Earnings Call Transcript - APH Q2 2025

Operator, Operator

Hello, and welcome to the Second Quarter 2025 Earnings Conference Call for Amphenol Corporation. If anyone has any objections, you may disconnect at this time. I'd now like to introduce today's conference host, Mr. Craig Lampo. Sir, you may begin.

Craig Lampo, CFO

Thank you. Good afternoon, everyone. This is Craig Lampo, Amphenol's CFO, and I'm here together with Adam Norwitt, our CEO. We would like to welcome you to our second quarter of 2025 conference call. Our second quarter '25 results were released this morning. I will provide some financial commentary, and then Adam will give an overview of the business and current market trends, and then we'll, of course, 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 second quarter of 2025 with record sales of $5.650 billion and record GAAP and adjusted diluted EPS of $0.86 and $0.81, respectively. Second quarter sales were up 57% in U.S. dollars, 56% in local currencies, and 41% organically compared to the second quarter of 2024. Sequentially, sales were up 17% in U.S. dollars, 16% in local currencies, and 14% organically. Adam will comment further on trends by market in a few minutes. Orders in the quarter were a record $5.523 billion, up a strong 36% compared to the second quarter of 2024 and up 4% sequentially, resulting in a book-to-bill ratio of 0.98:1. GAAP operating income was $1.419 billion in the quarter, and GAAP operating margin was a record 25.1%. GAAP operating margin included $29 million of acquisition-related costs. Excluding these acquisition-related costs, adjusted operating income in the second quarter of 2025 was $1.448 billion, resulting in a record adjusted operating margin of 25.6%. On an adjusted basis, operating margin increased by a strong 430 basis points from the prior year and 210 basis points sequentially. The year-over-year increase in adjusted operating margin was primarily driven by strong operating leverage on the significantly higher sales volumes, which was only modestly offset by the dilutive impact of acquisitions. On a sequential basis, the increase in adjusted operating margin reflected strong conversion on the higher sales levels as well as further progress on the profitability improvement initiatives on acquisitions. I'm extremely proud of the company's record operating margin performance in the second quarter, which reflects continued strong execution by our team. Breaking down second quarter results by segment compared to the second quarter of 2024. Sales in the Communications Solutions segment were $2.910 billion and increased by 101% in U.S. dollars and 78% organically. Segment operating margin was 30.6%. Sales in the Harsh Environment Solutions segment were $1.445 billion and increased by 38% in U.S. dollars and 18% organically. Segment operating margin was 25.2%. Sales in the Interconnect Sensors & Systems segment were $1.295 billion and increased by 16% in U.S. dollars and 14% organically, and segment operating margin was 19.5%. The company's GAAP effective tax rate for the second quarter was 18.3%, and adjusted effective tax rate was 24.5%, which compared to 20.4% and 24% in the second quarter of 2024, respectively. GAAP diluted EPS was a record $0.86 in the second quarter, up 110% compared to the prior year period. And on an adjusted basis, diluted EPS increased 84% to a record $0.81 compared to $0.44 in the second quarter of 2024. This was an outstanding result. Operating cash flow in the second quarter was a record $1.417 billion or 130% of net income, and free cash flow was a record $1.122 billion or 103% of net income, an excellent result, especially considering the growth we have experienced. In the third quarter, we expect capital spending to again be somewhat elevated versus our typical 3% to 4% of sales levels as we continue to invest to support the significant growth we are seeing in the IT datacom market. From a working capital standpoint, inventory days, days sales outstanding, and payable days were all within our normal range. During the quarter, the company repurchased 2 million shares of common stock at an average price of approximately $78. And when combined with our normal quarterly dividend, total capital returned to shareholders in the second quarter of 2025 was approximately $360 million. Total debt on June 30 was $8.1 billion, and net debt was $4.8 billion. Total liquidity at the end of the quarter was $6.2 billion, which included cash and short-term investments on hand of $3.2 billion plus availability under our existing credit facilities. Excluding acquisition-related costs, second quarter 2025 EBITDA was $1.7 billion. And at the end of the second quarter of 2025, our net leverage ratio was 0.9x. During the quarter, the company completed a successful $750 million U.S. bond offering and a EUR 600 million bond offering. As of June 30, the company had no outstanding borrowings under its revolving credit facility or its commercial paper programs, and we expect quarterly interest expense, net of interest income earned on cash on hand to be approximately $70 million, which is reflected in our third quarter guidance. I will now turn the call over to Adam, who will provide some commentary on current market trends.

