泰科電子 (TEL) 2012 Q3 法說會逐字稿

Ladies and gentlemen, good morning. Thank you for standing by and welcome to the fiscal Q3 earnings release meeting. At this time all lines are in a listen-only mode. Later there will be an opportunity for your questions, and instructions will be given at that time.

(Operator Instructions)

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 result. With me today our 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 www.TE.com. 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 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.

If you can turn to Slide 3, I will give you 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-dollar 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 was very strong at $414 million, and that was up 19% over the prior year. I'd characterize Q3 for us as a quarter of good execution.

Strong cost control and productivity improvements 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 are excited about the opportunities this acquisition will provide. They have excellent products and technology, as we've discussed before. We are going to add strong channels, the scale to drive costs down, and better customer service. And the results we are seeing are a little better than the plan, despite the markets being a little softer. We are very -- we are really excited about the quality of the team that's joined TE. And cash flow, as I mentioned earlier, was very strong, and we completed the sale of our Touch and Services business, which generated approximate $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 US, inventories in the channel were back in line. We were -- experienced the seasonal lift we typically see at this time of the year especially in our Networks business. So, things where tracking pretty much as expected.

In mid-May this momentum begin to stall and orders began to soften, especially in Telecom and in 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 business has continued to be solid, and we are building 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 reduction in our guidance for Q4. I will 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 will 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 four segments has two primary objectives, enabling us to best leverage our capabilities for the customer and further optimize our efficiency. We also believe this will provide improved information regarding the performance of the Company for our investors.

The changes in our segment structure are also enabling several of the top business leaders to get expanded or different roles, which I believe is really great for the organization's vitality and future evolution. The most noteworthy change for purposes of this call is Terrence moving into a segment leadership role. I'm really excited for Terrence and the Company, and we're also very fortunate to have Bob Hau succeeding Terrence. Bob most recently was the CFO of Lennox International, and prior to that was at Honeywell. Bob is a talented financial leader with strong multi-industry experience and operating skills, and he will join us in early August.

If you can please turn to Slide 5, and I will talk about our Q3 sales. Total Company sales of $3.5 billion were down 2% year-over-year on an actual basis and down 3% on an organic basis. Currency translation due to the weaker euro negatively impacted year-on-year growth by 400 basis points, or about $143 million. And the Deutsch acquisition contributed $174 million in revenue.

On an organic basis year-over-year, sales increased slightly in Asia but were offset by broad-based weakness in Europe and continued weakness in the North American Telecom market. In Asia, Automotive continue to be strong, offsetting softness in our CIS businesses. In China, we had another quarter of double-digit Automotive growth, but most other markets were slower than normal. Europe, which accounts for about one third of our total revenue, was down 4% organically from the prior-year level and flat sequentially. With the exception of Energy, all of our major businesses were down versus last year.

We expect a further slight decline in Europe in Q4 due to the auto seasonal shutdowns and reduced industrial spending at OEMs and in the channel. And, in general, Europe has been slow for a while, and the decline we have seen has been gradual -- steady but gradual. In the US, our Auto business has been strong, and demand in our Telecom and SubCom businesses has been week. On an organic basis, which excludes Deutsch, our US revenue is down year-over-year and up sequentially. We expect similar trends in Q4 with Telecom weakness and a slowdown in Industrial offsetting another good quarter in Auto and Commercial Aerospace.

Now I will turn it over to Terrence to walk through the third quarter results, and then I will come back to cover the outlook in more detail.

Thanks, Tom, and good morning, everyone.

Just before I get started with third quarter performance, I want to remind everyone that the segment reporting changes that Tom mentioned earlier will be effective with the first quarter of fiscal 2013, which begins on September 29. We will report current results in this new structure for the first time as part of our January 2013 release, and we would expect right now to file an 8K with re-casted segment historical P&L information by December, which will be well in advance of the January earnings call.

Now let me give you some highlights of the key markets in each of our segments. Unless I indicate otherwise, all changes will be on an organic basis, which excludes the effect of currencies and acquisitions. So, if you could please turn to Slide 6 -- in our Transportation Solutions segment, sales increased 13% on an actual basis versus the prior year and 6% organically. Sequentially total sales were up 10% driven by the acquisition of Deutsch, which added $174 million in sales in total, and the breakdown of that between our businesses are $96 million in Automotive and $78 million within our Aerospace, Defense and Marine unit.

Overall in the Automotive market, our sales performed as expected with an organic increase of 7% versus the prior-year. Sales were up 22% in Asia and 11% in the Americas, while in Europe sales were down 4%. Global vehicle production was approximately 20.5 million units in the quarter, which was up 10% compared to the prior-year. By region, vehicle production was up 20% in the Americas, 22% in Asia; however, the EMEA region remained soft with production down 8%. The strong year-over-year growth rates in Asia and North America were once again driven by the rebound following the disaster in Japan as well as our strong market position.

