Sujal Shah - Vice President-Investor Relations Thomas J. Lynch - Chairman & Chief Executive Officer Terrence R. Curtin - President & Director Mario Calastri - Chief Financial Officer (Interim) & Treasurer.

Craig M. Hettenbach - Morgan Stanley & Co. LLC Mark Delaney - Goldman Sachs & Co. Wamsi Mohan - Bank of America Merrill Lynch Amit Daryanani - RBC Capital Markets LLC Shawn M. Harrison - Longbow Research LLC Steven Fox - Cross Research LLC James Dickey Suva - Citigroup Global Markets, Inc. (Broker) William Stein - SunTrust Robinson Humphrey, Inc.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc. Mike Wood - Macquarie Capital (USA), Inc. Sherri A. Scribner - Deutsche Bank Securities, Inc..

Ladies and gentlemen, thank you for standing by. And welcome to the Q3 2016 TE Connectivity Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today's conference is being recorded.

I would now like to turn the conference over to your host, Sujal Shah. Please go ahead..

Chairman and Chief Executive Officer, Tom Lynch; President, Terrence Curtin; and acting Chief Financial Officer, Mario Calastri. During the course of this call, we will be providing certain forward-looking information. 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. We ask you to review the sections of our press release and accompanying slide presentation that address the use of these items. 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..

Thanks for joining us today. Please turn to Slide 3, and we will cover the highlights from today's call. Q3 was another quarter of solid execution in what continues to remain a challenging global economic environment. Our adjusted EPS of $1.08 represents a new company record, and was up 20% on a year-over-year basis.

Sales of $3.12 billion were essentially flat last year and in line with our guidance midpoint. Sales and orders were up sequentially, with sales up 6% and orders up 7%, excluding SubCom. Adjusted operating margins were strong at 16%, with adjusted EBITDA margins of 21% in the quarter.

For the fourth quarter, we expect the midpoint of our revenue and earnings per share to be $3.35 billion and a $1.20, respectively. Note that these figures include the benefit of approximately $200 million in revenue and $0.10 in EPS from the extra week in Q4 that we've been communicating all year.

If we exclude the extra week, we would expect revenue to be up about 3% organically year-over-year and adjusted EPS growth to be 22% year-over-year. Also, if you exclude the extra week, we expect our Transportation business to have its best growth quarter in Q4 and our Industrial segment to grow slightly for the first time this year.

For the full year, we are reiterating our adjusted EPS midpoint of $4.00, representing an 11% increase over the prior year. Continued growth in most of our harsh businesses, cost controls, share buyback and a lower tax rate are more than offsetting the first half currency headwinds and supply chain correction.

This has enabled us to reiterate our original guidance that we provided in October 2015, delivering double digit earnings growth in a slower economy. As I mentioned earlier, we expect to return to year-over-year organic growth in Q4, excluding the extra week. During the quarter, we continued to strengthen our harsh portfolio through acquisition.

In April, we announced the acquisition of Jaquet, which bolstered our portfolio of sensors for the auto market. This morning, we announced an agreement to acquire the Intercontec Group, a German-based manufacturer of high quality industrial metric circular connectors.

This acquisition strengthens TE's position in harsh connectivity applications for factory automation, and will be reported in the Industrial segment. In addition, I'm pleased to say our recent acquisition of Creganna is performing very well and ahead of expectations and positions TE as a leader in the high growth minimally invasive medical market.

We had a very strong cash generation quarter, with free cash flow of almost $600 million, which brings our year-to-date free cash flow to just about $1 billion. During the quarter, we returned approximately $230 million to shareholders, including about $100 million in share buybacks.

Year-to-date, we have returned nearly $2.9 billion to shareholders, including $2.5 billion in share buybacks. We expect to continue to take a balanced approach with our capital strategy, returning approximately two-thirds of our free cash flow to shareholders over time, with one-third free cash flow being used for acquisition.

I'll turn it over to Terrence Curtin, who will cover our performance in more detail..

Thanks, Tom. Good morning, everyone. Before we get to the segment updates, I'd like to cover our orders for the quarter, which will help provide the foundation for our results and expectations, so if you could please turn to Slide 4. And this shows our order trends, excluding our SubCom business.

Overall orders were essentially flat year-over-year and improved again sequentially by 7%, as the supply chain corrections that impact us in the first half are behind us. Our book-to-bill was 1.01 and we also had slight growth year-over-year, reflecting the recovery and stability of our end markets.

