TE Connectivity - Q4 2013
October 30, 2013
Transcript
Operator (participant)
And 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. Keith Kolstrom. Please go ahead.
Keith Kolstrom (VP of Investor Relations)
Morning. Thank you for joining our conference call to discuss TE Connectivity's fourth quarter and fiscal year 2013 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.
For everyone on today's Q&A portion, I would like to remind them to please limit it to one follow-up question so that everyone is able to get in the questions that they wanna ask. Now, let me turn the call over to Tom for some opening comments.
Tom Lynch (Chairman and CEO)
Thanks, Keith, and good morning, everyone. This was a very good quarter for the company, and it capped a year of strong performance in an uncertain economy. Q4 is especially noteworthy for several reasons. Our organic growth was 3.3%, and the company returned to growth for the first time since early last year, as continued strength in our Transportation Solutions segment was augmented with growth in our Industrial Solutions segment and in our Telecom Networks and Appliances businesses. Orders, excluding our SubCom business, grew 6% in the quarter, and the strength was broad-based in terms of end market and region. Our $0.93 per share is a new earnings record for TE and is up 22% versus the same quarter last year. We delivered 15.7% adjusted operating margins at a run rate of less than $14 billion in annual revenue.
We did have a very favorable mix in the quarter, but adjusting to more normal mix, our margins were still above 15%. Our efforts at driving lean across the company, which is our TE Operating Advantage program, are really paying off in customer satisfaction and margin improvement. And more to come on this at our Investor Day in November. For the third consecutive year, we were selected as a Top 100 Innovator by Thomson Reuters. Five years ago, we stepped up and refocused our innovation efforts, and we have a terrific product pipeline and a wide range of intellectual property that should fuel our growth for several years to come. And we had another strong cash flow quarter, and for the year, delivered $1.5 billion in Free Cash Flow, our sixth consecutive year of 10% or better cash flow yield on revenue.
For the year just ended, we increased adjusted earnings per share by 13% on sales, which were relatively flat. The team did a great job of delivering cost savings and productivity to more than offset the impact of a slow economy. I'm also very pleased with the integration of the Deutsch acquisition. The markets for industrial transportation and commercial aircraft are strong, and we expect to deliver the sales and cost synergy ahead of the acquisition plan. As expected, Deutsch has added great products and people to TE. I'm also very pleased that we generated adjusted net income in excess of 10% for the year, and as I mentioned earlier, we are converting these strong earnings into strong cash flow. During FY 2013, we returned $1.2 billion in capital to our shareholders in the form of dividends and share repurchases.
In fiscal year 2014, we expect to return over $1 billion in capital to shareholders. And as shown in our press release earlier this morning, our board has recently approved an increase of $1 billion to our share repurchase authorization. Please turn to slide four. Total company sales were $3.43 billion and were up 3% organically versus the prior year. The sales increase was driven by continued strength in the Transportation segment and improving demand in the Industrial and Telecom businesses. Please turn to slide five, and I'll review our segment performance. Unless I indicate otherwise, all changes are on an organic basis, which excludes the effect of currencies, acquisitions, and divestitures. We had another outstanding quarter in our Transportation business.
Sales were $1.4 billion, up 10%, and adjusted operating margins were again over 19% and in line with our expectations. Global automotive production was up approximately 4% to 19.6 million units, with strength in the U.S. and China. European demand continues to be soft, but does appear to be stabilizing. We also continue to see improvements in the heavy truck markets in several geographies. The Deutsch acquisition positions us very strongly in this high-end, harsh connectivity market. The strong operating margin performance is due to the increased revenue, continued productivity improvements, coupled with a very lean footprint and the strong performance in our commercial vehicle business. We expect another strong quarter in Q1, with revenues up about 10% versus the prior year on an expected vehicle production increase of about 3%. Please turn to slide six.
Sales and earnings in our Industrial Solutions segment were better than expected due to stronger end market demand and favorable product and channel mix. Importantly, we had strong order growth for the second quarter in a row, with solid growth in every region. On a year-over-year basis, sales were up 2%, and orders increased 10%. Book-to-Bill was 0.96. Orders were especially strong in the Commercial Aerospace and industrial equipment markets. Energy was up 7%. In the first quarter, we expect sales to be up mid to high single digits versus the prior year, with industrial equipment up close to 10% and aerospace and defense and energy up low to mid single digits. Continued strength in our Commercial Aerospace business is more than offsetting lower spending on defense programs.
