泰科電子 (TEL) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the first-quarter 2015 earnings release conference call.

(Operator Instructions)

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

Good morning, and thank you for joining us today. Today, we'll be discussing TE Connectivity's first-quarter results, along with the announcement to sell our broadband networks business to CommScope. With me today are Chairman and Chief Executive Officer, Tom Lynch, and Chief Financial Officer, Bob Hau, who will provide an overview of the transaction, review our first-quarter results and guidance, and then talk about TE going forward. We will conclude with a Q&A session.

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 those 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 follow-up question 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 opening comments.

Thanks, Sujal, and good morning to everyone. It's certainly a very exciting time for our Company, and we have a lot to cover this morning. Let me start by covering the transaction we announced earlier this morning. Please turn to slide 4.

Earlier this morning, we announced the definitive agreement to sell our BNS business, which consists of TE's telecommunications, enterprise network, and wireless business, to CommScope. CommScope is an industry leader, and we believe they are the right company to lead our BNS team and business forward. Our BNS team has built a successful business, and I want to thank them for their contributions, innovation leadership, and commitment to TE over the years. We look forward to working closely with CommScope to close out the transaction.

Our decision to sell BNS is really a key step in our strategy to continue to focus on strengthening the Company's leadership position in the attractive connectivity and sensor market, where we provide solutions that are essential for the connected world. As you know, earlier this year, we made the strategic decision to establish a leadership position in the sensor business. We believe that focus on connectivity and sensors, with special emphasis on harsh environment solutions, positions TE to provide our customers with an unmatched range of solutions, and to further accelerate sales and profit growth.

When this transaction is complete, 90% of our revenue will be focused on providing connectivity and sensing solutions, which enable our customers to capitalize on the megatrends of safer, greener, smarter, and more connected. As billions of devices, objects, and people become part of the Internet of Things, TE technology will play an increasingly key role. We have an unmatched range of products to meet these needs and unmatched resources facing the customer designing and supplying the products. Following the close of the transaction, 80% of our revenue will be focused on providing solutions for harsh environment applications, up from 50% several years ago. This has been a major focus of our strategy, and I'm very pleased with our progress and the results, which we will touch on in more detail when we review the quarter.

TE has a decade-long track record of clear leadership and meeting the demand of connectivity in harsh applications. This is our sweet spot and, importantly, this transaction will enable us to continue to maintain a very balanced capital allocation strategy. We intend to use the bulk of the proceeds from this transaction for share repurchase, while we also continue to aggressively invest organically and inorganically.

Please turn to slide 5, and I'll provide an overview of the transaction. The value of the transaction is $3 billion in cash, with a valuation of approximately 10 times adjusted EBITDA. We believe this is an attractive valuation for the business, which generated $1.9 billion of revenue in FY14. We expect the transaction to be neutral to adjusted earnings per share one year after closure when you factor in the use of the proceeds.

Our guidance provided this morning includes BNS; however, moving forward, BNS will be reported as discontinued operations. As I mentioned earlier, the majority of the proceeds of the transaction are expected to be used for share buyback, with flexibility to make strategic investments. The Board has authorized an increase to our share buyback authorization by $3 billion, making our total share repurchase authorization now approximately $3.7 billion. We do expect the transaction to close by the end of calendar 2015, subject to customary closing regulations.

Now I'm going to shift over to the quarter, talk about the highlights in the quarter, and then I'll hand it off to Bob Hau, who will go into the quarter in some detail. Slide 7 provides a summary of our Q1 results. We delivered strong results for Q1, with organic revenue growth in line with expectations, and 20% adjusted EPS growth year over year. Total Company orders were $3.7 billion, up 9%. Excluding SubCom, orders were up 4%. Book-to-bill, excluding SubCom, was 1.03. We continue to execute our strategy to strengthen our leadership position in harsh environment applications, with harsh business revenue growth of 10% year over year.

We continue to grow faster than the market in China in our harsh environment businesses. TEOA continues to drive profitability and enhance our margins. Adjusted gross margins were up 100 basis points year over year, and adjusted operating margins expanded to 16%. We are really pleased with the performance of Measurement Specialties and AST and have been successful in attaining new sensor design wins across multiple market segments. I would say that these acquisitions, pretty much seamlessly, come into our Company.

For FY15, we are holding our full-year adjusted EPS guidance at a midpoint of $4.20, despite a much-worsening headwind from FX. With expect continued strong performance from our harsh businesses and the continued recovery of SubCom to offset the setbacks headwind. Then lastly, our Board has recommended an increase in the dividend to $1.32 per share. This is the fifth consecutive year of double-digit increase in the dividend. Our shareholders will vote on this proposal in March, and it should go into effect in June.

With the most recent move of the dollar versus world currencies, our 2015 FX headwinds are now approximately $900 million in revenue and $0.35 in earnings per share versus last year. Versus the full-year guidance we provided last quarter, we have an incremental impact of $500 million on the revenue line and $0.20 per share. Despite this headwind, we are maintaining our full-year adjusted EPS guidance of $4.20, which delivers double-digit earnings per share growth. I have to say we feel pretty good about this performance.

Now, I'll turn it over to Bob to cover our segment results financials and guidance in a little more detail.

Thanks, Tom. Good morning, everyone. I'll start with the Transportation on slide 8, a business which continues to perform exceptionally well and extend our leadership position. In Q1, we grew 8% organically with OEM vehicle production growth up less than 1%. This performance reflects the steady increase in content growth, coupled with our broad-based share gains over the last several years.

Q1 was our first quarter owning Measurement Specialties and the integration momentum of this business is ahead of our expectations. Within the first 90 days, we secured a new integrated sensor and connector design win in a medical application and are engaged in new automotive applications. We continue to expect our total sensor business to grow above market, due to our unique combination of technology, resources, and broad, deep customer relationships.

Total Transportation, adjusted operating income was $345 million in Q1, up 16% year over year, with 80 basis points expansion and adjusted operating margins due to volume growth, favorable mix, and strong productivity execution. Looking forward, we expect another good quarter in Q2 with actual sales growth up mid-single digits.

