泰科電子 (TEL) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the TE Connectivity 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.

(Operator Instructions)

And as a reminder this conference is being recorded. I would now and turn the conference over to our host, Keith Kolstrom, Vice President of Investor Relations. Please go ahead, Sir.

Thanks. Good morning and thank you for joining our conference call to discuss TE Connectivity's third-quarter 2013 results. With me today are Chairman and Chief Executive Officer, Tom Lynch; and Chief Financial Officer, Bob Hau. During the course of this call we will be providing certain forward-looking information. We ask you to review the forward-looking cautionary statements included in today's press release.

In addition, we will use certain non-GAAP measures in our discussion this morning, and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation can be found on the Investor Relations portion of our website at te.com. Finally, for participants on the Q&A portion, I would like to remind you to please limit the follow-ups to one follow-up to make sure we are able to cover all the questions during the allotted time.

Now let me turn the call over to Tom for some opening comments.

Thanks, Keith, and good morning to everyone.

If you would please turn to slide 3. Q3 was a good quarter for the Company. Sales and earnings exceeded the high-end of our guidance range, and we had another terrific cash-flow quarter. Orders were $3.4 billion for the quarter. Excluding our SubCom business, orders were up 2% versus last year, and book-to-bill was 1.02. Book-to-bill was over 1 for the third quarter in a row, and was at or above 1 in every one of our segments, excluding SubCom. This is the third quarter in a row of year-over-year orders growth. Sales of $3.45 billion beat the high-end of our guidance due to continued strength in the transportation market and improvements in the telecom market.

In addition, due to project timing in the telecom market, we did benefit in Q3 from about $20 million of revenues that we originally expected to hit in Q4. We expect total Company revenues in the second half to be up about $25 million versus the guidance midpoint we gave in April.

Adjusted operating income margin was 14.8%, up 80 basis points versus the prior-year and up 120 basis points sequentially. Adjusted earnings per share of $0.88 was $0.06 above the midpoint of our guidance, due to the stronger sales and continued strong productivity performance. Free cash flow was $431 million, and we returned $314 million to shareholders in dividends and share repurchases.

For the fourth quarter, we expect sales in the range of $3.35 billion to $3.45 billion and adjusted earnings per share in the range of $0.88 to $0.92. This represents approximately 1% year-over-year sales growth and 18% year-over-year EPS growth. We now expect full-year adjusted EPS of $3.20 at the midpoint of our guidance. This is up versus the prior midpoint guidance due to the strong Q3 performance.

Now if you would please turn to slide 4. As I mentioned earlier, total Company sales were $3.45 billion, which was $25 million above the high end of our guidance range, driven by the Auto and Telecom businesses, versus the prior year sales were down about 1%.

Please turn to slide 5 and I'll review our segment performance in a little detail. Unless I indicate otherwise, all changes are on an organic basis, which excludes the effect of currencies, acquisitions, and divestitures. We had another outstanding quarter in our Transportation business. Sales exceeded $1.4 billion, which were up 8% and adjusted operating margins were just under 20%. Global automotive production was up 3% to 20.7 million units with strength in the US and China offsetting continued softness in Europe. We also continue to see improvements in the heavy truck markets in the US and China.

The strong operating margin performance is due to the increased revenue, continued productivity improvements, and the strong performance in our Commercial Vehicle business. We are capitalizing on the Deutsch acquisition we made last year and the integration is going very well. We expect another strong quarter in Q4 with revenues up about 10% versus the prior year on an expected vehicle production increase of 3.5%, and continued strength in the commercial vehicle market. Revenues will be down slightly, about 3%, due to seasonality.

For the full year, global auto production is expected to be up 2%, in line with the historical average. Due to our strong performance and the addition of Deutsch, we expect to be able to grow Transportation revenue by 7% for the full year.

Please turn to slide 6. Sales and earnings in our Network Solutions segment were slightly better than expectations, due mostly to improved demand in the Telecom Networks business. The pickup in telecom is due primarily to increased carrier CapEx spending in the US as well as selected projects in Europe, the Middle East, and Africa.