Sales and earnings in our Network Solutions business were a little better than guidance. Within this segment, orders and sales continued to improve in our Telecom Networks business, which is the business where we provide the connectivity for the broadband network for telecom carriers and cable operators. Across the world, we are seeing a gradual pickup in fiber-rich broadband network deployment. This improvement was offset by continued weakness in our Datacom Equipment business. In our SubCom business, project activity continues to be robust and funding continues to be slow. Revenue in the quarter was in line with expectations, but the return to the growth cycle looks to be in the second half. For the segment overall, in Q1, we expect a slight decline in revenue as the weakness in SubCom and Datacom more than offset the growth in the Telecom business. Please turn to slide eight.
Sales in the Consumer Solutions segment were down 5% versus the prior year. The continuation of, declines in the PC market and a slowdown in the growth in smartphones and tablets more than offset our growth in our Appliances business. In Q1, we expect sales to be down mid-single digits, as growth in Appliances is offset by continued softness in the Consumer Devices business. Now I'm going to turn it over to Bob, who's going to cover the financials in more detail.
Bob Hau (CFO)
Thanks, Tom, and good morning, everyone. Let me discuss earnings, which start on slide nine. Our GAAP operating income for the quarter was $465 million, which includes restructuring charges of $71 million and acquisition-related charges of $3 million. Restructuring charges were $311 million for the year, which was higher than our $275 million guidance. Given the progress we made on projects already announced, we implemented additional items that were originally expected to occur in fiscal 2014. In fiscal 2014, we anticipate a substantial reduction in the level of restructuring activity, with charges of approximately $50 million. Adjusted operating income was $539 million, with an adjusted operating margin of 15.7%, up 220 basis points from Q4 last year.
The improvement is driven by 3% organic sales, productivity from TEOA, and benefit of accelerated restructuring. As Tom mentioned, we did benefit from a favorable mix in the quarter. Adjusted EPS were $0.93, and GAAP EPS were $0.92 for the quarter. GAAP EPS included $0.13 of restructuring and other charges and $0.12 of income related to tax items. Turning to slide 10. Our adjusted gross margin in the quarter was 33.7%, which was a record level for the company. This is a 190 basis point increase versus the prior year, largely due to continued progress in our TEOA or lean programs, driving increased productivity with reductions in both material and conversion costs, and improved profitability related to the integration of Deutsch.
Total OpEx spending was $617 million in the quarter, which was flat versus the prior year, despite sales being up 3% organically. On the right side of the page, net interest expense was $30 million for the fourth quarter, and I expect approximately $31 million of expense in the first quarter, with a decline of about $1 million per quarter as we move through the year in 2014. Adjusted other income, which relates to our tax sharing agreement, was $7 million and largely in line with guidance. The adjusted effective tax rate was 23.8%, also in line with guidance.
In the first quarter, I expect other income of about $8 million per quarter, dropping to about $6 million per quarter for the remainder of the fiscal year, and I expect a tax rate of 24%-25% throughout the fiscal year. Now, turning to slide 11, I'll discuss our balance sheet and Free Cash Flow. Cash from continuing operations was $595 million, and our Free Cash Flow in Q4 was $412 million. Full-year Free Cash Flow was $1.5 billion. Capital spending during the quarter was $183 million, or about 5% of sales. This is consistent with our anticipated spending rate of approximately 4%-5% of sales going forward. Receivable days outstanding were 61 days, and inventory days on hand were 68 days. Both metrics remain in line with our expectations.
Now let me discuss the sources and uses of cash outside of Free Cash Flow, shown on the right side of this slide. You see, we began the quarter with $1.3 billion of cash and ended the quarter with about $1.4 billion. During the quarter, we returned a total of $313 million to shareholders. We paid dividends of $103 million and repurchased about 4.2 million shares for $210 million. We expect additional share repurchases of $150 million-$250 million per quarter during fiscal 2014, consistent with the 2013 levels.
