TE Connectivity's Organic Growth Reaccelerates as Industrial Overtakes Autos
TE Connectivity posted record adjusted earnings of $2.94 a share, even as operating-margin gains and free cash flow both cooled from prior quarters.
TE Connectivity (TEL), the connector and sensor maker, reported record net sales of $5.16 billion for its fiscal third quarter, up 14% from a year earlier and up 12% on an organic basis. Adjusted earnings rose 22% to $2.94 a share, also a record.
The headline numbers mask a shift beneath the surface. Organic sales growth jumped from 7% in the fiscal second quarter to 12% in the third, a sharp reacceleration after two quarters of deceleration from the fiscal first quarter's 15% pace. That reversal came alongside a third straight quarter of slowing profitability gains: GAAP operating margin expanded just 10 basis points year over year to 19%, down from 200 basis points of expansion in the second quarter and 260 basis points in the first, while adjusted operating margin expansion slowed to 90 basis points from 130 and 180 basis points in the two prior quarters. Earnings growth told a similar story, decelerating from 33% in the first quarter to 24% in the second to 22% in the third, even as the dollar figure kept climbing.
Demand indicators pointed the other direction. Orders reached a record $5.7 billion, up 27% year over year and 7% sequentially, for a book-to-bill ratio of 1.10, extending a run of high-20s percentage order growth that has now held for three consecutive quarters.
The growth split between TE Connectivity's two main segments continued to widen. Industrial Solutions sales rose 22% reported and 21% organic to $2.58 billion, while Transportation Solutions grew 7% reported and 5% organic to the same $2.58 billion figure. A year earlier Transportation sales of $2.42 billion had exceeded Industrial's $2.12 billion; the segments are now level, marking a mix shift toward industrial and data-center-linked demand. Within Industrial, Digital Data Networks sales tied to artificial-intelligence infrastructure grew 34% to $813 million, the fastest-growing line in the portfolio, while Medical sales fell 7%, underscoring how uneven the segment's internal mix has become. Transportation nonetheless narrowed the profitability gap, expanding adjusted operating margin 90 basis points to 21.0%, faster than Industrial's 70-basis-point gain to 22.8%.
TE Connectivity has agreed to acquire Astrodyne TDI, a business with about $250 million in annual sales, for roughly $1.4 billion, adding the unit to the Industrial Solutions segment.
Restructuring and other charges jumped to $83 million in the quarter from $14 million a year earlier, concentrating nearly all of the $103 million in nine-month restructuring spending into the single quarter, compared with $109 million spent over the same nine months a year earlier. Free cash flow slipped to $883 million from $962 million in the prior-year quarter as capital expenditure rose to $302 million from $225 million, even though free cash flow for the first nine months of the fiscal year still edged up to $2.2 billion from $2.1 billion.
For the fiscal fourth quarter, TE Connectivity guides to sales of about $5.25 billion, up 11% both reported and organically, and adjusted earnings of about $3.05 a share, up 18% year over year. That guided growth rate trails the 14% reported gain just delivered, continuing a pattern in which each quarter's guidance has been exceeded by the following quarter's results; the second-quarter release had guided to 10% reported sales growth and $2.83 in adjusted earnings, both of which the company topped.
Share repurchases accelerated to $529 million in the quarter from $301 million a year earlier, lifting year-to-date capital returns to $2.0 billion from $1.2 billion at the halfway mark. The company paid $226 million in dividends during the quarter, up from $212 million a year earlier, reflecting the 10% dividend increase announced in the second quarter.