In Transportation, orders remain solid, with 7% sequential growth. Industrial orders grew 15% sequentially. And I do want to highlight about 60% of the industrial order growth was due to the acquisition of Creganna, with the remainder of the growth being broad based across our Industrial businesses.

In Industrial, we saw order growth in each region, as the inventory supply chain is now back in line. And we expect sales growth in the second half over the first half across each of our Industrial businesses.

In Communications, excluding the impact of the sale of our Circuit Protection business last quarter, we saw sequential growth of 3%, driven by both our Appliances and Data & Devices business. Now, to talk to SubCom, now, the business continues its strong momentum. We were recently named as a supplier of the new MAREA transatlantic program.

And with this award, we have approximately $1 billion of programs in force in our SubCom business. Please turn to Slide 5, so I can discuss our Transportation Solutions segment results. Segment sales grew 2% organically in the quarter, with growth in Auto and in Commercial Transportation, offset by weakness in Sensors that we highlighted last quarter.

Our Auto sales growth in the quarter was in line with our expectations. And growth was driven by strength in Europe and China, partially offset by a year-over-year decline in North America. For fiscal 2016, we continue to expect mid-single-digit organic revenue growth in Auto on a 2% to 2.5% global auto production growth environment.

While we are maintaining our view of global auto production, the regional profile is slightly different versus our prior view. We now expect slightly higher growth in Europe and China, offset by slower growth in North America.

We do remain confident that our Auto business will continue to grow ahead of auto production, driven by the electronic content growth, as well as a rich pipeline of platform ramps from the design wins generated over the past several years. In the fourth quarter, we expect our Auto business to have mid-teen organic growth, including the extra week.

If you exclude the extra week, we expect our growth to be about half of that mid-teen growth in the mid-single digits. We are also very pleased with our Commercial Transportation organic growth of 3% year-over-year in what continues to be a challenging backdrop.

The growth we experienced was driven by the heavy truck sector in China and Europe, while in North America, heavy truck market continues to remain weak, as well as weakness in the global construction and ag markets.

Turning to Sensors, we saw a 2% organic decline, as we continue to be impacted by the weakness in industrial-related markets, which make up more than half of our sensor sales. We continue to see strong design momentum, especially in the automotive space, that we expect to fuel future growth.

For the segment, adjusted operating margins were 19.4% and were in line with our expectations. And we saw sequential expansion of 40 basis points. Now, let me turn to Industrial Solutions, if you could please turn to Slide 6. Overall segment sales were up 5% year-over-year, due to the acquisition of Creganna.

If you remove the impact of Creganna, organic sales declined 4%. About half the organic decline is driven by the impact of the oil and gas downturn, which has resulted in our Oil and Gas sales being down 31%. On a geographic basis, we continue to see trends across the segment that are consistent. Europe is stable and growing in many markets.

North America continues to be weak, and China remains sluggish. When we started the year, we expected further market improvement in China and North America than what we're actually seeing currently.

Now, turning to the markets within the segment, in the Industrial Equipment area, we saw 14% growth driven by the Creganna acquisition, which, as Tom mentioned, is performing ahead of our expectations. We are very excited about the growth potential in the minimally invasive medical market.

If you exclude Creganna, the Industrial Equipment area, we did see a decline of 7% organically, due to softness in North America and in China, but we did see a sequential growth of 4% on an organic basis as we see markets coming back in line.

In the Aerospace & Defense area, our sales grew 4% organically, with strong performance both in the Commercial air and in the Defense markets. And in Energy, our business was flat organically, with growth in the Americas and Europe offset by declines in Asia.

As we look forward, we expect first half to second half growth of approximately 12%, with growth in each of the business units, now that the inventory corrections are behind us.

From a margin perspective, adjusted operating margins were slightly down year-over-year, driven entirely by the declines in our higher margin Oil and Gas business, which impacted segment operating margin by approximately 100 basis points year-over-year.

Segment operating margins expanded 180 basis points sequentially, as we expected, driven by both the benefit of increased volumes and cost management. Now, let me turn over to Communications Solutions, and if you could please turn to page seven of the slides.

During the quarter, the Communications Solutions segment revenue was down 4% organically year-over-year, but grew 8% sequentially on an organic basis if you exclude of the impact of the Circuit Protection divestiture. Our SubCom business saw 10% year-over-year growth, driven by strong execution from the multiple projects it has in force.

