泰科電子 (TEL) 2014 Q3 法說會逐字稿

Welcome to the TE Connectivity Fiscal Third Quarter Earnings Conference Call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Vice President of Investor Relations, Mr. Sujal Shah. Please go ahead.

Good morning and thank you for joining our conference call to discuss TE Connectivity's third quarter FY14 results. With me today are Chairman and Chief 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.

We ask you to review the sections of our press release and the accompanying slide presentation that addresses the use of these items. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at te.com. Finally, for participants on the Q &A portion of today's call, I would like to remind everyone to limit themselves to one followup 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 opening comments.

Thanks, Sujal, and good morning, everyone. I'm very pleased with the results we delivered in the quarter.

Sales are up 4%, despite a very weak Subsea Communications market. Adjusted operating margins exceeded 15% and adjusted earnings per share growth was 14% year-over-year, at the high end of our guidance range and a new record for the Company. We also continued to generate strong cash flow with over $500 million of free cash flow in the third quarter.

Here are the key takeaways from today's call. Most of our key end markets have positive trends, especially in the Transportation and Industrial segments. The Subsea market has continued to be weak, but we believe the market has bottomed and I'll share some additional good news on this market with you in a minute. We continue to generate strong performances in businesses that serve our harsh environment applications, which account for approximately 70% of our revenue.

As I mentioned earlier, we continued to deliver solid financial performance with improved operating leverage and strong cash flow. This strong cash flow enables us to return significant cash to shareholders and strengthen the Company through acquisitions like those recently announced. The last point is, we're reaffirming our full-year guidance that we gave 90 days ago, despite a weaker SubCom business in Q3 and Q4. I'll comment on these key takeaways in a little more detail.

On the market trend side, we do continue to see positive trends in the majority of markets we serve and the combination of these trends and strong execution will result in strong financial performance this year. During the quarter, strength in the transportation market continued and most industrial markets continued their steady improvement. Transportation Solutions grew 8% organically with sales in order growth in all major regions.

Our Industrial Solutions segment grew 4% organically and our Appliances business in the Consumer Solutions segment grew by 9% organically. Revenue in our telecom and enterprise businesses were largely in line with our expectations. Revenue in the Consumer Devices and SubCom businesses were slightly below expectations in the quarter. On a regional basis, excluding SubCom, sales grew in North America, Asia, and EMEA, driven by particular strength in the US, China, and Germany.

We continue to execute very strongly in businesses that focus on harsh environment applications. As you know, several years ago we launched our strategy to increase the Company's focus in the harsh environment applications. We've been increasing organic investment and have focused our acquisitions in these areas. Thisstrategy is paying off, as over 70% of our businesses are in these segments, generating mid- to high single-digit organic growth and above our Company average margins.

These solutions are highly engineered, designed in partnership with our customers, and are characterized by relatively longer product cycles and higher margins. This capability is not easily replicated and we believe that TE's ability to provide this broad range of solutions for harsh environments will remain a strong differentiator and growth driver as we move forward. Below the top line, our efforts on TEOA continue to drive productivity gains and operating leverage.

Our gross margins have improved to the 33% to 34% range and we are now consistently generating 15% adjusted operated margins on an annual revenue run rate below $14 billion. We also continue to generate strong cash flow with over $1 billion in free cash flow through the first nine months of year, supporting our capital program and acquisition strategy.

Subsequent to the quarter, we closed the acquisition of SEACON group, which expands our business in the very attractive oil and gas market. In June, we announced the acquisition of Measurement Specialities, which establishes us as the leading supplier of sensors and connecters, adds nearly $40 billion to our addressable market, and further increases our content in harsh applications. Once the transaction is complete, TET will have a broad portfolio of sensors to go along with our leading portfolio of connecters. Our existing scale, coupled with Measurement Specialties' product range, will enable the combined companies to accelerate sensor growth as we reach many more customers.

Now let's turn to slide 3. Revenues in the third quarter were in line with expectation sand adjusted EPS of $1 was at the high end of our guidance range and a quarterly record for the Company. Free cash flow was strong at $530 million and we returned $169 million to shareholders in dividends and share repurchases.

For the full year, as I mentioned, we are reiterating the midpoint of our revenue and EPS guidance. Expected revenue of $13.95 billion represents 5% growth versus the prior year and adjusted EPS of $3.78 represents 17% growth versus our prior-year performance. A very strong year for TE.