Please turn to slide 9. Our Industrial Solutions segment performed well in Q2, with 3% actual and organic sales growth, representing the sixth consecutive quarter of year-over-year growth for this segment. Industrial equipment was flat organically, with growth in China offset by market softness in Europe and Japan. In aerospace, defense, oil and gas, we saw 8% organic growth driven by continued strength in commercial aerospace. We've received many questions about revenue risk from falling oil prices, and our exposure is actually quite limited. As a result, we would expect continued strength in commercial aerospace to more than offset slight weakness in our oil and gas business. In our energy business, we saw 1% organic growth, with gains in Americas offsetting market softness in Europe and China. Adjusted operating income was $101 million in Q1, up 1% versus the prior year. We continue to invest in footprint optimization and go-to-market resources to accelerate profitable growth. For Q2, we expect to grow low-single digits, with mid-single digit growth organically.

Turning to slide 10, our Network segment grew 2% year over year on an organic basis, driven by growth in our SubCom business as a result of projects that are ramping ahead of schedule. We're increasing our revenue outlook for SubCom to approximately $650 million for FY15 and expect our three large projects, which recently came into force, to contribute over $900 million over the next two to three years. Our broadband and data comm businesses declined versus the prior year, impacted by regional declines and project delays. In Q2, we expect total Network Solutions revenue growth in the high teens organically, driven by SubCom, with broadband and data comm up slightly organically.

If you turn to slide 11, I'll discuss our Consumer Solutions segment. In consumer devices, we continue to narrow our focus in order to improve profitability while continuing to invest in technologies that are important to the Company as a whole, such as miniaturization, antennas, and wearable enablers. Today, we're announcing plans to combine our consumer devices and data comm business units. The customers we serve in these businesses are converging, and much of the underlying technology and products are quite similar. This is the next key step to accelerate the performance of these businesses, which are core to our connectivity portfolio.

Please turn to slide 12, where I'll provide more details on earnings. Adjusted operating income was $555 million, up 14% versus the prior year. The growth versus the prior year is driven by improved manufacturing productivity across the Company and volume leverage. GAAP operating income was $477 million and included $27 million of restructuring and other charges, most of which were in the Consumer Solutions segment, and $51 million of acquisition-related charges in the quarter as expected.

Adjusted EPS was $0.98 for the quarter, above the high end of guidance, driven by strong productivity, mix, and cost management. GAAP EPS was $1.14 for the quarter, and GAAP EPS included acquisition-related charges of $0.09, restructuring and other charges of $0.06, and income related to tax items of $0.31. The tax item primarily stems from the effective settlement of essentially all pre-separation tax matters, with the exception of the inter-Company debt issue. We're currently scheduled for litigation in February of 2016, if no settlement can be reached prior to that time. For the full year of 2015, I continue to expect approximately $50 million to $75 million of restructuring and other charges reflecting $0.10 at midpoint of our guidance, up slightly versus last year. We expect roughly $0.22 of charges associated with recent acquisitions, which we more than offset by gains from the settlement of tax liabilities.

Turning to slide 13, I'll discuss the financial metrics that are tied to the TE operating advantage, or TEOA. Our adjusted gross income in the quarter was 34.6%. This is an expansion of 100 basis points versus the prior year, driven primarily by productivity gains from TEOA initiatives and leverage on additional volume. Adjusted operating margins expanded 140 basis points, driven by productivity and operating expense leverage.

Total operating expenses were $643 million in the quarter, with SG&A decreasing versus the prior year, and R&D increasing to $184 million, mostly from acquisitions and to support growth, primarily in transportation. Total operating expenses were 18.6% of sales, down 40 basis points from the prior year. Cash from continuing operations was $295 million, and our free cash flow in Q1 was $162 million. Free cash flow was impacted by timing of tax payments and SubCom project activity. Gross capital expenditures were up slightly year over year, and net capital expenditures were up $16 million versus the prior year. I expect capital spending rate to be approximately 5% of sales for 2015. I note we added a balance sheet and cash flow summary in the appendix of the slides for additional details.

Now, I'll turn it back to Tom.

Thanks, Bob. Please turn to slide 14, and I'll cover our outlook at a high level, with additional details provided in the slides. We expect to deliver another solid quarter in Q2, with revenue of $3.55 billion to $3.6 billion, up 3% to 6% year over year and in line with our normal seasonal pattern. We expect adjusted earnings per share of $0.98 to $1.02, an increase of 3% to 7% year over year.

Our Q2 outlook does include a headwind from currency exchange rates which are negatively affecting our guidance by approximately $250 million in revenue and $0.10 per share versus the prior quarter -- I'm sorry, versus the prior year. Our second-quarter performance will be driven by the continued strong performance of our harsh environment businesses, the building momentum in SubCom, and contributions from our sensor and oil and gas acquisitions. This is more than offsetting the significant FX headwinds.

Now, if you'll turn to slide 15, for the full year, we expect to deliver another year of double-digit adjusted EPS growth, despite these strong FX headwinds. We have a number of catalysts for growth: the strong secular trend is increasing electronic content, especially in harsh applications; our expansion into the high-growth sensor market; and the recovering SubCom business.

For the full year, we now expect revenue of $14.45 billion to $14.85 billion, up 5% versus the prior year, and this reflects 6% organic growth. Note that the total impact of currency exchange rates is now approximately $900 million versus the prior year. Our new revenue guidance represents $150 million of incremental organic growth versus our October view with increases in transportation, industrial appliances, and SubCom. And as I mentioned earlier, we are maintaining our adjusted EPS guidance to a range of $4.05 to $4.35 per share, representing year-over-year growth of 11% at the midpoint.

Just for clarity, compared to our prior guidance last quarter, this represents a $0.20 operational improvement offsetting a $0.20 headwind from foreign exchange. To provide a baseline for the performance of our business organically, adjusted EPS would have grown in the neighborhood of 20% year over year in constant currencies if it weren't for the negative impact of the dollar. But the good news is, is we're offsetting this with strong performance in the business.

I'm now going to spend a few minutes talking about how we think about TE going forward, post the BNS sale. Please turn to slide 17. In the nine years I've been here, I've never felt better about the opportunities facing the Company and our ability to seize them. These megatrends of safe, green, smart, and connected represent a market opportunity of approximately $165 billion for connectivity and sensor solutions, and we are the leading provider of these solutions. These markets are expected to grow at roughly 2 times GDP over the long term, driven by this increase in electronic content in virtually every industry.