We expect fourth quarter production to be about 19.5 million vehicles. We're down about 5% sequentially, in line with typical seasonality driven out of Europe. In the Aerospace, Defense & Marine market, sales were flat versus the prior-year. Strong demand and increased share in the commercial aerospace and oil and gas markets were offset by declines in the military market. For the Transportation Solutions segment overall in the fourth quarter, we expect revenues to be down slightly sequentially, due to the seasonal decline in auto production.

Part of our sales related to Deutsch are expected to be about $180 million, which will be up 4% sequentially versus the third quarter, and is which is also high single-digit growth when compared to Deutsch standalone versus its prior-year. Please turn to Slide 7 so I can cover our Communications and Industrial Solutions segment. In this segment, total sales declined 12% on an actual basis and 9% organically versus the prior-year. Sequentially, sales were up 8% organically, which was in line with expectations. In the Industrial Market, organic sales were down 14% versus the prior year but were up 5% sequentially. While we did see temporary improvement in Quarter Three, customers both direct and in the channel became more cautious around mid-quarter. And, due to this, and based upon current order trends, we expect quarter four in the Industrial Market to be down about 10% sequentially.

In the Datacom Market, which we include sales to the communication equipment, server, storage and wireless equipment markets, our organic sales were down 15% versus last year, due to reduced broadband and wireless spending, particularly with customers in Asia. Sales did show a nice sequential improvement, and were up 10%, and, in Q4, we expect revenues in this market to be similar to Q3 levels.

In the Consumer area, Consumer Device revenues were down 4% organically versus the prior year due to continued softness in the PC and consumer electronics markets that were partially offset by strong growth in both the mobile and tablet markets. Sequentially, our sales grew 9% organically, and we expect sales in the fourth quarter to be up 5% to 8% sequentially, as well. We are seeing improvement related to the new program wins in new product launches in both the Tablet and Mobile phone areas.

In the Appliance business, we were down 3% versus the prior year due to soft demand in Asia, which was more than offset by growth in the US, and sales grew 8% sequentially in this market. In the fourth quarter we expect the CIS segment revenues to be down about mid single-digits sequentially, due mainly to normal seasonality and a softer demand from customers in Industrial and the Appliance businesses.

So, please turn to Slide 8 and let me get into the Network Solutions segment. Total sales were down 13% in actual rates and down 9% on an organic basis, versus the prior year, driven by our Telecom in and SubCom businesses. Sales did improve 5% sequentially, which was lower than we expected. Organic sales to the Telecom Networks market were down 15% versus the prior year but up 9% sequentially. Year-over-year declines were once again due to reduced carrier spending in the US and Europe. As I just mentioned, sequentially sales were up about 9% in this market, but that was only about two thirds of what we expected.

We saw nice order momentum coming out of our second-quarter, the March quarter, but we did see order rate begin to slow in mid-May in the Telecom market, and, currently, we expect sales in the fourth quarter to be down about 5% sequentially. Demand in this market, particularly in the US, continues to lack consistency; however, the longer-term trend remained attractive, based on the demand for higher speeds and more connected devices.

In the Energy market sales were up 3% versus the prior year with growth in all regions, and we had 6% growth sequentially. We have seen some softness in orders, however, we expect revenues in Q4 to be up slightly versus Q4,driven by continued investment in distribution, transmission, and power generation around the world. In the Enterprise Networks market, our sales were down 2% as data center investment growth was offset by declines in office network spending.

And, finally, in our SubCom business, our sales declined 21% year-over-year as we expected. We did book about $110 million of projects during the quarter; however, funding of additional awarded projects continues to be slow. We expect sales in the fourth quarter of approximately $120 million versus our prior expectation of $140 million due to the push out in these customer fundings. For the fourth quarter, overall, Network Solutions sales we expect to be down slightly on a sequential basis, due to the softness in the Telecom Networks business.

Let me now shift to earnings, which start on Slide 9. Our GAAP operating income for the quarter was $371 million, which includes $94 million of charges related to the acquisition of Deutsch and restructuring charges of $25 million. The Deutsch acquisition-related charges include $68 million of non-cash share value purchase accounting adjustments and cash acquisition charges of $26 million. The $26 million is made up of transaction costs of $15 million and restructuring charges related to cost synergies of $11 million.

We continue to expect $75 million of total cash charges related to the Deutsch acquisition. About one half of this cash portion will be incurred in 2012 and the remainder in 2013. As Tom mentioned, the Deutsch integration is on track and we expect EBITDA to exit the year at approximately 28% level, which is slightly ahead of where we reviewed with you when we did the acquisition plan where we thought we'd be about 27% at this time.

Looking at adjusted operating income, adjusted operating income was $490 million in the quarter, with an adjusted operating margin of 14%. This performance is a strong improvement, both in dollars and rate, both year-over-year, as well as sequentially. Both gross and operating margins were in line with our outlook for the third quarter despite the lower than expected sales in the quarter.

