泰科電子 (TEL) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the TE Connectivity reports fiscal third quarter results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. Should you require assistance during today's call, please press star zero. As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Keith Kolstrom, who is the Senior Director of Investor Relations. Please go ahead.

Good morning. Thank you for joining our conference call to discuss TE Connectivity's third quarter results for fiscal year 2011, and our updated outlook for the full year 2011. 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, we ask you to review the sections of our press release and the accompanying slide presentations 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.

Finally for participants on the Q&A portion of today's call, I would like to remind everyone to please limit themselves to one follow-up question, to make sure that we are able to cover all questions during the allotted time. Now let me turn the call over to Tom for some opening comments.

Thanks, Keith and good morning everyone. I will cover the highlights of Q3, a little bit of overview of Q4, and then I will turn it over to Terrence, and he'll walk us through the details. If you can please turn to slide three now. This was a very good quarter for us. Sales of $3.7 billion were up 21% versus last year, and were better than guidance, due to a less than unexpected, unfavorable impact from the Japan earthquake, and the strong year-over-year growth was driven primarily by 5% organic growth that more than offset approximately $70 million of less sales due to the situation in Japan, and also a significant contribution from the ADC acquisition of about $300 million in sales.

Our adjusted earnings per share of $0.78 is a new high for us, and is up from $0.70 last year. We exceeded our guidance range primarily because of the lesser impact from Japan. We expected a $0.09 unfavorable impact and turned out to be $0.05. And really there, both our customers and our suppliers as well as our team did a terrific job in recovering faster than I think that anyone thought was possible at the time.

We also had another strong cash flow quarter generating $340 million of free cash flow, and we returned the entire amount to shareholders in the form of dividends and share repurchases. As I think you know our increased dividend rate kicked in this quarter. Overall our performance in the quarter was driven primarily by continued strength in our automotive business, where we continue to see double-digit growth in all regions except Japan in Q3. Continued strong demand in our telecom networks business in every region, and the contributions from the ADC acquisition which as you know are part of our networks business, and almost now fully integrated in the telecom business. These positives more than offset the continued softness in CIS, which we expected.

To highlight a little our network solutions business this segment had a very strong quarter generating $1 billion in sales, and delivering adjusted operating margins of 14%. And the ADC integration continues to progress very well. We are delivering the synergies we outlined a year ago, and the whole integration, I couldn't be happier actually, it is coming along very well, and we feel just about like one company already.

Orders during the quarter were $3.9 billion and $3.6 billion if you exclude our Subcom business. Our book to bill was 1-to-1 excluding Subcom. Despite the macro uncertainty right now, our orders in automotive, aerospace, energy and telecom were solid throughout Q3, and have continued this way so far in July, and so all four of those businesses have been running double-digit order growth. The Data Comm business which we thought would be on track by now continues to be softer than expected, and we also did see a little softening in the distribution channel late in the quarter.

For the fourth quarter our guidance is essentially unchanged, and we expect adjusted EPS in the range of $0.84 to $0.88, and just a reminder our fourth quarter has an extra week, and without this extra week we estimate adjusted earnings per share would be $0.79 to $0.83. This is another strong quarter year-on-year growth compared to the $0.72 we delivered last year. And for the full year we are increasing our annual guidance range to $3.06 to $3.10 of adjusted EPS, which is a little over 20% increase compared to the $2.54 we delivered in 2010. The increase in our guidance is due to the better than expected Q3 performance. So we are basically holding Q4 at our prior guidance level.

So with those highlights I will turn it over to Terrence, and he will walk through the quarter in more detail.

Thanks, Tom. Good morning everyone. Let me start by covering sales performance. If you could please turn to slide four. Total Company sales of $3.7 billion were up 21% year-over-year with growth across all segments and geographies. Organic growth which excludes the effects of currencies and the ADC acquisition was 5% in the quarter, and was driven by our transportation and network solutions segments.

Geographically we had organic growth of 12% in EMEA, 9% in the Americas, and Asia was essentially flat. And certainly this Asia growth rate was impacted by the Japan earthquake, which reduced our sales by $68 million in the quarter. The Japan impact on our organic growth rate on an overall basis was approximately 200 basis points, and the impact on Asia was about 500 basis points. ADC sales in the quarter were $311 million, or about half of our overall growth. And we also did benefit from currency translation which increased overall growth by about $200 million. On a sequentially basis sales were up 7% overall, and up 5% organically.