Please turn to slide 18, and I'll give you a few examples of the accelerating content story. In the automotive market, we are capitalizing on our leadership and connectivity to become a leader in sensors, and our customers are very excited about the combination. This combination of connectors and sensors represent the potential of approximately $400 of content for the average vehicle. Today, we are the clear leader, with content of slightly above $60 per vehicle. So, there's a lot of opportunity, and we are investing in the resources to capture more of it.

In the commercial aerospace market, there's going to be about 37,000 new planes expected to be delivered over the next 20 years, and all have a significant increase in electronic content. On top of that, TE content is increasing pretty significantly in almost every platform as a result of the increased organic investments over the last several years, coupled with the very strategic Deutsch acquisition, which is going very well.

Our customers increasingly see us as a solutions provider, which is driving up our content per design opportunity. That's very exciting. We're getting to do things we hadn't had the opportunity to do a few years ago. And, in some cases, where we bring a broader solution, we can actually see our content go up 8 to 10 times over prior models. In the industrial equipment market, electronic content is also increasing due to a variety of reasons, but you can see the big increases in factory automations and robotics in the smart factory. We see it all over the world. And all of these require more sensors and more connectivity, and we are very well positioned with these product lines.

Please turn to slide 19. As you know, the core of our strategy over the past several years has been to strengthen our leadership in harsh environment applications. Post the BNS transaction, this will represent approximately 80% of our business. Harsh environments demand excellence in engineering and manufacturing. In the typical application, we are involved very early with our customers in the design phase, and they are increasingly relying on us to provide the products that sense or pass more signal, operate in higher power environments, and take less space and waste.

This is our specialty. And what we see as increasing system knowledge in these applications is very important, and that is a strength of ours. These solutions typically have a lot of stickiness, because the cost of change is high, and our customers rely on the value we provide and continue to ask us to do more. We are having a very positive reaction, as I said earlier, to the expansion of our sensor capabilities because that gives us more options to meet customers' needs, and these are customers that are typically looking to reduce the number of the suppliers in order to get more strategic suppliers and simplify their own supply chain.

In the harsh environment markets, we have been steadily increasing inorganic and organic investments. We have expanded engineering and field resources at a faster rate than sales growth over the past several years. Our performance in TEOA is consistently driving up our quality performance and our margin performance.

Please turn to slide 20 and I'll wrap things up before we go to Q&A. Really, the summary of today is, going forward, TE will be more focused than ever on what we do best. 90% of our portfolio will be focused on sensors and connectors, and almost 80% will be in harsh environment applications. We have the broadest and deepest sensor and connectivity solutions on the market, and we will continue to strengthen this portfolio to be our customers' best choice. We also feel this portfolio will enable us to accelerate our sales and profit growth and continue to make TE a top choice for investors.

With that, let's open it up for questions.

Thank you.

(Operator Instructions)

Amit Daryanani, RBC Capital Markets.

Thanks, and congrats on a nice guide and the asset sale, guys. Maybe to start with the FY15 guide, I'm just curious, how do you think commodities are playing out in the guide?

My math says it's an $0.08, $0.09 benefit for you guys, but I think you have hedges that could delay this. I'm curious how commodities are playing out, and any updated thoughts on potentially looking to start hedging FX as we go forward, given how severe the impact has been for you guys?

Thanks. I'd say we're definitely seeing commodity costs come down as you know with copper. Our strategy has always been to hedge that to match cost with price, the timing of the cycles out there.

In particular, the big decline in copper prices that's happened recently will start to flow into us late in the year. It should provide a nice tailwind going into early next year. Bob, do you want to talk about?

Yes. First off, from an impact, you're right. You're a little bit heavy given the timing of the hedges and how those play out around the metals, copper, gold, and silver. It is probably $0.05, $0.06 benefit to 2015, and of course if metals continue with they're at, it'll be a nice tailwind for us into 2016.

In terms of currency, as you know, we are largely naturally hedged from a transactional standpoint. We have factories around the globe, and we build locally for our local customers, and so from a transactional standpoint, we don't have much exposure. Where we do, we actually do hedge the remaining exposure.

From the translational standpoint, which is the impact that Tom talked about in his opening remarks, we do not hedge. I think that you'll find the vast majority of companies that have foreign currency exposure on a translational standpoint don't hedge those currencies. That would be taking a bet on where those currencies will be going, and I don't want to take that bet.

Fair enough. I was wondering if you could just maybe touch on the transportation solutions business. You guys had really impressive, I think, organic growth in the December quarter. Your order book looks like it remains fairly robust.

The auto production environment I think has been fairly stable over the last 90 days. I'm curious, do you think content growth broadly is starting to pick up from the 5%, 6% threshold you've had in the past? Or do you guys think you see more market share? What's driving the strength on the transportation organic growth basis?

Content is drifting up, but the big thing in this time period is the share that we won three and four years ago. It is the design wins, particularly that we won coming out of the crisis, when we kept investing in engineering and in our auto business across the world.

In two areas that we got that we weren't leaders. We were the leader in the US, but with tremendous opportunity in China. We made significant investments in those regions. We always had a large investment in Europe, and it's really paid off.

I'd say more than anything, it's the design wins that we won that would take a few years to come to pass. We do see content continuing to drift up.

I don't think it's at the outside. It's probably that 4% to 6% range. It might be 4.5% to 6%, 4.5% to 6.5%, a lot of depends on in there, mix and stuff like that. For us, it's been more of the design wins of recent years.

Okay, thank you.

Thank you, Amit. Can we have the next question please.

Amitabh Passi, UBS.

Congrats again for my end. Tom, my first question for you was, how are you thinking about the rest of the portfolio, particularly if we look at some of the underperforming segments, energy, networks, data comm, consumer solutions? Maybe if you could just give us an update in terms of the rest of the portfolio?

As Bob mentioned on data comm and consumer, we actually decided to, and we're announcing that, real time that we're putting those businesses together into one business. The customers are all becoming the same.

There was always customer overlap, but now it's converging more and more, especially in China. The technology, particularly the core connectivity technology, that goes inside a box is very similar. We see much more opportunity to leverage that, and this is going to help our scale and cost-effectiveness, which we need to drive the profitability up. That's the plan there.