The 100 basis point sequential improvement in operating margin included improvement in all segments driven by the increased volumes and the cost actions that we initiated over the past year in our CIS and Network Solutions segment. As Tom mentioned, we do anticipate revenue levels in the fourth quarter to be down sequentially; however, we do expect operating margins to remain and 13.5% to 14% level, with additional improvement in the CIS segment. Adjusted earnings per share for the quarter was $0.79, and this was up 16% versus the prior quarter due primarily to the falter on higher sales and the benefits of our cost and productivity actions.

So, let's turn to Slide 10. If you look at the top half of this slide, our gross margin in the quarter was in line with guidance at 31% on lower than expected volumes, due to the cost actions I just mentioned and the operating leverage on the sequential volume growth. We expect gross margins to be in excess of 31% in our fourth-quarter.

Looking at the bottom half of the slide, operating expenses as a percentage of sales were 17% as expected. In Quarter Four, we expect research develop and engineering, as well as SG&A, to be approximately 5% and 12.5% of sales, respectively.

Now let me discuss items on the P&L below the operating line. Please turn to Slide 11. Net interest expense was $42 million, up from $37 million in the second quarter, due to a full quarter of interest on the debt that we issued related to the Deutsch acquisition. As we discussed when we announced the Deutsch acquisition, part of the debt raise was a prefunding of our upcoming bond maturity in October. Because of the prefunding, our net interest expense will remain tightly elevated again in the fourth quarter before, being reduced in 2013 by about $8 million per quarter once we pay down the October maturity.

We expect the net interest expense of approximate $40 million -- $41 million in the fourth quarter. Adjusted other income, which relates to our tax sharing agreement was $9 million, and in Q4 for we expect other income of approximately $11 million. The GAAP effective tax rate was 25% in the quarter, and the adjusted effective tax rate was 26%, which was a line with our guidance, and we expect the adjusted tax rate to be about 26% again in the fourth quarter.

Now let me turn to free cash flow and working capital that starts on Slide 12. Our free cash flow in the second quarter was $414 million, a very strong result and up 19% compared to last year. Cash from operations was just below $500 million, and, with the strong year-to-date performance, we now expect our free cash flow to exceed $1.3 billion in 2012. At this level, free cash flow will exceed our long-term target of 100% this year.

Capital spending during the quarter was $115 million, and, for the full year, we expect capital spending of approximate 4% of sales, in line with our long-term expectations of 4% to 5% of sales. Working capital performance in the quarter was very strong, and levels are in line with our expectations. Receivable days outstanding were 62 days and inventory days on hand reduced to 66 days. The inventory days are a five days sequential improvement, and I believe we've done a very good job managing our working capital this uncertain environment.

If you can please turn to slide 13 -- let me discuss sources and uses of cash outside of free cash flow. We began the quarter with $2.9 billion of cash and ended the quarter with $1.3 billion. During the quarter we paid dividends of $90 million which reflect the 17% increase to $0.21 per share per quarter, and we used $2 billion in April to acquire Deutsch. And, when you look at the slide, the $2 billion is shown both in the acquisition line and the repayment of Deutsch debt of $642 million. In addition, we received proceeds of $394 million from the sale of our Touch and Services business.

Outstanding debt was $3.76 billion at the end of the quarter which is down about $200 million from last quarter due to the commercial paper pay down in the quarter. As I mentioned on the last call, we plan to reduce our debt levels to around $3 billion level in 2013. As Tom mentioned earlier, with the strong free cash flow we expect for the year and the proceeds from our divestitures, we plan to restart our share repurchase program in the fourth quarter. And I want to remind you that we have $1.5 billion still remaining under our authorization.

Before I turn it back to Tom to cover the outlook, I'd also like to very quickly say I've enjoyed my tenure and time here as TE's CFO over the past six years, and I'd like to thank everyone, both my finance team, all of our employees, as well as our investors and analysts for their support. I'm very much looking forward to my new role leading the Industrial Solutions segment and the opportunities that we have in this space. And I'm also confident that Bob Hau will be an excellent CFO going forward.

So with that, I'll turn it back over to Tom.

Thank you very much, Terrence.

If you turn to Slide 14, I will talk about what we are seeing in our order trends. As I mentioned earlier, the order rate started to slow around the middle of the third quarter, particularly in CIS and Networks. And right now orders are continuing to run around $3.4 billion per quarter rate, which is down about 3% organically versus our last outlook. So what we saw in March and April are orders running in the $3.6 billion range -- slightly higher, and then it begin to soften. And, as we all know there's a great deal of uncertainty in most markets, particularly as it relates to the weak economy in Europe.

In our Transportation segment book-to-bill was $1.01 million. Orders continue to be solid with state demand in the Automotive and Commercial Aerospace market. In CIS, book-to-bill was $0.97 million, with particular softness noted in the Industrial business and in the distribution channel as customers continue to be very cautious. In Network Solutions, excluding SubCom, book-to-bill was $0.99 million, but spending by Telecom carriers continues to be less predictable and below expected levels. The net of all this is demand in our Telecom businesses including SubCom is at one of the lowest when levels in several years, due primarily to the slow global economy.

