TE Connectivity - Q4 2014

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by, and welcome to the TE Connectivity Q4 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If you should require assistance during the call, please press star followed by the zero. As a reminder, today's conference is being recorded, and I would now like to turn the conference over to your host, Mr. Sujal Shah. Please go ahead, sir.

Sujal Shah (Head of Investor Relations)

Good morning, and thank you for joining our conference call to discuss TE Connectivity's Fourth Quarter and Full Year Fiscal 2014 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 (CEO)

Thanks, Sujal, and good morning, everyone. Thanks for joining us. Here are some highlights of the call, and then we'll go into these in more detail over the balance of the call. We delivered strong results for fiscal year 2014, achieving or exceeding all our business model targets. I feel very good about how we continue to execute our strategy of strengthening our leadership position in harsh environment applications with another strong year of design wins in Auto, Industrial, and Appliances. We also made key acquisitions in sensors and Oil & Gas, which significantly expand our TAM. For 2015, the midpoint of our guidance reflects 8% actual revenue growth, 6% organic revenue growth, and double-digit adjusted earnings growth.

The benefits of recent acquisitions, the rebound of the SubCom business, and solid performance in the Transportation and Industrial segments will more than offset a slight slowing in EMEA and China, as well as currency headwinds. We do have multiple levers below the top line to drive EPS growth, most notably our TEOA program, which is really helping us improve customer satisfaction and driving productivity, as evidenced by our margins. And then lastly, but not least, of course, we expect to generate continued strong free cash flow growth, enabling us to return approximately two-thirds of our cash to shareholders while continuing to strengthen the company through acquisitions. Now, please turn to slide three. Q4 was a strong finish to a record year for the company. Sales were just shy of $3.6 billion and up roughly 4% year-over-year.

Adjusted EPS of $1.02 was up 10% at the high end of our guidance, and free cash flow was $661 million. Our Q4 results were driven by the continued strong performance of our Transportation and Industrial Solutions segment, as well as our appliance business in our consumer segment. Growth in these businesses more than offset weakness in our SubCom market, which has bottomed and is now entering a growth cycle. So, in a nutshell, Q4 results really continued what we saw through the first three quarters of the year. Please turn to slide four. I'm really pleased with what our team accomplished in fiscal year 2014. We delivered strong financial performance, strengthened our leadership position in harsh connectivity, and expanded our TAM through a major sensor acquisition. Our sales growth was 5%, overcoming the bottoming out of the SubCom market.

Adjusted operating margins were 15.4%, primarily powered by our TEOA program, and this was a very key milestone for the company to get through a full year at 15+ in operating margin at less than $14 billion in revenue. Adjusted earnings per share grew 17%, and we generated $1.7 billion of free cash flow, our seventh consecutive year of 10% or better cash flow yield on revenue. We continued to execute our long-term strategy of extending our leadership position in harsh environment applications, which are highly engineered, designed in partnership with our customers, and characterized by relatively longer product cycles and margins above company average. Our Transportation and Industrial segments, as well as our appliances business, continue to generate design wins at rates ahead of market growth, which strengthens our long-term market position.

We also made these two key acquisitions, establishing us as a leader in offshore Oil & Gas and the high-growth sensors market. Measurement Specialties establishes us as a leading supplier of sensors and connectors, adds nearly $40 billion to our addressable market, and further increases our content in harsh applications. Overall, our harsh businesses now account for approximately 70% of company revenue, up from the 50% range a few years ago, and are generating operating margins above the company average. This is our wheelhouse, so to speak, and we will continue to accelerate investment into these businesses. With the addition of a broad sensors portfolio, TE owns valuable real estate that serves as a gateway for customers to collect and analyze data, whether in Automotive, Industrial communications, or consumer applications.

In our short-cycle businesses, Consumer Devices and Data Communications, this was a tough year for financial performance, but a year of progress in innovation, key customer design-ins, and continued cost improvements. As a result of this progress, I expect that these businesses will be contributors to the company's earnings growth in fiscal 2015. In our networks business, it was a mixed year in terms of financial performance, but a good year in terms of strategic progress. SubCom bottomed out in fiscal 2014 with less than $300 million in revenue and generated an operating loss. On the bright side, we had an excellent year winning key projects, and these projects are now coming into force. In our Broadband Network Solutions business, which includes Telecom and Enterprise, we had a solid year. Sales growth returned for the first time in three years, and profitability improved for the second consecutive year.

I'll now provide some detail by business within each segment in the next four slides, unless I indicate otherwise. All changes are on an organic basis, which excludes the effect of currencies, acquisitions, and divestitures. Please turn to slide five. Our Transportation business had another outstanding year in fiscal 2014 with 10% growth and 20%+ operating margins. Content growth is driven by new safety features, higher emission standards, and the broadening adoption of infotainment applications, which require increased data transfer, more electrical connections, and more sensors. Electronic growth is a strong secular driver that will continue to fuel growth for TE. Last year's results clearly demonstrate how our company is benefiting from electronic content expansion and, importantly, an increased new platform win rate in both the Automotive and Industrial Transportation business, as our revenue growth more than doubled OEM production growth of 5%.

I really feel the investments we made in the downturn are paying off big time for us in this business. Q4 was another strong quarter with sales of $1.5 billion, up 6% over the prior year, outpacing global vehicle production growth of 2.8%. We delivered adjusted operating margins of 20%+ due to the volume growth and continued productivity improvements driven by TEOA. Looking forward, we expect another good quarter in Q1 with actual sales up approximately 10%, including about 10 or 11 weeks of Measurement Specialties revenue. Please turn to page six. Our industrial business performed very well in fiscal 2014. Revenue of $3.3 billion was up 6.6% and 5% organically. Adjusted operating margins increased 80 basis points to 14.7%. We had strong performance in Asia and the U.S., more than offsetting a relatively flat European market.

In Q4, revenue was up 10% due to strong organic growth of 6%, coupled with the acquisition of SEACON in our Oil & Gas business. Within this segment, commercial Aerospace, Oil & Gas, and Industrial Equipment grew mid-single digits in the quarter and the full year. Our robust organic product pipeline, coupled with the Deutsch and SEACON acquisitions, has positioned us very well in these attractive markets, which we believe have strong underlying secular trends that should provide attractive growth for years to come. The Industrial Equipment market is growing again, and our Industrial Equipment business has exhibited strong growth over the past 5 quarters, benefiting from our increased focus on factory automation markets, as well as a strong rail market in China. Our Energy business grew 2% in the year with strength in Asia and an improving U.S. environment, being offset by a weak European market.

