TE Connectivity - Q3 2015
July 22, 2015
Transcript
Operator (participant)
As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Mr. Sujal Shah. Please go ahead.
Sujal Shah (VP of Investor Relations)
Good morning, and thank you for joining our conference call to discuss TE Connectivity's third quarter results. With me today are Chairman and Chief Executive Officer Tom Lynch and Chief Financial Officer Bob Hau. During the course of this call, we will be providing certain forward-looking information, and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning, and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at te.com.
Finally, for participants on the Q&A portion of today's call, I would like to remind everyone to limit themselves to one follow-up question to make sure we are able to cover all questions during the allotted time. Now, let me turn the call over to Tom for opening comments.
Tom Lynch (Chairman and CEO)
Thanks, and good morning, everyone. The following are the key takeaways from today's call. Q3 was another quarter of solid execution as we delivered $0.90 in adjusted EPS, up 6% from last year and above the high end of our guidance. Adjusted operating margins continued to grow, and we're up 50 basis points to 15.9% year-over-year. Organic growth was 4%, and total growth was 11%, excluding the negative impact of foreign exchange. Our harsh environment businesses continue to perform well and generate strong profitability. And overall, I'm pleased with our execution in what I'd characterize as a mixed demand environment, and we'll talk about that quite a bit on the call today. Automotive, Sensors, Commercial Air, and SubCom led our growth. However, revenue was below our expectations due to weakness in China and supply chain adjustments in some North American industrial markets.
We saw order growth begin to slow midway through the quarter, and order rates are now running about flat with last year. For the fourth quarter, we expect sales up 3% organically versus the prior year and adjusted EPS up 6% at the midpoint. For the full year, we expect to deliver 5% organic sales growth and 10% adjusted EPS growth. This guidance is down from what we provided 90 days ago due to the continued weakness in emerging markets, particularly China. In constant currency, full-year adjusted EPS growth is expected to be 19% year-over-year. We had another good quarter of strategic progress in our sensor business with key platform wins in automotive, consumer, and security applications. The strategic rationale for the Measurement Specialties acquisition continues to play out very well, and we're really excited about our prospects here.
We now expect the Broadband Network Solutions sale to close in about 90 days, earlier than originally expected, and expect to use the nearly $3 billion of proceeds for share buybacks. Now, before I get into the details of our performance, I'd like to provide some color on what has changed in the market environment from our view 90 days ago. From a macro-regional perspective, Europe continues to grow, and it looks better than it did to us 90 days ago. The U.S. is mixed with a bit lower growth than expected due to supply chain adjustments, so I'd say the U.S. looks a little worse, but we do think this is mostly supply chain related. China has weakened with softness becoming more pronounced. From a segment perspective, Transportation remains strong with the exception of China.
In the Industrial Solutions segment, we see some softening in China and supply chain adjustments in the U.S. market. In Communications, Data and Devices and Appliances are seeing the impact of a weaker China market. So the main theme on market here is we're seeing weakness in China. Now, I'll please turn to slide three, and I'll go through a summary of our Q3 results. We delivered solid results for Q3 with adjusted EPS of $0.90 above the high end of guidance. Sales were $3.1 billion, growing 1% year-over-year and up 4% organically, but weaker than I expected, as I mentioned earlier. During the quarter, we returned $386 million to shareholders, which included $252 million in share buybacks, significantly increasing the pace of repurchases from the first half of this year.
Company orders excluding SubCom were flat organically at $3 billion with a book-to-bill ratio of 1.0, and basically orders ran at the same run rate excluding SubCom as they were in Q2, which was about $100 million below our expectation. Our TEOA program continues to contribute towards higher margins and profitability. Adjusted gross margins were up 50 basis points year-over-year, and adjusted operating margins expanded to 15.9%, up 50 basis points versus the prior year. During the quarter, we continued to see strong performance in our harsh businesses with good organic growth in auto, sensors, and Commercial Air. In our SubCom business, we grew strongly year-over-year while having another program come into force, growing the total value of programs in force to $1.5 billion.
As I mentioned, our China businesses saw weakening demand in the quarter, and separately, we also saw some inventory tightening in certain industrial markets in the U.S. Currency translation rates impacted Q3 by $296 million in revenue. That's unfavorably impacted Q3, and $0.10 in earnings per share year-over-year. Excluding the impact of currency exchange rates, adjusted EPS improved by 18%. Now, please turn to slide 4 for a summary of our guidance, which we'll also come back to later. For the full year, we are projecting sales of $12.35 billion, up 3% from the prior year and 5% organically. We expect adjusted operating margins to exceed 16%, with adjusted EPS up 10% at midpoint and nearly double that in constant currency. Our guidance assumes a 6% adjusted EPS increase in the second half versus last year.
For the fourth quarter, we expect sales up 3% organically over the prior year and adjusted EPS up 6% at the midpoint of guidance. Given the weakness in China and supply chain adjustments I mentioned earlier, we are adjusting our full-year guidance down by approximately $150 million in revenue and $0.04 in adjusted EPS. We now expect to deliver 5% organic growth and 10% adjusted EPS growth. With the cumulative move of the dollar versus world currencies during our fiscal year, 2015 FX headwinds are approximately $925 million in revenue and $0.32 in EPS versus last year. If it were not for the impact of FX, we would be generating 11% revenue growth and 19% adjusted EPS growth year over year.
All in all, we're delivering a pretty solid year in a, what I'd call, a murky environment, but we'll talk more about that as we go through the call. Now, I'll turn it over to Bob to cover segment results and financials.