We are the leading provider of fiber connectivity, and, based on the fundamental bandwidth expansion need, we believe the long-term growth of this market is going to be in the mid to high single digits range. And we very much are in a strong position to capitalize on this growth. If you turn to Page 15 or Slide 15, I will cover the current outlook. For the fourth quarter we expect our sales to be in the range of $3.325 billion to $3.425 billion which is down 2% to 5% sequentially. EPS are expected to be $0.72 to $0.76 per share or down 4% to 9% sequentially. Versus our guidance -- versus our prior guidance, the difference was due to a weaker economic outlook, a weak Telecom market, and the weakness in Europe and the continuing weakening euro. The euro itself is causing a decline of about $80 million in sales and a negative $0.02 earnings per share impact.

If you turn to Slide 16 for our full-year outlook -- full-year sales are expected to be $13.25 billion to $13.35 billion which is down slightly versus 2011 on an organic basis. Earnings are expected to be $2.82 to $2.86, also down slightly versus 2011 adjusted earnings per share of $2.95, excluding the extra week that we had in 2011. The euro has created about a 300 basis point headwind to our overall sales growth compared to last year and about a $0.09 negative impact.

A few final thoughts before we open it up for Q&A. It is clearly a challenging economic environment, but I think you can see where we are holding the operating margins that we are taking the appropriate action. I continue to feel really good about our portfolio, the range of connectivity products and solutions we offer. We did make two big acquisitions over the last year and a half to become the leader in fiber optic connectivity and to become one of the top two players in harsh connectivity. And I really think the integrations are going well. The synergies are on or ahead of plan, and this is just going to make us a stronger company for a long time.

And, at the same time, we continue to focus the portfolio, most recently with the divestiture of the Touch and Services business. We're getting back on track in tablets and smartphones, a small part of our business still, but we have a little momentum there. And, really importantly, our operating leverage is -- leverage continues to improve and within that, as we mentioned, CIS margins are picking up momentum again with two quarters in a row improvement. And we expect Q4 to be the third quarter.

When you look at performance versus 2011 on a 52-week basis, second half margins will be about 50 basis points higher this year, and EPS will be about equal with the second half of 2011 on sales that are 3% lower. So, again, we are managing the middle of the P&L very well in my opinion. And second half EPS will be up about 17% versus the first half of 2012. And I think our strong suit, which is our cash flow, is going to continue to get stronger, and, as Terrence mentioned, we will start regular share repurchases this quarter.

Just a little more comments on capital allocation. We are pretty much completing our first five years since we separated, and, in that time, we generated over $7 billion of free cash flow. We used about $4.4 billion of that for return on capital and about $3.4 billion for M&A, so the ratio is about 55%, 45% return on capital. And our priorities were to number one, strengthen the needs of the Company and make sure the strategic position of the Company got stronger, and, of course, secondly, any capital we didn't use for that, to make sure we returned promptly to the shareholders.

When I look forward, our priorities are going to change. Number one will be a consistent return of capital. We'll continue to look for growth on M&A in targeted markets, but I think you can think of us as kind of a two thirds capital return, one third reinvest in the Company. So, I think we are positioned to do that. We like the make-up of the portfolio, and we certainly expect to get -- continue to generate strong cash flow. I think the bottom line of all that is it's definitely uncertain out there, but we are really confident in our strategy and in our ability to execute well through the challenging environment.

So, thank you, and now I will open it up for Q&A.

(Operator Instructions)

Amit Daryanani, RBC Capital Markets

I just have two question, Tom. Maybe when you look at operating margins profile, you guys are certainly doing a good job hitting the 14% target on sub $3.5 million revenue now. The mix looks like of margins the Transportation has been a lot of heavy lifting. How do you think of margins of the other two segments, and could you maybe talk about what gets the other two segments to 14% off margins in terms of the revenue run rate, or for the cost initiatives, especially in the Network Solutions side?

Thanks, Amit. I think your comment that transportation has been carrying the load is right. And Networks -- I think the issue there is with the bottom of the cycle. We think -- I would expect that group of business to get back to 15% as the revenue comes up. I think inherently the gross margins in that business are good, some of the highest we have in the Company. So it is really a volume -- more of a volume issue. Clearly, we continue to drive productivity there. On the CIS I think it was a combination of two things, one, the market softened and the channel correction that happened in the first half of the year. In response to that, we took a lot of costs out. So there's clearly significant cost actions we've taken in that business, and now, as revenue, even though it is not picking up, you can see us improving the margin. And we should get significant lift in that business as the margin -- as the revenue picks up.

And Tom, maybe I'm reading too much into this, but I think you said you guys intend to return two thirds of the free cash flow back to shareholders. That seems a higher number at 67%, versus in the past you talked about 50% to 60%. Could you verify that? And then would the split between buybacks and dividends change on a go forward basis?

