TE Connectivity (TEL): Record Q3 Earnings Beat Estimates

TE Connectivity Ltd. (NYSE:TEL) scored the third consecutive earnings beat as it reported record third-quarter fiscal 2016 adjusted earnings of $1.08 per share, which beat the Zacks Consensus Estimate by 3.8%. The bottom line also surged 20% on a year-over-year basis. Moreover, the reported figure exceeded the higher end of the company’s guidance.

The impressive earnings were driven by robust growth in harsh environment and SubCom businesses. The company’s continued productivity improvements also reflected on earnings.

On a GAAP basis, the company posted record earnings per share from continuing operations of $2.19 in the quarter, up over 250% from 85 cents reported in the prior-year quarter.

Inside the Headlines

Net sales in the fiscal third quarter were relatively flat year over year at $3,121 million. The figure was slightly ahead of the Zacks Consensus Estimate of $3,103 million.

The top line benefited from excellent traction in the SubCom business as well as most of the company’s harsh environment businesses including Automotive, Medical, Aerospace, Commercial Transportation and Appliances. However, prolonged softness in industrial markets coupled with unfavorable macroeconomic conditions like oil and gas volatility and slowdown in China restricted growth.

Segmental Performance

Transportation Solutions revenues came in at $1,652 million in the quarter, up 1.9% on a year-over-year basis.Orders in the transportation segment came in at $1,659 million compared with the year-ago tally of $1,643 million. Though automotive organic sales growth in China and EMEA regions acted as tailwinds, weakness in industrial markets offset these improvements to some extent.

Communications Solutions continued to show weakness as revenues fell 10.3% year over year to $620 million. Orders also declined 14.9% to $399 million on a year-over-year basis. The lackluster performance of the communications business was largely on account of poor sales in Appliances and Data & Devices business lines. Data & Devices sales were impacted by Circuit Protection divestiture and product exits.

Industrial Solutions revenues picked up after a soft quarter, rising 5.3% year over year to $849 million in the quarter under review. Orders in this quarter rose 7.2% to $879 million. Growth in OEM and distribution orders drove sales, while the recently acquired Creganna also lent strength to the segment’s top line. However, weakness in oil and gas markets and industrial equipment hurt growth to some extent.

The company’s adjusted operating margin for the quarter expanded 20 basis points from the year-ago quarter to 16.1%.

Liquidity & Cash Flow

TE Connectivity exited the quarter with cash and cash equivalents of $694 million, down from $701 million as on Jun 26, 2015.

The company generated free cash flow of $589 million in the quarter, up from $391 million in the prior-year quarter.

Share Repurchase Program/Dividend

During the quarter, the company returned $231 million to shareholders through share buybacks and dividends.

Other Developments

The quarter saw TE Connectivity expand its portfolio through the acquisition of Jaquet Technology Group, which makes innovative speed sensors for the auto, rail and power markets. This expands the company’s scope of engineering and manufacturing expertise for sensor technology and adds to its automotive and industrial and commercial transportation portfolio.

During the quarter, TE Connectivity concluded the buyout of healthcare device company Creganna Medical Group for $895 million, in a bid to expand and emerge as the industry leader in high-growth harsh environment applications.

The acquisition will enable TE Connectivity to double its medical business revenues to approximately $500 million and cement its position in the high-growth minimally invasive medical device market. The company expects the deal to be accretive to the extent of $0.03 to adjusted earnings in the first full fiscal, while boosting interventional revenues by over $300 million.

Concurrent with the earnings release, TE Connectivity also revealed that it had inked an agreement to acquire Intercontec Group — a leading maker of high-quality industrial metric circular connectors. The deal will further boost its position in harsh connectivity applications for the industrial market. Intercontec will be integrated into the Industrial Solutions segment.

Outlook

TE Connectivity expects fourth-quarter fiscal 2016 adjusted earnings per share in the range of $1.17–$1.23 and revenues between $3.25 and $3.45 billion. The adjusted earnings and revenue figures incorporate the impact of Jaquet and Creganna acquisitions.

In light of the strong quarter, the company revised its full-year fiscal 2016 guidance. It now expects adjusted earnings per share in the range of $3.97–$4.03 (previously guided in the range of $3.90–$4.10) and revenues in the band of $12.15–$12.35 million (previous guidance was $12.1–$12.5 billion).

Conclusion

The company is currently experiencing a steady recovery in the automotive market and anticipates a rebound in its commercial transportation business in the forthcoming quarters, both of which hold immense potential. The company expects industrial orders to gain further traction, which is a sign of stabilization in the sector. However, the company continues to be bothered by the weakness in Chinese markets and foreign exchange volatility.

Going forward, TE Connectivity believes that the acquisition of Creganna and Intercontec Group will further boost its strong foothold in the harsh environment portfolio. The company has been undergoing restructuring in order to enhance its focus on the lucrative connectivity and sensor markets as well. These strategic steps are beginning to gain momentum, and will likely boost growth in the coming quarters.

In addition, though the exit of the Circuit Protection business may have impacted financials in the short run, we believe the company will now be able to channel its resources to more productive areas in the future, thereby augmenting long-term growth.

TE Connectivity currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry are Ballard Power Systems Inc. (NASDAQ:BLDP) , AU Optronics Corp. (NYSE:AUO) and Maxwell Technologies, Inc. (NASDAQ:MXWL) . Each of these stocks holds a Zacks Rank #2 (Buy).