I think it 's important that people understand that data comm and consumer are very, very core to the business. I view them as core as automotive, because it's another range of products.

If you think of a Company like ours, our specialty is connecting and we're building specialty in sensors, and those applications, that knowledge, they go into variety of different applications. We happen to be stronger in some than others, but the core technology, the core science, the physics, the manufacturing practices, the supply chain, they're all very similar. They're all practically identical.

With those as core businesses, and the strategy really is to be more selective because the profits pools have changed a lot more in consumer and data comm than they have in the long cycle industrial, transportation type businesses.

With respect to energy, energy, I view as a very good, solid business for us. It's been a little less of expectations the last couple of years because of Europe more than anything else. We're growing ahead of market in the US.

We have a nice strong niche position because we're selective in China. We expect, as the energy grid has to be upgraded in Europe, that we're well-positioned, and it's a very focused, well run business.

Excellent. Then just as a follow-up, Bob, on industrial solutions, can you maybe remind us again what needs to occur to structurally drive margins potentially into the mid to upper teens? Then maybe just related, can you just clarify what the gross margin was for BNS?

From an industrial solutions standpoint, we've seen some nice margin lift in that business over the last couple of years. We've now got six consecutive quarters of growth, so we're seeing some volume leverage that will flow-through.

As I mentioned, the current quarter, we're down just slightly on a year-over-year basis, really driven by some investments we're making in footprint optimization, moving some product around to get it in the right factories, as well as some investment in go-to-market resources, sales folks, product people to support our customers, as they develop the next-generation product to make sure that we're there with them.

Both of those actions will continue to drive cost out through the footprint optimization, as well as top line revenue growth. The 13% slightly below Company average right now, but we see that continue to expand in the latter part of this year, and obviously into the future.

What I'd add to that is that in our aerospace business, well above Company average, in our industrial equipment business, right at maybe slightly below Company average, but we expect it to be at or above Company average in the next two quarters. It's the energy business which is just really suffering from a very slow market right now that has pulled that down.

I'm pretty confident that with a slight uptick in sales, when we're at 1%, you don't get much operating leverage. The team's done a good job of holding their margins there. That'll pick up.

It's only going to probably be a 3% to 4% grower, bit when that happens, we have a lot of operating leverage in that business. As we said before, we view this business, we expect this business to be a high teens operating margin business, and that's the moves we're making to ensure that we get there.

In terms of BNS, we don't provide operating margins by segment, but we have said in the past and continue to be public with the operating margin for broadband networks business is slightly above Company average, nicely into the double-digit level.

Gross margin, right?

That's operating margin.

Okay.

Thank you. Next question.

Mike Wood, Macquarie.

Congratulations. First question, just on the upside that you called out in the quarter on Measurement Specialties. Is that coming from end market growth? Or have there been any tweaks that you've put into the business so far?

Hi, Mike. Thanks. I would say it's mostly the market right now. We haven't had a chance to impact sales growth with most of our focus has been on the integration as we fully understand what we have, so we can help set the priorities.

Our biggest challenge, which is a great challenge, is more opportunities that we can deal with. That's a big priority.

Getting out of the gate, them beating the numbers that they had signed up for, Measurement was important. Our own internal sensor business continuing to be strong and just continuing to ride on the back of a very robust market, which is as exciting, maybe more exciting to me because it gets to the strategic part of the reason that we did it.

We're getting in a lot more requests for proposals participating and having customers ask us to bid in some of these harsh businesses. The customers that we knew, but now bidding [the Meas] technology.

That doesn't result in revenue for a few years, as you know, but we're happy to see that this is happening quickly. That's really the theory of why we did this and the power of the combination that our go-to-market resources and global supply chain with Measure is very broad and deep, engineering team and technology pipeline.

We're seeing it. We're only one quarter into it, and one quarter obviously doesn't make a game, but it's what we've seen and then some, so very pleased at least getting off to a good start.

Great. For my follow-up, and I understand if you can't provide detail on this, but given your new focus, which is primarily on harsh, at least critical use applications typically carry high margins.

Do you have a longer term margin goal for the Company, given this new focus? Or also just a new benchmarking peer set that you're measuring your performance on?

I would say the way to think about it, Mike, is, no, we have not set like we did years ago the 15% margin goal. When we set that we felt that was really critical to prove that the Company had reached a point of strong operating capability.

Now, it is drive growth of 5% to 7% consistently, organic growth, and we would expect to drive 50 basis points plus margin growth. Of course, all of our businesses have aggressive targets for sales growth and margin growth with TEOA.

It's how we decide what parts of the portfolio go after, but we have not set a new external margin threshold that we want to reach, where we may be. We want to get through the divestiture of BNS and the integration [Meas].

I think generally if you listen to us, we think that we can maintain and continue to drive strong transportation margins. We think there's room in industrial margins.

The BNS margin will be a net sale accretive to the Company. We have pretty much all upside in the consumer device margin and the data comm margin because they're low. There are a lot of margin drivers in the Company.

I think that you see it in Q1, where we had some nice mix in Q1 for sure/. Maybe we got a few 20 or 30 basis points more than is typical, but we're knocking at the door of 2016, and we feel good about that

Great, thanks.

Thank you, Mike. Next question please.

Jim Suva, Citigroup.

Matt Sheerin, Stifel.

Thanks, and good morning. Just another question regarding the sale of the networking business, it looks like a portion of the data comm business has been carved out within the sale to CommScope. Is that the wireless part? Could you tell us what the run rate of your data comm business is now?

None of the data comm business was carved out. Wireless, to your point, is a broad term, so when we talk about wireless in our networks business, we're talking about distributed antenna systems. Any of the wireless product that data comm has stayed with data comm.

Okay. You're keeping that. Okay.

It was sold with what is in BNS today.

Got you. Just regarding the Measurement Specialties, I know the sensor business is sitting within your transportation business, but Measurement also sales into industrial and consumer markets. Will that business also be working with your other segments in terms of cross-selling and sales opportunities, or will they be running on a standalone basis?

From the day one, that's what we did. That's one of the things that I'm most pleased about that in all of our relevant businesses, most relevant businesses, where we want to broaden the sensor opportunity quickly, a lot of activity in automotive, a lot of activity in industrial transportation, a lot of activity in medical, significant activity in aerospace, even though that's a much longer cycle.