As I said, we ran about 55%, 45% return to M&A in the first five years, and, if my memory serves me right, about two thirds of the return was buy back and one third dividends. With dividends about $1.4 billion and returns about $2.9 billion in that period. I do you think, because we've made two significant acquisitions that really filled the two key strategic areas, by -- almost by definition going forward that they will be much more focused on a consistent return to capital and both on acquisitions. I would never say never, that's why I say when you think in terms of the model, the 55% to 60% to 70% is how I think of it as a return. I would expect us to continue to raise the dividend as long as global economies are sound, and our earnings will keep in line with our target dividend yield. I hope that answers your question.

It does. I will get back in the queue and congratulations, Terrence, on the new job.

Thank you, Amit.

Matt Sheerin, Stifel Nicolaus.

Just a question on the commentary on the CIS business and, specifically, the channel softness. Obviously, you went through inventory correction there. It sounds like distributors are being more cautious, but what does sell through look like in inventory levels? Are they bringing down inventories yet again? Or are they just being super cautious here?

Matt, think it is more of the latter, super cautious. A quarter ago when we were all together I think we were feeling cautiously bullish as the inventory correction was over. And we saw in Q2 and in Q3, actually, the lift in sequential revenue through the channel and their sell throughs were going up. But, as this slowdown began to happen in mid-May with US jobs peaking and all those other things, everybody is just starting to dial back a little bit. I don't think the inventory in the channel is a problem. I think just that what we've gone through over the last five years a couple times, collectively, everybody is managing that much more closely and including ourselves where inventory days are actually down this quarter. I think it is just everybody's a little bit gun shy.

Are you getting the sense that the distribution point of sales has weakened as well going into this quarter?

No, I think the slope has just changed. It was ramping, and now it's flattening, and I think that's just caution -- leading to caution.

Okay. And then on the OpEx side, it looks like you're holding margins fairly well given the volume softness across different parts of your business. If we are in this sort of component cycle that's stuck here, and we continue to see softness, are you looking at other cost-cutting measures whether it be in CIS or other businesses particularly networking where it doesn't look like things have bottomed yet?

I would say, Matt, I think as we proved over the last year, if we do we, we will continue to assess where are we from a volume level. And we will take actions as appropriate. So I think what you can expect, and I think what you saw like we did in CIS over the past year -- CIS was an area that we had to adjusted it. We are happy that in the third quarter we are back to prior-year OI levels even on lower volume. Essentially, we're going to prove it so if we see markets change that fundamentally we sort of had a high level at we will take -- we will evaluate further cost cutting.

It doesn't sound like you're at the point now where your ready to do that. You feel like things have at least -- aren't getting materially worse? Is that fair?

I'd say there's not much visibility Matt, but what we do have is a pretty robust set of alternatives of what we do depending on the circumstances and even though, as we entered the second half of the year, we were expecting I'd say modest recovery and normal seasonality we weren't -- we kept our cost structure more conservative to that and that's why we were able to get the margin to where it is. But we are taking a very conservative view -- not in a way that would hurt our responsiveness to customers. But it is uncertain out there, and so we are managing it accordingly.

Okay, thanks and, Terrence, best of luck in your new position.

Thanks Matt.

Shawn Harrison, Longbow Research.

Just wanted to talk a little bit about Deutsch. It sounds as if margins are going to be better exiting the year than you anticipated --high single digit revenue growth year-over-year. Maybe if you can just speak to where that revenue growth could get over the next 12 months. Can you see it accelerate given the feedback you're getting from the channel and then why is profitability running a little bit better than expected?

I think a couple things, the profitability -- the teams have been tremendous at getting at the early synergy opportunities ahead of schedule. So that's helped. The revenue is off slightly, and that's economics, but it's still up year-over-year, and the business a solid. I'd say it's -- we're not calling next year yet. It is a little outside our window, and we will talk about that next quarter. But we are very bullish about the business. We do expect that we will get lift through the channel. Because they -- especially in the Aerospace and military business they didn't really have much there, and we bring a lot there. We are the biggest player through those channels so we will definitely be able to help that there, and that's part of that channel strength comment before. And I think we will continue to find more opportunities for cost synergies just because of our size, helping them buy material cheaper and things like that. We feel good about it. It is a little bit hard to call the market -- the end demand environment. But, much like we did with ADC, the end-to-end system we can offer fiber. We have the end to end harsh connectivity we can offer into the industrial and commercial market. Every application we can serve so we are very, very excited about that.

Okay, then as a follow-up, just with restarting the share repurchase program, understanding that you have some debt coming due. How aggressive do think you'll be in terms of repurchasing stock during the fourth quarter?

We are going to get started as you know this quarter. I think our main thing is to be consistent within a certain range. I think that's the thing that we have brought back a lot of shares, but,when we made acquisitions, we turned it off, they were big acquisitions, you can expect us to be consistent and I'd say think about the 150 to 250 range.