R. Norwitt, CEO

Well, thank you very much, Craig, and I'd like to extend my welcome to all of you from sunny Wallingford, Connecticut. I hope that all of you on the call here today, together with your family and friends and colleagues are enjoying a wonderful summer so far. As Craig alluded to, I'm going to highlight our achievements in the second quarter. I'll talk about our trends and progress across our served markets. We'll make some comments on our outlook for the third quarter, and then, of course, we'll have time for questions at the end. Let me just say that we drove outstanding performance in the second quarter of 2025. In fact, our results were much stronger than expected, exceeding the high end of guidance in sales and adjusted diluted earnings per share. Our sales grew from the prior year by a very strong 57% in U.S. dollars and 56% in local currencies, reaching a new record of $5.650 billion. And on an organic basis, our sales increased by 41%, with all of our end markets experiencing robust organic growth. I want to say that we're particularly pleased to have delivered record adjusted operating margins of 25.6% in the quarter. This is an increase of 430 basis points from the prior year and 210 basis points sequentially. This strong profitability is a direct result of the outstanding execution of the Amphenol team around the world, who continue to manage well in what continues to be a challenging cost environment. Adjusted diluted EPS grew 84% from the prior year and reached a new record of $0.81. And finally, the company generated record operating and free cash flow in the second quarter of $1.4 billion and $1.1 billion, respectively, both clear reflections of the quality of the company's earnings. I cannot express enough my pride in our team. Amphenol's results this quarter once again reaffirm the value of the drive, discipline, and agility of our entrepreneurial organization as we continue to perform well amidst a very dynamic environment. We are very pleased in May to have closed on the acquisition of Narda-MITEQ, based in Hauppauge, New York, with annual sales of approximately $120 million, Narda-MITEQ is a leading provider of active RF and microwave components primarily for the defense market. Together with our previously announced acquisitions of XMA and Q Microwave and now with Narda, we're building a strengthened presence in RF interconnect and active RF components, which is a great complement to our leading position across RF connector, cable, cable assembly, and antenna products for this important market. We remain confident that our acquisition program will continue to create great value for the company. Our ability to identify and execute upon acquisitions and then to successfully bring these companies into the Amphenol family remains a core competitive advantage for the company. Now turning to our served markets. We're very pleased that the company's end market exposure remains highly diversified, balanced, and broad. This diversification continues to create great value for the company, enabling us to participate across all areas of the global electronics industry while not being overly exposed to the volatility of any given market or application. The defense market represented 9% of our sales in the quarter. Sales grew from the prior year by a very strong 25% in U.S. dollars and 18% organically. And this was driven by broad-based growth across most segments within the defense market. Looking into the third quarter, we expect sales to increase modestly from these second quarter levels, including the benefit of our acquisition. We are very pleased with our company's leading position in the defense interconnect market, where we continue to offer the industry's widest range of high-technology products. Amidst the current dynamic geopolitical environment, countries around the world are expanding their spending on both current and next-generation defense technologies, and we're positioned better than ever to capitalize on this long-term demand trend. The commercial aerospace market represented 5% of our sales in the quarter, and sales increased by 50% in U.S. dollars and 8% organically from the prior year as we benefited from the addition of CIT last year as well as our continued progress in expanding content on next-generation commercial aircraft. Looking to the third quarter, we expect our sales to be up in the low single digits from these second quarter levels. I'm truly proud of our team working in the commercial air market. With the ongoing growth in demand for jetliners, our efforts to expand