We closed the SEACON acquisition just after the quarter and the Measurement Specialties acquisition is on track to close this calendar year. I'll now provide some detail by business within each segment in the next four slides. Unless I indicate otherwise, all changes are on organic basis, which excludes the effect of currencies, acquisitions, and divestitures.

Please turn to slide 4. Transportation Solutions had another great quarter with sales of $1.585 billion, up 8% over the prior year, and with orders growth of 7%. Sales and orders grew across all regions and global auto demand continues to be solid, with vehicle production of about 21.4 million units.

The end market continues to be healthy and TE is performing well. We delivered adjusted operating margins of 21% due to volume growth, product mix, and productivity improvements driven by our TEOA program. Looking forward, we expect another strong quarter in Q4 with sales up high single-digits and operating margin expansion versus the prior year.

Please turn to page 5. Market demand in the Industrial Solutions segment was in line with our expectations in the third quarter. Revenues were up 4% and orders were up 2% versus the prior year.

The majority of the industrial markets we serve continued to gradually improve. Industrial equipment revenues were up 3%, driven primarily by double-digit growth in China. Our Aerospace, Defense, Oil, and Gas business was up 8%, due to continued strength in commercial aviation and the oil and gas units.

Our Energy business was up slightly in the quarter with growth in the Americas and Asia Pacific regions, offset by weakness in Europe. Adjusted operating margins were up 160 basis points versus the prior year, as the result of increased volumes and productivity increases and I'm especially pleased with our margin improvement in this segment. Looking forward, we expect another good quarter in Q4 with sales up mid-single digits organically and approximately 10% on an actual basis, including the SEACON acquisition.

Please turn to page 6. Sales in the Network segment were down 8% versus the prior year, due principally to continued project delays in our SubCom business. Excluding SubCom, sales were down 2% organically. SubCom weakness drove the decline in Network Solutions' operating margin in the quarter. Just to put it in perspective, our SubCom revenues were down 50% versus last year's Q3.

The Telecom and Enterprise businesses were down slightly year-over-year, but in line with our expectations. Strength in fiber optic and wireless deployments is being offset by declines in copper network investment. Our DataCom business was down 5%, due to continued market-related weakness.

In our SubCom business, I'm happy to report we recently received down payments on two major projects: the AAE-1 project which connects Asia, Africa, and Europe was announced in April and we received the down payment on that and then earlier this week, we announced the Hibernia project, which will connect New York and London as the first significant cross Atlantic build in some time, which is very good news. We also received the down payment there.

Both of these projects will start in late Q4, which we believe marks the beginning of the upturn in this cycle. And on a combined basis, these projects are worth approximately $700 million-plus over the next two to three years.

In Q4, we expect Network revenues to be flat, excluding SubCom. While we will start to build the very early stages of the build, we're not going to get too much impact from these projects until next year.

Please turn to slide 7. Revenue in our Consumer Solutions business was roughly flat versus the prior year and this continues to be kind of a tale of two cities. We had another strong quarter in the Appliance business, where we have a global leadership position and operating margins that run above our Company average. Sales in this business were up 9% year-over-year, due to strengthening demand in the Americas and Asia.

This growth was offset by lower customer demand for mobile phone components and continued weakness, although it looks like the PC business is starting to stabilize in the Consumer Devices business. Adjusted operating margins in the segment expanded 120 basis points year-over-year, due to the strong performance of the Appliance business.

In Q4, we expect revenues to be down slightly versus the prior year, due to continued weakness in the consumer devices portion of the business. We do expect another solid growth quarter in our Appliance business.

I'll turn it over to Bob to cover the financials in more detail.

Thanks, Tom, and good morning, everyone. Let me discuss earnings, which start on slide 8.

Adjusted operating income was $550 million, up 8% versus the prior year. GAAP operating income was $535 million and included $14 million of restructuring and other charges, most of which was in the Consumer segment, and $1 million of acquisition-related charges in the quarter. We anticipate full year restructuring charges of approximately $65 million for the full year.

Adjusted operating margin was 15.4%, up 60 basis points from Q3 last year. The improvement versus the prior year is driven by improved manufacturing productivity across all of our segments and volume leverage in the Transportation and Industrial segments. Adjusted earnings per share were $1 and GAAP earnings per share were $0.97 for the quarter. GAAP EPS included $0.03 of restructuring and other charges.

