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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 I get into the slides, let me give you some perspective on our second quarter.
And I think as you'll see in our results, we are continuing to demonstrate the strength of our diverse portfolio and the benefit of content growth across our businesses.
We are delivering organic growth ahead of our markets as well as strong operational performance and free cash flow generation.
I would say this performance is in a world with an improving economic backdrop that is dealing with global supply chains that are trying to keep up with the broader macro recovery.
We are continuing to execute our business model, and you can see this in our second quarter results as well as the guidance that we provide for the third quarter, and I'll talk about a little bit more today.
So let me also provide some key messages about today's call.
First off, I am very pleased with our execution in the second quarter.
We delivered sales growth of 17% and generated record quarterly adjusted earnings per share of $1.57, and this earnings per share represents growth of 22% year-over-year.
Our sales were ahead of our expectations, and it was broad across each segment, driven by the continued recovery in most end markets we serve, our broad leadership positions and the benefits of the secular trends that we're strategically positioned to capitalize on.
Also, our adjusted operating margins expanded 80 basis points year-over-year to 17%, and this was driven by margin expansion in both our Transportation and Communications segments.
I also believe that you're going to continue to see us demonstrate our strong cash generation and truly evident of that is our year-to-date free cash flow, which was approximately $1 billion, which is also a Company record for the first half of the fiscal year.
And as we look into our third quarter, we are expecting our strong performance to continue, with sales and adjusted earnings per share at similar levels to what we just delivered in the second quarter.
With that as a little bit of a backdrop, I do want to take a moment to frame out the current market environment and our business relative to where we were just 90 days ago when we last spoke.
In our Transportation segment, consumer demand in autos continues to remain strong, and auto production is remaining stable in the range of 19 million to 20 million units per quarter globally, even with the well-documented semi shortages, and we've also seen further strength in our commercial transportation end markets.
The trends around content growth remain strong as we continue to benefit from increased electrification of vehicles and higher production of electric vehicles, which will enable us to continue to outperform auto production going forward.
In our Industrial segment, we see increased momentum in the recovery of industrial equipment markets due to factory automation and increasing manufacturing capital expenditure trends.
Also in our Industrial segment, the Commercial Aerospace and Medical businesses are still being impacted by COVID, and this is similar to what we mentioned last quarter, but we do continue to see indicators of stability in our orders in both of these businesses.
In our Communication segment, the market trends we mentioned last quarter are continuing.
Consumer demand is getting stronger, and globally we've seen an increase in appliance demand.
We continue to see strong ongoing capital expenditure trends in the cloud applications as well as acceleration of demand around the data center.
And when you think about these trends I just covered in our segments as a backdrop, the faster than expected recovery in the markets that I mentioned has resulted in some challenges as the industries we serve replenish their supply chain and look to further secure supply.
While this dynamic has benefited our orders, which remains strong, it has caused broader supply chain pressure, and the pressure we're experiencing is factored into our expectations for the third quarter guidance, and Heath will provide more color on this in his section.
And the last thing I want to highlight is, let's all remember that we are still in a world that's still on COVID.
We continue to see countries go into lockdown again, and this is impacting some of our customers and their supply chains.
And certainly while vaccines are getting rolled out in certain parts of the world, the pace of the deployment and availability of the vaccines varies greatly by country, so some uncertainty remains.
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.
Second quarter sales of $3.7 billion were better than our expectations in each of our segments.
They were up 17% on a reported basis and 11% organically year-over-year.
We had 15% organic growth in our Transportation segment, with double-digit growth across all businesses.
We also had very strong performance in our Communications segment, with organic growth of 29%, which was strong double-digit growth in both of the businesses in that segment.
And in our Industrial segment, sales were down 4% organically due to the ongoing weakness in the commercial aerospace market.
From an orders perspective, second quarter orders were $4.6 billion, and this was up 36% year-over-year.
It reflects both the improvement in the markets that I mentioned, along with inventory replenishment in the supply chain by our customers.
Our earnings per share was a record at $1.57 in the quarter, and this was up 22% year-over-year and was driven entirely by our operating performance, resulting in adjusted operating margins being up 80 basis points year-over-year.
I am pleased that we were able to manage the broader supply chain pressures which all companies are dealing with and had margin expansion.
From a free cash flow perspective, in the second quarter free cash flow was $477 million, with approximately $340 million being returned to shareholders.