our product offering, both organically and through our acquisition program, are paying real dividends. The industrial market represented 19% of our sales in the quarter, and our sales in this market grew 25% in U.S. dollars and 12% organically as we continue to see improvements across our diversified industrial market. I'm especially pleased that we grew organically in all of our served geographic regions during the quarter, including in Europe. On a sequential basis, our sales grew by a much better-than-expected 11% from the first quarter. Looking into the third quarter, we do expect sales to moderate slightly from these second quarter levels on typical seasonality. The automotive market represented 14% of our sales in the second quarter, and sales in this market grew 10% in U.S. dollars and 8% organically as we experienced growth really in all regions. Sequentially, our sales in automotive grew by 7% from the first quarter, which was also much better than our expectations coming into the quarter. The communications networks represented 11% of our sales in the second quarter. Sales grew from the prior year by 143% in U.S. dollars, which was driven primarily by the addition of ANDREW. On an organic basis, our sales increased by a robust 16% from the prior year as we benefited from increased spending by communications networks operators as well as wireless equipment manufacturers. Sequentially, sales in the second quarter grew by 30% from the first quarter, driven in part by the ANDREW acquisition, which was completed in the first quarter. Looking into the third quarter, we expect sales to remain at these very strong Q2 levels. With our expanded range of technology offerings, especially following the acquisition of ANDREW, we are well positioned with both service provider and OEM customers across the global communications networks market. Our deep and broad range of products, coupled with an expansive manufacturing footprint, have positioned us to support customers around the world. As those customers continue to drive their systems to higher levels of performance, we look forward to supporting them for many years to come. The mobile devices market represented 6% of our sales in the quarter, and our sales grew by 14% in U.S. dollars and organically in the second quarter as strength in smartphones and laptops was only partially offset by declines in products sold into tablets. Sequentially, our sales increased by 4%, which was actually much better than our expectations coming into the quarter. Looking into the third quarter, we anticipate sales to increase in the high single digits compared to the strong second quarter levels. And finally, the IT datacom market represented 36% of our sales in the quarter. Sales in the second quarter grew by a very strong 133% in U.S. dollars and organically, and this was driven by continued acceleration in demand for our products used in artificial intelligence applications, together with continued robust growth in our base IT datacom business. As a result, we shipped substantially more than expected, including some modest portion of third quarter demand. I can tell you that we're more encouraged than ever by the company's position in the global IT datacom market. Our team has done an outstanding job securing future business on next-generation IT systems with a broad array of customers. And the revolution in AI continues to create unique opportunities for Amphenol, given our leading high-speed and power interconnect products. In fact, whether high-speed power or fiber optic interconnect, our products are critical components in these next-generation networks, and this creates a continued long-term growth opportunity for Amphenol. Turning to our outlook, assuming current market conditions as well as constant currency exchange rates, for the third quarter, we expect sales in the range of $5.4 billion to $5.5 billion and adjusted diluted EPS in the range of $0.77 to $0.79. This would represent sales growth from the prior year of 34% to 36% and adjusted diluted EPS growth of 54% to 58% compared to the third quarter of last year. I remain confident in the ability of our outstanding management team to adapt to the many opportunities and challenges in the current environment and to continue to grow our market position while driving sustainable and strong profitability over the long term. Finally, I'd like to take this opportunity to thank our entire global team for their truly outstanding performance here in the second quarter. And with that, operator, we'd be very happy to take any questions.