Turning to slide 9, our gross margin in the quarter was 33.6%. This is an 80 basis point increase versus the prior year, due to increased productivity from our TEOA or lean programs, the cost saving from restructuring in metals and general volume increases, offset by the impact of lower SubCom sales.

Out total operating expenses were $654 million in the quarter, which was up 5% versus the prior year. The increase resulted primarily from increased investments in sales and marketing to support growth initiatives.

On the right side of the slide, you'll see net interest expense was $26 million in the quarter and I expect about $26 million of expense again in the fourth quarter. Adjusted other income, which primarily relates to our tax sharing agreement, was $9 million. In the fourth quarter, I expect other income of about $8 million.

The adjusted effective tax rate was 21.8%, slightly better than expectations, as we saw a larger portion of our income earned in lower tax jurisdictions. I now expect a full-year effective tax rate of approximately 23%.

Turning to slide 10, I'll discuss our balance sheet and free cash flow. Cash from continuing operations was $501 million and our free cash flow in Q3 was $530 million.

Net capital spending during the quarter was $171 million or 4.8% of sales. I expect the capital spending rate to be approximately 4.5% of sales for the full year. In addition, we made a $200 million tax payment related to a pre-separation tax audit during the quarter.

Our working capital was in line with our expectations with receivable days outstanding at 63 days, inventory days on hand were 68 days, and payable days outstanding were 54 days. Let me discuss the sources and uses of cash outside of free cash flow shown on the right side of the slide. We began the quarter at $1.4 billion of cash and increased this to $1.6 billion in advance of the acquisition of SEACON, which closed subsequent to the end of the quarter.

During the quarter, we returned a total of $169 million to shareholders. We paid dividends of $119 million and we repurchased about 1 million shares for $50 million. Outstanding debt remained at $3 billion at the end of the quarter.

I'll turn it back to Tom.

Thanks, Bob. Please turn to slide 11 and I'll cover our outlook.

We expect another strong quarter in Q4 with revenue of $3.56 billion to $3.66 billion, which will be up 4% to 7% year-over-year. And we expect adjusted EPS of $0.98 to $1.02, an increase of 5% to 10% over a year and again, that's covering a very weak year-over-year performance in the SubCom business. We do expect continued strength in Transportation and Industrial.

For the full year, we expect revenue of $13.9 billion to $14 billion, up 5% versus the prior year. We expect adjusted earnings per share of $3.76 to $3.80, and that's an increase of 16% to 18%. As I mentioned earlier, a very, very strong year for the Company.

We're going to open it up for questions and then I'll make some closing comments when we're done with Q&A. Operator, if you could open the line for questions.

(Operator Instructions) Amit Daryanani.

Tom, on the Networking side, the SubSea business, given the wins you've had recently, I come up with a $120 million, $130 million run rate that's feasible in FY15 on a quarterly basis. I'm curious if that's a reasonable expectation to have. Importantly, how do you think leverage plays out on the upside in the undersea business? Is this something that can sustain 50%, 60% conversion margins as you start to see some revenue growth?

Thanks, Amit. As you know, we'll give a guidance for the full year next year, so I'm not really going to get in to any details, but I'm very encouraged. Finally, these projects, which we had one been awarded, are going to come into force and when we get the down payments, that's really the proof point. I think in the beginning, it'll start slow. As we're ramping, it'll take a couple quarters to really get at peak efficiency. The way I'd think about it at this point is it's been a pretty significant headwind for the last couple years and it should become a tailwind next year.

How do we think of conversion margins from that business, Tom, as you start to get incremental sales?

Again, I don't want to get too specific on that, but it'll be reasonable margin conversion. The first job, as you add jobs under your capacity, the conversion margins increase. We're still going to be not running at capacity with the first job or the second job, so if you look at our history it's when you have three or four jobs running, that's when you really see the margins start to ramp up. But it should be a positive, a nice positive next year.

Got it. Secondly, on the cash flow usage dynamics, the buyback pays at $60 million this quarter was a lot below the historical trends you've done for the last several years now. I'm assuming you guys are busy because of Measurement Specialties this quarter, so maybe that negated it. But maybe just talk about why was that pace slower? Is that something you should expect to see as you go forward or should we expect that to uptick?

Maybe just touch on the $200 million payment you guys had to make for the tax separation.