Okay. Thanks so much, and, Terrence, congratulations on the new role.

Thank you Shawn.

Sherri Scribner, Deutsche Bank

I just wanted to get a little bit of detail on what you're seeing or what you're hearing from customers in the networking segment. And, clearly, there's lots of long-term demand drivers, but as you've noted, that segment continues to be week. Do you have any sense from your customers about when they expect to see pickup in the market?

Yes, we talk to them regularly. I think it really, it is customer by customer situation in that business. Last year Europe was very strong, for example, and the customers were more aggressive even then we thought. This year they've turned that back. I think some of that is the uncertainty. In the US it started very slow because of all the strategic activity that was going on in the US telecom market. So we have seen the US pick up. It is just not anywhere near the rate, and it was slow last year in the second half. So I think there's a combination of caution as well as if I'm going to spend a little more capital, and I believe overall CapEx spending is down, I'm a little more going into the wireless versus the fiber right now. That's not unusual a few years back. The big push in the fiber, the home or fiber deep into the premise type program. Those have slow down-- no surprise. We fully expected that. So it is really a case-by-case, and we've seen China slow a bit. It was very strong for us last year -- slowing down this year.

Okay, great. That's helpful. And then in terms of the consumer business, consumer devices -- that's been a segment where you've been struggling. This quarter you mentioned PC is down, but you said tablets were a bit better. Can you give us a little more detail, and do you think you are gaining share in the market? Thanks.

I think we are growing with the market now, Sherri. I think, as you know, we had, before the double whammy, the customers that -- our customers that were losing share we were strong with and we hadn't established with the customers that are winning share. So, the last year has been about stabilizing the business both from a top line and a market position and a cost perspective, I think our team has done a tremendous job of doing that. And now we have -- we have won several important programs. I used to call it a beachhead. I think it is more than a beachhead for us now. Still a small part of our business, but this last quarter in terms of the programs we have won and the orders we've gotten. So I'd say we're now growing with the market. And that tablets market is growing 40% -- 30% to 40% something like that. And we are finally growing with that even though it is a small part of our business. So for us, the proof point is we can serve these customers. We have the technology, and we can get more than one or two wins. We still have to build on that.

Great, thank you.

Jim Suva, Citi

Good morning, this is actually Samuel Meehan on behalf of Jim Suva. I wanted to get a couple more details about Europe. When you look at the weakness in Europe -- European automotive, do you see any mix shift our model push outs that would have any significant impact on content dollars per vehicle.

Not really. I'd say the strength is still in the high-end. And a lot of that is exported from Germany to the US and China, and that part is still robust. Most of the weakness is in the southern Europe OEMs. So we have not seen any negative shift in content because of mix of cars.

Great. Thank you.

Wamsi Mohan, Bank of America

This is Ruplu filling in for Wamsi. Just -- you've talked about the margins and transport connectivity. I just wanted to touch on that's again. The margins improved quite a bit -- 140 basis points sequentially. How much of that was Deutsch, and how do see -- how should we think about margins going into the September quarter? Do you think you can maintain that high a margin?

Number one, Deutsch, as we talked on our last call both, in transportation as well as a total company is about 10 to 20 basis points of an OI benefit. So, when you look at that part of the question --when you look at the fourth quarter, because we will have seasonal slowdown in Europe, we do participate in the shutdowns that the OEMs have. We do expect our margin in transportation to be about 16% in the fourth quarter. I think when you look at what's offsetting that, we do expect further improvement in our CIS as segment going the other way. That helps us the cost improvement that we've had there in CIS, the combination is going to allow us to keep our margin up at that 13.5% to 14% level, Ruplu.

Okay, got it. And, just as a follow-up, on Subsea I see you've lowered the guidance a little bit from $520 million to $490 million for the full year. Last quarter you talked about one contract coming in later this year. Is that the contract that's being pushed out? And you also mentioned something about $110 million. When do those come in to revenue?

If you look at that Ruplu, the $110 million we booked during the quarter was actually a number of smaller projects really in the oil & gas area. The one project that we talked about last call you are correct. Tat customer has not completed its funding, and that's really why the revenue is down from the $140 million that we expected last quarter and fourth quarter down to the $120 million. The $110 million that we talk about it -- they will be contracts that start up next year and will be as part of next year. Okay, great. Okay, thanks and, Terrence, congrats again. Thank you, Ruplu.

Amitabh Passi, with UBS.

This is Jim hillier for Amitabh. I was hoping, in light of some of the macro trends, you could provide us any color on the current pricing environment as well as how lead times are currently trading.

Pricing, overall, I'd say not any big change. I think there is always pricing pressure in the business. But we're not seeing any unusual pressure. It always feels like a lot of pressure, but nothing unusual here so I think we will continue to be in that -- I'd expect to be in that plus or minus the 2% price erosion range.