As we look forward, we expect our strong performance to continue into the third quarter, with sales and adjusted earnings per share being similar to our second quarter levels.
For the third quarter, we expect sales to be approximately $3.7 billion, and this is up significantly year-over-year on both a reported and an organic basis, and we expect adjusted earnings per share to be $1.57, which is in line with the levels we just saw in the quarter we just closed.
As I already stated in the quarter, our orders were very strong at approximately $4.6 billion, and we had a book to bill of 1.22.
Orders in transportation and in Communications were up 50% and 45% respectively.
And this increase reflects both market recovery and supply chain replenishment in both of those segments.
In these segments, customers are not only placing orders to meet current production needs, but also replenishing the supply chains that were depleted during fiscal 2020.
I would also highlight that with some of the shortages in semiconductors and certain passive components, we are seeing some areas where customers are placing orders to secure supply beyond our lead times.
In our Industrial segment, it is a different picture than what we're seeing in Transportation and Communications.
But what is nice is that despite the year-over-year sales decline we had in this segment, we have seen orders growth of 7%, and that's driven by the continued recovery in the industrial equipment market, partially offset by the weakness in commercial aerospace segment.
Let me also, on orders, add some color what we're seeing organically on a geographic basis, and I want to do this on a sequential basis to show where order momentum is.
In China, our orders were up 3% from a strong base from fiscal quarter one.
And that growth was really driven by our Industrial and Communication segments.
Orders on a sequential basis in Europe were up 14%, and North America sequential orders were up 22%, and that was broad based growth across all our segments than those two regions.
So let me get into our year-over-year segment results and there are slides 5 through 7.
Transportation sales were up 15% organically year-over-year, with growth in each of the businesses.
In auto, our sales were up 14% organically.
And year-to-date, we are generating content outperformance over production in our expected 4% to 6% range.
We continue to benefit from our leading global position and increased production of electric vehicles, and as you've probably seen, the number of EV launches are increasing by our customers around the world.
In commercial transportation, similar to our first quarter, we saw 25% organic growth, driven by ongoing emission trends, content outperformance and ongoing share gains.
We are continuing to benefit from stricter emission standards and the increased operator adoption of Euro 5 and 6 in China which reinforces our strong position in that country.
We saw growth in all regions in our commercial transportation business, along with double-digit growth in all market verticals that we serve in this business.
The other nice thing that we continue to see is, we see increased wins on electric powertrain platforms and trucks which give us confidence about the future content potential in this market in out years.
In our sensors business, we saw 13% organic growth with growth in all markets and double-digit growth in auto applications.
We do continue to expand our design win pipeline in auto sensing and expect growth as these platforms continue to increase in volume.
From a margin perspective, adjusted operating margins for the segment expanded 80 basis points to 18.1%, driven by higher volumes versus the prior year and despite the supply chain pressures.
So if we now turn to the Industrial segment.
As I said earlier, our sales declined 4% organically year-over-year.
During the quarter, the segment continued to be impacted by the decline in the commercial aerospace market, with our aerospace, defense and marine business declining 21% organically year-over-year.
As I covered already, based upon the order patterns we do believe this business is showing signs of stabilization at the current quarter levels.
And when you think about our industrial equipment market, it was very strong and up 16% organically, with growth in all regions and increasing strength in factory automation applications where we're benefiting from accelerating capital expenditures in areas like semiconductor equipment as well as along the auto manufacturing supply chain.
We continue to see weakness in our medical business in our Industrial segment, and it was down 13% organically year-over-year, and this is being driven by ongoing delays in interventional elective procedures caused by COVID, and the dynamics we're experiencing in medical are consistent with what our customers are seeing, and we expect this market to return to growth as these procedures start to increase later in the year.
And lastly in the Industrial segment, our energy business, we saw 4% organic growth, and this was driven by increase in penetration of renewables, especially benefiting from solar applications around the world.
From a margin perspective, in Industrial Solutions our margins declined year-over-year to 12.5%, and that was really driven by the significant drop in commercial aerospace volumes.
So let me cover the Communications segment.
And in this segment, we continue to benefit from both the market recovery and share gains while delivering very strong operational performance.
Sales in the segment grew 29% organically year-over-year, with strong growth in both data & devices and appliances.
In data & devices, our sales grew 24% organically year-over-year due to the strong position we have built in high-speed solutions for cloud applications.