Amit, it's Bob. Both pieces, one, on the share repurchase, we did repurchase about 1 million shares in the current quarter, about $50 million. That is below what we've been running over the last several quarters and it is directly attributed to the M&A activity with Measurement, in particular, where we had, as you might suspect, material not public information, so we were blacked out of the market for essentially the vast majority of the quarter that limited that capability.

As we indicated when we announced the Measurement Specialties acquisition, out in to the future, we don't anticipate that deal to impact our go-forward plans in terms of return of capital to shareholders, maintaining the two-thirds back to shareholders over time. In terms of the $200 million pre-separation tax payment, that was done in conjunction with the other parties, Covidien and Tyco International, to pay in advance the 2005/2007 tax audit that is winding up. It's near completion. We're waiting for the final paperwork from the IRS, so we made that payment in the third quarter to essentially stop the interest calculation on that liability.

Very helpful. Thanks a lot, guys.

Amitabh Passi.

If you could help us in terms of thinking about normalized margins as we look out further to 2015, so kind of piggybacking on the last question. Automotive or Transportation, you're running just above 21%. Is there meaningful room to expand that? And then the bigger question, Network solutions, how do we think about normalized margins? Can that segment get back to at least the high single-digits or low double-digits over the next four to six quarters?

The normalized margin, as you know, we're pleased to be at this 15% and under $14 billion run rate. I think Automotive, I think this is what I've said the last couple quarters, but plus-20% margin with kind of normalized vehicle growth, which is in more the 2.5% to 3% range, I feel confident we'll continue to generate these kind of margins. This year we're getting a little extra benefit from the great, the really positive mix in heavy trucks, both the Deutsch acquisition and legacy TE business there.

That's given us a push on productivity strong in that business. I feel good about where the margins are and the ability to sustain them. I do expect that we'll improve the Network Solution margins.

SubCom is a pretty significant negative margin in the second half. As we get these two jobs rolling, that will start to turn.

In what we call the B&S unit, which is Telecom, Wireless, and Enterprise, that's running in double-digit margins now. This year, it'll be the second year in a row that we've added 100 basis points of margin improvement there. I do expect the Network Solutions to move back toward double-digit margins over the next year to 18 months depending on the end demand. But we're sized for that, to take advantage of reasonable growth.

Tom, just as a followup, on Network Solutions, particularly Telecom Networks and Enterprise networks, these segments are still kind of flat on a year-over-year basis. Can you give us a sense of what you're seeing in the demand environment, perhaps by geography, and how we should be thinking about growth into 2015?

Again, we're not giving any guidance yet, but next quarter, we'll give you specificity around the big businesses. What we're seeing around the world is mixed. It's a project business. In this past quarter, European projects were strong; strong in Telecom, weak in Energy. US was a little soft.

I think there's so much going on right now at the macro level in the US Telecom-related business, it's delayed a few things. But we believe the fundamentals are there to support solid growth in the US going forward.

Australia, that important job is building, despite the political uncertainty. China, as we've mentioned, we've been retreating a little bit from the China market because a good portion of that market just isn't very attractive.

It's kind of a mixed bag. The good news is that we have a really high win rate on the fiber awards. The fiber portion of the Network, for the second year in a row, is growing in solid double-digits.

Copper is shrinking, but the good news is the copper base is getting smaller and smaller. We think the math is going to turn pretty soon where that double-digit fiber growth and more and more jobs out there is going to start to deliver this into a low to mid single-digit business. There was pretty good operating leverage in the Telecom portion of that business because that's a nice margin business because of the highly engineered products there.

Wamsi Mohan.

Bob, can you bridge the 90 basis point decline in Transportation margins on a quarter on quarter basis? Obviously, it's still very strong versus a year ago, but any color you can share in terms of how it played out between price, volume mix. Was the operating margin more driven by increased investments and if so, where those investments were focused?

Essentially, from a sequential quarter-over-quarter, there's probably two significant drivers, the first one being the main one and it's a bit of mix of the Automotive versus the Industrial Commercial Vehicle piece, the heavy trucks. We're overweight in the second quarter on the Commercial Vehicle business, which has a higher operating margin. Secondly, we are making investments in the combined Transportation business and that is ramping up over time, so there's a bit more in terms of OpEx in the third quarter relative to the second quarter of this year.

Okay, thanks. Tom, can you talk a little bit about that commercial transport strength and how much longer it can persist? I think a couple quarters ago, you had noted there were pre-buys and expected that market to kind of soften. Sounds like there were puts and takes by different regions, but you're still tracking pretty strongly. Just wondering, is there something that is driving more persistent strength in that business over the next few quarters as well?