To be able to bring sensor solutions to the table to a big customer, it enhances your standing with the customer, and significant activity in the appliance business. We've already mapped the people in our traditional businesses into the sensor business with some ground rules that we don't overwhelm the new sensor team.

I am very pleased with the collaboration and the sensibility that everybody's using in how to pursue opportunities, but not get out ahead of our headlights. We've got a couple of design wins already, which frankly happened sooner than I thought.

Matt, that's one of the reasons you may have noticed in our transportation solutions slide in the presentation, where now reporting three different business units within the transportation solutions segment; automotive, commercial transport, and sensors, to provide the visibility into the sensor business. That is, as you pointed out, more than automotive.

Got it, okay. Thanks very much.

Thank you, Matt. Next question please.

Steven Fox, Cross Research.

Thank you. Good morning. Just on the transaction first of all, in terms of use of proceeds, I understand where investing in your stock would be a good way to neutralize the EPS dilution, but can you just give us a sense of where you stand versus pursuing other acquisitions that maybe could be even more accretive use of funds?

Sure, Steve, thanks. We have a pretty robust pipeline as we've talked about before. That pipeline is very focused on harsh, and as always in the situations, you never know how and when things are going to break free. We have priorities, how they would fit.

I think the nice thing is as we showed last year, we could make significant moves like SEACON, Measurement, and AST, significant investments and acquisitions and continue to have a very balanced return of capital terms in the form of dividend increases and share repurchase. To us, that's an ideal year, maybe not spent $2 billion in capital every year, but if the right opportunity was there, we will seize it if it's doable.

We clearly view, with the strong operational performance we have now, and there's still room for improvement, that putting more on the top line is the top priority. We see our customers wanting us to do more, because this ability to integrate and package that we're very good at, and we already do in automotive and industrial transportation and aerospace and defense, and are starting to do in industrial really helps the customer.

This idea of a broad range of connectivity and sensors is very potent from the customer's point of view. We're always looking to add into that. You would expect to see us continue to do a nice mix of M&A and capital returns.

Great. Then just to clarify a couple of comments, Tom, in terms of the Measurement Specialties business. You're saying that the revenues reported today are all basically from the Company's acquired book of business, but the teams have already gotten together and have pulled some sales synergies that we should start seeing over the next few quarters? If you could talk about what that low hanging fruit revolves around?

As we pointed out when we made acquisition, Steve, the design and sales synergies, like any design and sales synergies, take a while. That's year two, year three.

The short-term sales synergies are more out of two paths. One, we have more people selling to all of these customers, so can we sell more existing solutions to a customer just because we're in front of more customers? We expect to start to see some of that towards the end of the year.

What of the products that can go through the channel? Our channel team that's led by Joan Wainwright is working with our channel partners to identify what are the practical products that can be sold through the channel. We view that as the shortest term revenue synergy.

The longer ones are when we see that we can integrate a sensor into a wire in a certain application, whether it be in industrial or medical or whatever. That takes a few years to turn into revenue. It's all consistent with our acquisition plan.

Great. That's very helpful. Congratulations on the transaction.

Thank you, Steve. Next question please.

Shawn Harrison, Longbow Research.

Hi, good morning. Congratulations on the results. I wanted to dig in on two things in terms of the broadband networks business being sold, and also the buyback.

It looks like maybe the accretion this year from that business, or the earnings contribution, would have been around $0.40 to $0.45, meaning that you pick up at least 50 basis points of margin consolidated once the business is sold, but maybe why not accelerate the buyback earlier? You guys don't have significant leverage to even fill that gap earlier than, let's say, 18 to 24 months out.

Thanks for the question. In terms of the profitability, we're a little bit higher than what you've suggested, but an order of magnitude, that's about right. In terms of the share buyback, as we noted in our opening comments, we anticipate the deal to close by the end of the calendar year, and so that $3 billion of cash isn't available until the deal closes at the end of the year.

We are already and will continue to be active in our ongoing share buyback program. We bought back this most recently completed quarter, and we'll continue to do that as part of our return capital program, but the $3 billion, once that becomes available, will increase that activity.

Okay. Then as a follow-up, with a combination of data comm and consumer devices, EBIT margins probably best case scenario right now are maybe mid-single digits? Other than revenue synergies, how do you see the margins for that business long term?

Can it be at a mid-teens EBIT margin? What steps need to be taken other than just ridding yourselves of low margin business to get there?

Sure. Again, you've got to peel back the onion a little bit. If you look at both businesses, the core connector businesses, the EBIT margin is well above that.

In data comm, we had been investing in high-speed solutions and those product lines. If you measure them as we do, the product line profitability, they're losing money because they're in investment stage and the design ins are just starting.

The core business where we miniaturize connectors, sell them in the servers, storage, smartphones, pretty decent business. It's not as high an operating margin as industrial or industrial transportation, but there, then it's, can we be successful with these R&D initiatives we have, I call them. They're not pure R&D because we're selling the products, but they just haven't been adopted across industries yet. That 's really the question. How long will we pursue those?

We really believe in this insatiable data world that for data centers and for other applications in our Company, that high-speed of more than five, 10, 12 gigabit is going to be necessary. We are developing fiber connectivity and copper connectivity for 25 gig plus. Those are strategic investments that happened to reside in the data comm business.

Then we're looking at some other advanced technologies, that are most naturally in the consumer business, because that's where you get the initial application. It may not be where we get the bang for the buck eventually, certain types of manufacturing that we're applying there because the miniaturization, that is where the trend starts there.

By the way, over the years, we have seen the ability to miniaturize there moving quickly into our automotive business where it has been more and more important over the last five years. The good news is, it's not just [g's]. You've got cost reduce this thing, and if you keep cost reducing it, do you make it an uncompetitive business?

No, two-thirds of our business is solid and can get better, no question. That is the core connector business. One-third are investments that we're making.

We have milestones that we hold ourselves to, that are proof points that are either yes, we have the right technology, or the market is taking the technology, and when we see those not happen, and I'll give you a good example of a product line, Magnetics, that we divested last year, that was one of those. We felt we had a better way to solve the magnetic issue, and it turned out we didn't, so we divested it.

That's how I think about those businesses. They're very [core-related]. They are core connectivity businesses. How big they will be in the portfolio is to be determined, but they will be in the portfolio.