Now let me give you some highlights of our key markets in each of our segments, and as I discuss these all changes that I will discuss will be organic. Please turn to slide five. And I will cover the Transportation Solutions segment first. In this segment, sales increased 11% versus the prior year, and were up 2% sequentially. In the automotive market, our sales increased 11% versus the prior year, and were flat sequentially. Year-over-year sales were up 17% in EMEA, 16% in the Americas, and flat in Asia driven by the impact in Japan. In fact, if you go into China our sales were up 11% in China.

From a production perspective, global production was down 6% sequentially to about 18.5 million units in the quarter, which was flat with the prior year, and our sales growth again was above auto production due to the electronic content increase in vehicles, increased share, as well as Tier one customers building inventory in anticipation of the Japan earthquake recovery. We continue to see end demand trends outside Japan remaining strong across all regions, and we believe quarter four global auto production should be approximately 19 million vehicles, which would equate to a year-over-year production growth of 6%. This production number includes some increase from the production recovery following the earthquake, offset by the normal seasonal shutdown that we see in the fourth quarter in Europe.

In the Aerospace and Defense and Marine Market sales were up 12% versus the prior year, and up 13% sequentially. Growth was driven by continued improvement in the commercial aerospace as well as the oil and gas markets, as well as some increased share. For the Transportation Solutions segment overall, we expect year-on-year double-digit organic growth in our fourth quarter.

So please turn to slide six. In our Communications & Industrial Solutions segment sales declined 1% versus the prior year, and increased 6% sequentially. Strength in the Industrial and Touch Solution markets were more than offset by declines in our Consumer Devices business, and about $35 million in lost sales due to the Japan earthquake. We do expect some additional impact from Japan in our fourth quarter in this segment, as some customers have yet to fully recover, causing delays in certain programs.

Let me get into certain markets in the segment. In the Industrial Equipment market sales up 3% versus the prior year, and 5% sequentially due to the demand for factory automation, medical, and rail projects. We do expect this market for us to have similar sales next quarter as we had in quarter three. In the Data Comm market, which includes sales to Communication Equipment, Server, and Storage market, our sales were basically flat versus last year, and increased 7% sequentially driven by new program wins and spending on wireless infrastructure. As Tom mentioned this market continues to recover more slowly than we thought as we entered the year and based upon current order trends, we expect results similar to quarter three levels in our fourth quarter.

In the Consumer Device area, revenues were down 18% versus the prior year, and basically flat sequentially. The year-over-year sales decline continues to be due to customer mix and our relatively small position in smartphones, but revenues did stabilize versus quarter two. While this market, and while this business has clearly underperformed its market, we are encouraged by recent program wins and improved relationships with key customers. In quarter four, we expect the Communication & Industrial Solutions segment revenues to be similar to quarter three levels, which will be a low single-digit organic decline year-on-year.

So let's turn to slide 7 to cover network solutions. For the segment total sales were up 64% including ADC sales of $311 million. On an organic basis sales in this segment were up 7% versus the prior year. In the Telecom Networks markets our sales were up 24% organically versus the prior year, driven by the continued acceleration of investment in fiber networks. The growth that we experienced organically was driven by Europe, South America and China. This growth is well above typical seasonality, and we expect double-digit organic growth year-over-year in quarter four as well.

Sales for the Energy market up 13% versus the prior year with double-digit growth in all regions, as utility investment continues to recover around the world. In the Enterprise Networks market our sales increased 6% versus the prior year, due to increased data center spend globally, and growth related to infrastructure build-outs in emerging markets. These positives are continuing to be offset by a tough commercial construction market. And finally in our Subcom business as expected sales declined 14% versus the prior year.

Our bookings in the quarter were very strong at $280 million, which includes network upgrades, projects for the oil and gas market, as well as the approximately $180 million SJC contract, which is a system between Singapore and Japan that we announced on our last earnings call. We continue to by active in a number of bids and contracts in process, and we expect full year 2011 sales of approximately $600 million. Overall for the segment in quarter four we expect that the sales will be up mid-single digits organically year-over-year, and in addition ADC will contribute about $300 million. This is down slightly compared to quarter three primarily due to seasonality in our European markets.

Now let me cover our earnings which start on slide eight. Our GAAP operating income for the quarter was $471 million, which includes $12 million of charges related to the ADC acquisition, and $5 million of charges related to non ADC restructuring. Adjusted operating income was $488 million, with an adjusted operating margin of 13.1%. Margins were higher than we guided primarily due to the strong margin performance in our Network Solutions segment, and the reduced impact from the Japan earthquake. We do estimate that the Japan earthquake impacted our margin by about 50 basis points in the quarter.