To touch on Consumer Devices really quick, that was weaker, sounds like even next quarter, you're not really expecting that to recover. There are some significant consumer product ramps that are happening as we speak. So are you not levered to that and how do you feel about your position in that market longer term? Thanks.

The Commercial business, for the next quarter it looks -- and we'll talk again next quarter about what we see in 2015. It had been a little bit stronger than we've expected throughout the year. I think you've seen the pent-up demand in heavy trucks in the US and China and a little bit in Europe just starting. I think there's still a fair amount of momentum in the market because the new China emissions standards don't cut over, really, until January.

There's the pre-buy but most of it's going to be the post-buy. As we're seeing across all of our businesses, the China business is strong again. If that continues, there's strong economic activity which will require continued investment in heavy trucks.

We'll see this shift away from the local, that we're beginning to see from the local truck manufacturers to the more multi-nationals because of the emissions standards. I don't expect it to continue at this rate.

Buried within that is a pretty weak mining, construction, and agricultural business. It's growing at a much lower rate. The mining business, as you know, has been very weak for the last six months for heavy equipment. I'd expect heavy truck demand to start to slow down and then the heavy equipment demand to start to pick up and this will continue to be a very solid, solid growth business for us.

Thanks, Tom, and on Consumer Devices?

Consumer, we have a thin base. That's our issue. If a customer or two has a shift, we pay. We can get a nice windfall or we suffer and we're just thinly based in the business.

We continue to be selective. I think the team is doing a good job, but that's just not a strong business for us, yet. As I think I've indicated, it's going to take a couple of years, really, to put some wind at our back.

Thanks, Tom.

Mike Wood.

Thanks for the color on the $200 million tax payment. How does this compare to that more draconian scenario in your reserves regarding that inter-company interest exclusion? Would there be any major variance versus what you've reserved in the settlement based on -- it seems like you're nearing that closure?

The $200 million was essentially settling or is in anticipation of settling the 2005 through 2007 audit period, excluding inter-company debt. Once we get the final settlement, which we anticipate now in the fourth quarter, essentially we'll have settled all pre-separation matters, with the exception of the inter-company debt. As you know, that's currently going through the tax courts. We anticipate that to take some period of time. We're always open to settlement conversations, but right now, that looks like it's going to wind through the tax courts which, will take a couple of years.

When we first separated and started talking about the tax liability for the Company, the pre-separation tax liability, we essentially indicated $600 million, $700 million of cash payments would be anticipated over an extended period of time. With this most recent payment, we've essentially got about $450 million of that behind us. Going forward, once we settled that inter-company debt, we think there's probably another couple hundred million dollars of cash that will have to be paid out.

Great. With Measurement Specialties, since the announcement, there's been news about a factory strike in China and a shareholder lawsuit with [fairness], which I think that gets filed, typically, after every public company is taken out. Are these issues settled and would they have any impact on the timing of closing?

No, they aren't going to have any impact. We haven't closed yet, so we don't own MEAS and they're managing through the labor issue in China, which also is not unusual in these kind of deals, too. They anticipated it. We anticipated it and the shareholder suit is, it happens every time, I think. I don't expect any real issues.

Okay. Great, thank you.

Matt Sheerin.

I just wanted to follow-up on your comments regarding the profitability in Network Solutions. Tom, ex- the Subsea or SubCom business, it sounds like you were saying that the other three segments are at high single-digit to low double-digit operating profit. I just wanted to double check that, particularly on DataCom, the profitability there.

Although, obviously, year-over-year comps are getting easier there, still doesn't look like you're optimistic about that market. What's your near and long-term strategy there in terms of profitability, whether or not you're going to take another look at restructuring that business or taking another approach?

I break the networks -- we have it in three major pieces. There's the Telecom, Wireless, and Enterprise businesses that are sub-markets, but we have them run by one team. That's the business, I answered your earlier question on, that has operating margins in low double-digits today where we have strong market positions, where we have a great fiber product line, and we're really seeing the shift to fiber continue to increase.

I think that's well-positioned as the market picks up, as that mix of fiber and copper continues to move in our favor, to have operating leverage on the margin. SubCom, talked about that's negative margin, but historically, it'll run in the double-digit range. DataCom is still the weakest margin of the three, in the single digits. A lot of that is because we're investing pretty significantly in the next generation platforms and we have very low revenue there.

