TE Connectivity Ltd. (TEL)

TEL 
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Industry: Consumer Non-Durables
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TE Connectivity (TEL)

Q2 2013 Earnings Call

April 24, 2013 8:30 am ET

Executives

Keith Kolstrom

Thomas J. Lynch - Chairman and Chief Executive Officer

Robert W. Hau - Chief Financial Officer and Executive Vice President

Analysts

Ruplu Bhattacharya

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Shawn M. Harrison - Longbow Research LLC

Mark Delaney - Goldman Sachs Group Inc., Research Division

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Kevin LaBuz - Deutsche Bank AG, Research Division

Jim Suva - Citigroup Inc, Research Division

James F. Hillier - UBS Investment Bank, Research Division

Mike Wood - Macquarie Research

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the TE Connectivity Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to our host, Mr. Keith Kolstrom, Vice President of Investor Relations. Please go ahead.

Keith Kolstrom

Good morning, and thank you for joining our conference call to discuss TE Connectivity's second quarter 2013 results. With me today are Chairman and Chief Executive Officer, Tom Lynch; and Chief Financial Officer, Bob Hau.

During the course of this call, we will be providing certain forward-looking information, and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning, and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at te.com.

[Operator Instructions]

Now let me turn the call over to Tom for some opening comments.

Thomas J. Lynch

Thanks, Keith, and good morning, everyone.

Please turn to Slide 3. I'm pleased with our overall performance in this quarter. Adjusted earnings per share of $0.76 was a record for the second quarter and $0.06 above the midpoint of our guidance. Sales of $3.27 billion were in line with expectations. Adjusted OI margin of 13.6% was up 60 basis points versus the prior year and up 120 basis points sequentially. We generated $353 million of free cash flow. And during the quarter, returned $319 million of capital to shareholders through dividends of $88 million and share repurchases of $231 million, giving us a total share repurchase of about $409 million in the first half. The strong OI performance -- OI margin performance is another step towards delivering 15% margins at the $15 billion revenue level.

Our favorable earnings performance was due to higher revenue and strong margin results in our Transportation segment and continued productivity and momentum across the company. Orders were $3.4 billion in the quarter, up 4% versus the prior year and up 9% sequentially. Book-to-bill, excluding SubCom, was 1.06 and was above 1 in all 4 of our segments. This is a reference point book-to-bill, and our first quarter was 1.02.

The economy does continue to send mixed signals, but based on our order trends, we continue to expect a strong second-half due to the normal seasonal pickup, improvements in the industrial and telecom markets and strong productivity performance.

For the full year, we expect adjusted earnings per share of $3.10 to $3.22 on sales of $13.075 billion to $13.375 billion. Earnings per share was up slightly from our guidance last quarter. The outlook in our Transportation segment and strength is more than offsetting foreign exchange headwinds and a reduced outlook in our Networks business in the second half compared to the prior forecast.

Please turn to Slide 4. Total company sales of $3.27 billion were in line with our expectations, as I previously mentioned. On a geographic basis, sales in the Americas were up 5%, excluding SubCom, due to another quarter of strong U.S. Automotive demand and the Deutsche acquisition. This more than offset continued softness in Networks and Industrial.

In Europe, sales were up 2%, again due to the Deutsche acquisition, which more than offset the weakness in those markets in our Industrial and Networks market. Our Automotive sales in Europe were down about 1% versus the prior year on a decline in European auto production. Asia sales were down slightly in the quarter. Growth in China and Korea was more than offset by weakness in Japan. Strong performance in our Transportation segment and the addition of Deutsche more than offset weaker Networks revenue and foreign exchange headwind.

Please turn to Slide 5 and I'll provide some highlights of our segment performance. We had another very strong quarter in our Transportation segment. Sales were up 9% and adjusted operating income was up 31% due to increased organic revenue, the addition of Deutsche and very strong operating performance. The strong performance was in spite of a slight decline in global vehicle production around the world.

On a regional basis, vehicle production remained strong in North America and is picking up again in China. This offset weakness in Europe and Japan. Another important development was an increase in demand for industrial and commercial vehicles, primarily driven by demand for heavy trucks in the U.S. and China. The Deutsche acquisition is serving us very well in these markets. We expect continued strong results in the second half, with quarterly results similar to the Q2 levels.

Please turn to Slide 6. Results on our Network segment were down 11% versus the prior year, down 8% excluding the SubCom business, which is very soft right now. This resulted in about a $30 million decline in operating income. Demand across our Networks businesses continued to be slower than we anticipated. We are seeing additional project activity in our Telecom and SubCom businesses and feel we are well positioned to capitalize when these projects come into force. We have reduced our second half outlook in this segment, but do expect to improve our adjusted operating margin to the high-single digit range exiting the year.

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