The fiber and wireless portion of our Telecom business continues to be strong, offsetting declines in copper network investment. We have seen this trend for a while now. We also saw an increase in carrier activity around expansion of the fiber portion of the broadband network across the global market over the past several quarters. This is a good sign. With the ADC integration behind us, we feel we are very well positioned to capitalize on this activity as it turns into projects.

On a year-over-year basis, total segment revenues were down 4%; Subsea activity, project activity, continues to be fairly robust but funding continues to be slow. In the DataCom Equipment business we continue to see a weak IT hardware spending environment, although some signs of that stabilizing. And additionally, we exited the low end Magnetics Components business, which had revenue of about $60 million per year.

Sequentially, sales increased 15% and adjusted operating margins improved 300 basis points. The revenue increase is primarily due to seasonality and an uptick in demand in the telecom market. One encouraging point is for the first time in six quarters, revenue increased in our Telecom business on a year-over-year basis. Orders in the segment excluding SubCom were up slightly versus last year, and the book-to-bill was 1.03. In Q4 we expect sales to decline slightly versus Q3 with adjusted operating margins continuing to improve to near the 10% level.

Please turn to slide 7. Sales and earnings in our Industrial Solutions segment were in line with expectations. On a year-over-year basis, sales were down 4% as expected. Orders in this segment increased 4% over the prior year and book-to-bill was 1.03. In the fourth quarter, we expect sales to be about flat with the prior year. We see continued strength in the commercial aerospace and oil and gas markets, some signs of improvement in the US and in Asian industrial equipment markets, and continued softness in the energy market and in US defense spending.

But overall, our industrial markets feel like they are stabilizing, and feel like they are in better shape than they were this time last year. We expect to exit Q4 with segment adjusted operating margins back near the 15% range due to favorable product mix, our ongoing productivity movements, and Deutsch synergies.

Please turn to slide 8. Our focus on improving operating margins in our Consumer Solutions segment continued to make good progress in the quarter, as adjusted operating margins improved to 10%. Overall demand in the segment was a little weaker than the prior year. In Q3, orders did strengthen in the Appliance business in the US and China. However, we experienced slower growth in the mobile device market and the continuation of a weak PC market. In Q4, we expect sales to increase approximately 3% sequentially and adjusted operating margins to remain above 10%. In the Consumer Devices portion of this segment we continue to be selective in the programs we are pursuing in order to drive margin improvement.

Now I'll turn it over to Bob, who is going to cover the financials in detail.

Thanks, Tom. Good morning, everyone.

Let me discuss earnings, which start on slide 9. Our GAAP operating income for the quarter was $439 million, which includes restructuring charges of $67 million and Deutsch acquisition-related charges of $3 million. We continue to expect approximately $275 million of restructuring charges for the full year, and a substantial reduction in the level of restructuring actions next year. Our adjusted operating income was $509 million, with an adjusted operating margin of 14.8%, up 80 basis points from Q3 last year. Adjusted EPS were $0.88 and GAAP EPS were $0.79 for the quarter. GAAP EPS included $0.11 of restructuring and other charges and $0.02 of income related to tax items.

If you will turn to slide 10, our adjusted gross margin in the quarter was 32.8%, which was the highest level since separation. This is a 180 basis point increase versus the prior year, and about $50 million less in sales. The increase is largely due to continued progress in our TEOA, or lean programs, driving increased productivity with reductions in both material and conversion costs and improved profitability related to the integration of Deutsch. Total OpEx spending was $623 million for the quarter, up $27 million versus the prior year, primarily due to several nonrecurring expenses during the quarter.

On the right side of the slide details of the item of the P&L below the operating line. Net interest expense was $32 million in the third quarter, and I expect approximately $32 million of expense in the fourth quarter. Adjusted other income which relates to our tax sharing agreement was $10 million and largely in line with guidance. The adjusted effective tax rate was 23.6%, in line with our guidance of 23% to 24%. In the fourth quarter I expect other income of about $8 million and a tax rate of about 23%.

