Littelfuse Inc 2026 Q3 Earnings Call

Please proceed. Good morning, and welcome to the Littelfuse Third Quarter 2026 Earnings Conference Call.

With me today are Greg Henderson, President and CEO, and Abhi Khandelwal, Executive Vice President and CFO. This morning, we reported results for our third quarter, and a copy of our earnings release and slide presentation is available in the investor relations section of our website. A webcast of today's conference call will also be available on our website. Please advance to slide 2 for our disclaimers. Our discussions today will include forward-looking statements. These forward-looking statements may involve significant risks and uncertainties. Please review today's press release and our Forms 10-K and 10-Q for more detail about important risks that could cause actual results to differ materially from our expectations. We assume no obligation to update any of this forward-looking information. Also, our remarks today refer to non-GAAP financial measures.

A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided on our earnings release, available in the investor relations section of our website. I will now turn the call over to Greg.

Thank you, David, and thank you to everyone for joining us today. This morning, I'll provide details on our third quarter results, including performance highlights across our end markets. I'll then share progress against our strategic priorities before turning the call over to Abhi to review our segment financials and fourth-quarter outlook. Turning to the quarter, we delivered record net sales of $767 million. Our Q3 results were impacted by a one-time Dortmund contract amendment fee that reduced semiconductor sales by $28.5 million, which we will discuss in more detail shortly. Organic revenue growth accelerated to 22% year-over-year, driven by execution on our strategic priorities and demand strength across our markets. We also delivered significant margin expansion and 96% year-on-year earnings growth in the third quarter. This culminated in an adjusted earnings of $5.79, a record for the company.

Finally, I wanted to highlight our free cash flow performance, which is up 66% year-to-date, reinforcing our strong execution. Turning to performance across our end market exposures. Computing, communications, and diversified industrials, or CCDI, delivered another quarter of strong growth. Data center was again a leading contributor as we continue to capitalize on our unique grid-to-chip capability and customer-focused go-to-market model. Our data center backlog is expanding, and we see traction in our opportunity pipeline and design wins. Across diversified industrials, we delivered broad-based growth led by demand for medical and aerospace and defense applications. We also continued to execute on strong orders from our broad market channel partners, as end customer POS remains very healthy across geographies and applications. Turning to energy and industrial infrastructure, or EII, we saw broad-based demand momentum, and Basler Electric continues to perform well.

Within industrial infrastructure, growth was led by industrial automation, heavy construction, and HVAC demand recovery. Within energy infrastructure, grid modernization and utility investment drove increased demand for our market-leading protection solutions. Battery energy storage served as another key growth engine, where we are developing market-leading protection architectures to support rapid power scaling. In transportation and logistics, or T&L, commercial vehicle demand strengthened in the quarter. This was driven by our proactive go-to-market engagement and a market recovery across heavy truck, agriculture, and material handling equipment. In passenger vehicles, revenue increased, driven by strong execution as our teams are delivering content and market share gains despite lower global vehicle production. Overall, our third quarter performance reinforces the strength of our end market diversity and technology positioning. Our growth also reflects our sharpened focus on high-growth opportunities and our go-to-market shift as we continue to outperform our end markets.

Heading into the fourth quarter, we are well-positioned to maintain our operational momentum. Bookings were again a record in Q3, driven by growth across our businesses, and our book-to-bill remained well north of 1.0. Now let me update you on the progress we're making across our strategic priorities. Starting with go to market, we continue to see strong customer engagement translate into a larger, higher-value new business funnel. By engaging customers earlier in the design cycle with more of our multi-technology solutions, we are increasing both the breadth and value of our opportunity pipeline. As evidence of our traction year-to-date, the average dollar value per new business opportunity has increased by more than 20%, while third quarter design wins again grew double digits year-over-year. Together, these results reinforce our confidence in our long-term organic growth targets. Now let's turn to our high-growth opportunities, or HGOs.