Outstanding debt was $3 billion at the end of the quarter. On October 18th, we filed a press release calling for the redemption of all the outstanding 5.95% senior notes, which were to mature on January 15th, 2014. The slightly early redemption is part of our normal cash management. While no decisions have been finalized regarding the placement of this debt, I do not, excuse me, I do not expect our capital structure to change following the redemption, and continue to expect debt levels to be about $3 billion. I'll turn it back to Tom.
Tom Lynch (Chairman and CEO)
Thanks, Bob. Please turn to slide 12, and I'll cover our outlook. As I mentioned earlier, we have seen solid improvements in our order rates over the last couple of quarters in most of the end markets we serve. Although the overall global economy feels like it has more momentum than it did at this time last year, though, there's clearly still uncertainty, given slow job growth, the weak economy in Europe, and an unsettled U.S. government budget. When we take all these trends into consideration, this is our guidance for Q1. In Q1, which is our seasonally slowest quarter of the year, we expect organic sales growth of 4%-7% and adjusted earnings per share growth of 14%-20%. At the midpoint of the guidance, adjusted EPS would be $0.76, an increase of 17%.
I feel like this is a really good start to our new year. In Q1, we expect continued strong performance in our Transportation and Industrial businesses, with high single-digit year-over-year growth. We expect our Network Solutions segment to be down slightly, as improving conditions in the Telecom Networks market are offset by the softness in our Datacom business and continued project delays in SubCom. We expect our Consumer Solutions business to be down mid- to high single digits, as Q4 trends continue into Q1. Please turn to slide 13. Now for our full year guidance. Based on these current trends, we expect our organic revenue growth in fiscal 2014 to be in the range of 3%-7%.
We do expect a continuation of solid demand in the transportation and industrial markets, as well as in the Appliances and Telecom infrastructure markets. We expect continued softness in our SubCom business, as contracts coming into force remain slow until at least the second half of the year, and we expect our Consumer Devices business to be about flat. We expect to continue our execution momentum and to deliver adjusted earnings per share in the range of $3.50-$3.80, which is about a 13% year-over-year increase at the midpoint of our guidance range. This improvement is driven by organic sales growth, another year of strong productivity, and the increased benefits of restructuring. At the midpoint of our guidance, we expect to deliver 15% adjusted operating margins for the full year at $13.9 billion of revenue.
We also expect a significant reduction in Restructuring Charges as our footprint is much improved. Overall, this was an excellent quarter, a very solid year of earnings and sales growth, and, or cash growth, and I feel good about our momentum entering fiscal 2014. I'm confident that if the global economy continues to recover, we are well positioned to deliver attractive sales and earnings growth. Now, let's open it up for questions.
Operator (participant)
Ladies and gentlemen, if you wish to ask a question, please press star followed by the one. You'll hear a tone indicating that you've been placed in queue. You may remove yourself from queue at any time by pressing the pound key. Once again, for questions, please press star one at this time. Our first question today comes from the line of Amit Daryanani. Please go ahead, representing RBC Capital Markets.
Amit Daryanani (Equity Analyst for Information Technology)
Yep, thanks a lot, and good morning, guys. Two questions from me. You know, one, maybe you can just talk a little bit on the December quarter guide. I think sales, you're implying, will be down about 4%, so call it $160 million-$165 million, down sequentially. But if I run the math on EPS, it implies that operating income will be down $190 million or so. That's just detrimental margins of 50%+. So maybe you can talk about why such a severe decline or detrimental margins in the December quarter, and then maybe you can give us comfort on why you see them expanding to getting north of 15% by year-end.
Tom Lynch (Chairman and CEO)
Thanks, Amit. First, regarding the sales guide, as I mentioned, this is always our seasonally lowest quarter, we will typically see a 4%-5% sequential decline in revenue. It is a little higher falloff in operating income, but that's not unusual either, because what typically happens is this quarter, you hit the holidays, you have less work days, so your productivity and efficiency suffers a little disproportionately. On top of that, we come off what is typically a very strong quarter when we're running all out at the end of September. If you look at how we pattern from last year, first half, second half, almost exactly the same pattern, so no real difference there.
That's why I'm confident that the sales growth and margin, particularly the margin growth, through the second, third, and fourth quarter and 15% is, you know, I feel confident about us hitting that.