Before I move to the next slide, I want to mention the 8-K we filed on July 1, which provided an update on the Internal Revenue Service's review of the tax returns of Tyco International for the years 1997 to 2000. While this was an update on the status of the review, I want to assure everyone that our view has not changed on the eventual outcome regarding these issues or the amounts we expect to pay in the future.

Now turning to slide 11, I'll discuss our balance sheet and free cash flow. Cash from continuing operations was $614 million and our free cash flow in Q3 was $431 million. Year-to-date free cash flow of $1.1 billion is up 25% versus the prior year. Capital spending during the quarter was $144 million, or about 4% of sales, consistent with our anticipated spending rate of approximately 4% to 5% of sales going forward. Our receivable days outstanding were 59 days and inventory days on hand were 68 days. Both metrics remain in line with our expectations.

Now let me discuss sources and uses of cash outside of free cash flow, shown on the right side of the slide. We began the quarter with $1.1 billion of cash and ended the quarter with about $1.3 billion. During the quarter, we returned a total of $314 million to shareholders. We paid dividends of $104 million and repurchased about 4.8 million shares for $210 million. As discussed on prior calls, the dividend increased in the quarter by approximately 19%, to an annualized rate of $1 per share. We continue to expect additional share repurchases of $150 million to $250 million in the fourth quarter. The outstanding debt was $3 billion at the end of the quarter, and we expect similar levels for the remainder of fiscal 2013.

Now I'll turn it back over to Tom.

Thanks, Bob.

If you could please turn to slide 12. Based on the order trends we have been discussing, we expect revenue in Q4 to be in the $3.35 billion to $3.45 billion range and adjusted EPS in the $0.88 to $0.92 range. This strong performance would result in adjusted EPS being up approximately 18% versus the prior year due to increased sales, improved productivity, cost reductions, and our share repurchase program. Revenue is expected to be up 1% at the midpoint of our guidance due to continued strength in Transportation. The important thing here is this is the first quarter of year-over-year sales growth since FY '11.

Please turn to slide 13. For the full year, we expect sales in the range of $13.2 billion to $13.3 billion, and adjusted Earnings per Share of $3.18 to $3.22. The full-year midpoint assumes revenues about flat versus the prior year, adjusted operating margins of about 14%, and adjusted earnings per share growth of approximately 12%. Second-half adjusted earnings per share would be up about 15% versus the prior year on flat sales. Our adjusted EPS outlook is up compared to what we guided last quarter due primarily to the strong Q3 performance. For the full-year, we expect free cash flow of about $1.5 billion and to return in excess of $1.2 billion of capital to shareholders.

A few final comments before we go to Q&A. I am really pleased with the execution momentum we are building. Our team around the world is doing a very good job of navigating through the economic uncertainty, focusing on our customers' short-term and long-term needs, and delivering strong earnings and cash performance. And I emphasize the long-term needs because we continue to invest alongside of our customers. Our adjusted operating margins are near 15%, and I am confident we will reach this level at about a $14 billion to $14.5 billion revenue run rate.

Our annual free cash flow continues to run about 10% of revenue and gives us attractive choices. It enabled us to become a world leader in fiber optic connectivity with the acquisition of ADC and in harsh connectivity with the acquisition of Deutsch. We have also increased our engineering and R&D investment to approximately $700 million per year, in order to strengthen our technology and product pipeline across our businesses.

And last but certainly not least, the substantial cash flow has enabled us to consistently raise our dividend and return close to $4 billion through share repurchase in our first six years. In total, we have returned over $5 billion in dividend and share repurchases to our shareholders since fiscal year 2008. TE Connectivity has a very strong business foundation and we expect to deliver improved growth as the global economy recovers. Electronics continues to proliferate and this requires more connectivity, and at TE we are really proud to be the world leader enabling this connectivity.

So now let's open it up for questions.

(Operator Instructions)

Amit Daryanani, RBC Capital Markets.

Good morning, guys. I have a question and a follow-up. First of all, maybe you guys could just touch on the transportation margins that have improved by 90 basis points, I think, sequentially to 19.8%. Maybe just talk about how much of this expansion was due to mix versus leverage. And then going forward, do you think these margins are sustainable? I'm trying to make sure there's no one-time benefit that you guys may have had in the June quarter.

