TE Connectivity Ltd. (TEL)

TEL 
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Tyco Electronics Ltd. (TEL)

F3Q10 (Qtr End 06/25/10) Earnings Call Transcript

July 22, 2010 8:30 am ET

Executives

John Roselli – VP, IR

Tom Lynch – CEO

Terrence Curtin – EVP and CFO

Analysts

Amitabh Passi – UBS

Amit Daryanani – RBC

Matt Sheerin – Stifel Nicolaus

Craig Hettenbach – Goldman Sachs

Shawn Harrison – Longbow Research

Steven Fox – CLSA

William Stein – Credit Suisse

Jim Suva – Citi

Steve O'Brien – J.P. Morgan

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to Tyco Electronics Reports Strong Fiscal Third Quarter Results and Raises Outlook for Fourth Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded.

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

John Roselli

Thanks, Ruth and good morning. Thank you for joining our conference call to discuss Tyco Electronics third quarter results for fiscal year 2010 and our outlook for the fourth 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 all 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. Good morning, everyone. If you would please turn to Slide 3 now, as we previewed last week, Q3 was another strong quarter for us. Sales of $3.1 billion were at the high end of our guidance as stronger demand offset the negative impact of a weaker euro. Our adjusted EPS of $0.70 was up 9% sequentially and exceeded our guidance of $0.61 to $0.65. This earnings strength was due to slightly higher volumes and related strong fall-through, continued productivity improvements, and operating expense leverage.

One of the highlights for us in the quarter was our adjusted operating margin reached 15% for the first time since separation three years ago. And while our normal operating margin run rate is closer to 14% to 14.5% at this volume level, this is another indicator of the fundamental improvement in our operating leverage, which you know has been a very, very high priority over the last couple of years.

Our three largest segments showed continued margin improvement and in our network solutions segment, adjusted operating margins were up 260 basis points sequentially to 13.3%. That business had been lagging on the sale side, turned down – after the consumer business was turned down, turned up after them and we expect to see nice operating leverage there with volume pickup.

Order input was solid again this quarter with total orders of just under $3.3 billion and a book-to-bill of 1.06 and this was our fourth consecutive quarter of book-to-bill exceeding 1 and the orders were strong and consistent throughout the quarter and continued that way so far in July.

If you could please turn to Slide 4. On a sequential basis, orders grew 7% in the quarter. Our electronic components segment orders were up 2%, the industrial and data communication equipment markets in electronic components were up 14% due to increased demand and factory automation in broadband equipment. We did start to see this at the end of the last quarter and expected the growth rate to pick up in these two areas.

Automotive orders were approximately $1 billion in the quarter, which was down slightly versus Q2 due to currency translation. Excluding that, our organic growth was about 2%. But the book-to-bill was positive at 1.01. Compared to where we were a quarter ago, automotive was a little stronger than we thought. The vehicle production was approximately 18 million units in the quarter, which was essentially flat versus Q2 and as I said, a little bit better than, I think, anybody in the industry expected.

We are also benefiting from more favorable vehicle mix, that is more premium segment sales. When the market turned down hard over a year ago in addition to the end – the sharp drop-off in cars itself, the correction in the value to the inventory chain, we also saw slight shift in mix to lower-end cars with lower content.

I think everyone was concerned about how long that was going to last. We've actually started to see that shift back. So not only is the mix swinging back to a more normal mix which means that in the last couple of quarters more premium cars being sold, but we are also seeing the level of options per car creep up so that our average content per vehicle, which is in the $60, $61 range, is just about back to where it was in early '08 before the hard downturn came.

Based on current projections, we do see – expect fourth quarter auto production to be down by approximately 10% with most of this decline in Europe and China. And when you consider the positive trends I just mentioned, net that against the normal volume decline, our sales will be down about 5%.

Shifting to our network solutions segment, orders were up 11% sequentially and we are starting to see an increase in capital spending by our carrier and enterprise customers over and above the normal seasonal lift we see in this quarter. Orders in these businesses was – were up 19% and 9%, respectively with strength in all regions. Orders in our energy business were up 6%. I would say that the activity we are seeing was in line with what we expected in the quarter. Noteworthy in our specialty products businesses is that our touch business orders were up 7%.

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