And on lead times -- lead times have been at normal levels. Certainly, on certain products for certain customers and applications -- that specific but on an overall basis, you look at our lead times, our lead times there's no extension or contraction of them. They've been a normal levels for most of this year.

I think what we see more is just change orders a little more frequent. So it is people waiting. Waiting to buy until they get a little more sure so it is not so much that the fundamental lead times are reducing but we do see a little more churn in the order.

Okay, thanks and if I can also follow-up on your Telco business. It appears of spending has been weak. If you look at the budget outlook for some of the major North American carriers, spending looks more back half weighted this year. And, from your customer conversations, do you think ultimately we could see some improvement in this business by year end? And also as a follow-on to that if you have any update on the NBN ramp, that would be really helpful.

For us, we're only two months away from our year end so -- could there be? Yes. I'd say the general feedback has been it is coming. It is coming. It is been a little slower than obviously than we expected. Could it happen before the end of the calendar year? Our fundamental view is that pent up demand is happening because of this - because you still have to be able to -- even if you invest more in the wireless part. You still have to get the signal in the ground to have the coverage and the capacity really work. So, I'd say we expect the investment to pick up in our portion of the network, but it is hard to call the timing right now. A quarter ago we were feeling pretty good and seeing the ramp, but it was our Q3 and Q4 which would have been the June and September quarters. We got half of what we expected in Q3, and it is not going to-- right now our call is that it is not going to happen in Q4.

On your NBN, NBN for our 2012 is about $20 million. We are -- we started to get some of that program -- started to ramp here in our Q3 -- similar amount in Q4. Next year right now we would expect that to increase of to $50 million, $60 million as that program continues to ramp.

Great. Thanks again.

Mike Wood, Macquarie Capital

Tom, with the recent management changes, are you expecting any sort of -- after everyone takes over and gets set in the job, are they supposed to come back with cost savings initiatives or growth initiatives -- investment suggestions?

We always expect that. I think with this -- look, I think we will get some fresh looks things, right? But all of these four leaders have been in the Company from anywhere from 3 to 25 year so they know the Company pretty well. They've been part of the senior team for several years now so they understand even the business they are going into. While, it may be new for them to run, they understand it pretty well. So -- but I do think my comment on vitality, and, what I mean by that is, it is good when people shift around especially if it is not that disruptive because they've been around and they already know the business. So I do expect to get new ideas, absolutely. I don't expect us to turn the place upside down as result of this, but I do expect that we're going to be stronger as result of these changes.

Okay, and on the transportation side, your orders were above growth of global OEM production. Your sales reported were below that. Has that segment also been impacted by the de-stocking that you mentioned just given the uncertainty ahead of the plant shutdowns in Europe?

No. No. Really, Mike, when you look at it, what you saw in the third quarter of our sales being a little bit less in production really just due to our Asia content per vehicle and what we've got in Japan just being such a wait on the production growth. In the fourth quarter we expect our sales to be greater than production, and we expect it to be that way for the year. So it is really just how the production builds are going around the world.

Helpful. Thank you.

Mike Wehrle, Janney Capital.

I just wanted to ask on the restructuring -- so you're not talking about any further actions right now. But the restructuring that you've already done, is that going to go through immediately in the fiscal fourth quarter? Or will it be more of a fiscal 2013 event?

Most of the restructuring has to do with the Deutsch integration so when you look at that it may be relates to Deutsch and the integration of Deutsch into our structure. That will come in and relationship as we have the Deutsch integration, there are some tailing items that are coming, but most of those costs are already in or will be in in the fourth quarter. So some of those calls you see our tails related to prior actions.

Okay. So in the CIS segment, for example, is the benefit already being realized in the third quarter? Or will there be some upside in the fourth quarter?

As I said, we do expect CIS margin to go up sequentially, there is a lot of bit more benefit because the volume is coming down, but there will be a little bit of benefit in the fourth quarter.

Okay. And then just on the smartphone and tablet commentary. Are you getting onto more platforms? I know you mentioned a few wins, but is it about a broader set of customers or is it more content uptake on each platform that is sort of helping you out there? Which is it more?

It is more customers. A couple of customers we really haven't had much of a position with, and now we have a starting position with them. So we have more customers in a broader way and deeper way than we did a year ago is the way I think about it.

Okay. Thanks very much guys.

Craig Hettenbach, Goldman Sachs

Tom, you mentioned or commented on the stable trends in the automotive market, can you talk about just how suppliers and customers are managing inventory through the (inaudible)? Did you see any type of change through the quarter?

No, I think everybody is tight. But where we see it, as I mentioned earlier, a little more churn in the releasing of orders which I think is typical. Right now, in Europe we're going into the shutdown season. So the southern OEMs are going to shut down for more than normal. But that's no surprise. We've been expecting and planning that for months. I think it will be kind of a normal shutdown in the North. But inventory levels, whether on the lot or in the channel, seem to be in pretty good shape. Our inventory levels are in good shape.