Overall, this was a very good year for the Industrial Solutions segment, and we expect 2015 to be a good year as well due to our strong position in these harsh environment markets. Please turn to page seven. In Q4, sales in the networks segment were down 3% versus the prior year due to declines in our SubCom business. Adjusted operating margins of 9% were down slightly from last year due to losses in SubCom. SubCom did grow 65% sequentially, and we are confident the business is now moving into a growth cycle. We now have three programs that have come into force. The AAE-1 project, which connects Asia, Africa, and Europe, was announced in April. Last quarter, we announced the Hibernia project, which will connect New York and London.

And then earlier this month, you should have seen an announcement regarding Project Monet, which is a program involving Google that connects Latin America with the U.S. On a combined basis, these projects are worth over $900 million over the next 2 to 3 years. And with that, we now expect SubCom revenues to grow approximately $300 million in 2015 based upon these programs. So, in a nutshell, the SubCom business is turning from a headwind into a tailwind in 2015. Our Broadband Network Solutions business, consisting of Telecom and Enterprise, was roughly flat in the quarter. We did see some project delays in the U.S., and that was partially offset by continued growth in our data center and the data center market. For the full year 2014, BNS delivered organic sales growth of 3% and increased profitability.

So it was a good, steady year of steady progress in our business in these markets. Our Data Comm business was down slightly in Q4 due to a weak market in Japan. In Q1, we expect total Network Solutions revenues to be up low single digits versus a prior year, as SubCom growth offsets slightly lower spending in the U.S. broadband market. For the full year, we expect roughly 10% growth in Network Solutions, primarily due to the SubCom strength. And we also expect to deliver significant improvement in operating margins driven by these volume increases and continued productivity improvements. Please turn to slide eight. Performance in our Consumer business was in line with our expectations in Q4. Revenue was down slightly. We did see continued strength in our market-leading appliance businesses, and this was offset by lower revenue in our Consumer Devices business.

For the full year of 2014, organic revenue declined about 1%, as similar to Q4 devices decline offset appliance growth. Adjusted operating margin exceeded 10% for the second consecutive year in this segment. For fiscal 2015, we expect this segment to deliver low single-digit organic growth and continued improvement in operating margins. We expect another very good year in our appliance business and stable performance in Consumer Devices. Our devices strategy continues to be a selective one. Now, let me turn it over to Bob. He's going to cover the financials in more detail.

Robert Hau (CFO)

Thanks, Tom, and good morning, everyone. Let me discuss earnings, which starts on slide nine. Adjusted operating income was $571 million, up 6% versus the prior year.

GAAP operating income was $521 million and included $17 million of restructuring and other charges, most of which were in the network segment, and $33 million of acquisition-related charges in the quarter. Full-year restructuring and other charges were $59 million. Adjusted operating margin was 16%, up 30 basis points from Q4 last year. The improvement versus the prior year is driven by improved manufacturing productivity across the company and volume leverage in the Transportation and Industrial segments. Adjusted EPS were $1.02, and GAAP EPS were $1.60 for the quarter. GAAP EPS included the acquisition-related charges of $0.08, restructuring and other charges of $0.02, and a tax benefit of $0.68. The tax benefit primarily stems from the increased ability to utilize U.S. net operating losses based on forecasted future taxable income and the integration of SEACON.

For the full year 2015, I expect approximately $50 million-$75 million of restructuring and other charges, reflecting $0.09 at the midpoint, roughly flat versus last year. We expect roughly $0.23 of charges associated with the recent acquisitions, which we more than offset by reserve reversals from favorable tax settlement of non-intercompany debt pre-separation tax liabilities. Turning to slide 10, our adjusted gross margin for the quarter was 33.6%. This is roughly flat versus the prior year and up 50 basis points excluding SubCom. Total operating expenses were $631 million in the quarter, with SG&A increasing versus the prior year to support growth initiatives, but declining as a percentage of sales year over year. On the right side of the slide, net interest expense was $31 million in the fourth quarter, and I expect $31 million of expense in the first quarter of 2015.

Adjusted other income, which primarily relates to our tax sharing agreement, was $6 million. In the first quarter, I expect other income of about $8 million. The GAAP income tax rate of minus 34% was driven by the one-time gain previously mentioned. The adjusted effective tax rate was 22.3%, and I expect full-year adjusted effective tax rate of approximately 24% for 2015. Turning to slide 11, I'll discuss our balance sheet and free cash flow. Cash flow from continuing operations was $754 million, and our free cash flow in the quarter was $661 million. Gross capital expenditures were roughly flat year-over-year. However, we did see a decline in net capital spending to $93 million. During the quarter, we sold an underutilized asset generating approximately $100 million of cash. I expect capital spending rate to be approximately 5% of sales in 2015.

Working capital was in line with our expectations, with receivable days outstanding at 61 days, inventory days on hand at 65 days, and payable days outstanding 53 days. Now, let me discuss the sources and uses of cash outside of Free Cash Flow shown on the right side of the slide. We began the quarter with $1.6 billion of cash and increased this to $2.5 billion at the end of the quarter in anticipation of completing the Measurement acquisition, which closed on October 9th. During the quarter, we utilized $504 million to support acquisitions, primarily SEACON. We also returned a total of $283 million to shareholders. We paid dividends of $119 million and repurchased 2.6 million shares for $164 million. Outstanding debt grew to $3.9 billion at the end of the quarter, reflecting the added debt for the Measurement Specialties acquisition. Now, I'll turn it back to Tom.

Tom Lynch (CEO)

Thanks, Bob.