Just quickly, Tom, sorry, the follow-up on that 25 gig, 40 gig [movement], I know last time on the call you thought maybe towards the end of the year you would see some greater adoption. Do you still view that as a potential dynamic exiting the fiscal year?

I do, and it's not going to be big in the numbers because it takes time. The good news is we've won contracts. The program management is starting to plan installation, all good signs.

The rate of winning needs to increase for this to look like it is the business we thought it would be. We're not surprised. It's tracking to what we thought when we had a reset.

The industry, with all the change it went through, began to embrace these kinds of things a little bit slower. All the customers are saying they need to get there. It's just the rate at which they're going to get there.

Thanks so much, and congrats again.

Thank you. Next question please.

Craig Hettenbach, Morgan Stanley.

Quite a ride, Tom, in terms of I think of since the split from Tyco, a lot of portfolio management, arguably much for the better at this point. With that, I'd love to get your thoughts in terms of post this latest sale, what that means, in terms of the clarity of the strategy, the organization, and as you execute to the harsh environment going forward?

Sure. From the strategy that we've had inside the Company has been pretty darn consistent. We've had a strategy map that I think that we modify a little bit every couple years, but it's been fundamentally consistent around connectivity.

It got more granular when we acquired Deutsch around becoming much more aggressive around harsh connectivity. What that meant was acquire. We were moving at a nice pace. We always have a strong harsh business, but then in a sense took the double down approach. We were fortunate that Deutsch came on the market, and we got it.

We were incubating the sensor business to see is that a place that we should go into or not? We didn't know, and we had some doubts, but when we broke through a few years ago, then we decided logical place for us to be, not only because sensors are good business and the skills that we have are similar, not exact, but the skills you need to be successful in sensors, but more importantly because we see the convergence in the solutions.

As that moved from, let's see if we want to be in sensors, to this needs to be a new platform for the Company, that change the focus on networks. That made networks an important part of the business, but not as critical.

We also concluded in that time to really have to have the kind of business in broadband networks that we have in harsh or could have in sensors, we needed to augment the product line pretty significantly, a much broader wireless capability, which is not really something we could develop organically.

That was going to be a bit of a challenge. Then we weighed that against other opportunities. We decided we're going to have to optimize that business another way.

We were fortunate enough to find a very strategic buyer because you might have a business. Optimization may not mean selling because you're not going to get the value for it.

We had very strategic buyers so we can get more value than we could by running it ourselves or spinning it out or something like that. I think our patience of pursuing an optimal solution in this case paid off.

Now, you get to the point we're 90% connectors and sensors, 80% harsh, a pretty consistent strategy. The manufacturing methods are the same, pretty much in these businesses. How you go to market are very similar.

The applications are slightly different. The sharing of technology, you're sharing it across 90% of the business now. It's very exciting, especially at a time when customers are asking us to come in earlier in the architecture. That's why the solutions we're bringing in many cases today they're not "Sell us a part" solutions.

There really are, how do we optimize higher power, higher speed in a smaller footprint on this manifold, in this vehicle platform? What else can you do for us here? That's pretty exciting to us because it starts to open up other new paths for growing the business. We want to completely focus around that.

Got it. Thanks for that. As a follow-up on Meas and sensors specifically, when you talk about growing that above market, can you give any context in terms of are there any certain niches where they play? Where they're very strong?

They're growing fast in the market, relative to utilizing your larger sales force and distribution channel that should drive growth too? Can you give any context in terms of how that shakes out?

Yes. The business grew up with a very customer focus which is good, not so much an industry focus. Go in and win a customer is here or there, and really do well with that customer because in a smaller Company, you often face that Catch-22 of, where do I get the resources? I don't want to get out ahead of my headlights.

We're bringing them into more, for example, appliance customers, than they were in before. We're bringing them into more medical customers than they were in before.

They weren't in automotive customers, and we're bringing them in there. In industrial transportation, where they have a very nice business, the combination of their sensor business and our connector business, it's very attractive to our customers. That's how I'd really think about it, if that hits your question.

It does. Thank.

Thank you, Craig. Next question, please.

Wamsi Mohan, Bank of America Merrill Lynch.

Thank you. Good morning. Tom, you commented about [probable] lower energy prices pertains to the oil and gas portfolio. I was wondering you are seeing any trends of change in purchasing behavior from a demand standpoint in the transportation business, given where gas prices are? I have a follow-up for Bob.

I would say that our customers, Wamsi, anticipate some of that, but it's probably still too early. When we talk to them, they'll tell us that is the typical trend.

Gas prices go down in the US. With the improving economy, trucks go up. We like that. We have a lot of content on trucks.

I think that it is too early to say that we're seeing the trends yet. Although the mix of content as I alluded to earlier is still moving in a strong direction. We would expect if prices stay low, that will help the man.

Okay. Great, thanks. Bob, can you talk a little bit about any dis-synergies that might come from this divestiture, particularly because of maybe shared facility usage or overhead absorption, and what sort of things you intend to do operationally to offset some of that? Do you anticipate any things like site consolidation, etc? Thanks.

For the most part, from a factory standpoint, our BNS business had standalone facilities. Those facilities will transact with the deal, so we don't have a lot of work from a standpoint of factory remaining of X percent full, or having to find a way to manufacture something that is in a facility this going. They're relatively segregated, not a lot of work and worry there.

There are of course some shared services activities, some corporate functions. We've got a year before the deal closes, and of course we have a transaction services agreement post deal closure. We've got some time to work through those issues. We don't anticipate it to be an issue one way or another.

Okay. Great, thank you.

Great. Next question please.

Mark Delaney, Goldman Sachs.

Yes, good morning, and thanks very much for taking the questions. I was hoping you could elaborate a little bit more on some of your prior comments about potentially looking to make some additional investments with the proceeds from the BNS sale.

I know you talked about some of the product lines. You're excited to be an IOT type focused Company now with industrial and automotive. Maybe you could just touch onto how you're thinking about your end market diversification going forward?

As you exit BNS, the exposure to auto and industrial would go up, and if you could just talk about your comfort levels with exposure to those markets? As you're thinking about making investments, do you want to try and increase your exposure into other areas?