Adjusted earnings per share for the quarter were $0.78, and this is up 11% from $0.70 in quarter three 2010. The improvement was driven by volume, the acquisition of ADC, and the benefit of share repurchases, which together more than offset the negative impacts of higher metal costs and the Japan earthquake. We estimate that the impact of the Japan earthquake was a decrease in our earnings of approximately $0.05 per share in the quarter versus the guidance we gave last quarter of a $0.09 impact.

Turning to slide nine, and if you look at the top half of the slide which includes gross margin, our adjusted gross margin in the third quarter was 30.2%, which was down as we expected from about 31% last quarter, and in line with our guidance. In the fourth quarter we expect our gross margins to improve to 31%-plus, as the pricing actions that we have initiated take hold, and the lessening impact in Japan. This guidance is consistent with what I said on the last call.

If you look at the bottom half of the slide, operating expenses as a percentage of sales were slightly better than we guided. Expenses were up $118 million year-on-year, driven by the increase in sales, the addition of ADC, and the continued investment in our Research & Development programs. For quarter four, we expect as a percentage of sales RD&E will be about 5% and SG&A of about 12.5% which is in line with our longer term margin targets.

So let's turn to slide 10 so I can discuss items on the P&L below the operating line. Net interest expense $35 million compared to $34 million in the prior year, and in quarter four we expect that net interest expense will be approximately $36 million. Other income net which relates to our tax sharing agreement was an expense of $5 million due to the settlement of a portion of our shared tax obligations. This partial settlement also drove a lower GAAP effective tax rate of 17% in the quarter. If you adjust for this the adjusted other income was $9 million, which is slightly lower than guidance, and for quarter four I expect approximately $13 million of other income.

The GAAP effective tax rate was 17% in the quarter and the tax rate on adjusted income was 25%. I would highlight that the lower other income and the lower tax rate essentially offset each other, so there is really no benefit to adjusted earnings per share versus our guidance. In quarter four we expect a tax rate on adjusted income of approximately 26%.

Now let me cover free cash flow on slide 11. Our free cash flow in the third quarter was $340 million in approximated or adjusted net income. With the year-to-date performance we continue to expect 2011 free cash flow to be in excess of $1.3 billion excluding the ADC acquisition related spending of $105 million. On working capital we made solid progress in the quarter as both inventory and receivables were each down 2 days sequentially while payables were up 2 days. Overall we feel good about the current working capital numbers. Capital spending was $144 million in the quarter, up from prior year levels of $92 million. We expect the capital spending for the full year will be approximately 4% of sales, which is at the lower end of our long-term spending range of 4% to 5% of sales. And during the quarter we had $46 million of proceeds from the sale of Property, Plant & Equipment, and this was driven primarily due to the closure of the sale of the former ADC headquarters.

Now let me go to slide 12 to cover debt and liquidity. We began and ended the quarter with $1.2 billion of cash. During the quarter our free cash flow of $340 million was essentially returned to our shareholders through dividends and the repurchase of 7.4 million shares. $79 million of dividends paid during the quarter reflects the recent 12.5% increase in our payout. Other sources and uses of cash in the quarter were during the quarter we did complete the sale of the noncore ADC patents that we covered last call, and that generated $68 million of proceeds, and we also used $88 million of capital to tender legacy ADC debt.

Finally, during the quarter we entered into a new five year $1.5 billion revolving credit facility, which replaced the existing facility that was scheduled to mature in 2012. We are pleased to have this facility in place, because it continues to provide us with a very strong liquidity position.

So let me cover the order trends and our outlook, and if you could please turn to slide 13. Orders were solid in quarter three and as you can see from this slide, the book to bill was 1, if you exclude Subcom in all of our segments. Really when you see the order trends that we are experiencing, and as Tom mentioned as we exit the quarter, Transportation and Network Solutions segments continue to be very strong, but we have seen some softness in the CIS segment.

Let me turn to slide 14 to cover the outlook. For the fourth quarter, we expect our sales to be in the range of $3.9 billion to $4 billion, and this is an increase of 24% to 28% over the prior year. This does include approximately $300 million of revenue from ADC, and as Tom mentioned we do remind you that we do have the extra week in the fourth quarter, which we estimate will be $240 million of revenue, and is included in this guidance.