Amit Daryanani (Equity Analyst for Information Technology)
Fair enough. That's all. But then if I could just ask you a question on the transportation side. I mean, if I look at the September results and also the December guide, looks like the Transportation business is up about 10% year-over-year, organically in both quarters. If I looked at the global production numbers, you know, that's up about 3%. So I guess, I mean, it, it seems like you're seeing about a 7% content growth for September and December, net of ASP erosion. Could you talk about why you're seeing such a big acceleration in the content growth, and could that perhaps sustain for the next several quarters as well?
Tom Lynch (Chairman and CEO)
... Yeah, I don't think there's any sudden change in content growth. I think it's a couple things. One, we continue to do well around the globe and are growing in every market and believe we continue to move up our market share. Secondly, the Industrial Transportation business is very strong with the heavy truck market, and that's a pretty high-end market for us. So that's also lifting you know, our growth rate.
Amit Daryanani (Equity Analyst for Information Technology)
That's great. Thanks a lot, and congratulations on a good quarter.
Tom Lynch (Chairman and CEO)
Thank you.
Operator (participant)
Our next question today comes from the line of Mike Wood with Macquarie. Please go ahead.
Mike Wood (Associate Director)
Hi, thank you. I'm wondering if you can comment in terms of the range of possible outcomes for subsea sales next year. You know, in the context of, you know, $90 million next quarter, which would put you at, like, a mid-$300 million run rate, and obviously, you've talked about the robust pipeline. So what visibility do you have there in terms of the timing, potential downside, potential upside?
Tom Lynch (Chairman and CEO)
Thanks, Mike. Yeah, right now, I'd say SubCom feels flat year-over-year, but the second half is hard to call. I think there's probably more upside than downside, based on the project pipeline. And when we map the extent of this project pipeline to prior years, we know all projects will not come into force. But if we look at the typical come into force rate, we would expect to see things starting to pick up in the second half. And as we watch projects move through their funding process, you know, that's what we'd expect. So first quarter is pretty much what the first quarter is gonna be. Second quarter is probably gonna be close to that. Hopeful that the second half picks up and these contracts that we won come into force.
Mike Wood (Associate Director)
Great. And then another, if you could comment also on the Transportation segment as a follow-up to that last question. Next year, in terms of your vehicle production guide, you have more of a contribution from Europe than you had in your projections for this quarter and 1Q. What's the impact on TE in terms of that greater contribution from Europe from a content standpoint, your outperformance versus the global vehicle production?
Bob Hau (CFO)
Well, Europe definitely has higher content. And Europe, you really have to break it down. On the surface, which is the local demand for cars in Europe, that's been weak. But particularly German OEMs, they've been strong as they export quite a bit, and that's where we are strongest. So we don't see a dramatic change there. We see a slight improvement in Europe for us, so there's no big swing in our numbers based on Europe. Does that get to your question?
Mike Wood (Associate Director)
Yes, perfect. Thank you.
Operator (participant)
Next, we'll go to the line of Matt Sheerin with Stifel Nicolaus. Please go ahead.
Matt Sheerin (Managing Director and Senior Equity Research Analyst)
Yeah, thanks. Good morning. I was looking at your margin guidance for FY 2014 of 15%. Could you talk about the drivers? You've got two segments, Consumer and the Networking business. You're guiding sort of flattish. You're coming off of peak margins in the Transportation business. What are the drivers on, in terms of, margin expansion within the different segments, particularly in the businesses that are guiding flat?
Bob Hau (CFO)
Yeah, Mike, it's Bob. Across the board in 2014, we're seeing improvement in operating margin from all four of our segments. As you know, we had significant restructuring activity in 2013, and we see the benefits coming through into 2014. We've indicated about $100 million at exit. Into 2015, we'll see that full $100 million. In our 2014 numbers, you have probably between $60 million-$70 million of operating income improvement from those restructuring activities. And of course, we continue down the path of lean and our TEOA activity.
So all four of our segments, obviously, participating in that, where we have the good top line growth, obviously in our Transportation business and Industrial, where we're seeing mid- to high-single-digit growth, we'll get some nice volume leverage in our Industrial and Consumer business. I mean, our Consumer and Networks businesses, where they're a little bit more flattish, margin improvements will be harder to come by.