And as I stated earlier, the value of the programs in force with the new program we just won is approximately $1 billion. And we continue to expect SubCom to grow approximately 20% year-over-year in 2016.

Our Appliance business sales grew 2% organically, while our Data & Devices business declined 7% (sic) [17%] (13:00) organically, due to both the Circuit Protection sale as well as product exits. We did experience sequential sales growth in the Data & Devices area if you exclude the Circuit Protection divestiture.

For the segment, adjusted operating margins expanded 80 basis points year-over-year, as well as 270 basis points sequentially. And with that, I'll turn it back over to Mario to cover the financials..

Thanks, Terrence, and good morning, everyone. Please turn to Slide 8, where I will provide more details on earnings. Adjusted operating income of $501 million was essentially flat to prior year on flat sales, with adjusted operating margin of 16.1%.

GAAP operating income was $452 million and included $18 million of acquisition-related charges and net restructuring and other charges of $31 million. Adjusted EPS was $1.08 for the quarter, up 20% from the prior year, with benefits from share buybacks and a lower tax rate of 17%.

The tax rate was lower than we expected, resulting in an incremental benefit of $0.04 in the quarter. We expect the fourth quarter tax rate to be at a similar level as Q3. Note that the Q3 and Q4 tax rates are lower than our run rate. We now expect the full-year 2016 tax rate to be approximately 20%.

GAAP EPS was $2.19 for the quarter, driven by a $1.21 benefit, primarily from the settlement of all pre-separation tax disputes with Internal Revenue Service. As we previously disclosed, Tyco International entered into an agreement with the IRS to resolve all disputes related to the previously-disclosed intercompany tax issues.

As a result, we recognized a reduction of tax reserves of $1.1 billion, as well as an expense of $604 million, representing a reduction in receivables from our tax sharing agreement with Tyco International and Covidien. We're happy to report that all of our IRS legacy tax disputes are now closed.

As a result of the IRS settlement, want to give you some color on our tax rate and other income going forward. The IRS settlement benefits our tax rate. However, this benefit is essentially offset by the reduction of other income generated by the tax sharing agreement with Tyco and Covidien.

We now assume that the long-term adjusted tax rate declines to approximately 20%, just as our previously-communicated range of 23% to 24%. At the same time going forward, should assume that the IRS settlement will be essentially neutral to EPS.

Now, expect approximately $110 million of restructuring charges for the full year, $10 million increase from the prior guidance as we accelerate certain actions due to slightly weaker overall economic conditions. Now, turning to Slide 9, our business is executing well in an uncertain micro environment.

We are pleased to report sequential improvements in a lot of the operating metrics from the prior quarter. Our adjusted gross margin in the quarter was 33%, in line with our expectations.

Adjusted operating margins expanded 20 basis points year-over-year, with a strong focus on spending control and (17:10) improvement of certain declines in higher-margin businesses. Total operating expenses were $528 million in the quarter, down 4% from the prior year.

We continue to tightly manage discretionary spending, while balancing our continuing investment in our harsh businesses. Moving to cash flow, in the quarter, cash from continuing operations was $715 million. And our free cash flow was $589 million, up from prior year levels, due to strong working capital improvement.

We saw year-over-year improvement in DSOs and inventory days on hand came down as well. We have generated nearly $1 billion in free cash flow for the year to-date, reinforcing the health of our business. And we continue to expect full year free cash flow to approximate net income.

Adjusted EBITDA margins help explain the (18:12) performance of our businesses, including acquisitions. And adjusted EBITDA margins in Q3 were 20.7%, 460 basis points above adjusted operating margins and flat to prior year. Continue to be pleased with operating performance of our business, especially given the challenging market backdrops.

As Tom mentioned earlier, we announced an agreement to acquire Intercontec, expanding our harsh connectivity portfolio in the Industrial segment. We are expecting Intercontec to add approximately $75 million of sales and $32 million of EBITDA on an annual basis.

The transaction is a cash deal of $340 million that is expected to close in September 2016 and be accretive to adjusted EPS next year. We have added a balance sheet and cash flow summary in the Appendix for additional details. And now, I will turn it back to Tom..

focus our investments in harsh environment applications; relentlessly drive TEOA through the organization to delivers strong productivity and, as you can see, strong working capital and cash flow results; and consistently execute our capital allocation plan.

On a normalized 13-week per quarter basis in a low growth world, we are delivering second half revenue growth, 16% adjusted operating margins, strong double-digit adjusted earnings per share growth and outstanding cash flow. And with that, let's open it up for questions..