On an organic basis which excludes the extra week and the ADC acquisition, organic growth would be 3% to 6% year-over-year, and this organic growth does include a negative impact of $35 million from the Japan earthquake. Our quarter four earnings per share are expected to be $0.84 to $0.88. This reflects the benefits of our pricing actions, the improving situation in Japan, and the additional week in the fourth quarter. As with last quarter, we have included the year-over-year EPS reconciliation at the bottom of the slide, so you can see the moving parts.

Turning to the full year, sales are expected to be $14.3 billion to $14.4 billion, this is an increase of 18% to 19% compared to the prior year. ADC sales for the full year expected to be about $950 million, and provide 800 basis points of our growth. Organic growth without ADC and the extra week is expected to be 6% to 7%. From an earnings per share perspective we expect $3.06 to $3.10 per share, and this is an increase of 20% to 22% over fiscal 2010 earnings per share of $2.54. This is a very strong earnings growth when you consider the headwinds and earnings from both the Japan earthquake and the metals increase that we have experienced that you can see on the lower right-hand corner of the slide. Metals net pricing is a $0.14 headwind, and Japan a $0.08 headwind.

Just finally I believe when you look at this, the earnings power of the Company is really starting to gain momentum when you look at this 20% earnings per share growth year-over-year. With this, operator, let's open it up for questions.

Our first question comes from the line of Amitabh Passi with UBS. Please go ahead.

Thank you. Tom, perhaps the first question for you, I think in the press release you alluded to increasing levels of macro uncertainty, just curious maybe you could give us a sense of what you are hearing or seeing from customers perhaps across geographies, and as you look over the next six to nine months your general thoughts on where you think there are probably some upside/downside concerns?

Six to nine months is a long time out, but I will give you my best shot. From one perspective as I think we discussed throughout this recap here, if you look at two of our three segments, orders are strong in the infrastructure rebuild arena, or whether it be telecom or enterprise or energy, and for sure in automotive. And the signals from and I have been out to a lot of customers in the last couple of months, the signals from the automotive customers are very bullish. Now I know they want us to make sure we are ready with the production, because when things bounce back quickly a year and a half ago the whole supply chain was catching up, so we have to filter all of that. But I do believe that they are really bullish about next year, and the industry has been publishing numbers that are fairly bullish in terms of growth next year. Right now everything we see supports continued strength in automotive and continued strength in network.

The CIS network is really mixed into three broad things. We are strong in the Data Comm business, we are well positioned there, we have a lot of strategic momentum with design-ins, but the market as you can tell from following the big companies that provide the routing and the infrastructure and the services, is really kind of all over the place. It is hard to discern a trend. For us it is going a bit sideways.

Industrial is solid for us. It has been solid all year in terms of order growth. A little higher than normal growth. Slowed down a bit in the last few weeks, but we think that is more related to price increases and the summer. But we are watching that.

And then the consumer business, which in parts of the consumer business, smartphone and tablet in particular that are very strong, that as we talked the last couple of calls we are not that strong. So we step back from the picture I think we feel, clearly we feel confident about Q4 given the order rate we have into Q4, and the things I just said. Beyond there is always in this business the visibility somewhat limited. I would say I feel more positive than negative overall for sure.

Our next question from the line of Shawn Harrison with Longbow Research. Please go ahead.

Following up on that a bit. The commentary on distribution weakening a little bit. Is that solely you think tied to maybe some of the buying ahead of price increases, maybe a little bit of prebuy activity and not the market eroding? Just want clarification on that first?

I think it as little hard to tell, Shawn. As we dig into it we definitely know we have and I am sure other do, the impact of when you decide to raise prices, the channel buys a little bit ahead, and there are ways we manage that with them. So we always have that impact. It is the summer so we always see a little bit around this time of softness. I think the wilder card is demand softening a little bit. We do see a little softening in Data Comm and Industrial. Some of that flows through the channel. There is an element of that that is softening. This is on the watch closely list. Don't assume this is just a blip. We are not assuming it is falling off the edge, but one that gets a lot of attention from our team to gather as much information as we can.

Our next question comes from the line of William Stein with Credit Suisse. Please go ahead.

Thanks. Wondering if we can talk about ADC for a minute, and two parts of that. With very good sequentially growth in the Telecom/Networks part of the business wondering if that is in your view the start of a protracted cyclical upturn there, or a blip that reverses, or something in between, and then also if you could comment on a successful transaction here what the Company's appetite is for incremental M&A?