Bob Hau (CFO)
Thanks, Tom, and good morning, everyone. Please turn to Slide five for Transportation Solutions. Revenue grew 4% organically in the quarter, in line with our expectations. The automotive business grew 6% organically with growth in all regions, while global vehicle production was down 0.3%. For the full year, we continue to expect growth in excess of two times auto production due to share gains and increased electronic content. Our Commercial Transportation business was down in the quarter due to continued significant weakness in the off-road vehicle market and weakness in the China heavy truck market. Sensors continue to outperform expectations and are gaining momentum with both existing and new customers. Assuming we had owned Measurement and AST last year, our total year-over-year growth in sensors was 10% in Q3. We gained multiple new wins in automotive, consumer, and security applications in the quarter.
We continue to aggressively build this business, and our unmatched customer-facing and engineering resources are a significant asset for TE, as proven by our new wins. Total transportation adjusted operating income was $317 million in Q3, down 2% year-over-year as expected, with strong operational performance offset by FX, weakness in Commercial Transportation, and ongoing planned investments in sensors to support a growing pipeline of opportunities. Margins actually expanded year-over-year in each of our three business units: automotive, Commercial Transport, and sensors. However, the mix caused by high sensors growth combined with weaker Commercial Transport revenue impacted the margin rate for the segment overall. In Q4, we expect to grow actual and organic sales in the mid-single digits despite weakness in China and Commercial Transport, slightly lower than our prior expectations. Please turn to slide six.
Revenue in our Industrial Solutions segment declined 1% organically year-over-year versus an assumption of low single-digit growth when we provided guidance in April. The Industrial Equipment business unit was up 1% organically, with growth in Europe offsetting weakness in the US. In our aerospace, defense, and oil and gas business, continued strength in commercial aerospace was offset by a 37% decline in our oil and gas business, resulting in a 5% organic decline for AD&M in total. Our Energy business was flat organically as growth in China and the Americas was offset by declines in Europe. Adjusted operating income was $109 million in Q3, down 11% year-over-year due to unfavorable FX and significant decline in our higher-margin oil and gas business, more than offsetting improvement in commercial aerospace. In Q4, we continue to expect similar market trends as Q3, resulting in organic revenue decline in low single digits.
Please turn to Slide seven. Our Communications Solutions segment grew 12% year-over-year on an organic basis, driven by our strong position in the growing SubCom market. This more than offset market weakness across our China businesses, coupled with the planned exits of low-margin products and Data and Devices. Adjusted operating income of $71 million was up 163% year-over-year, and adjusted operating margin more than doubled to 10.3% from 4.2% a year ago due to robust SubCom growth. Heading into Q4, we expect revenue to grow mid-single digits on an organic basis, driven by the SubCom projects in force. We now have five programs in force with the announcement in May of the new Cross-Pacific cable network with the NCP Consortium. Please turn to slide 8 where I'll provide more details on earnings. Adjusted operating income was $497 million, up 5% versus the prior year, despite significant FX headwinds.
The growth versus prior year is driven by our TE Operating Advantage efforts to improve safety, quality, cost, and delivery, as well as volume leverage. GAAP operating income was $469 million and included $18 million of restructuring and other charges, most of which were divestiture-related costs, and $10 million of acquisition-related charges in the quarter. Adjusted EPS was $0.90 for the quarter, $0.03 above the midpoint of guidance and $0.05 above prior year, driven by strong productivity, restructuring savings, and cost management. GAAP EPS was $0.85 for the quarter. GAAP EPS included acquisition-related charges of $0.01, income from tax items of $0.01, and restructuring and other charges of $0.05. For the full year 2015, I expect approximately $100 million of restructuring and other charges.
This represents an increase from prior guidance driven by product exits in data and devices and resizing for a smaller oil and gas business. We expect roughly $0.27 of restructuring and other charges and $0.18 of acquisition-related charges, which will more than offset reserve reversals of $0.33 from tax liabilities for the full year. Turning to slide nine, our adjusted gross margin in the quarter was 33.6%. This is an expansion of 50 basis points versus the prior year, driven primarily by growth in our harsh environment businesses and SubCom, and productivity gains from our TEOA initiatives. Adjusted operating margins expanded 50 basis points, driven by productivity, restructuring savings, and cost management. Total operating expenses were $552 million in the quarter, with increases from acquisitions and R&D&E to support growth in sensors.
Cash from continuing operations was $524 million, and our free cash flow in Q3 was $391 million. Free cash flow was impacted by timing of tax payments in the quarter, and both gross and net capital expenditures were down $30 million year-over-year. I currently expect the capital spending rate to be approximately 5% of sales for 2015. I'll remind you we've added a balance sheet and cash flow summary in the appendix for additional details. Now, I'll turn it back over to Tom.
Tom Lynch (Chairman and CEO)
Thanks, Bob. Please turn to Slide 10, and I'll cover our outlook at a high level with additional details provided in the slide. Despite the softer market condition we are experiencing in China, we expect to deliver another solid quarter in Q4 with revenue of $3.1 billion, up 3% organically year-over-year. We expect adjusted EPS of $0.93 and increase of 6% year-over-year. Our Q4 outlook does include a significant headwind from currency exchange rates, which are negatively affecting our guidance by approximately $244 million in revenue and $0.10 per share in EPS versus the prior year. Our fourth quarter performance will be driven by the continued strong performance of our automotive business, the momentum in SubCom, and contributions from our recent acquisitions.
Industrial is expected to continue to be somewhat soft and will continue to be impacted by the uncertainty in China and ongoing weakness in oil and gas. Please turn to slide 11. Note that the total impact of currency exchange rates for the year is approximately $925 million versus the prior year and $0.32 in EPS. So to really provide a baseline for the performance of our business, revenue would be growing 11% and adjusted EPS would be growing by 19% year-over-year, were it not for the negative impact of the stronger dollar relative to other currencies. Now, before we open it up for Q&A, I thought I'd just add a few comments that I think are really important about our company.
