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Text: Due to the large number of participants on the Q&A portion of today's call, we're asking everyone to limit themselves to one question to make sure we can give everyone an opportunity to ask questions during the allotted time.
We are willing to take follow-up questions but ask that you rejoin the queue if you have a second question.
Before Heath and I get into the slides and the details of the quarter, I want to frame our view of the environment that we're operating in as well as our performance.
We are in an economy that is showing strong GDP growth globally, driven by the recovery from last year's COVID shutdowns with consumer spending that is robust, as well as corporations around the world increasing investment to capitalize on this recovery.
In addition to the recovery, it's also important to note that we've strategically focused TE around select secular trends and these trends are accelerating in the key markets that we serve.
You'll see this in our transportation segment with electric vehicle adoption accelerating in our communications segment around cloud investment and in our industrial segment with capital spending accelerating globally around factory automation as well as digitization.
While we have a recovery that is happening faster and is more robust than we all thought, the reality is that the world is dealing with supply chains trying to catch up to this faster recovery.
This is causing volatility for our customers as well as everyone that's in our customer supply chains.
In this backdrop, we are performing well in this environment and our strong results for the quarter and our performance so far this year demonstrates the strength and diversity of our portfolio.
You'll see this with contributions from each of our three segments.
We are generating sales, adjusted operating margins and adjusted earnings per share that are above pre-COVID levels and we remain excited about the additional growth and margin opportunities that we'll be on this year.
With this backdrop, let me provide some key messages from today's call about our performance.
First, I am pleased with our execution in the third quarter and the quarterly records that we achieved.
These records include sales of over $3.8 billion, adjusted earnings per share of $1.79 and adjusted operating margins of over 19%.
Our results were ahead of our expectations, driven by the continued recovery in most end markets that we serve, our broad leadership positions and strong operational performance by our teams.
It's also important to note that, while we are in a recovery, our growth also continues to be driven by the secular trends across our markets that are driving our market outperformance this year and will continue to drive the outperformance going forward.
Another key factor that you see is that, we are continuing to demonstrate our strong free cash generation model, and continue to expect free cash flow conversion to approximately 100% for this full fiscal year.
And as we look forward, you'll see and we'll talk about our orders in quarter three remain consistent with our second quarter, and we expect our quarter four sales to be roughly flat to our quarter three sales.
And we expect that these revenue levers will translate into strong performance with $1.65 in adjusted earnings per share in the fourth quarter.
As I mentioned, our results are demonstrating the strength and diversity of our portfolio, with growth and margin contributions from each segment.
In communications, you see the growth opportunities in the cloud and the ongoing increase in capital expenditure trends by the cloud providers.
In our industrial segment, you see increased investments in capacity and higher levels of factory automation.
And in transportation, you see content growth trends for electrification, as well as further electronification of both autos and trucks.
And in each of our segments, we are delivering strong operational performance, which are evident in the margins.
And when we look back to our discussion we had in October, we did indicate that our first quarter would be the peak of global quarterly auto production for our fiscal year, but not the peak of our earnings.
This is playing out as we anticipated because of our diverse portfolio.
For this fiscal year, we are expecting over 20% growth in sales, approximately 400 basis points of adjusted operating margin expansion and over 50% growth in adjusted earnings per share.
I am very pleased with this level of progress toward our business model and our team's ability to execute, especially with some of the markets continuing to recover and the broader challenges we've faced in the supply chain.
So, now, let me turn -- and I want to take a moment to frame the current market environment and our business relative to where we were just 90 days ago when we last spoke.
So, starting with transportation.
Consumer demand for autos remains robust, but ongoing challenges with semiconductor supply continue to impact our customers' ability to produce.
Global auto production came in slightly lower than expected in the third quarter, and we're expecting auto production to be approximately 19 million units in our fourth quarter.
The trends around our content growth remain strong in the transportation segment.
Our content per vehicle has accelerated from the low $60 range, a few years ago into the $70 range this year.
We continue to benefit from increased electronification and higher production of electric vehicles, which will enable us to continue to outperform auto production going forward, as content continues to grow.
In our industrial segment, we continue to see an industrial backdrop that is improving, which is benefiting our industrial equipment, as well as our energy businesses.
Also, in our quarter, our orders in medical have begun to recover, and we returned to growth as interventional procedures have started to increase again.
And the one area, where we are not seeing acceleration is in our AD&M business, but I will highlight, the business does feel stable at current revenue levels.