I would say if you go into the carrier part of the business it is pretty strong right now. You have to go by geography, and you have to go by segment in geography. Internationally, it is very strong. Less fiber deployed out there and we talked about NBN for example in Australia, all the way up to China has got more activity going, and Europe has a lot of activity going. A lot of quotes and a lot of building going on.

The US is really kind of two stories. The big carriers pausing right now for a couple of different reasons that you are aware of. The secondary carriers buying as they have let fiber in the network, stimulus was geared in that direction, and then of course, this business that we acquired as part of ADC, this distributed antennae system to help coverage is very strong right now, in-building and around building and in major event settings. There are a bunch of different things driving it, but we do feel like we are in a good cycle, and when we look at our Subcom business, which is clearly related to all that, a lot of quote activity. More quote activity this year than last year. Always have to go through funding and everything, so we feel good about that particular business.

Enterprise I think is moving along at a more steady level. Not on the growth trajectory of telecom, but lots of activity there. Similar drivers, more bandwidth, more security in the enterprise. And then the Energy business which is also in our Networks business as you know was flat to slightly down for three years, and I think the deferral of maintenance and upgrades has just caught up, and there is pent-up demand there, so we have been growing at double-digits nicely there, and would expect that to continue. All indications from our customers are that will continue. Terrence, you want to add anything to that.

Yes. When you look at the results for the quarter and for the year, ADC is performing completely with where we laid out when we did the deal, and to Tom's point, really the strength that we are seeing is in the international market. So some of that strength you see on the fall through, and the very good margin performance is really a combination of the product lines coming together, and our strong position globally around the world. So certainly to Tom's point, the trends we are seeing and the strength we are seeing, does look like it is an early part of a very good cycle.

As far as our appetite for additional M&A I think it really hasn't changed for the right strategic fits at the right size. We are definitely always looking, and building our pipeline. I think what ADC has done has given us confidence that we can do this well. This business is very well integrated, and it won't be long before we are not talking about ADC because it will be so well integrated that, I mean the sales forces are integrated. The factories are just about integrated. The lines of demarcation won't be so clear anymore, and of course that is how we get the rest of the synergy as well. I think we have the confidence to do more, we are selective the way I think about us, and we are strategic with them, not opportunistic.

Great. Thanks very much.

Thank you.

Our next question comes from the line of Craig Hettenbach, Goldman Sachs. Please go ahead.

Following up on the topic of M&A and ADC, which was a larger type deal. On a go-forward basis is the environment out there kind of tuck-in type deals, or can you frame out the opportunities that might be available?

Of course, we can't get specific, but I would say if you were to look at our pipeline, you would put most of what is on our pipeline list in a tuck-in category. As I said before, I wouldn't say we would never do a $1 billion-plus acquisition, if we had one that fit our strategic objective that fit our sort of value criteria we are more than willing to do it. But generally speaking in the industries we are in, and the industries that we want to augment through bolt-on acquisitions, it would be more the $200 million or $300 million sales level range in general.

Okay. And then just staying with the theme of capital allocation, the Company has been very balanced in terms of buying back stock, increasing the dividend. As you go forward and the business is generating a lot of cash, is there any bias toward buybacks versus dividends?

When you look at it, Craig, our view is that is return of capital to shareholders, either way you look at it. When you look at it, I think we will continue to evaluate that with our Board but the key message that we have always sent is, when you look at the strong cash generation model we have, where it does approximate free cash flow as we did this quarter, it is going to be balancing the strategic opportunities that you just asked Tom about versus return of capital. And our payout, we have been a payout philosophy on the dividend of around 25% of free cash flow. We will evaluate that with our Board. The key point is you said it, we will be balanced between return of capital as well as to Tom's point the strategic opportunities. It will be a balance ongoing, I would say that we will to review that with our Board, but I think the key message for you is the cash we generate is going to be put to use or probably returned to shareholders.

The last one is you have a couple of quarters of ADC under your belt. I know you talked about that business growth rate above the core business, and just wanted to see what type of feedback you are hearing from customers, and related to that growth rate as you go forward?

The feedback from customers in terms of the product range and from the customer's perspective of more one-stop shopping has been really positive, and I have talked to several of them over the last several months. I think how we have integrated on the front end to bring the story to the customer has been received very well. We started to see what I would call small wins out there with the combined product line that supports our acquisition theory that we were going to be able to get some growth over and above industry growth by being able to bundle the products and come in and provide a simpler solution.