TE is the world leader in connectivity and sensor solutions and building a leading position in sensor solutions, which is a great place to be in the increasingly connected world. Kind of just stepping back, Q3 organic growth was higher than last year. It was a little lower than our guidance, but it was higher than last year. Q4 is a little lower. They have different mix, but nonetheless, we're delivering solid organic growth in the second half in a pretty uncertain economy and growing very solidly when you include the harsh environment M&A that we did last year. As I mentioned, we're growing earnings almost 20% on 10% constant currency growth. This was a big year to really support our harsh environment strategy, and I think it's working very well. On that subject, the harsh environment businesses continue to perform well despite the recent weakness in China.
Q3 and Q4 organic growth is in the 2%-3% range and 4%+ for the full year and 12% at constant currency. Over the last three years, we grew the harsh environment business over $1.6 billion in revenue, and that's including the foreign exchange headwinds. We grew the operating profit of those businesses about $500 million, again, at current exchange rates. And this portfolio now makes up about 80% of the company. And as we said before, the margins are well above the company average. So I feel really, really good about the strength of our harsh businesses and the resiliency of our harsh businesses. If you go back, this has powered about a 300 basis point improvement in operating margin since 2012.
Sensors is a very exciting new growth platform with substantial sales and margin growth opportunity, and we're just at the very beginning of providing integrated packaging solutions. It's very, very early, but I've talked to a lot of customers about this, and the opportunity is real and will be another source of growth for the company. The net of all this is, over the past several years, we've really transformed TE into what I'd call an industrial technology company. Overall, I think this company is performing very well. We're positioned very well. We do view the recent softness to be temporary. We don't have a crystal ball, of course, but when we look at the fundamental drivers underlying all our businesses, we feel very good about them. It reinforces the strategy we have.
That strategy is pretty straightforward, and we look forward to continuing to execute it very aggressively and delivering solid performance across the company. So with that, we're going to open it up for Q&A.
Operator (participant)
Ladies and gentlemen, if you'd like to ask a question, please press star then one on your touch-tone phone. You'll hear a tone indicating you've been placed in queue, and also you may remove yourself from queue at any time by pressing the pound key. We do ask if you're using a speakerphone, please pick up the handset before pressing the numbers. And once again, if you have a question, please press star one at this time. And we do have a question from Amitabh Passi of UBS. Your line is open.
Amitabh Passi (Senior Technology Equity Research Analyst)
Hi guys, good morning. Tom, I had a question and then maybe a follow-up for the rest of the team. Just on your transportation solution segment, operating margins came in below 20%. I think you attributed part of that to mix weaker Commercial Transportation. Also looks like ongoing investments in sensors. Just wanted to get a sense whether we should expect that sort of level now to persist for the next couple of quarters? Then as a follow-up, you intriguingly mentioned a few design wins in the automotive segment in sensors. I was wondering if you could touch on that and maybe provide a greater insight.
Tom Lynch (Chairman and CEO)
Sure. Obviously, on the second question, we can't say too much, as I'm sure you understand. But as far as the margin goes, we expect the margin to continue to be in the 20% range, ±, depending on mix. As Bob pointed out, the three major segments in the business all improve their margin year-over-year. Sensors margins are lower than industrial transportation and automotive, as expected. And that's why I mentioned it's one of the real opportunities to continue to grow profitability as we scale that business. So we don't see anything short of a significant volume decline. I think when we're running at the 4%-5% growth rate, we have the momentum to continue to deliver strong margins. So ±20% a little bit is what I would expect over the next several quarters.
Amitabh Passi (Senior Technology Equity Research Analyst)
Okay. Can I squeeze in another follow-up then?
Tom Lynch (Chairman and CEO)
Sure.
Amitabh Passi (Senior Technology Equity Research Analyst)
Okay. Thanks. And then maybe just on the supply chain adjustments you talked about. Again, I don't know if you have any visibility or insight. I mean, is this a 1, 2-quarter phenomenon? Just generally, how you expect the supply chain and the potentially excess inventories to be digested here in the near term?
Tom Lynch (Chairman and CEO)
I mean, we do have some insight because we are large through the channel, right? So we have a very big business through the channel, which serves tens of thousands, actually hundreds of thousands of end customers. So we feel like it's kind of a statistically sound base of information to look at. And the channel was pretty robust in the first half, just like our industrial businesses, as everybody was expecting a little bit stronger second half. And we have seen that tighten up. We've seen it tighten up on sell-through, on sell-in. I think the good news is coming out of the last big downturn, everybody in the supply chain is very glued together in terms of what's going on, so we react much quicker than we did.
Of course, it's hard to predict with a ton of confidence how long it will last, but what our forecast reflects is it starts to abate through the fourth quarter, our fourth quarter, and that by the time we get into the first quarter, it should be largely behind us in the industrial part of the business. That's the current forecast. That's what we're hearing from the market. So that's the best insight we have right now.
Okay. Thanks, Amitabh. We have the next question, please.
Operator (participant)
Our next question comes from Amit Daryanani of RBC Capital Markets. Please go ahead.
Amit Daryanani (Equity Analyst)
Thanks a lot. Good morning, guys. I guess to start off with, Tom, if I look at the guide you guys are providing right now, adjusting for the FX tailwind, you saw reducing your forward expectations for the full year by about $235 to $240 million. Could you talk about how much of that is really due to this softness in China that you're talking about, and how much of that is perhaps due to the product exit in data and devices that you guys are undergoing?
Bob Hau (CFO)
Yeah, Amit. I think the way to think about that $240 before the tailwind from FX is really it's spread relatively evenly across all three of our segments: transportation, industrial, and communications. All three of them are seeing the implication of a slower China, and then we're also seeing the implication of supply chain or inventory adjustments really in our industrial and appliances business in those last two segments.
Amit Daryanani (Equity Analyst)
Got it. That's helpful. And then if I just think of the transportation segment with China slowing down, Europe seems to be holding up well for you guys so far. I'm curious, what's your thought on how much of your Europe exposure you think ends up as exports to China, essentially? And do you think that could be another level of concern we could have to contend with as we go down the next few quarters?