And today, our first question comes from the line of Craig Hettenbach with Morgan Stanley. Please go ahead..

The industrial market, nice to see a little recovery there, but just kind of big picture, how you manage the near-term profitability, which is weak in the current backdrop versus longer term growth expectations, I know you guys have been investing for Industrial, but just help us with kind of the longer-term path and what you see is the appropriate margins for that business longer term?.

I'll take this. It's Tom. I'll ask Terrence to add on when I'm done here. Industrial is an important, obviously, incredibly important segment for us. We're well positioned and, as you can see with the Intercontec acquisition, it's an important area to add in organically as well.

It has been a pretty sluggish environment, with the exception of commercial aerospace for the last several years. But it's fundamentally very good business. We still believe this is a business with high teen operating margins, if you get kind of normalized growth over time.

And you saw the leverage with a little bit of growth sequentially on our operating margin. So, it fits right into the sweet spot of harsh environment, highly engineered products. We have a tremendous range of products.

We've expanded that product range, not only in connectors with the recent acquisition, but with our sensor acquisition of a couple years ago. All while those markets are a little soft right now, we continue to be very bullish.

So, important market, well-positioned in the market, in every market, so wherever the industrial leaders of the world are, we're there close to them.

Terrence, you want to add to that?.

Yeah. The only thing I would add, Craig, is we're pretty proud of where we've gotten the margin. And, no, it's not where we want it to be in long-term, but when you think about the oil and gas effect we've had, it's slightly more than 100 basis that we, in a market that is flattish at best, being able to get back and cover that headwind we have.

So, clearly that is something that when you look at the margin, has impacted us and that has come down. I think also we still have an industrial equipment space that I talked about in the fall, that still, I would say, was probably the other sluggish area that's trying to get momentum.

I do think as the volume comes in, you saw the great improvement we have of about 100 basis points sequentially, you see the volume flow through. So, I do think we're doing a good job balancing it. We saw good growth in relationship to Comm air and Defense. 4%, I think we're performing very well there.

So, overall, I think we continue to have the same margin expectation we've had, which is higher teen, but clearly, I think we battled through the oil and gas downturn pretty well from a margin perspective..

Got it. And then, if I could, on my follow-up for the medical space, you guys have talked about kind of a system solutions approach, if you will.

Can you just talk about the go-to-market there, how it might be different versus the traditional sales approach you have, and then also as it relates to that, what you're able to wring out in terms of value in medical?.

I think there's a couple of things to that. When you talk about the go-to-market in medical, it is probably more akin to what we do in automotive. It's a much more direct sale, Craig.

So, when you sit there, what's great with Creganna, Creganna not only helped balance out some holes we had geographically, but also with the 200 engineers, they came in to help service that model as well as the footprint that keeps them (26:31) behind. So, I think when you think through that space, it is much more direct.

Now, when you're deal with more integration, it really is how do we bring the portfolio we had and what they did so well together? And we're early stages on that.

But I think that's where you'll get some of the value creation on the grow side is how we'll be able to do further integration and get to a higher content per unit opportunity than either company's had, together. So, I think it's much more around bringing the product set together.

The go-to-market is how do you make sure you cover the large players in that space. And with what we've had and with Creganna, we cover all the major players and have a nice position with them to get to that leading position..

I'd add, Craig, that the customer feedback of us being the acquirer has been very positive. Customers knew us peripherally from other things we do, but important to them that somebody with our strength and commitment to the market is there. So, that's been pretty unanimous as we've been out to all the big customers..

Got it. Thanks for all the color..

Thanks, Craig..

Thank you, Craig.

Could we have the next question, please?.

And we do have a question from the line of Mark Delaney with Goldman Sachs. Please go ahead..

Yes. Good morning. And thanks very much for taking the questions. First question is on the Transportation segment.

Can you talk about what the reason is that you think you're seeing an improvement in the year-over-year growth rates, excluding the extra week in the Transportation segment, in the fiscal fourth quarter, and if you can offer any views you have about the sustainability of the auto cycle as you move going forward after the September quarter?.

Sure. Thanks, Mark. A couple of points, I would say, the fundamental point is the design wins over many years coming into play, so that's been great for us for a long time and continue to expect that to be, so just momentum in design-in share. I think, also last year's fourth quarter wasn't a strong quarter, particularly in China.