I think in the US where ADC is strong in their carrier business, it is slow growth right now because of the potential M&A going on in that space, and the sorting out of how companies might come together, and what that implies for short-term capital spending. As I said, in the second tier it is strong, and in the digital antenna business it is extremely strong. So when we look at the acquisition case compared to where we were, it is really we are hitting on every element of our assumption.

So we feel very good about it as each month goes by we feel like we hit this at the right time. The team is getting the synergy at or ahead of pace, and the cultural integration which is usually the toughest thing, and the one that could upset things is going very, very well, because we have basically taken the best-of-the-best approach, and if you look across that business and take the top management, it is a nice mix of ADC and TE. So we feel really good about it.

Great. Thank you.

Thank you.

Our next question comes from the line of Jim Suva with Citigroup. Please go ahead.

Thank you. Congratulations to you and your team for great results and the good outlook.

Thank you Jim.

My first question is, when we think about the outlook for the auto trends, and typically the September quarter has European holidays, a lot of people on vacation and holiday the month of August, and we have got some model transition years from the automotive, or model transition time periods from the automotive OEMs. Can you talk about your outlook for the September quarter? Are you expecting a normal seasonal holiday and plant closure transition time period, or a little bit more of a compressed transition for the auto sector production?

When you look at it certainly as I said on the call, right now auto production sequentially versus quarter three looks flat, and to your point that is not typical. Typically you are right auto production goes down sequentially due to those shutdowns that you typically experience in Europe. What we are seeing is we going to be flat. We do have Japan recovering. That is really offsetting the European shutdowns. When you look year-on-year, the shutdowns in Europe are consistent with last year. So the German manufacturers have a little bit of a compressed shutdown, but they also had that last year, and some of the other manufacturers in Europe and southern Europe are more normal shutdowns. Year-on-year it is pretty consistent with where we saw in 2010.

Great. And then my follow-up question has to do with margins. First, just a little nit-picky one on gross margins, and a more important question on the operating margins. The nit-picky question is I think gross margins you are expecting about 30.5, and they came in below that. Can you help us maybe close the gap there, what happened? And longer term can you help remind us on operating margins what your goal is, is it the share level needed for that goal, and the timeline that we are looking at? Thank you.

On the gross margin it is really around FX, how currency has moved, and so forth. And I think the key when you look at gross margin is where we guided and exiting the year, we have a lot of moving pieces with Japan and metals, but it was pretty much in line with what we expected. From a long-term model still to get to the 15% that we remain confident in, it is really is 32% gross margin approximately, and our RD&E and OpEx structure, selling in G&A of around 17% combined. That is still how we see the model going forward.

What about the sales level to get there?

Sales level would still be around that $14 billion excluding ADC. We still believe despite the metals headwind, we can still achieve at around that level.

And the timeline?

We are not guiding, Jim, for next year yet. From that viewpoint, we will update our guidance for next year in our next call.

Thank you and congratulations again to you and your team.

Thanks, Jim.

Our next question from the line of Matt Sheerin, Stifel Nicolaus. Please go ahead.

Thanks and good morning. Question on the guidance impact on Japan, particularly the consumer business. You talked about another $35 million negative impact. Is it your sense that is the bottom, and is there any visibility that you have into the December quarter that business starts to come back?

Matt, it is Terrence. That $35 million is across our communications and industrial segment overall. There is a piece of that which is in Data Comm, there are Data Comm suppliers there as well as consumers. It is not just all consumer. From what we do see we do anticipate that should be the end of it in the fourth quarter. Anything else would be more.

Okay. And then just a follow-up on Jim's question regarding gross margin. You did talk about some positive impact from price increases that went through. Seems from our checks that some suppliers are having difficulty passing prices at this point, given that generally the lead times have come in and growth rates have slowed. How are your conversations going with suppliers? Is there one particular area that you are seeing success versus failure?

It is a broad based price increase as we talked on the past couple of calls and with where we sort of laid out from an expectation perspective, and our guidance is right in line. So as we sort of told you on prior calls, we assume that we are going to get about 60% to 70% of the headwinds back. Certainly we will get more of that back next quarter than this quarter. But from where it is happening and the recovery, it is pretty much net/net in line where we thought Matt.

Okay. Thanks a lot.