While early, we also believe our sharpened focus on our three HGOs, data center, grid and utility infrastructure, and aerospace and defense, is beginning to deliver tangible returns. Today, I wanted to specifically highlight our expanding aerospace and defense, or A&D, opportunities. While this high-growth market represents a small portion of revenue today, sales growth outpaced company average in Q3. A&D is an ideal market for our technology, given its mission-critical requirements and rapid transition towards high-voltage DC architectures. During the quarter, we secured several key A&D design wins, including high-reliability power semiconductor modules for defense flight control system and specialized switching solutions for a commercial space customer. Long term, we believe a focused A&D growth strategy will diversify our market exposure while providing strong and resilient profit contribution. Finally, turning to operational excellence.

At our May Investor Day, we highlighted semiconductor products and transportation, where we see opportunities to enhance our long-term growth while optimizing our portfolio and driving long-term profitability enhancements. While early, we are seeing evidence of our progress towards our 2030 goals. Starting with semiconductors, we delivered significant revenue growth and improved profitability in the quarter. This was led by our protection franchise, which delivered record revenue and profitability, while we see continued strong bookings momentum into year-end. Long-term protection remains well-positioned as a market leader and key enabler of the long-term electrification megatrend across our markets. In power semiconductors, organic growth accelerated alongside improved margins. While early, we are executing our more focused power semiconductor strategy around higher power and higher value opportunities. We are delivering for our customers as our orders have accelerated. We remain disciplined in balancing power semi growth opportunities with active portfolio rationalization and footprint optimization.

During the third quarter, we executed an amendment to a commercial supply agreement for our Dortmund facility. In exchange for a one-time payment, this amendment accelerates the delivery of contracted volumes while eliminating restrictive covenants. This step materially improves the underlying economics of the Dortmund asset and grants us significant strategic flexibility and optionality as we evaluate our broader power semiconductor footprint. Over time, we remain committed to better positioning our power semiconductor franchise for sustainable growth, structural margin expansion, and enhanced long-term returns. Turning to transportation, our sharpened focus on our market-leading customers, efficiencies, and scale is driving solid growth while achieving continued margin expansion as we scale our operations and simplify our cost structure. We believe our enhancements position us well to drive structural margin expansion in a muted underlying market environment. Taking a step back, we are encouraged by our third quarter results.

Our teams are executing against attractive market demand, converting an expanding customer opportunity pipeline, and driving profitability enhancements across the portfolio. I want to thank our teams for their dedication to serving our customers and delivering value. With that, I will turn the call over to Abhi.

Thank you, Greg, and good morning, everyone. Today, I will walk you through our third quarter financial performance before reviewing our fourth-quarter outlook. Please turn to Slide 6 for details on our third quarter performance. All comparisons are versus the prior year, unless noted otherwise. Reported net sales in the third quarter were a record $767 million, reflecting the $28.5 million one-time Dortmund customer amendment fee, which was not contemplated in our previous guidance. Organic growth contributed 22%, the Basler acquisition contributed approximately 6%, and foreign exchange was neutral. Adjusted EBITDA was $226 million, while adjusted EBITDA margin finished at 28.4%, up 690 basis points. Adjusted diluted earnings per share were $5.79, up 96% versus the prior year, and a record for the company. The improvement reflects strong volume leverage, favorable mix, pricing, and operational execution.

As a result of our operational excellence initiative, we expect to realize approximately $5 million in 2026 from restructuring savings. We continue to deliver progress towards our 2030 optimization goal of $50 million and see further opportunities into 2027. Operating cash flow was $230 million, and free cash flow was $216 million, up 64%. Year to date, free cash flow was $409 million, up 66%, as we continue to drive strong conversion. We ended the quarter with $825 million of cash on hand and a consolidated net leverage ratio of 0.7 times. We also returned $20 million to shareholders through our third-quarter dividend. Please turn to Slide 8 for our segment highlights. Starting with the Electronics product segment. Reported Electronics sales were $426 million, reflecting the $28.5 million one-time Dortmund customer amendment fee. Organic sales increased 27%, with passive products up 30% and semiconductor products up 24%.