TE Connectivity (TEL)
Q3 2012 Earnings Call
July 25, 2012 8:30 am ET
Thomas J. Lynch - Chief Executive Officer and Executive Director
Terrence R. Curtin - Chief Financial Officer and Executive Vice President
Amit Daryanani - RBC Capital Markets, LLC, Research Division
Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division
Shawn M. Harrison - Longbow Research LLC
Sherri Scribner - Deutsche Bank AG, Research Division
Wamsi Mohan - BofA Merrill Lynch, Research Division
James F. Hillier - UBS Investment Bank, Research Division
Mike Wood - Macquarie Research
Michael J. Wherley - Janney Montgomery Scott LLC, Research Division
Craig Hettenbach - Goldman Sachs Group Inc., Research Division
Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division
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Ladies and gentlemen, good morning. Thank you for standing by, and welcome to the Fiscal Quarter 3 Earnings Release Meeting. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Mr. Keith Kolstrom. Please go ahead.
Good morning, and thank you for joining our conference call to discuss TE Connectivity's third quarter 2012 results. With me today are Chief Executive Officer, Tom Lynch; and Chief Financial Officer, Terrence Curtin.
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. If you can turn to Slide 3, I'll give you a quick summary of Q3 and an overview of our Q4 outlook.
Q3 results were as follows: Sales of $3.5 billion were up 8% sequentially. This was slightly below our expectations, due to further weakening of the euro which had about a negative $50 million effect and a slower-than-expected recovery in our Network Solutions segment.
Adjusted operating margin improved 100 basis points sequentially to 14% and very importantly, sequential improvement in all of our segments. Adjusted earnings per share of $0.79 were at the midpoint of our guidance, despite the lower sales. And this is an improvement of 16% sequentially and 4% year-over-year. This year-over-year EPS improvement was on a slight sales decline.
Free cash flow is very strong at $414 million and that was up 19% over the prior year.
Uncharacterized Q3 for us is a quarter of good execution. Strong cost control and productivity improvement enabled us to improve operating margins back to the 14% level despite lower-than-expected sales. And importantly, margins improved across all segments.
In CIS, margins improved 100 basis points sequentially and are essentially at prior year levels on sales that are 12% lower than the prior year. We do expect additional margin improvement in CIS in the fourth quarter.
We completed the acquisition of Deutsch in April. The integration is on track and as expected. In Q3, Deutsch added about $0.04 of EPS as expected. We're excited about the opportunities this acquisition will provide. They have excellent products and technology as we've discussed before. We're going to add strong channels, the scale to drive cost down and better customer service, and the results we're seeing are a little better than planned, despite the markets being a little softer. We're very -- we're really excited about the quality of the team that joined TE.
And the cash flow, as we mentioned earlier, was very strong and we completed the sale of our Touch and Services business which generated approximately $400 million of proceeds.
We entered a little bit on the market environment. We entered the quarter with order momentum building across most of our markets and in particular, in Telecom Networks and our CIS businesses, as the economic outlook was improving in the U.S. Inventories in the channel were back in line, and we experienced a seasonal lift we typically see at this time of the year, especially in our Networks business. So things were tracking pretty much as expected.
In mid-May, this momentum began to stall and orders began to soften, especially in Telecom and our Industrial and Appliance businesses. We haven't seen a pronounced decline, but we have seen a softening.
Demand in the automotive and commercial aerospace businesses continues to be solid and we are building in the momentum in the Consumer business.
These trends, coupled with the uncertainty in Europe which is having an impact from a demand and a foreign exchange perspective, and the lower-than-expected growth in China, is resulting in a reduction in our guidance for Q4. I'll go through the details later in the call.
I do expect us to maintain our margin in the 13.5% to 14% range in Q4, despite the softness, and to deliver another strong cash flow quarter. We also plan to resume our share repurchase program in Q4, and I'll comment more on capital allocation later.
Before we move into the review of our results and outlook, I'd like to recap the organization changes we announced last week, so if you can turn to Slide 4.
These changes have been in the planning stage for some time. The regrouping of our business units into these 4 segments had 2 primary objectives. Enabling us to best leverage our capabilities for the customer, and further optimize our efficiency. And we also believe this will provide improved information regarding the performance of the company for our investors.