TE Connectivity Tops Q4 Earnings, Sales on Solid Markets - Analyst Blog

TE Connectivity Ltd.(TEL) reported fourth-quarter fiscal 2014 adjusted earnings of $1.02 a share, which surpassed the Zacks Consensus Estimate of $1.00 by a couple of pennies. The reported figure was also up 9.7% from 93 cents earned in the prior-year quarter. The company reported GAAP earnings, from continuing operations, of $1.60 per share compared with 92 cents reported in the prior-year quarter.

For fiscal 2014, the company reported adjusted earnings of $3.79 a share, an increase of 17.3% year over year, while GAAP earnings per share grew 42.1% year over year to $4.29.

Continued strength in transportation and industrial markets acted as the primary growth drivers. This apart, the company's appliances business, meant for the harsh environment, had higher margins compared to other businesses and this was also a positive. Further, the company is focused on cost-containment initiatives like its TE Operating Advantage (TEOA) strategy which leverages operational efficiency by eliminating waste and boosting the operating margin.

Quarterly Details

Total revenue in the quarter increased 4.2% year over year to $3,575 million but fell short of the Zacks Consensus Estimate of $3,603 million. The company's organic revenues grew about 3% in the quarter.

For full-year fiscal 2014, TE Connectivity's revenues came in at $13.9 billion, an increase of 4.8% compared with $13.3 billion reported in the prior-year. The organic revenues for fiscal 2014 grew 5% year over year.

Revenue growth was attributable to strong performance of the end markets including automotive, aerospace, defense, oil and gas, industrial equipment, appliances and enterprise networks.

The company's order level for the quarter increased 4.9% to $3.4 billion excluding those from the Subsea Communications, whereas its book-to-bill ratio came in at 0.98.

Gross margin in the quarter decreased 20 basis points (bps) to 33.5% year over year while the operating margin increased 110 bps to 14.6%.

Segment Details

Revenues in the Transportation Solutions segment increased 6.9% year over year to $1,494 million. The segment's operating margin increased 200 bps year over year to 20.4%.

Revenues in the Industrial Solutions segment were up 10.1% to $901 million. The segment reported an operating margin of 12.9%, declining 260 bps from the previous year's margin of 15.5%.

Network Solutions revenues declined 3.1% year over year to $779 million. However, the operating margin for the quarter increased 300 bps year over year to 7.1%.

Consumer Solutions revenues decreased 2.7% year over year to $401 million while the operating margin declined 50 bps to 11.2%.

Cash Flow and Balance Sheet

TE Connectivity exited the year with cash and cash equivalents of $2,457 million, up from $1,403 million as on Sep 27, 2013.

Net cash from operating activities for the quarter was $749  million, up from $593 million in the prior-year quarter.

Capital expenditure for the fourth quarter amounted to $93 million while the company paid $283 million in dividends and share repurchases.

The company's free cash flow for the quarter came in at $661 million against $412 million as on Sep 27, 2013.

Business Update

TE Connectivity recently completed the acquisition of the global designer and manufacturer of sensor and sensor-based systems – Measurement Specialties Inc. The acquisition serves as a strategic move for the company in its aim to become the leader in the high potential sensor industry.

The deal, valued at $1.7 billion including debt, is expected to close in 2014, subject to regulatory approvals. TE Connectivity will fund the transaction with cash as well as debt. The acquisition, initially announced in Jun 2014, is likely to be accretive to the company's earnings in fiscal 2015.

Outlook

TE Connectivity provided its guidance for first-quarter and fiscal 2015. The company expects the momentum in Transportation, Industrial and Network segments to remain strong. Further, it expects the appliances business to continue its growth, going forward.

TE Connectivity expects first-quarter revenues in a band of $3.46–$3.56 billion and adjusted earnings per share in the range of 88–92 cents. The company expects GAAP earnings in the range of 95–99 cents per share. GAAP earnings guidance is inclusive of restructuring charges worth 5 cents, 26 cents income from tax-related items and acquisition charges of 14 cents in the quarter.

For fiscal 2015, the company provided its revenue guidance range of $14.7–$15.3 billion, with adjusted earnings in the range of $4.05–$4.35 per share. GAAP earnings are anticipated in the range of $3.99 to $4.29 per share. GAAP earnings guidance is inclusive of restructuring charges worth 9 cents, 26 cents income from tax-related items and acquisition charges of 23 cents in the year.

The above guidance includes the impact from the acquisition of Measurement Specialties Inc.

Zacks Rank

TE Connectivity currently has a Zacks Rank #3 (Hold). Better-ranked stocks that look promising in the industry include AU Optronics Corp. (AUO), IEC Electronics Corp. (IEC) and Maxwell Technologies Inc. (MXWL). All these stocks sport a Zacks Rank #1 (Strong Buy).