Hello, Amit. To answer the last question, no, there weren't any unusual one-time benefits in that business in the quarter. We are really getting the volume leverage and we're getting the operating leverage from cost actions we took several years ago. And we are getting much better in that business at core productivity, which historically was not a strong suit, but is becoming a strong suit. As far as sustainability, I think an important thing to keep in mind, we are performing very well, but auto production is going to be up 2% to 3% this year, which is the historical average. So there is not a windfall in auto production. It feels a little better than that in the US because the US is up. But Europe and Japan, for example, this past quarter, have been down. So I think this is just many years worth of improvements in a number of areas, and at the same time, continuing to invest in that business to make sure we stay ahead on the innovation and technology curve.

Got it. And I guess my follow-up, we should still be thinking of 25% of conversion margins within the transportation segment. I want to make sure that that's the right way to think about it. And then the networking side, the 300 basis points of margin expansion you guys had this quarter was better than I was thinking. Can we talk about, was it all really existing by revenue leverage? I think most of the restructuring benefits are supposed to be a fiscal '14 story. So I'm assuming there's more margin expansion left going forward even if revenues don't improve substantially.

Regarding the transportation 25% fall through, I think that's the right way to think about it over the cycle. In an up-cycle you might get a little more than that, in a down-cycle you're going to get more negatives than that. But on average, we see it about 25%. In Networks, I would say there's two pieces. There's the continued improvement in productivity and we're getting volume. As you know, that segment has been down for several years now and we have been hurt by that. But we took advantage of that to continue to tighten up the cost structure. It isn't really from the restructuring we introduced this year or we started this year. That's not going to kick in until next year.

Fair enough. That's it for me. Thanks a lot.

Thank you.

Jim Suva, Citi.

This is Nicholas Jones on behalf of Jim Suva. Could you talk a little bit about what you're seeing in European auto sales as far as registrations versus production? Because I noticed your outlook came down another percentage point for the full year outlook.

Well, with respect to auto in Europe, I would say our Auto business has consistently strengthened relative to our outlook for the year. It's been partially execution on our part, but a better market generally every quarter than we expected. In Europe, it's definitely soft. New car registrations were down 6% or 7%. Some think they are bottoming. I hear that, but we do benefit from the fact that we are very strong. We're strong across Europe, but particularly strong with the German OEMs and a significant portion of their business is export to the US and China. So the strength in the US and China is definitely helping those OEMs.

Do you think Europe is stable and going to look up next year? Or is it still going to remain soft maybe for another year or two?

Boy, I'll tell you, that's hard to call. I think for us, we just stay close to the customers, make sure our lead times are tight. The recent trends, and I think the industry, is calling stabilization somewhat flat to slightly up next year. We will be giving you our view of that in November when we talk about our fiscal year '14.

Great. Thanks. That's all I have.

Thank you.

Wamsi Mohan, BofA Merrill Lynch.

Thank you. Good morning. In the Transportation segment, did you see any pull-in in the China commercial segment ahead of the class 4 emission standards that were supposed to go into effect July 1 for heavy trucks? How long do you think the strength in commercial will persist? Do you see this as multi-quarter from here? Thanks.

I think there might have been. Not in our revenue there wasn't any pull-in because we're not that strong in most of the heavy truck business because it tends to be a very local business. That's what is exciting about Euro 4 now becoming the law of the land because that's where our strength really comes to play, and the combination of Deutsch and TE over there. So we're starting to see a lift in our orders, but no big pick-up in our revenue because of an acceleration to get under the wire with the implementation of Euro 4.

Okay, thanks. And, Bob, a follow-up --

The heavy truck market, our orders are still pretty robust there and especially in the US. So the construction side has been a little bit flat. But I think we're optimistic given the general direction of the US economy.

So continued strength for a few quarters here at least.

We certainly have that built into the fourth quarter.

Thanks. And, Bob, as a quick follow-up, are you baking in any of the margin improvement from lower raw material costs here in your near-term forecast? Thanks.