Tom Lynch (Chairman and CEO)
Well, just to put it in, our China auto business is now flat to slightly down. It's really the first time since probably the financial crisis, and that's what we have reflected in the fourth quarter. So we are definitely seeing less imports into China of high-end vehicles. I think you've heard several OEMs report their outlook for their China sales. So we're seeing some of that. I believe we have that reflected in our European automotive numbers. We generally have pretty good visibility. Again, not perfect visibility, but we've taken our overall China numbers down quite a bit. And I think it'd be important to highlight that from quarter-over-quarter, we're going to be down about, let's see, 12% in China revenue. That's last year's fourth to this year's fourth. And it's pretty broad-based, as Bob said.
And the overall $240 million that Bob referred to, about two-thirds of that is China and Latin America, with, of course, China being the biggest piece. It had been slowing. It slowed more abruptly. And I think this is a key quarter to see is that it seems like maybe things are settling down over there now over the last few weeks. Does this now begin to bottom out and recover? Because we think the core fundamentals of a large population, a growing middle class, growing incomes, urbanization plays to all of our businesses, particularly where we're strong, which is harsh environment. And as I mentioned, our harsh businesses overall are still growing slightly despite a broader slowdown in China. Okay. Thank you, Amit. We have the next question, please.
Operator (participant)
Our next question comes from Craig Hettenbach from Morgan Stanley. Your line is open.
Craig Hettenbach (Managing Director and Equity Analyst)
Yes, thanks. Just following up on some of the commentary on China weakness, have you seen any change more broadly on the automotive side in terms of production forecasts you get? What OEMs are doing in this environment? Are they cutting back slightly to reflect that, or any type of additional information on the production side would be helpful?
Tom Lynch (Chairman and CEO)
Sure. I mean, what our customers, the OEMs, are telling us is in the fourth quarter, they plan longer than usual shutdowns in China. A week, maybe some up to two weeks. So there's definitely a goal to balance inventories throughout the channel, including cars on the lot. Now, the inventories aren't crazy. I think they've been keeping them pretty tight there, but it definitely reflects this slowing demand.
Craig Hettenbach (Managing Director and Equity Analyst)
Got it. And if I could switch gears just to the MEAS, the commentary that that acquisition is going well. Any specific anecdotes you can talk about in terms of as you look to leverage that through your broader distribution channels, through your customer relationships? What type of uptake you're seeing from that as they potentially benefit from a much broader platform, a detail?
Tom Lynch (Chairman and CEO)
Sure. I think the broad anecdote, we can't get too specific yet, as you know. Customers have their requirements. But the consistent anecdote is particularly in starting with auto and across several of our harsh environment businesses. We are spending a lot of time with customers where we bring in the product and technology experts from measurement and get them into places where they couldn't get in before. And we're seeing a lot of bidding activity resulting from that because they are really a fine, fine engineering and technology and product company. I think, as I've mentioned on these calls before, we knew them quite well and certainly expected that, and that's why we acquired them. But the deeper we got, the more engineers and applications engineers we got to know, the better we even felt about that. So it's kind of interesting.
In some ways, the biggest challenge we have is which ones to pick because there's a lot of opportunities to pick from. As Bob mentioned, we are ramping up our resources in a thoughtful way in that business so that we can take on more and more design opportunities. It's pretty broad-based, I'd say, but it's definitely focused in the harsh. Although we had some—we can't talk about them too much—but some really key wins in consumer that it's very good business. Again, because these are highly engineered components and packaged in a way that they can perform their function no matter how they're treated by the consumer. We're pretty excited about that. I'd say it's been a good almost first year, about a year now, of working with this team.
On the back end, the bringing lean into the operation, figuring the best place out where to make things, putting the organization together, that's all done. So we feel like that first year where you're figuring things out and how do you best work together, how do you leverage strengths but not turn off the small company you bought, I think I'd give us very high marks for that. And now we're really going on the offensive with getting in front of customers. Okay. Thank you, Craig. Could we have the next question, please?
Operator (participant)
Our next question comes from Mark Delaney from Goldman Sachs.
Mark Delaney (Managing Director and Senior Equity Analyst)
Yes, good morning, and thanks very much for taking the questions. The first question was just some clarification on the comments about some of the monthly trends that you're seeing with the business. Tom, I understand you talked about seeing some weakness beginning during the June quarter, and I think you commented that on a year-over-year basis, bookings are pretty flat. Could you just clarify if you've seen any stabilization in the monthly order patterns, or you're still seeing some month-to-month declines in the bookings?
Tom Lynch (Chairman and CEO)
I would say it feels like it's stabilizing. Week to week, things bounce around, but we're really kind of running at this ex-SubCom level, $2.9 billion-$3 billion order rate.
Mark Delaney (Managing Director and Senior Equity Analyst)
Okay. That's helpful. And then for follow-up questions, I'm going to focus on SubCom. I guess a two-part question. First, it seems like the comments for the fiscal 2015 revenue guidance, just a little bit above $700 million, seems like a real small downtick versus the comments for $720 million on the last conference call. So can you maybe help us understand what—I know it's small, but if anything's kind of changing that's driving that slight change to the revenue forecast for SubCom for fiscal 2015? And then the second part on SubCom, just given the new award that you won, what sort of visibility do you have into fiscal 2016 revenue and the SubCom business?
Bob Hau (CFO)
Yeah, Mark, you're right. There is an ever so slight decline, 720 to 712, 715, something like that, if I remember correctly. That's really just the timing of some material coming in when we get it loaded on ship. This is a project business, and so as you progress, as material comes in, all you need is a vendor to be late by a week, and you lose some revenue. But it's purely timing, so no implication of that whatsoever. In terms of 2016, too early to give guidance for 2016, but obviously, we've done well this year. We feel good about adding the fifth program in force, and we're spending that this year. That's now $1.5 billion in force for us.