It was in Europe and in the U.S., but China was in the midst of kind of a three quarter decline. We've seen that recovery in our third quarter this year and expect to see year-over-year growth in the fourth quarter. But the bottom line is it's a pretty solid market. We're well-positioned in it.

Terrence, you want to add anything to that?.

Yeah. No, the only other thing is, I think, when you look at the fourth quarter, fourth quarter, we had some blips earlier in the year around how production was, like Tom said, in China. I think when you look at production, production's been pretty stable and we're at that 2%, 2.5% production rate.

And I think that's really just proving our model that we can grow that mid-single digit in a 2% to 2.5% production rate. And while we're not guiding for next year yet, I do think thinking about next year and about a 2% production environment is how we're thinking about it right now, and we'll update you in the fall when we give 2017 guidance..

Very helpful. And for follow-up question on gross margins, they're down year-over-year in each of the first three quarters of fiscal 2016. I know you talked about the mix issues that have been impacting margin.

Is there anything else going on with gross margins being down or is it entirely mix?.

You're talking, Mark, about Transportation, right?.

For the whole company?.

Oh, the whole thing. It's a little bit of the volume in the first half and the mix. But now you can see you get back to this 13-week quarter, $3.1 billion run rate, the margins are back 33%, gross margins. The operating margins are back to 16%. So, no. I mean, our productivity has been good this year.

The health of the portfolio, I mean, you look at the dramatic improvement in the gross margin over the last several years and the operating margins because of the transformation of the portfolio. So, no, I'd say we're getting back to sort of where we expect to be.

And, of course, we expect to continue to improve as long as markets have some growth in them..

Thank you..

All right. Thank you, Mark.

Could we have the next question, please?.

And our next question comes from Wamsi Mohan of Bank of America Merrill Lynch. Please go ahead..

Yes. Thank you. Good morning. So, Tom, organic growth in Transport, you've noted some strength in China, also EMEA. Can you comment a little bit on the state of the North American market? I think you alluded to it being a little bit softer.

How do you see that progressing? And are you accounting for any softness in your outlook in European autos, particularly post-Brexit? And I have a follow up..

China improving in Q3, and expect to see that continue in Q4; Europe, sort of been on a steady track for a couple years now, steady, reasonable growth; and the U.S. falling a bit, but at a high level, I mean, so you get near this 18 million per unit level, I do think it slowed down a little bit as you see what the OEMs are saying.

So, we have factored that in to our outlook for sure in Q4. We haven't really factored in any Brexit. Of course, we are so close to the auto OEMs and talk with them all the time and right now, I mean, even if you look at our first three weeks, order rates in Transportation in July, they're very, very robust.

So, not crazy hot, but up over last year, as we expected, nicely and continuing to where they've been in the, as Terrence laid out in his comments earlier, a strong third quarter.

And just to reiterate, I think the industry and what we see, listening to our customers, and it's still early, and we'll get more specific next quarter, but kind of feels like a 2% production rate if we had to put the gauntlet down right now for next year globally..

Okay. Great. Thanks for the incremental color. And then, thanks for calling out the impact of that actually so clearly in fiscal 4Q. I was wondering how should we think about seasonality going into the first quarter of next year. If you ex-out the $200 million, consensus is roughly down 3%. It was down 5% last year.

But you obviously have made a lot of portfolio changes here and some other M&A here as well. So how should we really be thinking about the seasonality going into first quarter of next year? Thanks..

Okay, Wamsi, I'll take that. It's Terrence. I think when you think about the seasonality, last year, we had some inventory corrections that started fourth quarter of the fiscal year, well into the first quarter.

I think when we look at those corrections being behind us, I think you can expect taking our quarter four, backing out the extra week and then assuming anywhere from a 3% to 5% normal seasonal step-down. So, I do think you get into on a top-line perspective much more of normal seasonal quarter four to quarter one.

As you're thinking about it, but you highlighted it well, you do have to pull the extra week out of our fourth quarter..

Makes sense..

Thank you. All right, thanks, Wamsi.

Could we have the next question, please?.

And we do have a question from the line of Amit Daryanani from RBC Capital Markets..

Thanks. Good morning, guys. I have two questions as well. So, just looking at the guide for September maybe within Transportation, you guys are looking for, I think, 7%, 8% growth, excluding the extra week in the Transportation segment in September. Your orders, though, I think, are up 2% based on the June quarter number.