Yes. We have single-digit millions benefit in fourth quarter from lower copper, gold, and overall raw materials in our business. We are certainly seeing a benefit of the decline that we have seen over the last couple of months.

Okay. Thank you very much.

Matt Sheerin, Stifel.

Thank you. A question on the Networking business and the margin targets. I know you have talked about eventually getting back to the mid-teens operating margin. A couple of years ago, you were running at $1 billion or so revenue a quarter. Do we need to get back to those volumes? Or will the cost cutting actions that you're seeing enable you to get there sooner or mix or whatever the other issues?

I would say, Matt, it's in the 3.5% to 4% depending on the mix of the businesses. But we have a better cost structure than we did. And we also have the benefits of the ADC synergies. Of course right now, our SubCom business is at a very low point and is just a little bit above breakeven. Our Telecom business margins are solid, in the double-digits, so as revenue picks up there, we expect to get a lot of leverage there. So we definitely feel this business, as it gets back to what we historically would define as the more normal revenue level, should be at or around the Company average margin.

Okay, great. And then on the telecom networks and then enterprise, on the enterprise side are you seeing any signs of reinvestments there? For instance, December quarter into next year? And then on the telecom network side, are you seeing any signs of life in China in terms of any pipeline there?

On enterprise, it's mixed. The enterprise business in general over the last several quarters, I'd say it's been going sideways, looks up, goes down. It's a very, very local business. For example, we're strong in India and the enterprise market there has been very slow because of the economy. We are a middle-of-the-pack player in the US, so we are picking up there, particularly in the data center. But overall, I'd say it's pretty mixed and relatively flat. That's how we see it for the next quarter. Your telecom question again? I'm sorry.

Just that your outlook for China recovery and pick-up there.

I'd say two things. China is slow and China is a tough market. It tends to be a very low-end market, so that's an area where we've become more selective over the last two or three quarters. We are really focusing on the mid- to high-end solution where they are available. Because we find that it's super competitive at the low end. And in general, that's how we look at the Company. We are staying away from the true commodities space that isn't strategic or necessary to defend the balance of business.

Okay. Makes sense. Thanks a lot.

Thank you.

Mark Delaney, Goldman Sachs.

Thanks very much for taking the question. I was hoping you could elaborate a little bit more on the operating margin comments. I think the 15% threshold, the revenue required to get to that had been $15 billion to $15.5 billion of revenue overall. And Thomas, if I heard you properly, you said $14 billion, around $14.5 billion now? With the restructuring that you're putting into place that comes into effect next year, should we expect the revenues that you need to get to 15% operating margins to come down further?

I would say that that includes the $14 billion to $14.5 billion. But we're close. Obviously, we're at $14.8 billion in the third quarter. And it's down $1 billion from a year ago due to a couple of things. The margin leverage from Deutsch, the tremendous productivity year we're having, a little bit of business mix right now. For example, Consumer was 15% of the business last year, it's 12% of the business this year. Some of that's Consumer being down and Automotive being up. So I think we have some of those kind of trends.

But I feel confident in the $14 billion to $14.5 billion. Of course, we're not going to put a limit on that, but that's the best way to think of it. And think of it on an annual basis. We have seasonality, as you know. So Q3 is typically our peak quarter in revenue, all other things being equal. We come down a little bit in Q4. Last year our revenue went down 3.5% to 4.5% sequentially to Q4. This year only 1.5% because of strength in other business. And then our weakest seasonal quarter is Q1. So when we say 15%, we are talking about a sustained full year of 15%, which means in the peak quarters, we'd be needing to run above 15%. We would need to run 15.5%, for example, this time next year to offset, which would be a lower margin first quarter because of the lower sales due to the seasonality.

Thanks for that. For my follow-up question, there has been some talk about improved spending on broadband in the US, and I was hoping you could help us understand how well you are positioned to benefit from that.

As you know, there has been a lot of announcements by the big carriers over the last six months, and some search companies that are getting new into that business as well, about expanding the amount of bandwidth per home. More recently, just in the last week, another carrier announced a different type of plan where you could, as a consumer or a business, sign up for 500 megabits. One has announced they are going to deliver 1 gigabit. So that is all great news for us if it comes to pass. It tends to drive the whole industry to increase spending. So we did finally start to see a little bit of increased spending in the fiber portion of the network.