I would add to that I think we are making very good progress. It is difficult progress but it was, we had to make some progress, and the team just stayed with it. I think this kind of pricing, industries aren't used to it in electronics. On the other hand we aren't used to the commodity costs, and we can't take them at the rate they are at. A lot of preparation, multiple meetings, but we are getting there with it. So I feel very good about the progress.

Okay. Thank you.

Our next question comes from the line of Sherri Scribner with Deutsche Bank. Please go ahead.

Hi, thank you. I just wanted to talk about the higher commodity costs, which I don't think we have talked about on the call. It looks like based on your expectations for the fourth quarter that metals will be a lesser percent impact to the quarter than we have seen over the past couple of quarters. Now clearly part of that improvement is the price increases, but I wanted to get a sense of what you are thinking about metals over the next couple of quarter, and the impact that has, and does the more positives metals environment or the pricing help you get closer to your operating margin targets in fiscal 2012? Thanks.

Sure. The metals environment is versus the last time we spoke really hasn't changed. If you look on an overall basis as you can see on the walks on the guidance page, it going to be a $0.14 headwind for our year net of the pricing. And when you look at it the metal environment has sort of flattened. It has had a little bump up the past couple of weeks. But overall when we look at it, fourth quarter still will be about a $0.01 headwind to earnings per share. That is about 30 to 40 basis point on the operating margin.

As we go into next year pretty consistent with what I said last quarter. Certainly we have benefited from hedging as well this year. And if you sort of take current metal rates and you roll off our hedges, and you assume our pricing we still would have maybe a $0.05 or $0.10 headwind next year for the pricing, certainly metals earlier in the year were lower than they are now. So right now with what we have done with pricing and our hedging programs, metals would be a slight headwind into next year at current rates of about $0.05 to $0.10 per share.

Great. Thank you.

The next question from the line of Steve O'Brien with JPMorgan. Please go ahead.

Thanks for taking my question. Looking at the ADC numbers, I think you are talking about $950 million in revenue contribution fiscal 2011 versus sort of $1 billion previously. That just might be some kind of sort of about $1 billion before. Sort of looking at the ADC revenue contributions, $310 million in June, $274 million in March, it would about 2% above what ADC reported on a standalone basis kind of last year. Is there accounting adjustments in there that impact that organic growth, or is that the kind of level ADC is growing at right now?

With the things Tom talked about, ADC is growing when you look at with AT&T and Verizon right now. They were growing slower, and that is what we expected. So the $950 million to $1 billion, Steve, to your point is rounding. The number really has not changed on the topline, but we did expect this year with what AT&T and Verizon were doing in their roll-outs, that it would be a slower year until some of the DAS things kicked in, so it is right where we expected and the earnings of $0.12 per share is right where we expect.

Got you. So do you think, what would be the timing potentially for a reacceleration to that 6% to 8% organic growth target when the DAS projects reach critical mass?

The 6% to 8% organic growth included both our businesses so it was a global picture when we gave out that guidance. It was combined for the entire segment including ADC. It was not just ADC, Steve.

Got you.

So it was really the combination and the leverage that we get around the world, not just in the legacy ADC business.

Great. Thanks for that.

Thank you.

Our next question comes from the line of Amit Daryanani, RBC Capital Markets. Please go ahead.

Ryan Jones on for Amit. On Network Solutions if we recall correctly, the target has been to get to about 15% Op margins, and this quarter is obviously a stellar performance. I was just wondering how should we think about that long-term target, especially since we are very close to it right now and the timeline to getting 15% op margins in that segment very consistently?

When you look at it, certainly we had very strong growth internationally, and next quarter we do expect that network solutions will run around this level. We also are getting some seasonal benefit. We are typically stronger this time of year. So when we still look at it, the long-term target for this business, margin has not changed. When you look at it, I think if we continue to see the volume that we are seeing in there, I think later next year consistently be in at 15%, it is a real opportunity, but we will do that as part of our guidance, as we update that next quarter into next year.

Thanks. And then my follow-up question is last quarter I think you said that about 3 million units were coming out of your full year forecast due to Japan. And I was wondering given your expectations for 19 million units next quarter, is that 3 million, is that view still intact, or is there a better recovery than you are seeing than with your Japanese customers?

Actually when you look at it is really 1 million units now. When you look at it, you are right. Last quarter we said 2 million units in the third quarter and 1 million units in the fourth quarter related to the Japan earthquake. It is going to be 1 million units and almost entirely in the third quarter. We really view in the automotive realm of things, the Japanese earthquake is essentially over and we are starting to recover.