Please turn to slide 12, and I'll cover our outlook. Although the environment is a bit more uncertain than 90 days ago, we do expect to deliver another solid quarter in Q1 with revenue of $3.46 billion-$3.56 billion, up 4%-7% year-over-year and in line with our normal seasonal patterns. We expect adjusted EPS of $0.88-$0.92, which is an increase of 7%-12% year-over-year. Our Q1 outlook does include a headwind from currency exchange rates, which are negatively affecting our guidance by approximately $100 million in revenue and $0.03-$0.04 per share in EPS versus the prior year. In Q1, we expect 10% growth in Transportation, including contributions from Measurement Specialties. We are assuming global auto production to be up 1%-2%, which is what the industry is guiding to versus the prior year.

We expect Industrial Solutions to be up mid-single digits versus last year, with solid growth in the U.S. and Asia more than offsetting softness in Europe. We expect double-digit growth in the Aerospace and Oil & Gas businesses driven by strong organic growth and revenue contribution from SEACON. Network Solutions is expected to be up low single digits, led by growth in our SubCom business, as we discussed before, with three programs now in force. We expect our Consumer Solutions business to be down mid-single digits as growth in Appliances more than offset our continued slower device business. Now, please turn to slide 13. Our strong performance across the company in 2014 positions us for another year of solid sales, profit, and EPS growth as we enter fiscal 2015.

We have a number of catalysts for growth, including the secular growth of electronic content, the SubCom recovery, the tremendous design win momentum across our harsh environment businesses, and the contributions from acquisitions in sensors and Oil & Gas. We expect momentum in these areas to more than offset some of the weakness we're seeing in Europe and China and headwinds from currency exchange rates. For the full year, we expect revenue of $14.7 billion-$15.3 billion, up 8% versus the prior year and reflecting 6% organic growth. We expect an adjusted earnings per share of $4.05-$4.35 and an increase of 11% at midpoint. Our revenue and EPS guidance does include an approximate $400 million revenue and $0.15 a share EPS headwind due to the currency exchange rates versus a prior year that we mentioned earlier.

In Transportation, based on 2.5%-3% vehicle production growth, we expect mid-single digit or better organic revenue growth and double-digit growth, including contributions from Measurement Specialties. We expect Industrial Solutions to be up mid-single digits versus last year on an organic and actual basis. The benefits of the SEACON acquisition are offsetting the negative impact of currency. Organically, we expect strong growth in our Aerospace and Oil & Gas businesses, single-digit growth in Industrial Equipment, and continued low single-digit growth in Energy, which has most of its business in Europe. Network Solutions is expected to be up approximately 10% this year, with most of the growth being driven by the strength in the SubCom business.

We expect our Consumer Solutions business to be about flat versus last year with the same trends we've been seeing: strong performance in Appliances, which we expect in the low to mid-single digits, and offset by slight declines in Consumer Devices. We have covered a lot of ground today, as always, and I'll make a few points before we move to Q&A. Despite the somewhat uncertain times we're in and the indicators are, as you all know, are bouncing around quite a bit, I'd say it feels like they're generally positive more than negative recently, but there is uncertainty out there. We feel the most important thing is that the underlying secular trends driving our business are very strong. In this increasingly connected world, TE is really well positioned with our tremendous range of connectivity and sensor solutions that are so critical to that connected world.

We also continue to strengthen the company's leadership in harsh application markets, as we've said. In 2015, this will account for approximately 75% of our total revenue. We've made key acquisitions to broaden our TAM and give us more opportunity for growth. Just as important as any of this, we continue to improve our execution. It's driven by our TEOA program, and you can see it in our operating margins exceeding 15%, our net margins exceeding 11%, and in Q4, we're just under 12%. Our cash flow meeting or exceeding 10% of revenue for the seventh consecutive year. So I feel like we have the operating side of this business moving very well. We continue to have a balanced capital allocation program and expect to return about two-thirds of free cash flow to shareholders in the form of dividends and share repurchase.

So a very good year and looking for another solid year in 2015. So, Operator, let's now open it up for questions.

Operator (participant)

Of course. And ladies and gentlemen from the phone lines, if there are any questions at this time, please press star followed by the one on your touch-tone phone. You'll hear a tone indicating you've been placed in queue, and all questions will be polled in the order they are received. Once again, if there are any questions at this time, please press star followed by the one on your touch-tone phone. And our first question today comes from the line of Amit Daryanani from RBC Capital Markets. Please go ahead.

Amit Daryanani (Analyst)

Thanks, Bob. Good morning, guys. I have a question and a follow-up. I guess, Tom, maybe to start with the networking segment, you talked about how the funded backlog has gotten up to about $900 million.

Could you talk about what is your total backlog number today? Because I'm assuming it's much bigger than $900 million. And you're talking about a cycle starting to re-accelerate. The last time we were in an upcycle, revenues actually peaked, I think, at $320 million-$330 million in revenues. So I'm curious, what's the backlog broadly, and do you think that level of peak could be feasible over the next two years, maybe?

Tom Lynch (CEO)

Sure, Amit. The $900 million really relates to those three big projects. We have awards that aren't in backlog well above that. And as you know, as we've said before, we don't really put it into backlog until we have a down payment.

So these three, we also have a base level of maintenance business that goes on year in and year out, and it's more like a regular business where you get orders quarterly to do work for our customers. So this $900 million is really what's going to lift us from the level of what we were at last year in the $250 million-$300 million range to the kind of the $550 million-$600 million range. We think it bodes very well for how the cycle, the second part of your question, typically go. We have seen a pickup in bidding, so we would expect that this is really the indication of the cycle picking up. And yeah, it did peak at over $1 billion several years ago.

When we model everything and the demands on bandwidth, the age of certain networks under the sea, the desire for more and more redundancy, it all says that this should be another very strong cycle.

Amit Daryanani (Analyst)

Perfect. And I guess just as a follow-up, Bob, if you could maybe just talk about the Measurement Specialties acquisition now. You have a few other things moving around in the model, so it's unclear to me. But maybe just talk about fiscal 2015. In the past, you talked about $0.04-$0.06 accretion from Measurement. My math shows it's probably a $600 million+ revenue, $0.10 accretion based on what you guys are talking about right now. So could you just maybe confirm that?

And also just talk about what's the December quarter impact for Measurement and if there are one-time charges like inventory adjustments and so on that you intend to flow through the model for Measurement Specialties, I guess.