Mark Delaney (Managing Director and Senior Equity Analyst)
Thank you.
Tom Lynch (Chairman and CEO)
Okay. Thank you, Mark. We have the next question, please.
Operator (participant)
The next question comes from William Stein from SunTrust.
William Stein (Senior Analyst)
Thanks for taking my question. Tom, earlier you mentioned that you saw part of the slowdown extending through the fiscal Q4 guidance and likely ending in Q1. So this clarification is really about whether that's the China-related weakness or the North American sort of channel adjustments you're seeing, or whether it relates to both. What gives you the confidence to have the view that this ends by the end of fiscal Q4? Thank you.
Tom Lynch (Chairman and CEO)
Sure. Thanks, Will. Really, my comment about we think it will, based on what we're seeing and hearing now, work its way through in Q4 is the North America industrial. And part of that is, and demand is still, it's slower. It feels slower from what we're hearing in second half, first half, but it's not off that much, and you still have a pretty healthy American economy, even though I think most of us feel it's not growing the way we thought it would. It's still growing and all the indicators like payrolls and things. And then when we just look at the sell-in and the sell-through, what we're hearing is that that should start to work its way through by the end of our fiscal year. That's our best estimate at this time. China's harder to tell, I think, just because data's harder to get.
I mean, kind of the only data you have is your own data. We have seen China can move up very quickly as well. So I'm more uncertain about that, Will. I mean, last year we had a tremendous first quarter in China. Actually, we had a pretty good first half, and saw it begin to taper in the second half. Harder to tell there. Wouldn't be surprised if this kind of leaked into through the first quarter, but that's a guesstimate based just on recent order trends. Okay. Thank you, Will. Next question, please.
Operator (participant)
Yeah. Next question comes from the line of Shawn Harrison from Longbow Research. Please go ahead.
Shawn Harrison (Senior Research Analyst)
Hi. A two-part initial question, if I may, then a brief follow-up. On the B&S business and then also the proceeds, is the B&S business still running at kind of a $0.53 EPS run rate for the year? And then on the proceeds, in terms of deploying that, is that on top of the typical buyback where you've been spending $150 million-$250 million a quarter? So we'd see, say, $200 million on average of buyback, and then $600 million or $800 million a quarter of incremental buyback once the deal closes?
Bob Hau (CFO)
Yeah, Sean, the B&S business, as you know, is now recording our discontinued operations. I would say it is broadly, generally performing as we expected through the sale process. In terms of proceeds, you're right. We have a practice or a capital deployment approach of $150 million-$250 million per quarter share repurchase. We did $252 million this most recently completed quarter. We expect to be in the market in fourth quarter. Once the B&S transaction closes, that will be an additional $3 billion, or that we'll be able to return the majority of that back to shareholders. So that's in addition to our deployment of our operating free cash flow.
Shawn Harrison (Senior Research Analyst)
Okay. And then just my brief follow-up. Tom, if you could just remind us and I guess delineate between the content you have per vehicle in China versus, say, Europe. So the declines we're seeing in China auto production, just to weigh that a bit. And how much of what you're seeing right now is truly declines in production versus some other factors in terms of maybe mix going against you?
Tom Lynch (Chairman and CEO)
No, I would say it's definitely production-related. Our content in China is sub 50. It's much higher in Europe. So there can be a mixed effect, but it's kind of interesting. Over any period of time that we look at, it just doesn't. The numbers are so big. It's 80-some million cars being sold that the math kind of almost smooths itself out unless you had a dramatic shift. I mean, we were worried coming out of the last downturn that the world was going to go to buying small cars, and that was going to have an impact on our content. We didn't see any of that. So the exciting thing about China is content is growing faster in China cars, both local and multinational. And the hot car in China right now are local SUVs, where we have really nice content.
Our content in China, regardless of whether it's a local Chinese automaker or a multinational, is really almost exactly the same. In fact, a little higher with the locals because we provide a little more to them than we would to the OEM, which is a real strategic advantage that we started back in the downturn. So I guess the short answer, Sean, is there's a long answer, is we're not really seeing that much impact, if at all. It's kind of in the $0.10-$0.20 range of content per unit mix at this point.
Shawn Harrison (Senior Research Analyst)
All right. Very helpful, Tom. Thanks so much.
Tom Lynch (Chairman and CEO)
All right. Thank you, Shawn. Could we have the next question, please?
Operator (participant)
Our next question comes from Sherri Scribner from Deutsche Bank.
Sherri Scribner (Senior Equity Research Analyst)
Hi. Thanks. I was curious if, I don't know if I missed it, but did you give a number for global vehicle production this quarter? And then also, could you give us some detail on how much China is as a percent of revenue for the three different segments? I know that Asia-Pacific's about a third of your business, but maybe some metrics around how big China is by different segment would be helpful.
Tom Lynch (Chairman and CEO)
Sure. At a high level, China's running in the 17%-18% of our total business. That's total company. It's much higher than that in data and devices. Part of that is because most of the production's in China, and it is sometimes hard to, in those kind of businesses, where's consumption locally and where's consumption globally. Our auto business, which runs over $1 billion, is all local consumption.
Sherri Scribner (Senior Equity Research Analyst)
Okay.
Tom Lynch (Chairman and CEO)
Then the other part of your question, Sherri, is the auto production volumes for fourth quarter. So we have, in our current guidance, auto production for fourth quarter globally, about 21 million vehicles, up about 3.5% year-over-year. That gets you to the 2% on a full-year basis, just under 87 million vehicles, excuse me, just under 87 million vehicles.
Sherri Scribner (Senior Equity Research Analyst)
Did you give a 3Q number?
