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5 Things TE Connectivity Ltd’s Management Wants You to Know

While the numbers reported by TE Connectivity (NYSE: TEL  ) in its latest quarterly earnings report painted a detailed picture of the state of the company, they don't necessarily tell the whole story. The conference calls that typically follow earnings reports are often a rich source of additional information, and any investor seriously following a company should take the time to tune in. Here are five important points made by CEO Tom Lynch and company during TE Connectivity's most recent conference call.

Harsh environments are paying off

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 have been increasing organic investment and have focused our acquisitions in these areas.

While TE Connectivity makes connectors for all sorts of different industries, the company has been focusing on areas where its products need to be able to withstand the elements. Lynch stated that 70% of the company's revenue now comes from these so-called harsh environment applications.

This is good news because segments that cater to harsh environments, such as transportation and industrial, are not only growing, but also managing double-digit operating margins. Transportation grew by 10% during the quarter, with a 21.1% operating margin, and industrial grew by 6%, with a 15% operating margin. What's more, guidance for next quarter calls for both the transportation and industrial segments to continue to grow by 7%-10%, while the rest of the business will be struggling to grow.

Acquisitions can fuel growth

Subsequent to the quarter, we closed the acquisition of the SEACON Group, which expands our business in a very attractive oil and gas market. In June, we announced the acquisition of Measurement Specialties, which establishes us as a leading supplier of sensors and connectors at nearly 40 billion to our addressable market and further increases our content in harsh applications.

Part of TE Connectivity's harsh environment strategy involves making acquisitions that further the company's reach into those lucrative markets. The SEACON Group provides connectivity solutions to the oil and gas industry, a harsh environment if there ever was one, and the acquisition increases TE Connectivity's scale in those markets. Measurement Specialties is a leading designer of sensors, and being able to offer both connectors and sensors for harsh environment applications greatly increases the total addressable market for TE Connectivity.

Subsea communications segment has bottomed

In our SubCom business, I am happy to report, we recently received down payments on two major projects. The AAE1 project, which connects Asia, Africa and Europe, was announced in April and we received the down payment on that. Then, earlier this week, we announced the Hibernia project, which will connect New York and London. That's 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. On a combined basis, these projects are worth approximately 700 million plus over the next two to three years.

One of the weak spots for TE Connectivity during the quarter was the network solutions segment. Within that segment, subsea communications revenue was down by 50% year over year. The two projects mentioned in the quote above are expected to generate around $700 million of revenue for the company over their respective lifespans, and TE Connectivity has already booked $550 million in subsea orders related to these projects during the quarter, which will be recognized as revenue once the work is complete. These deals should help raise the operating margin of the network solutions segment going forward, which fell to just 5.4% during the quarter.

Transportation margins are sustainable, helped by heavy trucks
When asked by an analyst whether the 21% operating margin in the transportation segment was sustainable, Lynch responded:

I feel confident that we will continue to generate these kinds of margins. This year we are getting a little extra benefit from the great, the really positive mix in heavy trucks both, the Deutsche acquisition and legacy TE business there, so that has given us a push. Our productivity is strong in that business, so I feel good where the margins are and the ability to sustain them.

TE Connectivity's transportation segment depends on the strength of the global automobile market. With global auto sales hitting a record in 2013, growing by 4.2%, and with continued growth expected in the coming years, TE Connectivity stands to benefit. Sales of heavy trucks have also helped the company's bottom line and, in July of this year, sales of medium- and heavy-duty trucks rose by 15.7% in the United States.

Breaking into mobile devices
When asked about the stabilization of the PC market, Lynch responded:

I mean, 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, so up or down.

We like it being up better than down so that's encouraging, but our real focus there is to build a better position in smartphones and tablets. You know, we are better than we were a couple years ago, but we are still not where we need to be.

The consumer segment is a small one for TE Connectivity -- just 11.4% of total revenue during the quarter -- and with a fraction of that related to PCs, the stabilization of the PC market seen in Intel's recent earnings report doesn't mean too much for the company. But the explosion of mobile devices offers an opportunity for TE Connectivity, and with nearly 1 billion smartphones shipping in 2013, and further growth expected in the coming years, the company is putting its focus on the right area.

The bottom line
Conference calls often contain a bevy of information in addition to the numbers presented in the earnings release. Often, the statements and tone of the CEO can reveal a great deal about the company's long-term prospects. In TE Connectivity's case, CEO Lynch seemed extremely optimistic about the company's most important segments. That bodes well for the company's bottom line going forward.

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9/2/2015 3:08 PM
TEL $58.61 Up +0.70 +1.21%
TE Connectivity CAPS Rating: *****