TE Connectivity began fiscal 2013 with tepid first quarter sales and profitability that were in line with expectations and company guidance. TE generated $3.18 billion of sales during the first quarter, at the low end of its November outlook of $3.15 billion-$3.25 billion and about a 1% decline from the year-ago quarter.
TE began 2013 by shuffling its corporate structure and creating a new reporting segment, consumer solutions, which is made up of the consumer device and appliance products that were pulled from the communications and industrial solutions segment. Each of the other three segments–transportation solutions, industrial solutions, and network solutions–were affected by the reorganization, which could result in elevated general and administrative results in the short term as the product groups acclimate to the new arrangement.
The shuffling could make it easier to integrate Deutsch, TE’s substantial 2012 acquisition, which has materially improved the firm’s exposure to the automotive and industrial markets. On an absolute yearover- year basis, consumer solutions sales fell 4%, transportation solutions grew 3%, industrial solutions grew 2%, and network solutions fell 8%. However, without Deutsch, TE’s sales would have been down across the board.
The soft global economy has created a challenging environment that limits consumers’ discretionary spending, which could have an adverse effect on the consumer solutions and network solutions segments in particular. Still, the industrial solutions segment offers higher-margin opportunities that could benefit TE in the short term, while transportation solutions could see significant benefits from countries adopting stricter environmental standards, which is likely to continue to drive consumer adoption of hybrid cars.
Gross margins improved to 32.5% from 29.7% in the yearago quarter, but operating margins fell to 10.6% from 11.4% because of materially higher restructuring costs and administrative costs. While TE said it is aggressively pursuing long-term cost-reduction measures, integrating a company as large as Deutsch during a volatile economic climate is a significant challenge, and we expect costs to remain elevated for several more quarters.
TE expects second-quarter sales of $3.25 billion-$3.35 billion and full-year sales of $13.3 billion-$13.7 billion, driven by the transportation solutions and industrial solutions segments.
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