Thanks, Mark. In terms of the first part of the question, increasing organic investment, what we have seen over the last five years is a pretty good correlation, particularly in the harsh businesses which are our strong suit, that when we invest and increase the number of engineers and field engineers. Field engineers in our industrial business because a lot of customers. It's a fragmented market and design engineers, and in our more OEM kinds of businesses, like commercial air, automotive, industrial transportation, design engineers.

Wherever we have opportunity to find the right design engineers, put them close to the customer, we take it. It is an open-ended charge to go get those folks because there's such a correlation, and the more we can be sitting with the customer and the architecture, the better job we can do for them, and the more business we get. You can see best in the rate of growth in our commercial air businesses and our automotive and industrial transportation businesses.

More recently, we've been applying that to our industrial equipment business and our appliance business, high margin, high market share businesses, where the co-design, and because we have a lot of systems knowledge, we can really help the customer design their products, the insides of their products, the electrical system, how the electronic systems functions, much more effectively. We make those investments where the customers are receptive to them, and where we can get the engineers and the right engineers.

It's much less about, are we going to hold off on investing in automotive until we bring industrial up? No, and the reason is because of the content growth.

Automotive grew 4.5% vehicle production last year, projected somewhere around 2.5% this year. We're still going to be mid- to high-single digits growth because of the design-in wins we've had, and the vehicle content growth.

This content growth is probably as good and it's as consistent as it's ever been, at least in the nine years I've been here. It provides an element of growth, that while the business itself might cycle, this should be a good business for us in most cycles.

On top of that, if you look at what our margins were five or six years ago, they are dramatically improved because we've become much more effective at what we do and how we design. By the way, our customers share in that improvement. Even with that, the margins are up, so that when the cycle maybe goes into a down cycle, our wherewithal is so much stronger.

No, I don't look at it from, I wouldn't want to get a bunch of new design wins or acquire some technology that's relevant to us if it's automotive, because it makes us bigger, because I just think that the underlying trend is so positive there. It's clear that when we look across the portfolio, sensors in general and industrial markets we serve in particular are very, very high priorities for M&A. It plays to our strong suit.

We've been making smaller acquisitions there to, in some cases, give us a portfolio like SEACON or broaden our portfolio like this company Sibas, that we acquired in China in the last few months. It's not a big company, but a significant product line we didn't have that they only sold in China that we'll now take around the world.

You will continue to see as make small technology acquisitions so that the solution strategy we can bring more and more to the customer, and it's all relevant. It all has to do with collectivity or sensors. Does that get at your question?

Yes. That's very helpful. Then for a follow-up, just on the SG&A, the dollars came down sequentially. I think the SG&A as a percentage of sales is at one of the lowest levels in several years.

Maybe first, how much of that was some of the TEOA initiatives versus just FX causing SG&A to come down? Maybe you can help us think about what the SG&A levels will run at going forward?

Mark, from a standpoint of the benefit, year-over-year, we've done about 40 basis points. There's certainly benefit in both areas of TEOA, as you know. Last year, we expanded TEOA from what had been a factory productivity and a lean product development process in our [DNE] organization to really be, as we call it, TEOA everywhere.

Our G&A functions are now seeing the benefit of that. There's definitely also some tailwind from an FX standpoint. It's a combination of both. As we continue to see organic growth, we'd expect that percent of sales to generate some leverage throughout the course of the year.

Just add to that, the area we've been consistently investing in, and it happens to show up in this line, but it's really the digital, the effort to accelerate the digitization of the Company. Better website, better product information, things like that. That's going to continue. We view that as essential to our value proposition.

There are some areas we're not investing. We feel we're adequate in the back office. That is not an area. That's a strategic area that we are investing in the S portion of G&A.

We are not shy about putting field resources in the field, particularly in harsh environments where the solutions are more complex, and the ability to help a customer through the design, from a field applications engineering perspective, is important.

Then thirdly, we're going to be investing in field resources in sensors. We've started to take advantage of all of these opportunities, and they're growers. The multiplier to growth is very positive. It takes a few years, but I think with our margin improvement and the leverage across the balance of our SG&A, that funds it adequately, and continues to put a lot of fuel into the growth pipeline.

Thanks very much.

Next question please.

William Stein, SunTrust.

Thanks for taking my question, and congratulations on the very strong operational outlook. First, I'm hoping to get a clarification. When asked about margins, I think you said you wouldn't disclose gross margin, but operating margin on BNS was above Company average? Nicely double-digit? That's surprising to me. Did I hear that right?

I believe I said, and should have said, it is slightly below Company average.

Got it, okay.

[So we ended] at double digits.

Then my real question I guess is actually about SubCom. We spent a lot of time today talking about what's core, and in particular talking about harsh, and then other things you came to decide weren't so core, so you're divesting.

This is an area that certainly fits in the category of harsh, but you've also talked about it as in a way, very different and potentially not core to the Company. Of course, it's difficult to find a buyer.

We are seeing your only real competitor, I think, in this space, Alcatel-Lucent, looking like they're trying to IPO this business. Understanding that the timing might not be right, given the troughing position of that revenue, is this something you could consider?

Could? Yes. Are we? No. We have looked at this many times. The most important thing about the business is that they're the best in the world at what they do. When you start out with that, at least my philosophy is, you've got to be careful that you don't run away from a business too fast.

Given the uniqueness of the business, it really is worth more inside the portfolio than the out. Sure, there's a lot of people who would love it. They either don't have the wherewithal or pay.

If you contrast it to BNS, BNS is another good business. We weren't sitting here with our finger on the red button. Let's get rid of this thing. It was a strategic decision that it's not going to get as much priority as it did before sensors.

It still can be a very good business. We think there's a good cycle or a solid cycle coming. When we cross with a strategic buyer that could buy it at a price where they could get their value, and we could get our value, it made total sense.

If you look, as somebody else indicated earlier in the call, that's been our approach to the businesses. You could call it niche business that are on the outside of the portfolio. In this case, SubCom is a niche but it's a world leader in what it does, so it has real value. I think it's going to be with us for a long time.

Great, thank you.

Thank you. Next question please.

Sherri Scribner, Deutsche Bank.

Thanks. I was hoping you could give us a little more detail on pieces of the BNS businesses that you're selling, and what specifically those product are, and how much of that came from the ADC acquisition?

