TE Connectivity Ltd. (TEL)

TEL 
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Tyco Electronics, Ltd. (TEL)

F1Q10 (Qtr End 12/25/09) Earnings Call

January 27, 2010 8:30 am ET

Executives

John Roselli - VP, IR

Tom Lynch - CEO

Terrence Curtin - EVP & CFO

Analysts

Amit Daryanani - RBC Capital Markets

Matt Sheerin - Thomas Weisel Partners

Steven Fox - CLSA

William Stein - Credit Suisse

Amitabh Passi - UBS

Jim Suva - Citi

Shawn Harrison - Longbow Research

Brian White - Ticonderoga

Wamsi Mohan - Bank of America

Presentation

Operator

Ladies and gentlemen we'd like thank you for standing by and welcome to the Tyco Electronics reports fiscal first quarter results teleconference call. At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today’s call will be recorded. I would now like to turn the conference over to your Vice President of Investor Relations Mr. John Roselli. Please go ahead sir.

John Roselli

Thanks Steve. Good morning and thank you for joining our conference call to discuss Tyco Electronics first quarter results for fiscal year 2010 and our outlook for the second quarter. With me today is our Chief Executive Officer, Tom Lynch and our Chief Financial Officer, Terrence Curtin.

During the course of this call, we will be providing certain forward-looking information. We ask you to look at today’s press release and read through the forward-looking cautionary statements that we’ve included there. In addition we will use certain non-GAAP measures in our discussion this morning and we ask you to read through the sections of our press release and the accompanying slide presentation that addressed 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 tycoelectronics.com. Now let me turn the call over to Tom for some opening comments.

Tom Lynch

Thanks John and good morning everyone. And if we can start with slide 3. I'll briefly talk about the first quarter and what we're seeing in our markets right now. And then I'll turn it over to Terrence and he'll go through our Q1 results in more detail.

Our first quarter was a very good start to our fiscal year and it was actually our third quarter in a row of solid sales and profit improvement. Our sales and earnings significantly exceed our guidance in yet another quarter of strong free cash flow.

On the sales front, we grew 7% sequentially to $2.9 billion and our largest segment Electronic Components we grew 17%, it was 14% organic growth. On a very positive note, within the Electronics Component segment consumer and industrial markets grew at double digit rate sequentially resulting from a combination of improved end demand in most of these markets as well as continued inventory replenishment in the supply chain.

Our Networks and Specialty Products businesses did remain somewhat sluggish in the quarter and we expected this that they are showing some signs of stabilizing demand and our Undersea business declined 25% sequentially as we expected.

The sales growth in the quarter coupled with our aggressive cost reduction efforts and footprint actions resulted in our gross margin improving to 29% and this improved our adjusted operating margin to 11.5%. This compares to 8.2% in the prior quarter and just as a point of reference in our fiscal year '08 when our sales rate was about $14 billion, our average gross margin then was 29%.

So, as you know, a big focus area for us over the last couple of years has been to improve the operating leverage in the company and I’m really pleased with the operating leverage that we're seeing as a result of streamlining the footprint, improving productivity and cleaning up the portfolio.

The net effect was this enabled our Electronics Components segment to return to double digit margins in the quarter after generating operating losses just two quarters ago and I will say our management teams in those business has navigated through tough time [kept] around the future and got us back in solid profitability pretty quickly.

As you know and as we've talked about over the last year, our primary focus coming out of this downturn was to achieve a 12% operating margin at $12 billion annual sales level without sacrificing our strategic opportunity. Our team has done an outstanding job executing on this objective in the last year and we're right on track to achieve the [12 to 12] goal.

And then finally with respect to cash we generated $256 million of pre cash flow in the quarter which is really outstanding performance and Terrance will elaborate on later in the call. Typically Q1 is a low cash flow quarter for us. Because getting out of the gate like this, was another good kind of our strong execution.

Let me now talk a little bit about what we're seeing in the market. Our total company orders excluding Undersea grew 15% and our book-to-bill ratio was 1.09. This growth was led by our Electronic Components segment and its broad based across the consumer industrial markets we serve. We also experienced growth in our Specialty Products segment reflecting improvement in our aerospace and defense and touch businesses.

Orders in our Network segment were up 1% sequentially, showing a little sign of improvement late in the quarter. Our Networks businesses due continue to be impacted by lower capital spending by our customers. These businesses turned down later than our components businesses, and are recovering in the same cycle at least that's the way we see it right now.

Finally, in our Undersea business, project activity remained robust although we did not book any significant projects in the quarter. However, we did have a previously booked project move forward and we now expect full year sales in the $7 million to $8 million range up from our prior view of $600 to $700 million.

So based on everything we see today, we expect sales in Q2 to be flat to slightly higher than Q1. We do expect end demand to continue to improve in our components businesses, but this will be somewhat offset by the end of the inventory replenishment portion of this cycle. We are optimistic that the improvement we're seeing in our industrial infrastructure markets excluding Undersea is going to lead the stronger sales in these markets in the second half.

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