Matt Sheerin (Managing Director and Senior Equity Research Analyst)
Okay, thanks. And Tom, on the Datacom, the commentary continues to be cautious there. Do you see any signs of life going into fiscal 2014? And, if you think it's gonna remain flat and down year-over-year, are you looking at additional cost savings in that business?
Tom Lynch (Chairman and CEO)
I would say it's gonna be down, but most of the decline is because we exited some very low-end business this year. When you take that out, we're gonna be slightly down. I think that's mostly, you know, just a slow market, but, you know, we're a middle-of-the-pack player there. That business has gone through a lot of restructuring over the last year, so I don't anticipate any significant additional restructuring there.
Matt Sheerin (Managing Director and Senior Equity Research Analyst)
Okay.
Tom Lynch (Chairman and CEO)
Never say never, but you know, we stepped up to that about six to nine months ago.
Matt Sheerin (Managing Director and Senior Equity Research Analyst)
Got it. Okay, thanks.
Operator (participant)
Our next question today comes from the line of Shawn Harrison with Longbow Research. Please go ahead.
Shawn Harrison (Senior Research Analyst)
Hi, just following up on Matt's question on the margin targets. Just would you be willing, Bob, just kind of give maybe a range where you think each of the four segments could, you know, be for the year in terms of an EBIT margin?
Bob Hau (CFO)
... I don't wanna get into guidance by segment, but I think the key, and I mentioned this in the previous answer, if you look at the volume growth, the overall top revenue, Transportation, Industrial, being kind of mid- to high-single digits, Transportation, obviously stronger than Industrial, but in general, nice improvement. That's where we're gonna see the higher lift from a year-over-year standpoint. Consumer Solutions and Network, both seeing real benefits from the restructuring actions that we took in 2013, and continued improvement in new products have higher margins, but without the volume lift, you're not gonna get dramatic improvement in the operating margin. Now, obviously overall, I'm doing very well growing from the 14.2% we had this year to 15% next year.
But clearly, Transportation and Industrial are doing the majority of the heavy lifting, given the volume.
Shawn Harrison (Senior Research Analyst)
Gotcha. I guess, on the restructuring savings, maybe another way to come at that question is, you know, of that $70 million or $60-$70 million, you expect the restructuring savings to fall into 2014, you know, how much of that is Network Solutions versus Industrial Solutions versus Consumer Solutions?
Bob Hau (CFO)
Probably the easiest way to think about that is if you look at where the investment went, the $300 million, you know, roughly between networks and consumer, 70% of the spending were in those two businesses. And so you'll see the majority of the benefit in those two businesses.
Shawn Harrison (Senior Research Analyst)
Okay. Well, just-
Bob Hau (CFO)
40% networks and about 30% consumer.
Shawn Harrison (Senior Research Analyst)
Gotcha. Gotcha, that's helpful. And then just as a follow-up, if I guess, you know, with commodities being down, how much of a tailwind from commodities you're baking in on a dollar basis to your 2014 numbers?
Bob Hau (CFO)
Commodities definitely helping on a year-over-year basis. You have to be a little cautious. Number one, there's a lot of the year left, the commodities still move. Additionally, with our hedging program, that benefit feathers in over time. But on a full year basis, if commodities were to hold where they're at today, there's probably $45 million-$50 million of tailwind for us on a full year basis.
Shawn Harrison (Senior Research Analyst)
Okay. Very helpful, and, congrats on the quarter, guys.
Bob Hau (CFO)
Thank you.
Tom Lynch (Chairman and CEO)
Thanks, Sean.
Operator (participant)
Our next question is from the line of Jim Suva with Citi. Please go ahead.
Jim Suva (Managing Director)
Thank you, and congratulations for you and your team for your great results and a strong outlook. When we think about the outlook, just to be clear, I assume that the stock buyback of, I think you said, $150-$250 per quarter, is built into your EPS guidance. And then also, am I correct that you are not building any potential acquisitions? And if you can, you know, talk about that a little bit, because it seems like your past acquisitions are progressing better than historical, and some of your peers do a lot of acquisitions. Are we now looking at the point where we should expect Tel to start to be a little more aggressive on acquisitions?
