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TE Connectivity (TEL) Beats on Q1 Earnings, Lags Revenues

Zacks Equity Research

TE Connectivity Ltd. TEL delivered first-quarter fiscal 2019 adjusted earnings of $1.29 per share, beating the Zacks Consensus Estimate by 2 cents. However, the figure declined 9.2% year over year and was in line with the high end of the projected range of $1.25-$1.29 per share.

Net sales in the quarter were up 0.3% year over year to $3.35 billion. Solid segmental performance, especially in the Industrial and Communications segments, drove top-line growth in the reported quarter.

However, sales lagged the Zacks Consensus Estimate of $3.38 billion.

The company’s total orders declined 6% year over year and 4% sequentially. Notably, orders from China declined 22% year over year. Moreover, weakness in global oil production and lower order levels at Transportation and Communication segments in China resulted in the overall decline in total orders.

Top Line in Detail

TE Connectivity operates in the following three organized segments.

Transportation Solutions: The segment generated $1.99 billion of sales (59.3% of net sales) in the reported quarter, down 2.3% on a year-over-year basis. The decline was primarily due to 1% organic decline in sales of automotive on lower global auto production. However, Commercial transportation witnessed 2% organic growth. Moreover, Sensor business grew 4% organically, year over year.

Industrial Solutions: This segment recorded sales of $928 million (27.7% of net sales), up 5.2% from the prior-year quarter. The segment witnessed organic growth of 5% in the reported quarter. Further, orders were up 6% organically. Strength in aerospace, defense and marine led to organic growth of 13%. Moreover, 1% organic sales decline in industrial equipment was offset by strength in medical applications.

Communications Solutions: This segment generated sales of $433 million (12.9% of net sales), which increased 2.6% year over year and experienced organic growth of 5%. This was driven by strong growth in data and devices due to high-speed connectivity in data center applications. Notably, Appliance business declined 2% organically due to weakness in Asia.

TE Connectivity Ltd. Price, Consensus and EPS Surprise

TE Connectivity Ltd. Price, Consensus and EPS Surprise | TE Connectivity Ltd. Quote

Operating Details

First quarter fiscal 2019 gross margin was 33.3%, which contracted 160 basis points (bps) from the year-ago quarter. Adjusted operating margin was 16.9%, down 190 bps year over year.

Operating margin for Transportation solutions and Communication Solutions declined 16.4% and 5.3% year over year. However, operating margin for Industrial Solutions increased 9.5% year over year.

Moreover, R&D expenses were $161 million, down 2.4% from the prior-year quarter and selling, general, and administrative expenses were $389 million, up 3.2% year over year.

Given the slowdown in market conditions, the company is ramping up its efforts to reduce its fixed costs, which, in turn, is expected to have a positive impact on profitability in the near term.

Notably, the company incurred an acquisition charge of $5 million compared with $2 million in the year-ago quarter.

Balance Sheet & Cash Flow

As of Dec 28, 2018, TE Connectivity’s cash and cash equivalents was $505 million compared with $848 million as of Sep 28, 2018.

The company generated free cash flow of $69 million in the reported quarter. Further, TE Connectivity paid back $645 million to its shareholders through share repurchases and dividend payments. Notably, the amount paid to the shareholders includes proceeds from the sale of the company's Subsea Communications business.

Guidance

For fiscal second quarter of 2019, the company expects net sales in the range of $3.3 billion and $3.4 billion, indicating decline of 6% at the mid-point. The Zacks Consensus Estimate for sales is pegged at $3.51 billion.

Adjusted earnings per share are projected in the band of $1.13-$1.17. The Zacks Consensus Estimate for earnings is pegged at $1.38 per share.

Additionally, for fiscal 2019, TE Connectivity anticipates net sales of $13.45 and $13.85 billion, projecting decline of 2% year over year at the mid-point.

The company anticipates adjusted EPS to be within $5.35-$5.55, indicating low-single digit growth at midpoint.

To Conclude

TE Connectivity reported mixed first-quarter fiscal 2019 results, beating earnings estimates but missing the same for revenues. The company reduced fiscal 2019 earnings guidance and sales forecast owing to weak market conditions in China and softness in European Auto. Moreover, the company expects revenues and earnings to stay flat sequentially in the second quarter.

The company’s strong efforts toward business development will continue to benefit segmental performance.

The Transportation Solutions segment is anticipated to witness organic growth in low single-digits, owing to global decline in auto production, primarily in Europe and China. However, the company expects margins in this segment to improve by the end of fiscal 2019 at the back of cost actions initiated by the company.

The Industrial Solutions segment is also poised to grow in low-single digits with growth in aerospace, defense and medical partially offset by weakness in factory automation applications.

Communications Solutions segment is also expected to grow in low-single digits. The decline will primarily be due to weakness in Asian markets for data, devices unit and appliances.

Zacks Rank & Stocks to Consider

TE Connectivity currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader computer and technology sector include SYNNEX Corporation SNX, Twitter, Inc. TWTR and Cloudera, Inc. CLDR. All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Expected long-term earnings growth rate for SYNNEX, Twitter and Cloudera is 0.7%, 22.1% and 8%, respectively.

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