I feel really good about those high speed platforms, but there's no question that they are -- we're winning awards, but the market's adopting slowly. As you know, in that whole space right now, there is an awful lot of change going on in the whole, what I'd call, the communication equipment infrastructure side.

Again, we don't have a real strong position there. I think there's an opportunity for us. We're investing in terms of, for the Company, a relatively modest amount, significant in that business, but a pretty modest amount of investment to make sure we have a strong high speed play.

Thanks. Regarding the SEACON acquisition, could you tell us what revenue contribution approximately would be this quarter? Is it roughly $30 million or so?

That's exactly right. There's about $30 million, $35 million of revenue and that is encompassed in our guidance for the fourth quarter.

Okay, thanks a lot.

Jim Suva.

Congratulations to you and your team. When we consider the Transportation segment, I believe long-term, you were saying that growth rates should be 6% to 8%. Now that we're seeing that Europe is improving, which has very high content per cars and also, this newer hybrid technology catching on and you just posted organic growth rate of 8%, is there anything in there that makes it especially on the high end or are we actually shifting toward long-term, we could be at the upper end of that normal range of 6% to 8% or even higher given the hybrid technology coming on?

And the second question is for Bob, CFO, on restructuring with these acquisitions that are being folded in, outlook on restructuring charges that I believe you've been kind of actively focused on reducing your restructuring? I didn't know if that was on an apples to apples basis or if all of a sudden now, with acquisitions, we need to model in some additional integration, acquisition restructuring charges.

Thank you, Jim. Regarding the automotive growth rate, you're right, we do see it as 6% to 8% and we took that up a little over a year ago from, we used to see it as 5% to 7%. A couple factors in there, more, I would say, content driven for sure. I think most so-called experts would see the typical production growth is going to be in the 3% to 4% range, so solid content. HEV, hybrid electric vehicle, definitely the bigger that gets, the better that is for the supplying into the market, because that's more content.

Of course, the Measurement acquisition is going to help our content, as we get their products and we start selling them into the automotive market, which they're not today. They have a nice business in the industrial transportation but the really big opportunity is Automotive. It's too early to change the range, because there's so many factors that go into that, but certainly, I'd say there's a lot more pointing to the higher part of the range than the lower part of the range at this point.

Great. Then on restructuring charges?

Jim, in terms of restructuring, both acquisitions that we've got going on right now, SEACON just recently closed and Measurement that will close by the end of the calendar year, neither one of them have significant restructuring associated with them. I don't anticipate big movement above what we've indicated is more normal level of restructuring on annual basis of $50 million to $75 million. I think, we'll be in line with that going forward. Now, of course, as we look at other acquisitions, that may change, but we'll indicate that when that changes.

That's great news across the board. Thanks and congratulations to you and your team there.

Sherri Scribner.

This is [Krithi Shetty] calling on behalf of Sherri Scribner. I just had one question on the operating margin. Given your long-term target of 15% and looking at what you've reached this quarter, it was around 15.4%, how should we think about the target? Do you still maintain it at 15% or how should we position your op margins going forward?

I think the best way to think about it is, as we laid out our operating model, we would expect the business, in an economy that's grown 3% to 4%, to grow 5% to 7% organically. That operating model should generate into a normal copper environment, no big swings in exchange rates, 20% to 25% flow-through. All other things being equal, we would expect that to lift our margin 30 to 50 basis points.

We're not setting a new margin target like we did before, but I think we have good operating leverage in the Company now. Of course, our big thing is to continue to drive solid, consistent, double-digit EPS growth and cash flow that continues to approximate net income, as we're on track this year for another year of free cash flow above 10% of revenue.

Okay, got it. If we were to look at the different segments, I was just wondering is there any kind of seasonality that we can look into? For example, with the Transportation and especially with networking, given the SEACON weakness and things like that.

Yes, it's interesting. I think seasonality still exists, but because the markets are so global now, seasonality isn't as pronounced as it used to be. But having said that, what you'll typically see, like we're seeing, now we're in our fourth quarter, Automotive, sequentially, will go down because it's heavy vacation in August and that's when the biggest model changeover occurs in August.

Typically, broadband or the non-SubCom/DataCom portion of networks, this will be a stronger quarter because of the weather. It's pretty much good weather everywhere, typically. That's a business that's very affected by that because it's outside, primarily.