And in our wireless business, which is still relatively small, at about $150 million annual revenue, we have seen a double-digit pick-up in the last two quarters, as the carriers are trying to augment their tower-based network with not quite small cells, but distributed antenna systems. So it feels better than it has in a while for us in terms of spending on our portion of the network. I think there's only a couple of data points yet so we are not getting carried away with bullishness. But what the customers are saying, we're seeing the amount of RFP activity in the US, all definitely feels, we are more bullish than we were last year, for sure.

Thank you.

Shawn Harrison, Longbow Research.

I have a follow-up first on the commodities. Assuming the second quarter is where we see commodities bottom out, when would you see the full benefit? Would it be the December quarter or the March quarter of 2014 before you would see that fully run through the model?

I think the key to think about it is, we have a hedging program in place for our key raw commodities. Essentially what we do is we look out our demand out 18 months and we hedge roughly 50% of that demand. So there is definitely a lag in the impact, both negative and positive, overall, from commodity swings. So if you think commodities bottomed out in second quarter, it's Q4, Q1 that you start seeing that benefit roll through the P&L.

And then as a follow-up, I believe earlier, Tom, you may have said that the operating margin target for industrial is about 15% in the fourth quarter. I was just wondering if you could confirm that. And then second, should that business with maybe some incremental restructuring gains and some volumes coming through, be operating long-term above 15%?

I'd answer yes on both counts, Shawn. Yes, we did say we expect to be back to the 15% range and we definitely view that as a business that should be above average Company margins, no question, with a little pick-up in revenue, continued improvement in productivity and the benefit of some of the restructuring we're doing.

Is this where you would see maybe most of the benefit from a commodity tailwind?

No. Actually, we use the most copper in absolute terms and proportionally in the Transportation business. But Industrial will benefit. But there is a lot of copper and precious metal in the Transportation business because of the harsh environment.

Thanks so much and congrats on the quarter.

Mike Wood, Macquarie.

In terms of the transportation segment out-performance versus global vehicle production, can you talk about how much of that is being driven by content on passenger vehicles versus the C&I or the Deutsch contribution there? And maybe along those lines, if you can talk about whether Deutsch is still on track with that roughly $0.05 a quarter accretion. Or if the better C&I is helping that?

Yes. I would say the performance relative to production is all of those things you mentioned. Deutsch is really in the Commercial Vehicle, so it doesn't play into the Light Vehicle revenue versus production numbers. But we're benefiting as well from market share gains that we began to get in design-ins, shortly after the financial crisis. As you recall, we continued despite the significant drop in the Auto business then we made the decision to continue to invest in engineering and R&D and in some cases increased our investment, and that's really starting to play out. We won some design wins that take two or three or four years to turn into revenue. That's clearly helping us.

So I think the industry estimates are we've gained 3 points of market share in the last four years. I think we are still gaining a little market share in China as well, even though we have a high market share there. Electronic content next I would say is a little bit higher than norm, because of the high-end car sales are a little bit higher than norm. It's not a big number, but getting a small tailwind from that. And our overall margin in transportation is benefiting from just the addition of the Deutsch industrial commercial business as it was, because that was a high 20s EBITDA business. And the synergy, that we are slightly ahead of plan on the cost synergy. Revenue, although picking up, is slightly below plan. But that overall acquisition is clearly shaping up to be a real winner for us.

And, Mike, we're on track to deliver the incremental $0.12 or $0.20 accretion from Deutsch.

And, Mike, also as a -- this is Keith -- as a data point, the Commercial Vehicle business was about $200 million in the quarter. So about 14% of the Transportation segment total.

Got it. Okay. And also on the Subsea business, how far did your backlog take you out there? You are forecasting $110 million next quarter, but with the $20 million quarterly order rate, is there a risk that that pulls back down to your trough levels?