Great. Congratulations on a good quarter.

Thank you.

Thank you.

Our next question comes from the line of Wamsi Mohan, Bank of America. Please go ahead.

Yes, thank you. Terrence, you mentioned some buildup of inventory in automotive at Tier one customers in fiscal third quarter in your prepared remarks. How much of the revenue increase about production trends would you attribute to this inventory dynamic, and do you therefore, why would you not expect auto revenue trends for T to be below production trends for next quarter? What are the offsetting factors there?

As you know, certainly you have production. And production year-on-year like I said was basically flat quarter three to quarter three, and we grew 9% quarter three on quarter three. I am sorry, 11% quarter three to quarter three in automotive. When you look at that certainly there is content increase. There is a little bit of share gain. But the separation had a little bit of extra. And what we did see in places like Japan, we did still see some customers making sure they were taking goods in, and even though the OEMs were not producing.

So it is a little bit of an elusive number, but it was one qualitative reason we were a little bit higher. When you look at going into next quarter, next quarter where you have about a 6% growth and we said the segment is going to grow 10% year-over-year, we will get a little bit of that unravel, but the content increases and the share gain will still allow us to grow higher than production. So year-on-year production like I said in the call, 6% in quarter four. We are going to grow double-digit. We will have a little bit of negative impact from the Tier one customer, but the content and share gain will still drive the growth above production and absorb that.

Thanks a lot. And Terrence, can you remind us of where your hedge levels are for raw materials heading over the next six months?

When you look at it right now the hedge levels if you look at it from a metals perspective, in the fourth quarter we are probably going to be in around the $420 copper and $1450 gold, and around $34 silver. Silver pretty much in line with the market, the other two we still have some protection. And I think to the point, Wamsi, similar to what I said to Sherri, when the hedges roll off the current market net of our pricing, right now we see a $0.05 to $0.10 headwind going into next year.

Great, thanks a lot.

Thank you.

Thank you.

Our next question comes from the line of Amitabh Passi with UBS. Please go ahead.

Thank you, a quick follow-up. I apologize if you touched on this. Should we assume CIS operating margin likely bottomed in the June quarter, and should we expect improvements as we go forward? Related to that, I think Tom you talked about some customer wins in that segment. Was hoping you could shed a little bit of color who these customers might be, or which sub-segments?

When you look at the margin as I do for your question, CIS we do believe has troughed with this quarter and stabilized. From that viewpoint I do think that our guidance does assume their margin is going to increase going from Q3 to Q4. So that is a fair assumption, Amitabh.

Could you repeat the questions on the customers again?

Yes, I think that you said specifically in reference to the consumer area of CIS that you had seen some customer wins.

Oh yes, some new program launches with the guys that reported last night. I think last quarter we have a little bit of a beachhead. Now we are probably a couple of feet off the beach onto the land. So we are making progress it is really building up consumer team's confidence, but we still have a long ways to go, and consistency is what we need in that business. Making progress and making progress with the right customer. But we have got to string together three or four more quarters of that kind of progress.

Okay. Thank you.

Thank you.

And our final question comes from the line of Shawn Harrison with Longbow Research. Please go ahead.

Two very brief follow-ups. Terrence, if you could repeat the global production for the third quarter, and then what you expect the fourth quarter to be as well? And then second on ADC, just want to tie up the synergies where we are at right now. Are all of the SG&A synergies in the model, and maybe the timing for those manufacturing synergies to still come online?

Sure. In Q3 we said production was around 18.5 million units which was basically flat year-on-year with last year, and we see Q4 being about 19 million global production, which is up about 6% versus last year, Shawn. So that is the production question.

Let me move to your ADC. When we look at ADC as we said when we laid out the business case for you all, we said $100 million of cost synergies. $60 million of that was going to come out of the SG&A area. We will be running that level in those SG&A synergies in our fourth quarter. From that viewpoint consistent with what we said before, that is on track. The manufacturing synergies, we are in the process of planning those and working those, they will come in throughout next year. When you look at those $40 million, not all will be have next year, but they will be in effect by the end of the year, and in that regard that is how you should expect it.

Thank you very much, and congratulations again on the quarter.

Thank you.

Thanks everyone for your questions.

Thanks for joining the call today. If you have any follow-up questions, please feel free to contact the IR team. Thanks.

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