Tom Lynch (Chairman and CEO)
Yeah, Jim, we have baked in the share repurchase at that $150 million-$250 million range. It's the range of repurchase that we had in 2013, and we plan to continue that per quarter going into 2014. So that's baked in, a modest improvement in the shares outstanding, a modest reduction. In terms of acquisitions, we have not baked into our guidance any acquisitions we may or may not do into 2014. Obviously, if we were to conclude any acquisitions in the year, we'd revise our guidance to that point. Just adding on to that, regarding M&A, we have a robust pipeline, but as you know, we're pretty thoughtful about it.
We really focus on strategic fit, but I would expect, and we desire to continue to round out our product line and our overall connectivity portfolio. It's a big market. We have the broadest product line, but we're not satisfied yet. So, you know, we're always looking, but we don't build that into our outlook.
Jim Suva (Managing Director)
Great. And as a quick follow-up, there's been some indications that the Australia fiber build-out has been, you know, slowing down here, as well as some changes in China. Is that incorporated into your guidance? Did you put in some conservatism there for it, or how should we think about those recent trends that are happening into those areas, which once were a very highly attractive area and very robust outlook?
Tom Lynch (Chairman and CEO)
I would say, Australia, for sure, is still very attractive. What's going on there is, as you know, the change in government, they've got to sort through how they want to build the broadband network. The prior government was fiber to the home. This is more like fiber to the node. In both cases, it's a lot, a lot more fiber than, and a lot more broadband than the country has today. So, you know, it could affect us $10 million-$15 million a year, is our estimate right now, which we have included in our guidance. So we don't see... I mean, things could change, but we're not getting any indications, and, and we're very, we're very close to the organization down there. On China, I'm, you know, we are being ...... you know, a slow business for us.
The opposite side of the road on the automotive, so to speak, which continues to be a booming business for us.
Jim Suva (Managing Director)
Thank you, and congratulations to you and your team.
Tom Lynch (Chairman and CEO)
Thanks, Jim.
Operator (participant)
Question today comes from the line of Mark Delaney with Goldman Sachs. Please go ahead.
Mark Delaney (Analyst)
Hi. Thanks very much for taking the question, and congratulations on the record results for the September quarter. Yeah, I was hoping you could remind us about what your exposure is to the European market. You know, I think there's some green shoots in the automotive business and then maybe even in Telecom as we look into 2014. So are you seeing any positive indications in Europe? And then can you help us think about how TE might benefit from that?
Tom Lynch (Chairman and CEO)
So about a third of our business is done in Europe. The biggest part of that is automotive. And a pretty significant portion of that business, 20%-30%, is exported out. So, you know, it's a little murky to walk through. But in general, we're strong in all our businesses in Europe, and that's, you know, that's depressed our growth rate over the past few years. But we have strong, profitable businesses there. Our best businesses, the automotive, which, as I indicated, continues to be a good business because of the export base. Our strongest energy market is in Europe, which has been slow this year, very slow, but we're starting to see signs that it's picking up.
We have a pretty sizable Telecom business in Europe, which is not very fiber rich yet, so we're encouraged about the prospects for that, and we are seeing some green shoots, so to speak, in some areas of accelerated fiber build-out. Our largest industrial equipment business is in Europe, which has been slow, but is also, as we mentioned, in overall Industrial business, showing signs of stabilizing and picking up. So I'd categorize Europe end market demand as being feeling a little bit better, but off of a low base. So it's nothing to get, you know, gleeful over yet, but stabilizing is the way it looks.
Mark Delaney (Analyst)
Got it. That's helpful. Thank you. For my follow-up, can you guys just clarify on the restructuring benefits that you assume for fiscal 2014? I know, $60 million-$70 million. Is that, is it $60 million-$70 million of benefits that you get for, for fiscal 2014 overall, or as you exit fiscal 2014, you'll be getting, $60 million-$70 million on a run, on a run rate basis?
Bob Hau (CFO)
The $60 million-$70 million is for the full year. We'll exit a bit higher, and what we've said is a $100+ million benefit into 2015, once we hit that full run rate.
Mark Delaney (Analyst)
Okay, thank you very much.
Operator (participant)
We have a question from the line of William Stein with SunTrust Robinson. Please go ahead.
William Stein (Managing Director and Senior Equity Research Analyst)
Great. Thanks for taking my question. I'm wondering if you can comment on the cash flow outlook for next year. With the lower restructuring charge, how does that affect cash?
