 billion and declined by 13% in U.S. dollars and organically and segment operating margin was 21.6%. Sales in Interconnect and System – Sensor Systems segment were $4.111 billion, an increase by 6% in U.S. dollars and 3% organically and segment operating margin was 18.3%. The company’s GAAP effective tax rate for the fourth quarter was 22% and the adjusted effective tax rate was 24%, which compared to 19.2% and 24.5% in the fourth quarter of 2022, respectively. And for the full year of 2023, the company’s GAAP effective tax rate was 20.7% and the adjusted effective tax rate was 24%, which compared to 22.3% and 24.5% in 2022, respectively. In 2024, we expect our adjusted effective tax rate to be approximately 24%.

GAAP diluted EPS was $0.83 in the fourth quarter, up 1% compared to the prior year period, and on an adjusted basis, diluted EPS increased 5% to a record $0.82 compared to $0.78 in the fourth quarter of 2022. This was an excellent result. For the full year, GAAP diluted EPS was a record $3.11, a 2% increase from $3.06 in 2022. And adjusted diluted EPS was a record $3.01 in 2023, an increase from $3 in 2022. Operating cash flow in the fourth quarter was a record $842 million or 162% of adjusted net income. And net of capital spending, our free cash flow was a record $739 million or 142% of adjusted net income. We are pleased to have continued to deliver such a strong cash flow yield in the quarter and for the full year. In the full year, 2023 operating cash flow was a record $2.529 billion or 130% of adjusted net income.

Net of capital spending, our free cash flow for 2023 was a record $2.160 billion or 111% of adjusted net income, a very strong result. From a working capital standpoint, inventory days, days sales outstanding and payable days were 85, 70 and 55 days, respectively, all within our normal levels. And during the quarter, the company repurchased 1.3 million shares of common stock at an average price of approximately $86 bringing total repurchases during 2023 to 7.2 million shares or $585 million. When combined with our normal quarterly dividend, total capital returned to shareholders in 2023 was $1.86 billion. Total debt on December 31 was $4.3 billion, and net debt was $2.7 billion. Total liquidity at the end of the quarter was $4.9 billion, which included cash and short-term investments on hand of $1.7 billion, plus availability under our existing credit facilities.

Fourth quarter and full year 2023 EBITDA was $830 million and $3.1 billion, respectively. And at the end of the fourth quarter of 2023, our net leverage was 0.9 times. We are very pleased that the company’s financial condition remains 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 it’s not too late to wish all of you a happy New Year here from Wallingford, Connecticut. As Craig mentioned, I’m going to highlight some of our achievements in the fourth quarter and also for the full year of 2023. I’ll then discuss our trends and progress across our served markets. I’ll make some comments on our outlook for the first quarter, and then, of course, we’ll have time for questions. Our results in the fourth quarter were stronger than expected, exceeding the high end of our guidance in sales and adjusted diluted earnings per share. Sales grew by 3% in U.S. dollars, 2% in local currencies, reaching $3.327 billion.

On an organic basis, our sales did decline by just 1%, with growth in commercial air, defense, automotive and IT Datacom markets offset by declines across our other end markets. The company booked $3.164 billion in orders in the fourth quarter. This was a 10% growth versus prior year and flat to last quarter, but did represent a book-to-bill of 0.98:1. We’re very pleased to have delivered record adjusted operating margins of 21.2% in the quarter, a clear reflection of our team’s outstanding execution and these margins increased 30 basis points from prior year and 40 basis points sequentially. Adjusted diluted EPS reached $0.82 in the quarter, representing a growth of 5% from prior year. I have to say that we were especially pleased that the company generated record operating and free cash flow of $842 million and $739 million, respectively, in the fourth quarter both just really clear reflections of the quality of the company’s earnings.