So, can you just maybe help me understand the delta between orders up 2% and the guide that you have? What else could drive the upside there?.

We, you have the ongoing backlog, Amit. And as I said a minute ago, the orders continue into July to be really, really solid. And you have to think of there was inventory correction last year that especially affected China.

So, you have some of that normalizing, so you don't have the normal just linear quarter-to-quarter, my Q3 orders equals my Q4 sales. But when you look at our backlog right now and the way it's scheduled out and the rate of orders, it's a solid Q4.

Terrence, you want to add to that?.

No. I think what you see is you will see a little bit of a seasonal step-down like we normally get around Europe, so I actually think we're getting back to a more normal pattern, Amit, and feel very good with the backlog, as you said, Tom, that the backlog's there to deliver on that 7%, 8% growth (35:20)..

Got it. And I guess if I could just follow-up, Terrence, on the Industrial side, you had some nice margin improvement in the quarter, but you have always talked about Industrial getting in line to corporate average margins, 16%, 17%, let's just say.

How do you think the path is there for the next 300 basis points of margin expansion? Is there an absolute revenue number that you need to achieve? And are there incremental cost take out that you would call out that should help you out as well?.

Well, I think number one, Amit, we have been doing cost take-out as we've been in a slow environment to really get to where we've been, to keep it flat even with the higher margin oil and gas impact we've had.

I do think what's nice about the Industrial business, and you saw it sequentially, is how strong the follow-through can be in that business across the segment.

So, when you sit there it is much around volume as we continue to march up because a lot of the cost actions have already been effectuated, so it will be much more volume dependent as we go from there..

you've got Commercial air and Defense above; you've got Energy a little bit below; Medical moving up with the acquisitions because that's accretive to the margin; and then, you have the Industrial Equipment business that's really been the factory floor has been a flat market for a couple years, but it's fundamentally a really tight business and the business we just added in, which is a nice add to the product line and into the revenue as well, is accretive to the margin.

So, we feel pretty confident that with reasonable industrial production, we'll follow that, and also embedded in there is significant piece of the business that goes through the channel, which is attractive business..

Okay, thank you, Amit.

Can we have the next question, please?.

And our next question comes from the line of Shawn Harrison with Longbow Research Company. Please go ahead..

Hi. Good morning, everybody..

Morning..

What I wanted to drill in on, I guess, was the restructuring, looking I guess now for $110 million this year. What would be the savings that you'll see in fiscal 2016? And how much of that spills into 2017? And I guess any comment there in terms of how you would think about incremental restructuring actions in 2017.

Are you finished or there are other things that need to be tidied up?.

Yes, Shawn. Hi, this is Mario. We have increased slightly the restructuring for this year up to $110 million. The way you should read it is normally the payback is around 18 months, two years. So, you should think about the benefits in 2017 to see on that basis.

And as far as pipeline of restructuring activity into 2017, we're going to be much more clear in next quarter with the guidance, but you should expect some level of obligation for (38:26) 2017 as well..

Okay. Thank you. As a follow-up maybe for you, Tom or Terrence, M&A activity, I don't know if it's just timing, but it's stepped up now, three acquisitions over the past two quarters.

Is the environment for M&A freeing up? I know valuations aren't cheap or is there just, given the shift in the portfolio to harsh environment just more resources being put toward M&A, so we should expect maybe a more consistent cadence of M&A over the next few years?.

Shawn, thanks. Good question. I think this, three in this short period of time, is more coincidence than anything else honestly, because just to give you a little of the history. Intercontec, we've been, like we often do and is often the case with a really nice privately held company, it takes a while to work through it.

And in this case, we actually did some market experiments, I would say, over a couple years to prove to both of us, both parties, that there was synergy and it was great. So, that's been in the works for awhile. Jaquet, the sensor is a fragmented market. And there's always small sensor companies, most of which we're not interested in.

That was a much shorter train. (39:46) And I would say Creganna was shorter than normal, but part of the plan once we had done advanced cast (39:53), so they happened to come in to these three months. Would have had our druthers, Intercontec would have been a couple of years ago. But sometimes, that's how they work out.

So, I don't think the universe of properties or the availability has changed that much.

Terrence, if you want to add some color to that...?.

No, Tom, I think you said it right. I think it is some of these things, when something gets auctioned like a Creganna, we don't control that top box (40:20). And then Intercontec, it was a journey with the owner about also when's he comfortable selling and making sure he sees how his company's going to do well. (40:32) I think that takes time.