Our backlog, as you know, we don't put anything in backlog until we get that first big down payment and are ready to go into force, as we say, in that business. So I think Q4 we feel pretty good about it, that revenue level. Some business needs to come in to force to hit the continued revenue level or move it up. We are encouraged by the fact that there's a lot of programs out there, but that's been the case for a while. A year ago I would have thought the SubCom business would be higher than it is now. And it's just taking longer to get the funding. But there are some very big projects that we've been awarded that are, what I'd call, very sensible projects. Sometimes in this business you can be awarded a project, but you know there's a 10% chance it's going to get built. We have several that are well over the 50% chance, and the funding is close. But in terms of visibility and backlog, it's a quarter, two at max right now. When you hit the boom time, it tends to move out to a year, to five quarters.

Okay, thank you.

Amitabh Passi, UBS.

Tom, a question on Network Solutions. We're hearing incrementally from operators, focus on upgrading their copper networks to either VDSL2+ or Vectored VDSL. Can you remind us what that means for your business from a content perspective versus fiber to the primetime networks? It seems like there's a bit of a shift towards upgrading copper-based networks versus taking fiber all the way deep into the network.

I think both are going on, but overall investment in the copper network almost everywhere has been consistently declining. One of our strengths is that we have a strong copper business as well, so more than half of our business is in the fiber network. Three years ago, that was different. So we feel we are really well positioned. Our overall growth rate has been down even though our fiber growth rate has been consistently in the mid single-digits to double-digits because of the slowdown in the copper network. So as long as there's investment in the network, we typically feel good about it, in the wired, the last mile, the back haul. Whenever the carriers are making that a priority again, we're going to benefit from that because we really have the full end-to-end fiber and copper network, which nobody has anywhere near both of those to the extent that we do.

Okay. And just as a follow-up, if I look at the operating margin expansion in that segment from roughly 6% to 9%, was that largely all driven by volume? Or would you say structurally the segment is now at a higher operating margin level relative to where it was a quarter or two ago?

Yes, Amitabh, there is certainly a benefit from the sequential growth, sales up, I think, about 10% sequentially. Clearly we've been doing some significant restructuring. We will see benefits of that into '14 and '15. We are seeing benefits of our TEOA and general productivity in that business. I'd say we certainly feel better about margins at 9%, but historically 13%, 14%, and we anticipate in the long run, our Network segment will be about Company average. 6% last quarter was abnormally low, and we're certainly happy to see the 300 BPS improvement sequentially.

Got it. Okay, thank you.

Steven Fox, Cross Research.

Thanks. Good morning. Just to follow-up on that last comment, I was wondering in terms of some of the restructuring activities in the Networks business, can you give us an idea of what the actions were that has helped margins? How much was completed or maybe completed towards the end of the quarter that gives you comfort into this quarter as you get the full benefits of that? And an idea of what's left to do that's important. And I had a follow-up question. Thanks.

I'd say you have to think about the restructuring in that segment in three buckets. Over the last year or two, most of it has been related to the ADC integration. So that's where most of it was. What we call the legacy TE business was pretty lean in that business. And we knew one of the very attractive aspects of ADC, after their phenomenal product line and strong position in the fiber network, was there was a lot of opportunity to move their cost structure more like the TE cost structure. So that is largely, that's the major contributor. With the market being lighter in the last couple of years, we have taken that opportunity to take additional costs out. And then the third piece of the puzzle is the restructuring that's in the works now that will benefit starting next year. So some of that is additional, what you would call, additional ADC plants. Although we've been together a couple of years now, so we don't distinguish that much anymore. And some of it is our lean programs are really enabling us to put what used to be in three plants, in two plants, along those lines. So there's really three pillars to the restructuring piece of it.

Great. That's helpful. And then as a follow-up, I know you're not giving guidance for the December quarter, but relative to what you're seeing in both your sales and your orders for this quarter, how are you feeling about typical seasonality off in this space? Is there any markets that you feel a little bit better about, a little bit worse about, as you look out towards year-end spending? Thanks.