Tom Lynch (Chairman and CEO)
3Q was down 0.3%, about 21.5-21.7 million units.
Sherri Scribner (Senior Equity Research Analyst)
Okay. And then can I just ask a question about the transportation segment? I think your long-term goal has been to grow that segment in the high single digits, and it looks like we're tracking a little bit below that this year. I know there's been some puts and takes, but what's your view overall of the ability to continue to grow that segment in the high single digits? Thanks.
Tom Lynch (Chairman and CEO)
Thanks, Sherri. I think historical production levels of about 3% in the last three years is going to average out, or take next year's estimate this year and last year, it's going to average out to about that. We would expect to do that, especially with our expansion into sensors, which will grow, we're kind of going from a very low base there. So yeah, I think if production grows in that 3%, we expect to grow 2x production, which is what we're doing this year. So for example, this year production is growing 2%, and we're growing 6%+. So we still feel that hold.
I think we really feel good about this year's performance because it proves out what we've been saying about the pipeline of wins that we've had over the last four or five years, that we're growing our win rate faster than the market's growing, and now that's showing up in this kind of multiplier of production effect where if you go back four or five years, we were always saying 1.5 times production. Now we're over 2 times production. As we begin to ramp the sensors business over the next several years, that'll increase it even more. We feel very good about this great auto business of ours.
Bob Hau (CFO)
Sure. I'd say in the current quarter, excuse me, the current year, we're definitely seeing the headwind from FX impacting the overall growth. If you back that out, transportation is well above the 6%-8%. Now that's also got the benefit of the acquisition. Our guidance is mid-single digits organically. That's below that 6%-8% long-term rate, and that's really driven by slower commercial vehicle, both in heavy truck declines in the second half of this year and slower off-road. But long-term, still believe the 6%-8%.
Tom Lynch (Chairman and CEO)
Okay. Thank you, Sherri. Could we have the next question, please?
Operator (participant)
The next question comes from Jim Suva from Citi.
Jim Suva (Managing Director)
Thank you very much. Congratulations to you and your team. On slide six of your prepared handouts entitled Industrial Solutions, I was taking a look at the operating margins. I know most of the questions have been focused on transportation, which is rightfully so, but kind of looking away from the other areas for potential improvement, the operating margins for Industrial Solutions came down pretty meaningfully year-over-year. Yes, of course, actual and organic sales came down 5%-1%, but the 100 basis point decline in operating margins is a pretty big gap. Can you talk to us a little bit about that? Because to me, it seems like this is one area of meaningful improvement that you can do for the company.
Is it really tied now to sales for the future of this company, or restructuring, or are you doing some plant consolidation, or how should we think about what actions you're actively doing, or is it just simply tied to sales for improving this turnaround of this segment, which is below corporate average?
Tom Lynch (Chairman and CEO)
Thank you, Jim. Well, yeah, the margin decline, as we point out here, is really two big factors, right? The oil and gas business is down 30%+, and that's the highest margin business in the segment, and the NFX. We have a strong European industrial footprint, particularly in Energy and in Industrial Equipment. They're strong margin businesses. So particularly Energy, which has been slow in Europe. Our Industrial Equipment business has actually been pretty good. If you go through the makeup of the business and talk about, and who knows how long this oil and gas thing's going to last, but that team has managed to, despite a 35% decline in revenue, keep the margins in solid double digits. The piece we bought, which is more in the service and support side than the new project side, is still in the 20%+ range.
So what I would say is our aerospace defense business is very strong with above-company average margins. Our oil and gas is below right now, but again, who knows when. But as that grows, that's inherently, because of its harshest environment characteristics, a high-margin business. Industrial Equipment is the one that's the big fragmented business that serves multiple industries, lots of small customers that we've been steadily improving. Growth slowed down a little bit right now, but that's where you're seeing us in the past and continue to fine-tune our manufacturing network. TEOA is especially important there in the slow-volume, high-mix business. But those margins today are at about company average. What's holding it down right now is oil and gas and energy. Energy because of Europe, oil and gas just because of what happened in the market.
But we still believe and are committed to this as an above-company average margin business.
Jim Suva (Managing Director)
For that pressure from oil and gas, do you just kind of wait for it to come back, or do you proactively make some plant adjustments?
Tom Lynch (Chairman and CEO)
Oh, yeah. That's how we kept the margins in double digits by being very proactive. I mean, super proactive. Bob, you want to add on to that?
Bob Hau (CFO)
Yeah. Jim, as I mentioned in my opening comments, we've now increased our restructuring charge for $100 million. Part of that is communications restructuring, and part of that is oil and gas. So we've definitely been taking action this year.
Jim Suva (Managing Director)
Okay. Then, as a quick follow-up, for the stock buyback, you'd mentioned that the BNS is looking to close about a little bit earlier than expected within 90 days. Can you remind us, as investors, about your cadence or appetite for the stock buyback and timing that you're going to do? I think it's about a $3 billion sales proceeds. And the timing that one should expect for that stock buyback, as it looks like the acquisition or divestitures are going to close a bit earlier.
Bob Hau (CFO)
Yeah. So we had been indicating we expected the transaction to close by the end of the calendar year. We now see that closing within the next 90 days or so. And as you indicate, it's $3 billion of proceeds. And we've said really since the day we announced the transaction back in January that it would be the vast majority of those proceeds would be used for share buyback, and we have not indicated the specific timing of that.
Jim Suva (Managing Director)
Great. Thank you very much.
Tom Lynch (Chairman and CEO)
All right. Thank you, Jim. We have the next question, please.
Operator (participant)
The next question comes from Wamsi Mohan from BofA Merrill Lynch.
Ruplu Bhattacharya (Analyst)
Yes. Good morning. It's Ruplu filling in for Wamsi. Tom, just a high-level question to start. Can you just give us your thoughts on the overall product portfolio? Are you done with the product exits that you were doing in the data and devices segment? And overall, is there any more opportunity to rationalize the product portfolio?