Favorable secular trends in cloud services are leading to increased capital expenditure by our customers and our content and share gains are enabling us to grow on cloud-related sales at double the market rate.
Just to give you an example, at one of the major cloud providers we are now providing 6x the content on the next-generation server applications versus the prior generation.
In our appliances business, we are also seeing strong growth trends.
Sales grew 35% organically year-over-year, driven by our leading global market position, share gains and ongoing market improvement across all regions.
From a margin perspective, our Communications segment and team delivered very strong execution in the quarter and delivered 21% adjusted operating margins, and these were up 720 basis points versus the prior year.
I am pleased with the way our team has worked through the supply chain pressures to deliver the strong operating margin expansion in this environment and our Communication teams are capitalizing on growth trends in their end markets, while delivering strong operational execution, and you see this reflected in our results.
Adjusted operating income was $637 million, up approximately 23% year-over-year with an adjusted operating margin of 17%.
GAAP operating income was $612 million and included $17 million of restructuring and other charges and $8 million of acquisition-related charges.
We continue to optimize our manufacturing footprint and improve the cost structure of the organization and continue to expect total restructuring charges in the ballpark of $200 million for fiscal '21.
Adjusted earnings per share was $1.57 and GAAP earnings per share was $1.51 for the quarter and included restructuring, acquisition and other charges of $0.06.
The adjusted effective tax rate in Q2 was approximately 17%.
For the third quarter, we expect our tax rate to be up slightly sequentially and continue to expect an adjusted effective tax rate around 19% for fiscal '21.
Importantly, we expect our cash tax rate to stay well below our reported ETR for the full year.
Now turning to slide 9.
Sales of $3.7 billion were up 17% versus the prior year and 6% sequentially, demonstrating the strength of our portfolio.
Currency exchange rates positively impacted sales by $115 million versus the prior year.
Adjusted earnings per share of $1.57 was up 22% year-over-year and 7% sequentially, reflecting our strong operational performance.
Adjusted operating margins were 17% and expanded 80 basis points versus the prior year.
While we would have expected higher fall-through on this level of sales growth, we saw impacts of higher freight charges and other supply chain pressures in the quarter, and these will continue into the third quarter.
And as you are aware, these supply chain issues are having a broader impact on our customers and suppliers as well.
As Terrence mentioned, the supply chain is catching up to the increased level of demand we are seeing in many of our end markets, and given these dynamics, I'm pleased with the results we delivered in the quarter and of our momentum going forward, as shown in our third quarter guidance.
In the quarter, cash from operating activities was $580 million.
We had very strong free cash flow for the quarter of $477 million and a year-to-date free cash flow of approximately $1 billion, which is a record for the first half of a fiscal year.
We returned approximately $340 million to shareholders through dividends and share repurchases in the quarter.
Our strong free cash flow performance demonstrates the strength of our cash generation model, and we expect to -- we continue to expect free cash flow conversion to approximate 100% for the full year.
We remain committed to our disciplined use of cash, and over time, we expect two-thirds of free cash flow to be returned to shareholders and one-third to be used for acquisitions.
Before we go to questions, I want to reiterate that we remain excited about how we have positioned our portfolio with leadership positions in the markets we serve, along with organic growth and margin expansion opportunities ahead of us.
To summarize, the outlook for many of the markets we serve is consistent with what we were seeing 90 days ago, along with some acceleration of growth in the commercial transportation, industrial equipment and communications markets.
We are continuing to see the benefits of secular trends across our portfolio and are capitalizing on these opportunities.
The economic recovery has been faster than expected, and we are seeing the corresponding near-term pressures in the broader supply chain as a result.
These impacts will be resolved, and nothing has changed with respect to our growth and margin expansion expectations.
We are executing well with things we can control, and our outlook for Q3 continues to reflect the strength of our portfolio.
We expect to continue to generate strong free cash flow, maintain a disciplined and balanced capital strategy and drive to our business model performance.
And we remain focused on value creation for our stakeholders going forward.
Michele, could you please give the instructions for the Q&A session?

user
q2 adjusted earnings per share $1.57.
q2 gaap earnings per share $1.51 from continuing operations.
q2 sales $3.7 billion.
sees q3 adjusted earnings per share about $1.57.
sees q3 gaap earnings per share about $1.51 from continuing operations.
sees q3 sales about $3.7 billion.

assistant