Got it. Then if I could just follow up on the smartphone and tablet piece. You commented you think you now have a beachhead. Any thoughts around the types of technology -- I know you've done antennas, how do connectors fit in, and is there an opportunity to expand you're content on programs as you go forward?

I think there's an opportunity expand it, but within the products that we know best, so right now our focus is on key things we do. Antennas and connecting systems so we are not to say we would never stray from that, but I think there's just so much opportunity as we continue to get better. The good news is we have the technology. We have the products but for us, our problem in the past has been more about execution and the pace of execution, and we are really improving that. And now we have to build a track record. We earn a couple programs, do well, and then we earn a few more, and then that's the way we're -- the approach we are taking.

Okay. And how much -- I know you guys have talked about the management change about a year ago in terms of the customer interface and things like that. How much has that come into play in terms of the ability to gain traction now?

The changes we did with our channel? Consumer, I'm sorry. That's helped a lot. Organizing around the vertical markets which -- it took us a while to take CIS and break it into these local vertical businesses. But it is -- one of the first we did was consumer and that has made a massive difference as well as the leadership that's in that group. So they made all the difference in the world. We have better Customer intimacy and relationships, and we are executing better and we just have to keep doing it.

Okay. Thank you.

Anthony Kure, KeyBanc

Just a couple quick ones, can you just talk about China, specifically, how it progressed through the quarter. And if you found any inflection points, maybe to the negative and then any change in that relatively recently. Just maybe talk about the linearity of China through the quarter if possible?

I think China has been steady but slower than we thought. When we sat there a quarter ago, we would have been expecting as you know, the government was keeping interest rates up trying to cool things off, trying to cut back on some of the speculation in how things -- that was going on in and trying to head that off and of course balance that with economic growth. We saw that for sure the first two quarters. We thought by the third quarter that would begin to pass and that stimulus would have happen. There's still -- appliance stimulus was announced and things like that, but we haven't really seen it pickup. Auto has been still very robust although it's going to little bit slower for sure that has the last couple years but still high, 16%, 18% for us. But a lot of our other businesses are flat to even slight -- in some cases slightly down. Now some of that is the export are down because of Europe and US, but it's -- I haven't seen an inflection point, no. I'd say our people on the ground there expect things to get better because of what the government is saying. But it is hard to call.

Okay, thanks, that's helpful color. And I guess and a similar vein instead of China, maybe on the enterprise IT markets. I'm just hearing consistently now that Sea level folks make -- the decision makers here are really taking the sharper in budgets in the second half of the calendar year. Just wondering is that -- are you seeing that and is -- has that had any differences among the geographies either better or worse?

I'd say we are seeing it pretty broad-based. That second quarter to third quarter our business that serves those markets picked up -- see some sequential pickup. We would've expected that. Again, go back three months, we would expect that some sequential pickup in Q4. We don't expect that now in this outlook. So, I agree with you, we are feeling that as well.

Okay, thanks so much.

Amit Daryanani, RBC Capital Markets

Just wanted to maybe talk a little bit about the commodity [calls] how that's playing out in the September quarter as you progress. Secondly, given the fact that FX has been a fairly severe revenue and, to some degree, an EPS headwind this year, Any calls in trying to hedge FX out on a rolling 12 month basis? Have you guys come up with annual guides?

Amit, it is Terrence. Two things. Let me take the second piece first. So, number one, we do hedge transactionally. We don't hedge translationally. You're right, if you look at this year, it is a significant headwind that we're dealing with, almost $400 million. But they are weakening. I don't see us changing our policy around hedging translation because of -- our earnings are also hedged because the translation comes through at the OI margin. When you look at metals a slight benefit right now. As you know we have a risk management process that we do on how we fix. So, really, when you look at it, metals are slight benefit, not significant due to the positions we put in place when copper and gold and silver were a little bit higher. So we are relatively fixed out for the next six to nine months pretty firmly. There may be some benefit if metals stay where they are later -- next year, but right now it is a pretty minor benefit.

On the metal hedging, it is still a rolling kind of two quarter out process, right?

It actually goes out 18 months, but the more current it is, the heavier we are fixed from a ratio of what we buy. And then it sort of goes out over time, but you're right, it is a rolling 18 month program.

Thank you. This is Tom, before we cut off the call just a few closing comments or one closing comment. Terrence and I have been together since we separated in the year before that in the business and it is been -- for me, it is been fantastic. Many of you if not all of you out there have had the opportunity to deal with Terrence, and he's the consummate pro -- a guy who loves and is committed to the Company, and he's made it a lot better. And in his new role, he is going to make it even better. So I know it is not easy for him to unplug from this part of the job, but, boy, I'll tell you he's done a great job. He's left our organization in great shape. He's been integral in recruiting a tremendous successor, and he's going to take this other business -- in my mind no question to another level. So, thank you, Terrence, for everything you've done. And thanks, everybody on the call. Appreciate it.

Thank you, everyone.

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