Tom Lynch (Chairman and CEO)
I think the product portfolio is pretty solid right now. I'll carve out a few exceptions to that comment. We are still rationalizing in data and devices. Our strategy there is to really focus on our core connectivity business, which is a good business for us, and move out of what we've now deemed to be commodities and things like that. That's going well. That's why you see such big declines in that business, because we're elegantly and treating our customers well by exiting those products. Across the rest of the portfolio, I like it. I mean, I think you'll see more adding than subtracting. Whatever we do on the subtraction would be more fine-tuning around, "Hey, this range is a commodity. It's not really strategic. We don't need it to sell other products. We don't want to put our energy into it.
We'd rather anything that widens this harsh environment moat, and sensor business is where our inorganic and organic investments are going. If you see further exits, it'll really be around the edges.
Ruplu Bhattacharya (Analyst)
Okay. Thank you for that. Then just as a follow-up, you've talked about the heavy truck market being weak in China. Can you talk about the other geographies? Are you seeing weakness in any other place apart from China in that market?
Tom Lynch (Chairman and CEO)
I think in North America, as you know, it's been a very hot market the last couple of years. The growth rate is slowing, but no surprise there. We've all expected that. But we expect heavy trucks to continue to grow. We actually expect China to kind of rebound eventually. Hard to call, but you went through a nice surge with the adoption of Euro 4, and really the government really drove that hard. So you had a period where trucks were going down and content was going way up. And there has been a little shift in China to smaller trucks, but we believe with all the infrastructure building over there that's going on, that will swing back to larger trucks, which are much more efficient. And there's a lot of opportunity in China to improve the kind of transportation of goods industry.
That plays to our strength because that's more content. I think in a little bit longer term, probably, hopefully late next year, you start to see China pick up. The U.S. continues to be okay, and Europe has been pretty solid. The challenge in the industrial transportation market has been off-road. As we know, the agriculture industry has been really not investing due to where farm prices are. You have the commodity industry. You have the spillover effect of oil prices down. Construction, although it's mixed, it's starting to level off. All those industries have been a drag over the last few years. What I think will happen over time is you'll see those industries begin to recover because there's been enough demand. You'll get a lower growth rate in heavy trucks.
This business will, over time, return to a kind of a low single-digit production growth rate, which is very attractive for us because we have so much content, and we've grown our content so much over the last couple of years.
Ruplu Bhattacharya (Analyst)
Thanks. Appreciate the color.
Tom Lynch (Chairman and CEO)
Thank you, Ruplu. Could we have the next question, please?
Operator (participant)
Our next question comes from Matt Sheerin from Stifel.
Matt Sheerin (Managing Director)
Yes. Thanks. Most of the questions have been answered, but did want to go back to their commentary about the distribution inventory correction that seems to be going on. Could you give us a sense of what you're seeing on a sell-in basis versus sell-out and expectations for where you think inventories are going to go? And what do inventory days look like at distribution now versus where they should be?
Tom Lynch (Chairman and CEO)
Days are up a little bit, but I think it's more single digits than days. In my conversation with the distributors, again, I think everybody's been managing it. We're all managing it much better than we did the last time around because of what we've learned. So I mean, clearly, the first half, we had nice growth in our sell-in in the first half. And sell-through was pretty solid too, but we began to see late second quarter, early Q3, sell-through began to slow a bit. And that's when the inventories began to build a little bit. And I think we all were like, "Let's jump on this quickly and get things in balance." So I don't think it's a—I don't think it's a big horrendous deal, but it's enough to have our third quarter be slightly down in the channel and probably our fourth quarter relatively flat.
But that's why we think that coming into Q1, sell-throughs and inventory levels are back to where they should be. Again, it's not a major disruption, but it is a fine-tuning, which I think is good. It doesn't feel good when it's happening because we're selling less, but I think it is good because the system's more in balance.
Matt Sheerin (Managing Director)
Okay. That's helpful. Just a quick question for Bob. The share count assumption for the quarter in your guidance, what's that?
Tom Lynch (Chairman and CEO)
So we expect that in fourth quarter, we'll continue at that, excuse me, $150 million-$250 million range. So call it a $1 million or $2 million share reduction from third quarter.
Matt Sheerin (Managing Director)
Okay. Thanks a lot, guys.
Tom Lynch (Chairman and CEO)
All right. Thank you, Matt. We have the next question, please.
Operator (participant)
Our next question comes from Mike Wood from Macquarie Securities Group.
Michael Wood (Analyst)
Hi. Thanks for all the information. Hard to break out the SubCom profit is what you're trying to do with increasing margins in the mobile device subsegment. Can you just give us some more color on what's happening in those two submarkets?
Tom Lynch (Chairman and CEO)
The subsegments? Head in devices, Matt or Mike?
Michael Wood (Analyst)
Yeah. SubCom and just on the mobile device side where you're exiting some lower margin product. How successful are you in getting that margin up in the mobile device side?
Tom Lynch (Chairman and CEO)
Yeah. So on the mobile, we'd call the Data and Devices business because we combined those businesses. We announced that early in the year because of what was, customers are converging, technologies becoming more similar, and frankly, we needed to reduce costs in those two businesses, which are our two weakest businesses. So we're still in the turnaround. I think we have some good wins. We have some losses. I don't think there's enough there to say, from a market perspective, we've changed our position. We are changing our cost structure, and we are getting back into the product range, which we do best. Kind of the core connector, fine-pitch, board-to-board type of connectors, power connectors where we're very good and that we want to put the lion's share of our energy around. So it's still in the kind of midway through the turnaround, I would say.