So, I do think it's a little bit of three things at once. So, it's just that, Shawn. I think when you look at the environment, I think the environment – you said it very well. I think things are still – you have to pay for good assets. And I think we have three good assets here. And that's along our harsh strategy.

I think the harsh strategy, we've talked about interventional a lot over the past six months, but I think when you also look here, Jaquet and the sensors, how it strengthens us in automotive, especially in turbo sensor applications. And I think when you look at Intercontec, what's great about Intercontec, is it gets us closer to the factory floor.

They're a leader in that space that really relates to the how do you hook up servo motors on the factory floor, which is a very harsh application, and you make sure your power and your signal into the application is controlled now (41:25) to make sure you never have downtime.

And the company has an exceptional product line and technology that we're bringing in that was a gap for TE. So, I think each one of these show how our thought about the portfolio continues to evolve around harshness as well as how do we serve our customers better with a more complete portfolio.

So, I think that's what really the three of these being together at the same time. You get to see how we're thinking. So, hopefully, that helps..

It does. Thanks, Terrence..

All right. Thank you, Shawn.

Can we have the next question, please?.

And our next comes from the line of Steven Fox with Cross Research. Please go ahead..

Thanks. Good morning. Just a couple of specific questions on some of the results, first of all, the Appliance business, it sounded like it's experienced some decent growth. Can you just talk about what's driving some of that growth in a little bit more specific? And then secondly, you talked about organic growth ex-Creganna.

I was just curious what kind of growth you've seen from Creganna out of the box with that business. And then I had a quick follow-up..

Sure, Steve. It's Terrence. Thanks for the questions.

First off, on Appliance, what we've seen in Appliance, Appliance has been – they got impacted a little bit around the inventory correction with our channel partners, because they do have part of their business goes through there but if you really look at what we've been experiencing, we've been experiencing a very robust U.S.

and Europe production environment. So, I think we're seeing nice growth there that's been the backdrop. What we have had in Appliance is that the China OEMs have slowed in China. So, the appliance production in China has come off a little bit. So, while we were growing 2%, it's really been driven by the U.S. and Europe.

We see it again here in the quarter we just guided to, and going into next year, we probably expect a similar picture. On Creganna, certainly, we didn't own it a year ago, but in this first quarter, if we did own it, it would have grown about 11%.

So, when we look at that interventional market, as we've talked to you, we see a market that we like it very much because of the trend that supports about mid to higher single digit market environment in that interventional space, that $3 billion market, that Creganna helps us get a leadership position in, but really a good first quarter that, on a pro forma, we owned them a year ago, would have been up about 11%..

Great. It's helpful. And then, just real quick on the SubCom business, given the growth you're seeing, where are we versus prior cycle margins? And can you talk to how margins have improved recently and how they may improve in the next couple quarters? Thanks..

The margins are similar and we're seeing margins gradually move up. So, it's following the same general pattern. None of the patterns are exactly the same, but, yes, we are seeing margins now are higher than they were on a one year run rate than they were a year ago. So, we are seeing that happen..

Thanks very much..

Thank you..

Thank you, Steve.

Can we have the next question, please?.

And we do have a question from the line of Jim Suva with Citi. Please go ahead..

Thank you and congratulations to you and your team..

Thanks..

Could you briefly – you mentioned about, I believe it was automotive from Brexit did not have a impact. Can you just make sure? Did I get that right? And then, what about your other segments? Did you see any impact post the quarter close from Brexit? And then, my follow-up just to kind of throw it in at the same time is on the tax rate.

It ended up this year, I think, lower than everyone expected, so it helped out your earnings as you're reiterating guidance.

So, was it the industrial market that kind of the profitability came in softer or what was the cause that even though earnings reiterated guidance and you have more M&A, the tax rate really helped out this year? And longer term, are we looking at a lower tax rate? How should we plan tax rate longer term? Thank you..

So, let me start with your Brexit question, Jim. Thanks for the comments, by the way. Yeah, it's hard to feel any impact right now. I mean, as I said, you can look at our orders right up to last week, they're running what we based this guidance on and slightly ahead of the run rate last quarter and nicely ahead of the run rate last year.

And Europe continues to be really solid kind of across most of our businesses. So we haven't really seen any impact yet. So, like I guess like everybody else in the planet, we're waiting to see if there's really going to be an impact or not.

On the tax rate, Mario, you want to?.