Robert Hau (CFO)

Sure, Amit. First off, your numbers are essentially on. What we described when we announced the acquisition of Measurement was the business was, call it a $550 million revenue business, and we anticipated generating mid-single digit EPS, so $0.04-$0.06. With our guidance here in 2015, that revenue is about $600 million. Obviously, there's some growth in the market. We're seeing good content growth across the space. And from an EPS standpoint, it's probably about $0.10, a little bit better than we initially guided. Part of that is better performance. We've now been doing some due diligence and pre-integration work.

We've now owned it for a couple of weeks, and we're seeing slightly better performance coming into 2015, as well as there is some restructuring. When we gave that $0.04-$0.06, we indicated that did include some modest restructuring. There's not a big restructuring play with the acquisition, but there's some modest restructuring, and that will be dialed out. We're continuing the $50-$75 million restructuring that I talked about that are in GAAP earnings but not adjusted earnings. It does include the integration or the restructuring that we'd have associated with Measurement. In terms of impact to the December quarter, if you take those numbers and roughly divide by four, there is some seasonality into that, but you won't be too far off.

In terms of what's baked into the numbers, the near-term amortization of things like the inventory step-up and the backlog step-up will be excluded from earnings and included in GAAP but not included in adjusted earnings.

Sujal Shah (Head of Investor Relations)

Okay. Thank you, Amit. Can we have the next question, please?

Operator (participant)

We do have a question from the line of Mike Wood from Macquarie. Please go ahead.

Michael Wood (Analyst)

Hi. Thank you. You gave a lot of color on the SubCom sales outlook. Can you just describe if there's anything unusual in the profit recognition? I know you discussed this last quarter on the call, how the accounting may differ there and how profit margins might look throughout the year.

Tom Lynch (CEO)

Sure. I think it's really, Mike, thank you for the question. It's what we said last time that the business really goes in phases, especially when you're ramping up or ramping down.

So ramping up in the beginning, you're doing a lot of planning. We've actually doubled the number of people at our New Hampshire factory where we build the cable for the projects that are on this side of the world. And so you typically have lower profitability early on. We do a percentage of completion recognition, but just the nature of the business, when you're early in the project and have 98% of it to complete, where we've always been is you're a little more conservative in the early parts of the project because you don't know what the unexpected they're going to be. No change in how we do it. We would expect that as we ramp to the kind of $500 million range, it's mid-single digit type of OI margins from where we are today.

And then when we get back to the normal range, which is more than 650-750, that's when you see it being closer to the company average. So we actually expect the same patterns as last time.

Michael Wood (Analyst)

Thank you. And then in terms of a follow-up on Network Solutions SubCom, you're guiding to relatively flat for next year. Can you give some more color on that, maybe by region? I understand the U.S. telco CapEx backdrop is challenging, but I know you're increasingly exposed to the higher growth fiber rollout.

Tom Lynch (CEO)

Sure. I expect it to be similar to this year. I'm hopeful that it'll be better than that because I do believe in all the modeling we do that there's pent-up demand, but we have been off on that in our, I've been off on that in our estimates of the last few years.

The nice thing is that the fiber-copper crossover has happened, and so copper is a much smaller part of the total build-out, and fiber continues to grow at double-digit, and that's really our sweet spot. It tends to be much more project-oriented business. This past year, we saw strength in Europe, a couple of significant builds. We saw mixed in the U.S. I expect the U.S. to pick up in the second half because the newcomers into the U.S. market are starting to really build momentum, and we are doing very, very well with them. It is a little bit of a mixed bag, as you say, but I think we're positioned well. We're cost-efficient in the business. It is a double-digit margin business that we've improved the last couple of years.

And we've really structured it to be a very low-growth business but be able to take advantage and therefore get the higher flow-throughs on the margin as we grow above low single digits. Does that get at your question?

Michael Wood (Analyst)

Yes, it does. Thank you.

Sujal Shah (Head of Investor Relations)

Okay. Thank you, Matt. We have the next question, please.

Operator (participant)

We do have a question from the line of Craig Hettenbach with Morgan Stanley. Please go ahead.

Craig Hettenbach (Analyst)

Yes. Thanks. Question on MEAS, Tom. If you look at that company had been fairly acquisitive small deals prior to you guys taking them out, can you just talk about kind of the pipeline of M&A potential in that space? And then also what MEAS does for TE in terms of your sales approach and being more strategic to OEM customers?

Tom Lynch (CEO)

Sure.

I'll answer the second part first because that's really the strategic theory behind the acquisition that we have all these resources at these customers. And not unusual in your smaller company, you have to be much more selective in who you go after. With us, we're in with all of them early in the architecture. So we're only two weeks officially into it, but our team, I know, is even more excited than they were three or four months ago because we just see more and more of the depth of MEAS' capabilities and products. And I think we feel very comfortable with the revenue synergies, and we're getting more comfortable that over time it's going to probably be a little better than we thought. So that idea of our scale with the customer and resources in front of the customer with their product line is bearing out.

It's still early. We have to deliver and all that, and nobody's taking anything for granted. The teams are coming together very nicely. I think that's as important as anything else. There seems to be real chemistry, and the MEAS team is taking significant leadership roles in the business. The second part of the acquisition pipeline, yeah, I mean, we're still, our number one priority is to make MEAS and AST successful, get them integrated, no question about it. At the same time, where we can see opportunities that make sense to round out what we have, we're going to be in those conversations. But our team knows that the number one priority is to integrate this and make this one team and very successful as we laid out when we announced the acquisition.

And that is why we went with a company like MEAS that has a broad range so that we could. We didn't have to. They did the roll-up, and we didn't want to have to get into that kind of strategy in order to become a major sensor player. So don't be surprised as we add on to the portfolio with sensors, but number one priority is clearly to execute what we have now.

Craig Hettenbach (Analyst)

Okay. Very clear. Thanks. As a follow-up, you mentioned some near-term uncertainty in the environment. So granted, it looks like you have some growth drivers to kind of help you get through. But on the environment, any other color you can add in terms of just what you're hearing from customers, how they're managing inventory, and kind of how business trended September into October here?

Tom Lynch (CEO)

Well, yeah, sure.