Tom Lynch (Chairman and CEO)
Thanks, Will. I think we're gonna continue to generate cash at around the net income level. So I'd say it's in that 1.4 ±. I do expect some CapEx to increase year-over-year, and restructuring charges are down, but restructuring spending is about flat. So in the early stages of restructuring, our cash outflow lags our charges, and then it eventually catches up. Bob, I don't know if you wanna add anything to that.
Bob Hau (CFO)
Yeah, the charges that you see or saw in 2013 at $300+ million, the cash flows out really over three years. Certainly the majority of it is in 2013 and 2014. 2014, it's up slightly, but not significantly.
William Stein (Managing Director and Senior Equity Research Analyst)
That's helpful. Thanks. And then if I can just hit the margins, and I know there's been a lot of discussion on this. It looks like transportation at a very strong level and going higher. And certainly for the company, you just blew through the 15% target nicely in the quarter. How do we think about aggregate drop-through to the operating line? And then, is there a significant delta from one segment to the next with regard to the drop-throughs?
Tom Lynch (Chairman and CEO)
I'd say relative to the relationships of the businesses, you know, Transportation and Industrial, which are our long cycle, highly engineered, harsh environment businesses, which honestly is what we do best at, have a higher flow-through than consumer, which is at the other end of the spectrum, where you need volume, particularly in devices, to get flow-through and the volume's been intermittent for us there. Networks is sort of the mix. Our Telecom Networks business, again, highly engineered products and harsh environment, high flow-through. So you'll typically get higher flow-through in Industrial, then Transportation and in Telecom networks.
William Stein (Managing Director and Senior Equity Research Analyst)
Great. That's helpful. Thanks very much.
Tom Lynch (Chairman and CEO)
Thank you, Will.
Operator (participant)
Our next question comes from the line of Amit Daryanani with RBC Capital Markets, and if there are any additional questions, please press star one.
Amit Daryanani (Equity Analyst for Information Technology)
Thanks. Just have a quick follow-up, guys. Regarding the capital allocation, Tom, I think you mentioned at the onset of the call that you expect to return $1 billion back to shareholders. But if I do my math, at least using the midpoint of the buyback on that $150 million-$250 million range, that would be $800 million alone, and then, then your dividend policy, I think, is a little over $400 million. That would put you well north of $1.2 billion, I think. Does that imply that maybe the buybacks would be at the low end of that $150 million-$250 million range, or did I just miss you, or you had the $1 billion comment initially?
Tom Lynch (Chairman and CEO)
Oh, I said $1 billion, Amit. It's early in the year. You know, last year was a year of no M&A. To be determined what happens this year. But I think of that as, you know, what we see right now, that's what is the most likely range. What happened this year, as we progressed through the year, there were no M&A opportunities that made sense to us, so we increased the buyback. That could happen again, or, you know, if we see the right opportunities, that are strategic and help us, strengthen the company and increase our growth rate, you know, we'll go in that direction. But at this point, I'd say $1 billion is the way to think about it in total.
Amit Daryanani (Equity Analyst for Information Technology)
So that, I guess, Tom, that would imply the buyback would be $150 a quarter then, right?
Bob Hau (CFO)
Well, Amit, actually, the comment in the script was over $1 billion, so I mean, it's, again, early in the year, so.
Amit Daryanani (Equity Analyst for Information Technology)
Got it.
Tom Lynch (Chairman and CEO)
If you were to take it literally at $1 billion, it would be at the low end.
Amit Daryanani (Equity Analyst for Information Technology)
Got it. So the way to think about it is, you know, at minimum, it's gonna be $150, and as you ramp through the year, and if you don't find or don't do enough deals, then you could ratchet it up higher, much as you did in fiscal 2013.
Tom Lynch (Chairman and CEO)
That's correct.
Amit Daryanani (Equity Analyst for Information Technology)
All right. Thanks a lot.
Tom Lynch (Chairman and CEO)
Thank you.
Operator (participant)
Speakers, nobody else is queued up at this time.
Tom Lynch (Chairman and CEO)
Well, thanks, everyone, for calling in. Just one reminder, our investor day, the first one in two years, is in New York on November 19th, and we'll look forward to hopefully seeing all of you there. And until then, have a good couple of weeks. See you late November.
Operator (participant)
Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation in using the AT&T Executive Teleconference.