From 90 days ago, let me talk about communications.
The end market trends that we mentioned last quarter are continuing.
Consumer demand continues to be robust in appliances and capital expenditure trends remain strong in cloud applications.
And while that to look at where we were versus 90 days ago by our segments, I do want us all to remember that we are in a world that's still dealing with COVID and the uncertainties around variants.
While all our global factories are operational, we continue to watch developments in each of the regions we operate and our focus has been and will continue to be on keeping our employees safe, while also helping our customers capitalize on the improving economic conditions.
In the third quarter, sales of $3.8 billion were better than our expectations and were up over 50% year-over-year, demonstrating strong performance through the economic recovery with growth in all segments.
Also on a sequential basis, sales were up 3% and our earnings per share was up 14% with sequential margin expansion in each segment.
Compared to last quarter, industrial segment sales were up 5%, driven by ongoing strength in industrial equipment and increases in energy and medical.
And in the communications segment, sales were up 16% with double-digit growth in both data and devices and appliances on a sequential basis.
And in our transportation segment, our sales were in line with our expectations.
When you look at orders in the quarter, they remained strong at $4.5 billion consistent with the levels we had in the second quarter.
And this reflects market improvement along with ongoing inventory replenishment by our customers.
If you think about the balance sheet, we continue to maintain the capital strategy between making sure we're returning capital to shareholders as well as M&A.
Earlier this month, we entered into an agreement to acquire ERNI, a European connector manufacturer that has a complementary product line and serving the industrial market.
This acquisition has a purchase price of approximately $300 million and is consistent with the bolt-on strategy around acquisitions that we talked to you about.
As we look forward, we expect our strong performance to continue into our fourth quarter.
We expect sales to be up in the high teens over the year to approximately $3.8 billion.
Adjusted earnings per share is expected to be approximately $1.65 and this will be up 40% year-over-year.
And as you can see on the slide, we've included our full year numbers and our performance relative to both fiscal 2020 and 2019 which I highlighted earlier.
For the third quarter, our orders remained strong at approximately $4.5 billion consistent with the second quarter levels that I mentioned earlier.
Order levels continue to reflect economic recovery and replenishment across a number of our end markets.
Year-over-year, we saw orders growth in all businesses and in all regions.
Transportation orders remained elevated due to the market recovery, as well as the auto industry supply dynamics.
In our industrial segment, orders grew 8% sequentially and with growth in industrial equipment, energy and medical and flat orders in AD&M which indicates the stabilization that I mentioned earlier.
In communications, sequential order growth was driven by strength in data and devices.
So let me also add some color on orders and what we're seeing from a geographic perspective on a sequential basis.
We continue to see growth in Asia where our China orders were up 6% sequentially.
In Europe, our orders were down 7% sequentially and in North America, our orders were essentially flat versus last quarter.
So with that as a backdrop around orders, let me get into our segment results that you'll see on slides five through seven and I'll cover this briefly.
Starting with transportation, our sales were up approximately 70% organically year-over-year with growth in each of our businesses.
Our auto business grew 90% organically and we are benefiting from the market recovery and are demonstrating continued content outperformance due to our leading global position.
We continue to benefit from increased production of electric vehicles, as TE's technology and products are enabling high-voltage architectures and applications with every leading OEM on the planet.
In commercial transportation, we saw 56% organic growth driven by the market recovery, ongoing emission trends as well as content outperformance.
We are continuing to benefit from stricter emission standards around the world and increased operator adoption of Euro 6, which reinforces our solid position in China.
The other key point is that we continue to gain momentum with wins on electric powertrain platforms and trucks, which while this doesn't give revenue or orders today, it will provide future content growth for our leading position in commercial transportation.
In sensors, we saw 20% organic growth, driven primarily by auto applications and we also saw growth in the commercial transportation and industrial applications as well.
For the segment, adjusted operating margins expanded sequentially to 19.4% on essentially flat sales.
So let me turn to the industrial segment.
And in this segment, sales increased 13% organically year-over-year.
In our industrial equipment business, sales were up 36% organically with growth in all regions and benefiting from the momentum in factory automation applications where we continue to benefit from accelerating capital expenditures in areas like semiconductor and automotive manufacturing.
Our AD&M business, sales declined 7% organically, driven by the continued weakness in the commercial aerospace market.
In our energy business, we saw 9% organic growth driven by increases in renewables, especially global solar applications.