Stabilizing, but not exciting from a profitability point of view. We still have work to do to reestablish the growth and get the margins up to double digits. On the SubCom side, as Bob mentioned, seeing steady progress in the market. We continue to have a high win rate. There continues to be a lot of bid activity. The cloud players are very active in this. So we pointed out before, that's a big change from who the primary drivers were before. But fundamentally, we think it's a good change because there is a tremendous desire for high-quality service and plenty of bandwidth because that's so integral to the total value proposition of those players. So we think that's a fundamentally good driver. And the backlog's now up to $1.5 billion. So I'd say we continue to see more proof points that we are in the uptick cycle.
We're feeling good, pretty good through 2016. You got to keep knocking off several wins a year to fill the pipeline. Overall, feel good that, for sure, SubCom's on the way back up. We're getting our arms around the data and devices business from a strategy and a cost structure. We can see the point we want to be.
Michael Wood (Analyst)
Great. And then on MEAS, it seems like if I back into the numbers, it was roughly similar contribution versus last quarter to the segment. Has that seen any impact yet from China? I believe China was just under 20% of sales. And is that expected, or is there any restructuring actions taken to offset that weakness?
Tom Lynch (Chairman and CEO)
I would say I'd call it a consistent quarter. They're certainly going to see, as China in general slows down, they'll see an impact, but not significant. And overall, growing very nicely organically, as I mentioned, our sensor business, if we had owned AST and measurement this quarter last year, that business grew 10%. So certainly seeing some nice growth overall. And I would say in China, sensors are not as established in the vehicles over there, particularly the local vehicles. So you have kind of an additional demand pool that in order to become competitive, you need to put more features in. So we feel that's an extra demand driver. And the only per se restructuring that's going on is where we're combining for scale. We're not doing any in response to market conditions. Oh, it's growing slower, so we're taking cost out.
We're investing in the business, as I said, from that perspective so that we can win more deals and grow it faster.
Michael Wood (Analyst)
Great. Thank you.
Tom Lynch (Chairman and CEO)
Welcome. Thank you. Could we have the next question, please?
Operator (participant)
Our next question is from the line of Steven Fox from Cross Research.
Steven Fox (Managing Director)
Thanks. Just one question from me. I'm just a little confused still by the increase in the restructuring charges, understanding what you just said. But you expressed a lot of positive statements around harsh environments in general, but you're downsizing oil and gas. And then along the same lines, you're doing some product pruning, which I would think has been an ongoing effort for a number of years. And I'm just curious what that has to do with restructuring and whether that was also in response to end markets. Thanks.
Tom Lynch (Chairman and CEO)
Yeah, Jim. I'll let Bob add to this too. Oil and gas is adjusting to a 35% decline in the business and the natural uncertainty about everything that's going on around oil with, does Iran come back in, when do oil prices go up, etc. The remainder of the increase is related to kind of the phase of accelerating the phase of data and devices. So that's what it's related to. We're really not restructuring in any other business, Bob.
Bob Hau (CFO)
Yeah. The vast majority of our restructuring to date and will be for the year is in the communication segment and oil and gas in particular. Oil and gas last year was a $300 million business. We're going to exit a $200 million clip that really calls for some pretty significant restructuring.
Then data and devices in combination of the product exits that we've really been underway for, call it 12-18 months, we're on the closer end of that, 12 months, plus the combination of the old Datacom and the consumer business drove us to take some additional costs out. But we're not taking out costs in our harsh environment growth. To your earlier question, Mike's question on measurement, we're not taking out costs where we've got growth opportunity.
Steven Fox (Managing Director)
Understood. Just real quick, I understand the need to sort of keep your plans for a buyback close to your vest for now. I mean, when the deal closes, can we expect some kind of signals around how you plan to execute or use that $3 billion in proceeds, or is this sort of going to be status quo and we'll learn about it sort of on a backward-looking basis?
Tom Lynch (Chairman and CEO)
Well, I think one of the hallmarks of TE has been some pretty good transparency. Once the deal closes and we get into the activity, we'll give you some color about what our expectations are.
Operator (participant)
Our last question comes from the line of William Stein from SunTrust.
William Stein (Senior Analyst)
Thanks for taking my follow-up. So with the pull-in of the timing of the BNS sale, can you just highlight to us what the regulatory approvals that you're still waiting on are? And with regard to the $3 billion consideration, understanding that you've told us that you expect to use the majority for buybacks, would you consider another acquisition potentially in the sensor area? At the Analyst Day, the company, I would say, was still constructive on its intention to acquire in that space. And I wonder if this could be an opportunity to readdress that. Thank you.
Tom Lynch (Chairman and CEO)
Well, let me address the second part of that question. I think the strength of the company is our strong cash flow, our really strong capital structure, our strong operating leverage, and all that provides choices, right? So we clearly have an active M&A pipeline. Sensors and harsh environment are very important to us. And wherever we get the right opportunity to strengthen those businesses, we will seize them. Of course, it has to be at the price that we think fits with our strategy and our return goals. So yeah, I mean, the bottom line is we can do both. That's really the simple message. We can do both. And if you look back the last few years, that's what we've done. We bought MEAS. We bought AST. We did significant buybacks. I think that's really one of the strengths of TE.
And then in terms of the timing, well, we've pulled it in a bit from end of the calendar year to now within 90 days. We have really three large regulatory hurdles: U.S., Europe, and China. We have U.S. and Europe, so we're awaiting China. And of course, there are a number of other countries that have the right and obligation to weigh in, but it's really those big three. And of course, then CommScope's in the midst of integration planning that we're helping them with, obviously, and let them comment on that progression. But it really is at this point the regulatory hurdle with China.
Steven Fox (Managing Director)
Great. Thanks very much.
Tom Lynch (Chairman and CEO)
All right. Thank you, Will. If you have follow-up questions, please contact Investor Relations at TE. Thank you for joining us this morning, and have a great day. Thanks, everybody.