We don't have a big consumer electronics business, but that cycle would typically be strong right now because of getting ready for the holiday season. I think over time these peaks and valleys of seasonality are starting to get smoothed out a bit.

Okay, got it. Thanks. I wanted to confirm, you said the guidance factors and SEACON acquisition of $30 million to $35 million?

That's correct in terms of revenue.

Okay, great. Thank you.

William Stein.

First, I'm wondering if you can comment on PCs? I think you noted that as weak in the quarter, but we started to see that turn at a lot of companies, in particular, Intel. I'm wondering if you can give some color there?

It looks like that business might be finally leveling off. We still have a pretty nice position in the PC business. In the grand scheme of things of the Company, it's not that big.

Up or down, we like it being up better than down. That's encouraging. But our real focus there is to build a better position in smartphones and tablets. We're better than we were a couple years ago, but we're still not where we need to be.

Great. In the wireless infrastructure end market, I apologize if you already mentioned this, but I must have missed it. This is an area where people have been paying a lot of attention to relative to the China mobile build and we saw one very problematic data point last night. Wonder what you're seeing in that market?

Again, we have a pretty nichie wireless infrastructure business, so in our DataCom business, that business is going well and I'd say more because we have a great product line that goes on the tower, as much share benefit as it is market. Then in the Telecom business, we have a digital antenna system. And that business is pretty vibrant right now in the US as it's a way of expanding overage and capacity, especially around large venue-like stadiums. We're seeing that pick up.

Again, in the grand scheme of wireless, we're kind of a niche player. I don't think it would be indicative of a trend one way or another.

That's helpful, Tom. On the M&A pipeline, you guys have been pretty clear that you're focused on sensors, Measurement Specialties. What should we think about as the focus going forward? Is the Company ready and able to target additional acquisitions? How should we think about that, please?

Sure. I'd say, to start with, we're focused on harsh environment, continuing to build that part of our business. If you go back a few years, it was about 60% of our business and with these two new acquisitions, it's moving up to close to 75% of our business as we've also sold out of things like magnetics and touch. We're continuing to reposition the Company. I think that's working well for us.

We do have a very, let's say, robust pipeline. As you know, it usually takes longer rather than shorter to bring the ones that you really like in, if you can bring them in at all. We do have the desire and the capability to do more. We're very selective. We had two hit quickly here. It just happened to be that's the way the timing worked out. It was two years before that and two-plus years before that.

There's no real consistent timing, I would say. But what I like about where we sit today is we're building a good reputation for how to do these and I think we're an attractive acquirer to a Company and I know the companies that are coming in feel really good about coming in to TE. We're also selective, really selective. But I think we want to continue both organically and inorganically build out harsh because that's our sweet spot. That's what we do best and we think we do it better than anybody.

Thanks, Tom, that's helpful. Appreciate it.

Mark Delaney.

Bob, I'm hoping you can help me bridge the implied operating margin guidance for 4Q versus 4Q of 2013. It seems, by my math, that Op margins are relatively flat year-over-year. I think you guys should be getting some restructuring and commodity benefits that are flowing through on a year-over-year basis. But maybe you could just help me understand and quantify what some of the dollar headwinds are, be it SubSea being lower profitability, maybe mix, or some of these other factors you already discussed, like the new investments.

We're about flat. The biggest swing is SubSea for sure. It was reasonably profitable last year and unreasonably lost this year, if I could say it that way. That's the single biggest thing. Pretty much everything's tracking. I think consumer devices is down a little bit, kind of hanging around the same margin level we've been.

I think the good news is the consistent march of the Industrial business up and the Transportation business now operating consistently above 20%. That Transportation business can move from 22% to 21% to 22.5% to 20.5% depending on mix and the region we're selling in, but what I'm really happy about is it's consistently above 20%. We feel it will be consistently above 20%.

That's helpful. Thank you. Maybe you could just help me understand specifically what we should be expecting for restructuring savings for this year and then into next year. My understanding was there should have been about $100 million of savings that the Company was expecting to realize in FY15 but sounds like there's some reinvestments going on. Maybe just help me understand what the net savings amount we should be thinking about now.

The restructuring benefit for 2014 is about $80 million. We have been saying $70 million to $80 million. We're at the upper end of that range. Our expenditures is a little bit above what we were anticipating in the first half of the year, so there's a slightly more benefit accrued.