As you can imagine, we're always in front of the customer, but I have been talking to a lot more customers than normal lately. And part of that is just around, "What are you seeing out there?" And that's the first question they ask me too. So I don't think anybody has any particular advantage. It's mixed. I think we've seen, we saw late in the fourth quarter and early in the first quarter, the order rate dip, but then it's picked up the last couple of weeks. How much the big dip in the stock market affected everybody's psyche? That seemed to make everybody, including us, more nervous. Is that going to have people get more cautious? But I'd say there's some positive indicators. That doesn't mean there isn't uncertainty, but European car registrations are still positive, right?

I think we would have been worried they were going to dip into the negative. So that's a really good thing. The consumer confidence in the U.S. is up. So that's a positive thing. It's always hard to call China, but we're coming off a double-digit growth in China again. So I'd say it feels a little more uncertain than when I was talking to you 90 days ago, but you can't put your finger on it. It's not as if, "Wow, something has really dropped off." And in our biggest business, Transportation, steady as she goes with the order rate. So that's kind of it. I mean, I think we expect, no question, that our businesses with our customers in Europe will be a little bit slower in 2015 than 2014. I mean, they were pretty robust in 2014 and probably a little bit slower in China.

But it's slower growth. It's not decline. And we think that'll be offset with a little bit better in the US and then these other tailwinds we have, like the acquisitions and SubCom. So it feels like a pretty, obviously, we think it's a balanced look right now. It's always hard to guide next year at this time of the year when we're only in October and nobody else is out there really talking about it officially. But that's how we see it.

Craig Hettenbach (Analyst)

Got it. Thank you.

Sujal Shah (Head of Investor Relations)

All right. Thank you, Craig. We have the next question, please.

Operator (participant)

Our next question comes from the line of Amitabh Passi from UBS. Please go ahead.

Amitabh Passi (Analyst)

Hi. Thank you. Tom, I had a question and a follow-up. I wanted to go back to Network Solutions.

If I look at the segment, I think ex-SubCom, we have peak sales in fiscal 2011 at about $3.1 billion. Your guidance for fiscal 2015 implies $2.6 billion. So we're still down about 15%. Just wondering, is there anything else you need to do in the segment in terms of right-sizing the cost structure? Do you feel the rest of the segment is fairly optimal? Because it still seems like structurally we're well below where we were four years ago.

Tom Lynch (CEO)

Yeah. A couple of points there. As Bob mentioned, I think Bob mentioned we did and he probably will. We have been doing that. So both with since the revenue hasn't materialized as we expected, we've certainly been doing a significant amount of that, and a large portion of our restructuring in the past year was geared at that segment. It's really a few things.

I feel like in the broadband space, we're very well positioned. We have an excellent product line. We're winning a higher rate of fiber awards than we did three or four years ago, and it really is the benefit of the ADC acquisition. But no question, the market has been a lot softer than I thought. So you have a little bit of that, and we have taken a fair amount of cost out in response to that. And we're evaluating. But right now, I think we feel like we're close to being at the right place from a cost structure because I am hesitant, having lived through the Automotive downturn when we decided we're going to invest and certainly not cut, that it helped us. Now, I know this is a different market.

It's more volatile, and it's not an Automotive market, but we also don't want to cut into muscle yet. That's how I feel about the business. I'm getting more optimistic about the outlook. The Data Comm business is really a bigger issue for us because we always trailed in sort of this mid-speed communication product line, and we made the decision many years ago to go to high-speed and sort of do the leapfrog strategy. We have a pretty good 25 gig plus product range in fiber and copper. It's adapting, being adopted, I should say, very slowly in the market given all the change that's going on in the communications equipment market. So a little bit of a double whammy on us, and we're still investing, and I'm not ready to back off the investment in high-speed because I think that would be short-sighted at this point.

So we're still investing, and the high-speed market hasn't really materialized. In the mid-speed where we're weak, we're not benefiting there. So Data Comm is a business that's a mid-single-digit kind of margin business. SubCom will get back to its normal over-the-cycle solid double-digit, and that's strictly cycle because we're executing well there. And BNS, which is $2 billion of that Network Solutions segment for us, total revenue is $2 billion. That's low double-digits, which is up two years in a row. So I do feel like for sure the cost actions we're taking are paying off, and we're poised. We have a great product line as things pick up a little bit to really capitalize on it.

Amitabh Passi (Analyst)

Excellent. And just a quick follow-up for me, Tom, just on the subsea business.

As we move to higher speed rates of 100 gig, 200 gig, 400 gig, do you feel you guys have the active electronics portfolio fairly well established, or is there scope there for partnership and maybe even M&A?

Tom Lynch (CEO)

I feel like we have it very well established. I mean, we have led in the long-haul fiber transmission since it started. This was 15, 18 years ago, really an AT&T-type Bell Labs business. That's the heritage and DNA we still have in that business. It's an extraordinary group of talented engineers in North Jersey. So they are constantly driving the distances and the cost per bit down and doing a lot of other things to enable our customers to have dedicated links within the cables, providing a tremendous amount of flexibility. So I do feel very confident about that.

There's no guarantees, obviously, but that's another one where even with the down cycle, and this team knows from being in it from the very beginning, you have to keep pushing the technology through the down cycle, and we've done that. So I feel good about our position there.

Amitabh Passi (Analyst)

Thanks a lot, guys. Thank you.

Sujal Shah (Head of Investor Relations)

All right. Thank you, Amitabh. Can we have the next question, please?

Operator (participant)

Our next question comes from the line of Matt Sheerin from Stifel. Please go ahead.

Matt Sheerin (Analyst)

Yes, thanks. Good morning. Just wanted to ask a question to clarify the restructuring charges Bob, you talked about for FY 2015. How much of that is related to acquisitions versus other activities?

Robert Hau (CFO)

What we described was $50 million-$75 million of expenses over the year, roughly in line at the midpoint of that with what we spent in 2014.

What we've said is really an ongoing level of restructuring. Obviously, we had been investing significantly higher than that in prior years, but we think this business and the way the markets run, that $50 million-$75 million of spending is kind of a run rate. And roughly 15% of that or so is associated with acquisitions. Again, none of our larger acquisitions, SEACON, Measurement, and AST, which is a smaller one for that matter, not a lot of significant cost takeout. It's more of adding to our portfolio and getting the revenue synergies. But there is a bit of that coming through in 2015.