Operator, Operator

The first question is from William Stein with Truist.

William Stein, Analyst

Congratulations on an excellent quarter. What really stands out to me is the operating margin, which I believe is now above your drop-through target. I wonder if this is a good time to revisit that goal. Historically, you've mentioned a 25% fall-through rate, and you're now exceeding that on an aggregate basis. What should we expect moving forward?

Craig Lampo, CFO

Yes. Thanks, Will. Really appreciate the question. Yes, listen, I would agree. The team has just done an exceptional job really driving operating margin. I mean, 25.6% in the quarter is really an amazing achievement that the team should be really proud of, and we certainly are. We certainly expect this operating margin to continue. As you know, and as you just mentioned, we've long targeted the 25% conversion margin, and in the last couple of years, we've really meaningfully exceeded that benchmark. So it's partially due to just the exceptional organic growth, but also we're really just selling higher technology products, and we continue to do a great job of controlling our costs in our traditional Amphenolian fashion. Now listen, we do expect some normalization of conversion margins as we continue to scale our cost structure in line with these higher sales volumes as we move into maybe 2026. But we believe that the overall impact of that will be modest and our conversion margins will continue to remain significantly higher than that 25% conversion target we've historically had. As we continue to grow, we believe there's still room for further margin expansion. This reflects the increased level of technology we've had that's embedded in our products, differentiated value that we consistently deliver, and certainly the innovation and execution that we've had.

Operator, Operator

The next question is from the line of Steven Fox with Fox Advisors.

Steven Fox, Analyst

Just to follow up on that margin question. Adam, can you talk a little bit about how that sales mix is sort of becoming richer? I would imagine a good portion is due to the mix of sales from Gen AI data centers. But can you sort of describe to us what's changing in the tech roadmap for Amphenol that's driving the margins?

R. Norwitt, CEO

Yes. Thanks very much, Steve. I mean, look, I think Craig just alluded to the fact that for sure, when you grow really fast, and we did grow by 133% in IT datacom, you really would expect conversion margins to be a little bit higher in that high-growth area. And that's true in whichever market where we would grow at that speed. But relative to Craig's comment about technology, I would tell you this is really across the company. When we think about the importance of our products, to our customers, and ultimately, the value that we create for our customers with these next-generation high-technology products, whether that is in the defense market, the industrial market, the automotive market, the communications networks, and of course, in IT datacom, by creating more value for our customers and by continuing to instill that Amphenolian cost mindset into everything we do.

Operator, Operator

The next question is from the line of Amit Daryanani with Evercore.

Amit Daryanani, Analyst

Adam, I guess there's always this worry around peak revenues, peak margins when we have strong prints like this one. And so perhaps you can touch on it. I realize it was about $150 million of shipment in June versus September that you talked about. But really away from that, can you spend some time talking about how do you think about the durability of growth on the AI infrastructure side as you go out over the next few quarters?

R. Norwitt, CEO

Yes. Thanks very much, Amit. And certainly, I can understand the question. I mean, look, we talked about the fact that we overperformed, and this was a very, very strong outperformance. If you think about our second quarter, we originally guided the quarter to be at the high end, $5 billion in sales, and we ultimately achieved $650 million more than that. And on the IT datacom side, we outperformed very significantly. There is continued momentum in that space, and when we think about the durability, we are really excited about the continued growth opportunities in this revolution of AI. I can tell you that our team continues to win in this market, and we see future growth and demand remaining strong.

Operator, Operator

The next question is from Joe Giordano with TD Cowen.

Joseph Giordano, Analyst

Sticking with AI, just curious if your business there is getting more concentrated or less concentrated from a customer standpoint as you've moved along here? And if you were to just like average out your 2Q and your 3Q there to smooth for the pull forward here.

R. Norwitt, CEO

Yes. So first, thanks very much, Joe. I mean, number one, I'll tell you, we have a very broad business here. There are some big folks who are spending on this, and we have a broad representation across all of those big folks. And quite the contrary, I wouldn't say that that is overly concentrated. And as you ask about, for sure, if you look at Q2 and Q3 and if you consider that stable performance, do we see future growth opportunities? We do. Is every quarter going to be sequentially more than the quarter before it in a space like this? I wouldn't necessarily say that.

Operator, Operator

The next question is from Mark Delaney with Goldman Sachs.

Mark Delaney, Analyst

Let me add my congratulations for the strong results. I also had a question on AI and some dynamics there. You spoke to seeing some degree of pull-in from 3Q and 2Q. Maybe you can elaborate on what you think contributed to that and why you shipped early.

R. Norwitt, CEO

Yes. Thanks very much, Mark. I mean, I wouldn't necessarily call it a pull-in, but rather that we were able to out-execute our customers' original demand plans, and they'll take whatever we can ship them. We see continued momentum in this space, and we expect our visibility from customers and future plans to create incremental opportunities for us.