Sure. There's really I'd say three, a lot of products, but if you wanted to break it down, what we call the telecom business, half of that came from ADC and half of that came from TE. Those are the fiber optic and copper connectivity solutions that are in the outside plant of a telecom or cable network.

They're connecting the fibers and the coppers and the coax that go from the origination of the signal, out of a cable head end or a central office for a telecom through the network, to your house or to a node close to your house. That's half of the business, a little over half of the business.

About 40% of the business are, what we refer to, enterprise. That's the conventional way to describe it as structured cables in the enterprise or in the data center. That is where in your office you have the communication cables behind the wall that provide, that come to the outlet, that we used to plug our PCs in to get data.

We now have wireless access points on the ends of those cables. That's a business that is a lot of small transactions all around the world.

Then, the remaining piece of the business for us is this relatively small niche digital antenna business. All of the digital antenna business came from ADC. About 20% of the enterprise business came from ADC, and a little over half of the telecom business came from ADC.

Okay, thank you. That's helpful. Then just thinking about the consumer business, that business has been declining for you in terms of revenue on a year-over-year basis since you broke it our.

I'm trying to understand what type of goals do you have for that business? What needs to happen there before you make a decision that maybe that's also a piece of business that you might want to divest?

Yes, I've said before. You say never say never. You can imagine we study and think about this a lot, but I've not come up with any multitude of scenarios that we've played out where we would sell our consumer device connectivity business. It is what we do.

What we're doing differently is coming at it much more as a product and a platform business. While we have it in a segment in a vertical market, it's optimized miniaturization, optimized antennas, things like that, optimized high-speed cable assemblies that are needed. The capability is needed all over the Company. Some of the Company has its own capability. Some of it relies on consumer.

To really come at it from a much more of a platform basis, so that it's much less trying to pick a winner that you win, which in this consumer business is very difficult to do. Because we've been trailing it for a few years, it makes it even more difficult when you're not the incumbent.

The strategy there is to run it a little differently, and by combining it with data comm, it'd be more cost-effective. It would be better with the customers. We collaborate nicely, but really one face to the customer.

The focus, put more emphasis and more investment which we'll be able to, once we do this on the really critical technologies, and get out of stuff that, I know we've been in it for 15 years, but that's become a real commodity in the business. You're never going to make double-digit margins on it.

We expect these businesses, over the next 18 to 24 months, to get back to double-digit margins. I don't think that's a whim. There's a real plan to get there that's based on some success we've had already in platforming.

Thanks, Tom. That's helpful. Then Bob, I just want to ask in terms of a cash balance, it looks like the cash balance now is relatively low after acquisitions. Can you just let us know what type of cash levels you need to run the business?

I know there are some timing issues in there, if you can just tell us what brings that cash level back up? Thank you.

Sure. Thanks, Sherri. Cash balance is down, but obviously we in the current quarter paid for the Measurement acquisition. We had built up quite a bit of cash in the preceding quarters, but we're sitting at about $900 million of cash, a level that we're very comfortable with.

Half a billion to a billion, three-quarters of a billions dollars is what we need to operate. It's not an issue there whatsoever. Of course, we're a very strong cash generating business.

First quarter is traditionally our lightest quarter, and that will be the case for 2015 also. That will ramp as we get into Q2 and beyond.

Thank you.

Thank you, Sherri. Next question please.

Jim Suva, Citigroup.

Thank you very much. First of all, I have a question for each of you. Maybe if, Bob, you could let us know little bit, just to be clear, the accelerated stock buyback announced today, I assume FY15 EPS does not include anything from the accelerated portion of that?

Then Tom, on the consumer you mentioned that you're narrowing your focus. TE from the spin in 2007, the first few years were about narrowing the focus. Now, we haven't heard that for the past few years, or lease maybe I don't remember it now.

It seems like you're talking about narrowing consumer focus a little bit again. When would that narrowing of the consumer be completed? Thank you.

Soon, I hope, Jim. There are some chunks. The first phase of it, you have a good memory, was we really outsourced a lot of product back in the day, and resold it under our brand name. We concluded back then that really didn't make much sense, given the changing circumstances in the industry. One time it did, but it didn't, and that had distracted us a bit.

Now, it's really about platforming and getting out of these commodities applications where you're not really leveraging what we do best, precision engineering, high-speed, high power throughput. I think we were too fragmented.

The first go-round wasn't good enough. As the market continue to be very dynamic, there's only been one consistent player on top and everybody else underneath has changed, and I think for where we were in the order of our position in our part of the market, we suffered from that.

I do feel like we have the team that's come in over the last couple of years and the product range that we're developing that gives us the ability to not bet on customers, but provide core capability that you have to tailor or semi-customized for the customers. It's a bit of a change.

This business has never been, if I would have ranked us from strongest and weakest, it's never been amongst our strongest, I would say, over the last five or six years. I feel like we're rebuilding our strength because the fundamental know-how is there, and now we're much more focused. The results have to be produced. There's no question about it.

I'd say over the last six to nine months, I feel it taking shape, that it's going to be a solid business. I keep saying to everyone who asks me, would you consider selling this business?

Never say never, but I don't even think about it because these are the products we make, the billions of things we punch out a year. These are products, and they go in other places.

We're pretty confident we'll move the performance of the business up. We've moved nicely with the Chinese OEMs. It's not enough to celebrate with, but it was a key milestone of the last six months to change our position meaningfully there, not just accidentally. We've done that.

It's not enough to declare victory, but we have a pretty stringent milestone here that we hold ourselves to and we're making progress. It's going to be a couple of years before this is in the double-digit business, but there's a clear path to get there.

Then Jim, from the standpoint of the share repurchase, we did not announce an accelerated share repurchase program. What we've said was the majority of the proceeds will be used for share repurchase. The Board of Directors did authorize an increase in our repurchase program, adding $3 billion.

We now have $3.7 billion of authorization, and we'll continue to buyback share per our prior program through the balance of this year. Then once the transaction close by the end of this calendar year, that $3 billion will be available for repurchases at that time.

Great. Thanks for the clarification.

Thank you, Jim. Looks like there's no further questions. If you do have questions, please contact investor relations at TE. Thank you for joining us this morning, and have a great day. Thanks, everyone.

Thank you.

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