Well, when I think about the markets in general, let's think how we felt six months ago. We feel better. Part of that is because six months have gone by, but I do think on most indicators in our business, like we've talked about in this hour, orders up, book-to-bill up, things like that are much better than they were a year ago. So if that lasts through the fourth quarter, I think that we should feel better about the first quarter than we did a year ago. But as you know, it was in May of last year we were feeling, as we guided 15 months ago about the second half of FY '12, May of last year the orders started to turn down, and it happened across the world, not just in our world. And that did not really turn back up until November. The good news is the order rates are still holding and we're in the end of July. So I'd say that's a really positive sign, but I'd like to get through the next few months obviously, before we start talking about next year.

Great. That's all very helpful. Thank you very much.

You're welcome.

Sherri Scribner, Deutsche Bank.

Hello. This is Kevin LaBuz on behalf of Sherri. Thanks for taking the question. My first is on your consumer side, can you just talk about what success you've had getting traction from smart phones and tablets? And I have a follow-up. Thank you.

Sure. I would say we've had more success in smart phones than tablets. We have a beachhead in tablets. It's fairly narrow. In the last year and a half, we have done extremely well with the smart phones designed in Asia. So it's not broad-based, but we have real momentum there. So in the tablets, not so well there, but better in the other tablet area.

So it's mixed for us. And it's still relatively small for us. And we continue to be very selective. Because not all smart phone and tablet business is great business. So that's really been our strategy. I think, what I really feel good about and our team feels good about and deserves credit for, is we know we can be successful where we target. It doesn't mean it will happen about overnight, but we know we can do the miniaturization. We know we can ramp from zero to 500,000 parts a week in the way that's required in that market. We know we can be cost competitive and make an attractive margin in the projects we are targeting. So I'd say we feel like we have, we know we have, much better capability in that market, but we're still being selective.

All right. Thanks. And then my next question is on the Networking Solutions side. Obviously, you sound a bit better this quarter than you did last. So I was just wondering what changes you have seen over the last 90 days that have led to the better assessment. Thank you.

I think, for sure the second half in Networks is always better than the first half. Because of seasonality and you're in the summer, and you're coming out of the winter. So that always makes the business better. As Bob pointed out, margins were unusually low and at the bottom of our experience in the last quarter. So we knew they would get better. We are really seeing and encouraged by the activity in the wired portion of the network.

So much CapEx went into, particularly in the US, LTE in the last couple of years, but you still need the wired portion of Network if you're going to deliver video in 30 seconds, download video into your tablet or smart phone. You need to be fiber or very close to the home. So the physics would say, got to build fiber deeper. The recent RFP activity says, boy, there's more RFP activity, we saw the first year-over-year increase in our orders in six quarters. So all of those are positive signs. A year ago all those weren't happening, and we were not as bullish, to say the least. But we also know that one quarter or two quarters doesn't make a trend. But the most important thing is we have an outstanding product line and we are well positioned around the world. I mean, we are calling on every major carrier and they know who we are and they know what capabilities we have. So we're positioned as they decide to accelerate, we're positioned to help them and benefit from that.

All right. Thank you very much.

Thank you. I think that was the end of the questions. I will just take a minute to wrap up. Again, very good quarter for us. I would say this quarter is the result of many years of hard work. Certainly improving economic conditions in a few areas have been helpful, but most of this performance is due to the strong execution by the teams around the Company. We've talked a lot about the leverage this Company has and you really see it the last couple of quarters that with a little bit of revenue tailwind, tremendous leverage in the margins, the core productivity is the best I've seen since I've been in the Company.

Bob mentioned our lean program, which we call TEOA. We're becoming a lean Company. It's showing up in everything we do, and probably most importantly our ability to service the customer. We've gone through accelerating our restructuring, so we'll start to see the benefits of that next year. And then the cash flow is strong in this Company, which really is, I think, a very good sign, as it's been pretty linear this year. And if you look at our working capital statistics, at the same time our on-time delivery statistics are getting much better. And those two things are moving in the right direction. That tells me we are executing well. The most exciting thing is, there's still a lot more room for improvement. So thank you for being on the call and have a good summer. We'll talk to you soon. With that, operator, we'll close things off.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.