TE Connectivity Ltd. (TEL)

TEL 
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Tyco Electronics, Ltd. (TEL)

F2Q10 (Qtr End 3/26/10) Earnings Call

April 28, 2010 8:30 am ET

Executives

John Roselli - VP, IR

Tom Lynch - CEO

Terrence Curtin - EVP & CFO

Analysts

Amit Daryanani - RBC Capital Markets

Amitabh Passi – UBS

Matt Sheerin - Thomas Weisel Partners

Jim Suva - Citi

Shawn Harrison - Longbow Research

Brian White - Ticonderoga

William Stein - Credit Suisse

Craig Hettenbach - Goldman Sachs

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Tyco Electronics reports strong fiscal second quarter results conference call. At this time, all participants are in a listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded.

I’d now like to turn the conference over to your host, the Vice President, Investor Relations Mr. John Roselli. Please go ahead.

John Roselli

Thank, [Tasha] and good morning. Thank you for joining our conference call to discuss Tyco Electronics second quarter results for fiscal year 2010 and our outlook for the third quarter and full year. 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.

Also, as we announced this quarter we’ve renamed our Undersea Telecommunications business to (inaudible) Subsea Communications or Sub-Comp in short, you will hear us refer to it that way today.

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

Tom Lynch

Thanks, John, good morning, everyone. Let’s start with slide three. I guess the best opening would be a lot difference the year makes. We really had an outstanding quarter in the second quarter. Our sales were up 27% year-over-year and 2% sequentially. Our operating margin up 13.9% was up 240 basis points sequentially and well ahead of our 12/12 goal.

Our gross margin of 32.4% was the highest since 2007 when the company separated. Our earnings per share of $.64, was up 36% sequentially and significantly exceeded our guidance. If you recall our guidance, the midpoint of our guidance was $0.52 and we were over that by $0.12, $0.08 of that was operational, $0.04 was tax and intangibles, we will be walking you through that in detail. And our free cash flow was strong at $422 million and we are on track to deliver in excess of $1.2 billion of free cash flow for the year.

The performance was due to definitely improving economic environments with strong execution on the company’s part as well. The global economics environment continued to improve this quarter and we were able to capitalize on this trend. Our Electronic Components segment was up 55% year-over-year and 4% sequentially. This growth was broad based across all geographic regions and end markets and our CFO will walk you through each of the markets in detail in a few minutes.

This more than offset the decline on our Subsea Communications segment, as you know we have been foreshadowing and discussing that expected decline for several quarters now. We're really encouraged by the demand strength in most of our electronic components end markets and expect sales to stay at the current level in the second half as continued growth in the industrial markets offsets normal seasonal decline in automotive in the fourth quarter. And it's pretty clear that the environment is much better than three months ago and when we started three months ago significantly better than we expected when we started here six months ago.

During the second quarter we did begin to see a pickup in business levels in our Specialty Products and Network Solutions segment and as a result we expect revenue to increase about 10% in the second half in these segments. As you know these segments turndown later than components and they are recovering about two quarters later. Again this growth will more then offset the further softening in our Subsea business, which is now going to settle in at about 150 million per quarter range.

I’m also really pleased with our continued improvement in execution. Our gross margin increased about three points sequentially to 32.4% and this drove the adjusted operating margin increase to 13.9%. Improving gross margin has clearly been a top priority for the company for several years, the reduction in our footprint coupled with our productivity programs are clearly delivering results.

Our second quarter gross margin also benefited from (inaudible) point of favorable mix about half of which was due to very strong margins in the Subsea business. And those strong margins in Subsea Communications were directly related to excellent execution on the part of that team.

We expect gross margins to be in the 31% range for the balance of the year, which is approximately two points higher than our 2008 levels on about 20% lower revenues. Our operating margin has exceeded our near term goal of 12% and we’re well on our way towards (inaudible) milestone goal of 15%. We now expect to achieve 15% margins at a sales level of around 14 billion.

Timing, we had another very good quarter of free cash flow of $422 million in the quarter. We paid a quarterly dividend of 70 million and repurchased approximately 5.7 million shares during the quarter.

Read the rest of this transcript for free on seekingalpha.com