Matt Sheerin (Analyst)

And so for the business then, is that still predominantly focused on the networking area where you've been focusing your restructuring efforts, or is it just tweaking across the business?

Robert Hau (CFO)

It's tweaking across the business.

If you look at the spending that we did in 2014, we spent about $60 million. Almost 60% of that was in networks alone. As you look at our businesses, those that have below company average margins and below our margin expectations, networks and consumers, obviously, those are ones that we're looking more closely at for cost opportunities.

Matt Sheerin (Analyst)

Okay. That's great. Just another question on Measurement Specialties, if I can, just regarding, Tom, the cross-selling opportunities. I know the big opportunities to cross-sell that technology into passenger vehicles. What kind of time horizon or opportunity are we talking about in terms of the selling cycles?

Tom Lynch (CEO)

I would say, on average, it's going to be two to three years. There's some opportunities that will be in the 2-year range. The really sweet opportunities are more in the three-year range just because that's just a typical design-in cycle.

So in our model, when we bought them, we did not have any significant revenue from Automotive until year three. We also have across the portfolio, and it's primarily in the harsh businesses, but opportunities in appliance, opportunities in Industrial Equipment, and Industrial Transportation, much longer cycle in AD&M. So they're not really baked into sort of the model for the acquisition. But what's really potent about having a full range of sensors too, not just one or two technologies, but having a full range, having thin gauge wire, all the connectivity that we have, our material science-based businesses that connect and protect things. When we go into a customer now, we can really offer some creative solutions on how to solve problems.

The next generation of Appliances, how do you substantially simplify the wiring harness, which if you look inside of Appliances, I mean, it's kind of mind-numbing, the complexity of it, which makes repairs very complicated. So there's just so many opportunities that—and what we're doing is we're being very deliberate with it because we don't want to get it out of focus. So it's prioritizing one at a time, getting success. And that's what we had baked into the acquisition. But we're very excited because it just opens up so much more of the customer's footprint, so to speak, or their real estate, so to speak, to us.

Matt Sheerin (Analyst)

That's very helpful. Thanks a lot.

Sujal Shah (Head of Investor Relations)

All right. Thank you, Matt. We have the next question, please.

Operator (participant)

Our next question comes from the line of Jim Suva with Citi. Please go ahead.

Jim Suva (Analyst)

Thank you very much. And congratulations, guys.

I just wanted to clarify on your Q1 guidance for the Transportation sector. If I back out the Measurement acquisition, are we looking at revenues kind of being flat to maybe up 1% year-over-year? And if so, that seems like a below-market, or kind of what's going on there? Is my math incorrect?

Tom Lynch (CEO)

I know it's murky. We don't have Measurement for the full quarter, but what we have in there for organic growth is right around 5% based on, it's in that 4.5%-5.5% range based on a two to three, I should say 1%-2% production range. And right now, as I mentioned earlier, the order rate in that business is very solid. So no, we wouldn't expect our, we're not seeing anything that would say that we're going to drift down into low single-digit organic growth.

Jim Suva (Analyst)

Great.

And then with the gradual adoptions of more hybrid technology, more sensors, electronics in cars, and electronic cars, is there a chance that the typical content range starts to increase to the higher end or even above that higher end of the range, or is there other obsolescence that's going on that will just keep it within that normal historical range? I think historically, connectors have grown what, kind of 6%-8% less at 2% ASP decline, is that the way to think of it?

Tom Lynch (CEO)

It's in the ballpark. I definitely think there's more, let's say there's more likelihood of it moving to the higher end of the range than the lower end of the range. I mean, that's clearly what we're seeing. And we're at every OEM in virtually every electronic application.

That doesn't really. Today, we have plus or minus in the ballpark of $60 million of our content, connectivity-related content, $60, I mean, per car, roughly. We have $2 of sensor content. So about what we would estimate is somewhere in the neighborhood of 1% of the sensor market. And now we're going to bring in a full range of sensors and just the constant march of more electronics. I mean, every time you try to move the emission standards up, the engine control units get more sophisticated. The semiconductors have more pins. And the kind of connectors that go with them are very sophisticated and more valuable. So it's almost. I agree with you. I would continue to see that move up. And that's certainly our strategic plan assumes that, and that's why we continue to invest aggressively in engineering in that business and in M&A.

Robert Hau (CFO)

Hey, Jim. It's Bob.

Just, I think I heard you say 6%-8% content growth plus 1%-2% price. It's more like 4%-6% content is what we've traditionally seen. But as Tom points out, with some of the content growth and the growth in electronics and sensors, we'll see it at the upper end of that 4%-6% range.

Jim Suva (Analyst)

Great. Thanks very much, gentlemen.

Sujal Shah (Head of Investor Relations)

All right. Thank you, Jim. We have the next question, please.

Operator (participant)

And we do have a question from the line of Shawn Harrison with Longbow Research. Please go ahead.

Shawn Harrison (Analyst)

Hi. Morning, everyone. I wanted to get, I guess, looking it out over the next, say, 24-36 months with Measurement Specialties in terms of just profitability. The implication is maybe a mid-teens EBIT margin for this year based upon the updated guidance.

Where do you think you can get that within the next 12-24 months? Should we be at mid-20s EBIT margin, or is that too aggressive?

Tom Lynch (CEO)

Timeframe again, Sean?

Shawn Harrison (Analyst)

I would say, let's say within 24 months. Run rate exiting two years from now.

Tom Lynch (CEO)

EBITDA range?

Shawn Harrison (Analyst)

EBIT, EBITDA, that's the other one. Fair.

Tom Lynch (CEO)

I think of it this way. We would expect to improve it somewhere in the neighborhood of 200 basis points a year, 250 basis points. But the volume leverage being the biggest thing because it's not so much a cost play as we said. And as we bring their products into the more attractive markets, which are the harsh environment markets. So there'll be steady margin improvement in the next 24 months. But as we get designed into auto and into these other more harsh environments, that's when I would expect it to accelerate.

Shawn Harrison (Analyst)

And this year, the EBITDA margin would actually be upper teens then? Is that the correct number to use?

Tom Lynch (CEO)

Mid to upper teens is about right.

