TE Connectivity Ltd. (TEL)

TEL 
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TE Connectivity (TEL)

F4Q12 Earnings Call

November 5, 2012, 8:30 a.m. ET

Executives

Keith Kolstrom – VP IR

Thomas J. Lynch – CEO, Executive Director

Bob Hau - CFO

Analysts

Wamsi Mohan – BofA Merrill Lynch

Matthew Sheerin - Stifel, Nicolaus & Co., Inc

Amitabh Passi - UBS

Shawn M. Harrison - Longbow Research LLC

Amit Daryanani - RBC Capital Markets, LLC

Jim Suva – Citi

Craig Hettenbach - Goldman Sachs Group Inc.

Steven Fox – Cross Research

Mike Wood - Macquarie Research

Kevin LaBuz – Deutsche Bank AG

Anthony C. Kure - KeyBanc Capital Markets Inc.

Michael J. Wherley - Janney Montgomery Scott LLC

Presentation

Operator

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the quarter four earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions).

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

Keith Kolstrom – VP, IR

Thank you, good morning, and thank you for joining our conference call to discuss TE Connectivity's fourth quarter 2012 results. With me today is our Chief Executive Officer, Tom Lynch and our 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 addresses 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.

Finally, for participants on the Q&A portion of today's call, I would like to remind everyone to limit themselves to one follow-up question to make sure we are able to cover all questions during the allotted time.

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 three and we'll get started.

We had a pretty solid Q4, delivering sales of 3.4 billion, adjusted earnings per share of $0.76 and free cash flow of 569 million. Our operating performance was in line with our guidance. And are adjusted EPS benefitted by $0.02 due to a lower tax rate.

Our Transportation business had another strong quarter, while our CIS and Networks businesses continued to experience soft markets as expected.

Overall, I consider this to be a quarter of good execution. Our adjusted operating margin at 13.5% during the quarter and ran just under 14% during the second half of the year despite the fact our Networks business continues to be in a very weak part of the cycle.

Our overall business is now running at a full-year adjusted operating margin of 13 to 14% at the $13 to $14 billion revenue range. So I feel good about the improvement in our operating leverage. However, in this uncertain and slow economic environment, it's also clear that we need to reduce our costs further. I'll touch on this in more detail later in the call.

During the quarter, we resumed our share repurchase program and bought back 5.5 million shares spending just under $200 million.

Integration of Deutsch is proceeding very well. And the touch in services business – divestitures are complete. With these changes, we have a very strong and focused connectivity portfolio.

For the full year, sales were 13.3 billion, down 3% organically versus fiscal 2011. Adjusted EPS was $2.86, also down 3% versus the 52-week fiscal 2011. Free cash flow was 1.43 billion, up 7% versus the prior year. And operating cash flow was right around 2 billion.

I'm especially pleased about our free cash flow performance, which has been strong and consistent over our first five years despite what has been, at times, a volatile and uncertain economic environment. This is certainly one of our most important strengths in the company.

Now, if you could please turn to slide four. Total company sales of 3.36 billion were down 3% versus the 13-week prior year quarter and also down 3% on an organic basis. Currency translation, primarily due to the weaker euro, negatively impacted year-on-year growth by about 400 basis points or 155 million. The Deutsch acquisition contributed $153 million in revenue.

On an organic basis, in Asia, our revenue was up slightly. Automotive continued to be strong across the region, offsetting demand softness in our CIS businesses. Within CIS, the industrial equipment market was especially soft. On the positive side, our small but emerging Mobile business was up 40%.

In China, markets were quite mixed. But overall, the slowest since the '08, '09 timeframe. Our auto business continued to be strong, up 20% year-over-year while our CIS businesses were down 10%.

In Europe, which accounts for about one-third of our total revenue, business was down 5% organically from the prior year level. Most of this decline was in automotive and industrial as our networks business was flat with last year. We expect further seasonal declines in Europe in Q1 due to the seasonality of our business and continued softness in auto and industrial. Right now, the automotive industry is projecting about a 10% reduction in European automotive production in this coming quarter.

Our revenue in North America was down 6% year-over-year on an organic basis. Continued strong demand in our automotive business was offset by soft demand in our Telecom and Industrial businesses as well as our SubCom business.

Please turn to slide five and I'll provide some highlights of our segment performance. As a reminder, beginning next quarter, we will be reporting in our new segment structure and I'll touch briefly on this later on.

Transportation had another strong quarter of performance. This business is now running at a 5-billion-plus annual revenue rate. Overall, vehicle production is now at about an 82 annual unit rate with continued growth. And in 2012, there was strong growth in the U.S. and Japan, moderate growths in China offsetting weakness in Europe.

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