A big chunk of that benefit is associated with the large restructuring actions we took last year, so we got some of the benefit in 2013. We got the majority of the benefit in 2014. I would expect a more nominal benefit in 2015 and we'll give some color around that when we give 2015 guidance at the end of fourth quarter.

Steven Fox.

First of all, just to be clear on the SubCom business, it lost money last quarter. It looks like it lost a couple more cents per share than you were thinking going into the quarter, but you're saying that the next couple of quarters, the losses don't get any worse and start to improve mid-year next fiscal year. Could you give us an idea of when breakeven would come back?

Secondly, on the Auto market, just to be clear, it looks like auto production ticked up a little bit more than you would have said 90 days ago. Your Transportation sales are basically unchanged. Was there anything you saw in the channel in terms of inventory build that made you maintain the sales outlook you have, relative to what's going on in demand?

Let me answer the second one in auto. The industry numbers are always getting refined. We have pretty good visibility into what our customers are telling us to build from them. It's a strong fourth quarter. I'm sure this is, by far, the strongest since I've been here. No, there isn't any underlying conclusion to draw from that, Steve. I think it's a strong fourth quarter and we'll see how it plays out.

But we're, at this time in the quarter, we're responding to what the customers are telling us to build. Could it be a little better, a little worse, yes, but I'd be surprised if it was materially different. We don't really see any inventory issues. We're not hearing anything around that, kind of watch outs. We're pretty plugged into that.

The first part of your question on SubCom, I think, yes, you summed it up. It's cost us, relative to where we were before, a few cents versus our guidance. 90 days ago, we offset that with other improvements, which is the good news.

Early Q2, I'd expect to start to be profitable again. But we'll get specific on our guidance. We'll give a little granularity there. We'll be further into the projects and see at what rate they're building.

But we're hiring people in New Hampshire, which that's the ultimate sign because we don't do that unless the designs are pretty much finished and customer is ready to get going. That's why we're feeling better, but not giddy, yet, given how tough the last few years have been in SubCom.

Understandable. I appreciate the color. Thanks.

Shawn Harrison.

On the SubCom, Tom, the math you gave within Network Solutions implies that business lost $15 million to $20 million in the June quarter. Am I in the right ballpark with that math?

Yes.

Okay. Maybe the better question is, when do you expect it to breakeven again?

I think, with the risk of avoiding giving guidance too early, I think it's going to be in the early, the first half of next year. I want to see us, how do we come out of this quarter, at what run rate on the projects? As I said, we're hiring the people. That means we're building the cable. Once the ships get in the water with the cable, then historically, jobs run very consistently, other than weather, but we always have that. The key thing is get the award, get the down payment.

That's happened. Start building the cable. That's starting. Then get the cable on the ships and the ships are actually starting to lay cable. Then you can -- it's a lot easier to predict. But that's how I feel about it right now and certainly, our team has a strong view of what's going to happen. But before I go out there with more granularity, I'd like to see how we come out of this last quarter of the year.

That's fair. Then just on SEACON, what is the EBIT margin projected to be for that business? I think initially it was like a 30% EBIT margin, which would imply something like $0.07 to $0.08 of maybe potential EPS accretion in 2015, but any more granularity on the profitability of SEACON as we enter 2015?

Shawn, it's Bob. The business is about, call it, $120 million of revenue. When we announced the acquisition, we did indicate that they do about 30% EBITDA margin. So you've got the numbers right. Obviously, we haven't given 2015 guidance for the total Company, certainly not for SEACON at this point in time. That is at 30% EBITDA margin of pre-acquisition.

Okay. Would you expect a lot of integration costs? If so, would that just fall into 2014?

There's not a lot of integration costs. We just completed the deal, so we're now in the midst of bringing that company into the fold, but there's not significant restructuring associated with it.

Okay. Thanks so much for the detail.

Thanks, everybody, for your questions. Just a few closing comments. I'm excited because we're coming down the stretch of a very good year for the Company. As I mentioned earlier, we expect to deliver 5% organic growth, overcoming an incredibly weak SubCom business, 17% adjusted EPS growth, and another tremendous year of free cash flow. Our harsh environment portfolio is performing very well, really pleased with that.

We also are continuing to strengthen the Company with the strategic acquisitions of SEACON and Measurement Specialties.

As Bob indicated, we will continue to consistently return capital to shareholders. I think we have a very balanced capital allocation strategy. I think we have a balanced business strategy. I feel good about where the Company is positioned.

Thanks again for joining us this morning and have a good day and a great rest of the summer.

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