Shawn Harrison (Analyst)

Okay. Then I just want to focus in on the Consumer Solutions business. Appliances, you're doing fine. Consumer Devices itself, we know the struggle. But I mean, what is the outlook if we look over the next 12-24 months within that business? What can you either do to improve profitability, or do you at some point in time walk away from the business given the challenges you've faced so far?

Tom Lynch (CEO)

Sure. The appliance business we're doing very well in. That is one of our best businesses. And we feel very confident we grew faster than the market.

I was just listening to one of our big customers talk yesterday and their growth rates by market, and we're exceeding them in every market. So we're getting designed in around the world at a faster rate than ever before. It's an excellent business. It's a very harsh environment business in most Appliances. In devices, think of us as retrenching. I can't imagine us exiting it because the products that we develop there, they do find their way into other applications outside of the consumer applications. So in that business, that's where we get miniaturization. The smallest products we design, that's where you usually have your initial breakthroughs on how you optimize the metals that you use, where automation often comes in first, kind of breakthrough automation. So the way I think of it is the core connectivity part of the business is strategic to the company.

It would be a flank that I would not leave open given that it's the pure devices part of the business is 5% of the company type level. I think our core connector business in there is a decent business. It's the products around that that they're not quite where we need them to be yet. So that's a business, as Bob mentioned, we've taken cost out of a business that we continue to be very selective, much more selective in what we bid on than we were two or three years ago. So don't be surprised if it gets smaller with better margins before it gets larger.

Shawn Harrison (Analyst)

Okay. Is the business profitable currently, the devices?

Tom Lynch (CEO)

Yes, it is.

Shawn Harrison (Analyst)

Okay. Perfect. Thanks, Tom.

Sujal Shah (Head of Investor Relations)

Thank you. Hey, thank you, Shawn. Can we have the next question, please?

Operator (participant)

We do have a question for the line of William Stein with SunTrust.

William Stein (Analyst)

Please go ahead. Great. Thank you for taking my question. Good morning. I'm hoping you can talk about the book-to-bill specifically. Tom, earlier you mentioned that orders took a dip in the quarter. I think you said they had recovered book-to-bills below 1 overall and below 1 ex-SubCom in most of the segments as well. Is that sort of typical performance? Or if you contemplate that, including the more recent changes, let's say, into the beginning of the current quarter, do those numbers look better? Is it more in line with typical? How should we think about that?

Tom Lynch (CEO)

Sure. I would say when you look at Q4, kind of typical book-to-bill for Q4, but a little mix in there, probably a little better in Transportation, a little lighter in Industrial.

It's really those are the businesses where the book-to-bill, I think, is most indicative in our networks and SubCom business. It doesn't really mean that much because you can get releases against a big project. And so a book-to-bill at a moment in time doesn't mean that much. The book-to-bill is positive so far in the first quarter. It's too early to read into that. But I'd say the last couple of weeks' orders look more like what we'd expect in a solid economy. But that's got to last. And as I said earlier, even when things are less uncertain, I'm always a little more nervous at this time in our quarter because we come into the holidays and our Industrial and Automotive businesses are sizable in Europe. And we've seen occasionally over time unpredictability in the length of holidays.

So I don't think it's anything unusual, but it's just this is the hardest time of the year for us to call. But I'd say book-to-bill ratios aren't really different from what we would expect. And that's why we are guiding the way we're guiding.

William Stein (Analyst)

That's helpful. Maybe the next one's for Bob. I'm wondering if you can comment on FX. It seems to explain about all the difference between your guidance and what was, I think, broadly expected if you include Measurement. But I thought that you had been hedging FX. I'm a little surprised that it's having such a near-term effect.

Robert Hau (CFO)

Yeah. Well, where we are, in fact, naturally hedged is on the transactional side of FX. So because we are very global in both our factory footprint, our sales footprint, and our customer footprint, we buy and sell in typically the same currency.

So we're largely naturally hedged. The FX impact that we're talking about that impacted us in Q4 and now forecasted to impact us into 2015 is the translational side. We do not hedge translational. I mean, it's an accounting issue. It's not a free cash flow issue. And so the impact that we've talked about, the $400 million in revenue and the $0.15 on a full-year basis is what we're seeing given the pretty significant strength in the dollar against essentially all currencies, but particularly for us, euro, yen, and RMB are the big drivers for us.

William Stein (Analyst)

Great. Thank you.

Sujal Shah (Head of Investor Relations)

Thank you, Will. Can we have the next question, please?

Operator (participant)

We do have a question for the line of Mark Delaney with Goldman Sachs. Please go ahead.

Mark Delaney (Analyst)

Good morning. Thanks very much for taking the question.

Tom Lynch (CEO)

Good morning, Mark.

Robert Hau (CFO)

Good morning, Mark.

Tom Lynch (CEO)

I know, Tom, you already talked about some of the sales opportunity with Measurement and the ability to cross out a broader range of products to some of the customers. I'm hoping you can also just talk a little bit about the roadmap for products going forward. Is there any thought about doing integrated products where you'd be selling a full solution of a sensor with a connector, maybe even some software on it, and moving further up the value chain?

Sure. I would say, again, since we just completed the acquisition and while we did pre-integration planning and all those kind of things, you can't really get inside until the deal closed. But having said that, part of our strategic objective is to be more than just a sensor seller, more than just, "Well, we'll now carry the we're already carrying a bag with connectors into the customer.

Now we'll put sensors in the bag." That's the earliest. So the first synergy is through the channel. The second synergy is, "Hey, we just have more access to customers," as I described earlier. But we do believe, absolutely, with customers wanting fewer suppliers to simplify their world and suppliers who can provide more so that they can get more value, which in some cases it's, "Hey, I want a solution that gives me less cost," or, "I want a solution that gives me less weight or less footprint." The more integration you can do, the better we will be. So I would say in the first year, think of it as experiments we'll be doing, right? We'll be picking a couple of customers. It's not going to be revenue in the near term, but seeing what's practical, what's doable, what's practical.

But we already see from modules we do in some of our businesses when we can integrate wire connectors and build a box for the customer that's smaller than if they had to do it themselves, there's value in that. So we definitely see that as a longer-term strategic objective. Now we have to prove the theory.

Mark Delaney (Analyst)

Thank you very much.

Tom Lynch (CEO)

You're welcome. Thank you.