Operator, Operator

The next question is from Samik Chatterjee with JPMorgan.

Samik Chatterjee, Analyst

Adam, I know last quarter, you had mentioned some of the pull ahead that you thought was happening in mobile devices, which is why you had guided a bit for a sequential moderation. I just wanted to hear if you were seeing anything that would be indicative of sequential moderation outside of AI.

R. Norwitt, CEO

Thanks very much, Samik. In terms of the rest of the company, I wouldn't say that there's anything really notable around the book-to-bill. We continue to have still a very positive outlook for that market.

Operator, Operator

The next question is from Luke Junk with Baird.

Luke Junk, Analyst

I want to circle back to operating margin dynamics. Of course, we've talked about the higher technology underpinning that margin dynamic. Adam, hoping maybe you could talk about some of the pure operating pieces here in terms of blocking and tackling.

R. Norwitt, CEO

Well, Luke, I'm glad you asked that question because growing 41% organically is certainly not a trivial task. And I mentioned it in my prepared remarks, how grateful I am and how proud I am of our team for really moving mountains here. It's hiring the people, putting in place the automation machines, and setting up new facilities. It’s been quite impressive across the board. And it is those little movements by the thousands of people around the world that ultimately allowed us to satisfy our customers and take advantage of the growth opportunity.

Operator, Operator

The next question is from Joe Spak with UBS.

Joseph Spak, Analyst

Adam, I want to emphasize that you mentioned there has been strong performance in the AI area, attributed to customers wanting to access everything available. However, it sounds like you're suggesting there might be some sequential softness to account for that. Can you clarify this situation for us?

R. Norwitt, CEO

I would not call Q3 an air pocket. The demand from our customers remains very strong. There's no doubt about it. It's just that when they think of their demand plans and want to match all the various parts of that, we've gotten a little bit ahead in certain areas.

Operator, Operator

The next question is from Asiya Merchant with Citigroup.

Asiya Merchant, Analyst

If I can just double-click a little bit on the industrial market as well. That did really well for you guys, better than expected, I think, even on an organic and sequential basis. If you could just talk about the improvement that you're seeing there.

R. Norwitt, CEO

We are very encouraged by the performance in the industrial market. It's our third quarter in a row of year-over-year organic growth, and that included this quarter, strong sequential growth on an organic basis. We have now seen double-digit organic growth in Europe in industrial in the second quarter.

Operator, Operator

The next question is from Andrew Buscaglia with BNP Paribas.

Andrew Buscaglia, Analyst

Yes, I wanted to ask on the acquisition of Narda. Can you comment on what you paid for it, either valuation or dollar amount-wise? Are there more deals on the horizon?

R. Norwitt, CEO

We paid roughly $300 million for Narda, which is a reasonable multiple. In terms of our acquisition pipeline, we continue to hunt for companies that have great people with great products and a great market position. We're very encouraged by the performance of CIT and ANDREW, and acquisitions still represent one of the best returns on the capital that we're generating.

Operator, Operator

The next question is from Saree Boroditsky with Jefferies.

Saree Boroditsky, Analyst

There were a number of end markets in the quarter that came in better than your expectations. Can you talk about what surprised you in the quarter?

R. Norwitt, CEO

What surprised us to the upside is the strong performance across nearly all of our end markets. That ability to execute when there is demand available for us was a common theme across all of these end markets. The demand that we see across our markets appears to be strengthening.

Operator, Operator

The last question is from Wamsi Mohan with Bank of America.

Wamsi Mohan, Analyst

I just want to go back to AI. How far out do you have visibility in the order book? And how much volatility have you seen in the order patterns in IT datacom, especially relative to AI?

R. Norwitt, CEO

Our out-execution to our customers' demand was really more clear here in the second quarter. We feel we have a strong order visibility, and we see continued robust demand. Well, thank you very much. And I'd like to once again thank everybody for joining our call this quarter. I wish everybody a great continuation of your summer, and we look forward to talking to you all again in 90 days.

Operator, Operator

This concludes today's call. Thank you for joining. You may now disconnect your lines.