And lastly, in our medical business as I mentioned earlier, a return to growth in the quarter and was up 10% organically year-over-year with the recovery in interventional procedures around the world.
From a margin perspective, adjusted operating margin for the segment expanded year-over-year by nearly 300 basis points to 15.8% despite the volume declines in our AD&M business.
And this was driven by solid operational performance by the teams.
Now let me turn to the communications segment.
And our team continues to demonstrate strong operational execution, while capitalizing on the growth trends in the markets that we serve.
Sales grew 31% in the segment organically year-over-year with robust growth in both data and devices and appliances.
In data and devices, we grew 16% organically year-over-year due to the solid position we built in high-speed solutions for cloud applications.
We continue to see capital expenditures increasing by our customers and our content growth is enabling us to grow cloud-related sales at double the market rate this year.
In appliances, sales grew 57% organically versus the prior year with growth in all regions driven by market improvement, our leading global market position, and ongoing share gains.
I do want to say that our communications team continues to deliver outstanding performance to complement the higher sales levels that they're executing to.
And you see this with our adjusted operating margin in the segment of 23.5%, which is up 760 basis points versus the prior year.
Overall, across our segments our teams are capitalizing on growth trends in their end markets demonstrating the diversity of our portfolio while delivering strong operational execution.
Adjusted operating income was $734 million, up significantly year-over-year with an adjusted operating margin of 19.1%.
GAAP operating income was $714 million and included $11 million of restructuring and other charges and $9 million of acquisition-related charges.
We still expect total restructuring charges to approximate $200 million for fiscal 2021 as we continue to optimize our manufacturing footprint and improve the cost structure of the organization.
Adjusted earnings per share was $1.79 and GAAP earnings per share was $1.74 for the quarter which included restructuring acquisition and other charges of approximately $0.05.
The adjusted effective tax rate in Q3 came in as we expected at approximately 18% with our fourth quarter tax rate expected to be around 20%.
We expect to continue our -- we continue to expect our adjusted effective tax rate for the full year to be around 19%.
Importantly, we expect our cash tax rate to stay well below our reported ETR for the full year.
As Terrence mentioned, we delivered record performance in Q3 on sales, adjusted operating margins, and adjusted EPS.
We are not only showing progress versus the prior year, but we are also delivering higher sales margins and adjusted earnings per share versus fiscal 2019, which represents a pre-COVID baseline.
Sales of $3.8 billion were up over 50% versus the prior year and up 3% sequentially with solid performance in each of our segments.
Currency exchange rates positively impacted sales by $138 million versus the prior year.
Adjusted earnings per share of $1.79 was up significantly year-over-year and up 14% sequentially reflecting our strong operational performance.
Adjusted operating margins were 19.1% also up significantly versus the prior year.
Year-to-date our adjusted operating margins are running at around 18% and our fourth quarter is expected to be a continuation of this strong performance.
Turning to cash flow, in the quarter cash from operating activities was $682 million.
We had very strong free cash flow for the quarter of $539 million and year-to-date free cash flow is approximately $1.5 billion.
In Q3, we returned approximately $445 million to shareholders through dividends and share repurchases.
Our cash flow performance demonstrates the strength of our cash generation model.
And we continue to expect free cash flow conversion to approximate 100% for the full year.
We remain committed to our disciplined use of capital.
And overtime, we continue to expect two-thirds of our free cash flow to be returned to shareholders and one-third to be used for acquisitions.
As Terrence noted, we entered into an agreement to acquire ERNI earlier this month.
And we expect to close by the end of this quarter.
ERNI has revenues of approximately $200 million annually, and will be reported as part of our industrial equipment business.
Before we go to questions, I want to reiterate, that we are performing well in this environment, despite challenges in the broader supply chain.
Our results for the quarter and our performance so far this year, demonstrate the strength and diversity of our portfolio with contributions from each of our three segments.
We delivered record performance in Q3.
Our fourth quarter guidance represents a continuation of our strong performance.
And we are excited about growth and margin opportunities beyond this fiscal year in line with our business model.
Ludy, could you please give the instructions for the Q&A session?

user
te connectivity q3 adjusted earnings per share $1.79.
q3 adjusted earnings per share $1.79.
q3 gaap earnings per share $1.74 from continuing operations.
q3 sales $3.8 billion versus refinitiv ibes estimate of $3.74 billion.
sees q4 adjusted earnings per share about $1.65.
sees q4 sales about $3.8 billion.

assistant