Sujal Shah (Head of Investor Relations)

Thank you, Mark. Can we have the next question, please?

Operator (participant)

We do have a question for the line of Wamsi Mohan from Bank of America. Please go ahead.

Wamsi Mohan (Analyst)

Yes. Thank you. Good morning. Tom, your comments indicate better U.S. outlook versus Europe and China in 2015.

But when I look at the fourth quarter results on an organic basis that you just reported, it appears that the largest incremental year-on-year contribution actually came from APAC, followed by EMEA, and then U.S. was only $10 million incremental. So what are you seeing that would explain this reversal and how much of it is potentially SubCom? And I have a follow-up.

Tom Lynch (CEO)

What I would say on that, Wamsi, is it's all relative. What I mean, I'm talking from a relative perspective. So for us, Asia grew 7%-8% for the year last year. China over 11%. I think that's going to be down a little bit. Not a lot. For us, Europe grew for the year 5%-ish. I think that's going to be down a little bit.

Again, it's still going to grow because of our strength with the German automakers and the amount that they export, etc. I think in the U.S., we'll expect to see the appliance business continue to be solid. The Energy business, which really began to pick up in the second half of the year for us in the U.S., we see that trend continuing as there's pent-up maintenance and expansion there that we're benefiting from. I think auto will probably be. It's hard to call flat. It was very strong last year, but slightly down. So that's really how I kind of see it. It's not that Asia will continue to grow, have a higher growth rate than the U.S. because of the demographics over there. It's just relative change in growth year-over-year. That's really what I meant. I don't know if that gets at your question.

Wamsi Mohan (Analyst)

Yeah. Yeah. No.

Thanks. That's helpful, Tom. And Bob, can you maybe address what the hedge levels for copper and gold are and what sort of margin benefit, if any, you're expecting in your guidance from metals pricing? Thanks.

Robert Hau (CFO)

Yeah. So we hedge our copper, silver, and gold on a monthly basis. So we look at our demand 18 months out. We take a position every month. So for the 2015 fiscal year, we'll probably call it 60%-65% hedged for our overall demand. Tailwind, we had a really nice tailwind in 2014. It's a little bit less than that in 2015. Call it right now about $20-$30 million of OI tailwind on a fiscal year basis.

Wamsi Mohan (Analyst)

Okay. Great. Thank you very much.

Sujal Shah (Head of Investor Relations)

All right. Thank you, Wamsi. Can we have the next question, please?

Robert Hau (CFO)

And we do have a question for the line of Sherri Scribner with Deutsche Bank.

Please go ahead.

Sherri Scribner (Analyst)

Hi. Thanks, Tom. I just wanted to ask you about the operating margin. If you look at the guidance for fiscal 2015, it suggests operating margin somewhere in the range of 16%. And you guys have talked about 15%+. How much of that upside to margins this year is driven by the improvement in the subsea business? And what do you see as your sort of long-term operating margin at this point through the cycle? Thanks.

Tom Lynch (CEO)

Sure, Sherri. There's going to be a lift on operating margin because it was such a drag with SubCom losing money. But SubCom will still be next year below the company's average operating margin. So you do get some relative improvement, but it's still below the company average.

I think the best way to think about operating margins for the company, and now that we've really got the operations of the company tuned up and the footprint in good shape, is that if we're growing in this 5%-7% range, we don't have unusual movements in metals or exchange rates. You have kind of some natural movements, let's say, that track to inflation. Then in the 50 basis points per year range, I would expect to grow in that.

Sherri Scribner (Analyst)

Okay. Thank you.

Sujal Shah (Head of Investor Relations)

Okay. You're welcome. Thank you. Thank you. We have the next question, please.

Operator (participant)

We do have a question for the line of Steven Fox with Cross Research. Please go ahead.

Steven Fox (Analyst)

Sure. Thanks for taking my question. Just a couple of clarifications.

Tom, based on what you've said so far in the call, are you saying that SubCom lost more money in the quarter because of these program startups, or were you able to reduce the losses quarter-over-quarter? And if you could give us a hint on when it turns profitable again. And then just to be clear, what currency rates are you using in your new full-year guidance?

Tom Lynch (CEO)

Thanks, Steve. No. SubCom lost a little bit of money in the fourth quarter, less in the third quarter. And we'll start to get a little above break-even in the first quarter. But it's a really good question to help us clarify. You'll start to see the momentum in SubCom in Q2 and beyond because that's when the ships are really out there, not fully utilized, but a lot more utilized than we are today, laying the cable.

So bottomed in Q3 in terms of profitability, started to see the revenue ramp in Q4, but not a whole lot of profit, enough profit with it to substantially help the bottom line, and then beginning to get into the black in Q1 and then accelerate past there. So that's the way I'd think about SubCom. Bob, do you want to talk about FX?

Robert Hau (CFO)

Yeah. In terms of FX, we're essentially looking at the current FX rate. So call it $1.27 or so to the euro. We project that out for the balance. We don't take a position on what's going to happen in currency. So if there's additional fluctuation, good or bad, that could impact the overall business. But of course, we've had a pretty significant decline in, call it, the last 30, 60 days of improvement, strengthening of the U.S. dollar, order of magnitude 7%-8%.

That is baked into this outlook.

Steven Fox (Analyst)

Great. Thank you very much.

Tom Lynch (CEO)

Thank you, Steve.

Sujal Shah (Head of Investor Relations)

Thank you, Steven. There's no further questions. I'll just turn it back over to Tom for a couple of closing comments.

Tom Lynch (CEO)

Thanks, Joel. Thanks, everybody, for joining. Just to reiterate, really had an excellent year, I think, in 2014. And as much as the financial performance, I feel like the execution of our strategy, which is to really build strong performance in for the long, long haul, I feel we're doing that. And I think you can see that, hopefully, in how we're guiding in an uncertain 2015 with multiple levers and, importantly, going from two segments, delivering most of the momentum to now three segments in 2015 and a good portion of the consumer segment within appliance. So I feel like we're hitting on most cylinders.

It's exciting because we still have a lot of opportunity and plenty of room to improve. With that, hope everybody has a good end of the year as we go into the holiday season. I'm sure we'll be talking to you soon.Thank you.

Operator (participant)

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