Yeah. Just begin with (46:20) a comment around our long-term tax rate view is now around 20%, down from where we communicated previously, which we were around 23% to 24%. Currently, the settlement, the IRS settlement, is the biggest moving piece here. As you think about that, you need to combine it with the SG, (46:46) the other income going away.

So that is why we characterize it as a kind of an EPS neutral movement. Now, for 2016 in the second half, we are experiencing a lower than run rate tax rate. So, in Q3, we had the 17% tax rate. We expect Q4 to be similar.

Great. Thanks for the details and especially for pointing out the other income line fluctuates with the tax rate. I think some people often (47:23) struggle with that. Thank you. And, again, congratulations to you and your team at TE Connectivity..

Thanks, Jim..

Thanks, Jim.

Can we have the next question, please?.

And we do have a question from the line of William Stein with SunTrust. Please go ahead..

Great. Thanks for taking my question. Gentlemen, I think, Terrence, you mentioned sort of a preview on auto production for next year. And, Tom, you might have reiterated that view.

I'm curious whether the China stimulus that's been in place since last September, and it's so therefore about to annualize, how that factors in to your view of global production, if at all, and why shouldn't that drag global unit growth more?.

Thanks, Will. Yeah. Well, I think what we certainly saw as the stimulus helped reverse the decline that was happening early in the year. So, we returned to growth in – nice solid growth in Q3 and we'll see that again in Q4 in Auto.

And all the numbers from the industry are, of course, very preliminary for next year, but they're assuming a reasonable China market next year, not a booming market, not a bearish market. That's kind of how we see it and what our leadership over there sees.

So, I don't think – we don't expect an unusually positive catalyst from it because it's really already into the base is the way I would think about it..

Tom, to clarify, what I'm asking is the stimulus for consumers for taxes in automotive, that's been in place since last September.

So as that annualizes, is there not an expectation that China is going to be a more difficult market next year?.

No. Okay. Well, it's hard to say. But, again, if you think of this year being 2% to 2.5%, next year being in the 2% range, other markets were kind of weak. Some of the Asian markets were inconsistent. It really depends.

Is China is going to come off? I mean, if you look at macro China, where the weakness has been is in industrial China, not consumer China. The consumer markets in China and the consumer in China continues to be pretty healthy.

And the growth in the China economy is in the consumer market, which is a good thing in general because that's what fuels economic growth and then eventually feeds the industrial part of the economy. So, I think we don't have a crystal ball, for sure, Will.

But right now, what we're seeing is – we would expect reasonable growth in China, definitely down from what it's run over – take our fiscal 2016 out of it because growth in fiscal 2016 is pretty modest. I think we kind of see another modest growth in fiscal 2017. It's below the historical growth rates.

And that's how you get to this 1.5%, 2% production growth in 2017. But I think this will play out. But generally, we're not hearing or seeing anything from our customers and from our patterns that would say differently right now.

It was better in the third quarter than we thought; probably a little better in the third quarter and a little less in fourth quarter. We saw the curve being a little bit different in the second half, but, overall, it's about where we expect..

Okay..

Just to add one thing, when we look to the 2% next year, we'll guide more next quarter. It does assume a slower China production environment versus this year's China production environment. So, we do anticipate it'll be a little slower environment in China from a production perspective due to the 1.6-liter engine that you talked about..

Yeah..

But we still expect the China production environment to grow next year based upon what we're seeing today..

That perspective is very helpful. I appreciate it. If I can squeeze one more in, your military and aerospace end markets seem to have done well in the quarter.

I'm wondering if the DoD budget and the end of sequestration, is that helping or is this more sort of unrelated to that? And then in aerospace, I think we've had some negative data points from Boeing and Airbus on the wide-body jets.

And I'm wondering if whether your results and outlook are doing well despite that because of growth elsewhere or are you just not seeing that weakness yet? Thank you..

Will, thanks for the question.

A couple of things, on Commercial Aerospace, feel very good with the program wins and even if you have some of the wide-body adjustment, we do view that our Commercial Aerospace business would grow that mid-single digit with the platforms we have won; not only with the big carriers, also the regional carriers like Embraer and Bombardier (52:46), and so forth.

And so, I actually feel very good even with those data points you mentioned about. I think in Defense, it's been nice that as we've seen some of the budgetary things happen, we're starting to see some pick-up in Defense. I think you saw that in our quarterly results where we grew 4%.

And I think that's creating a little bit more of a constructive backdrop in Defense than we've had in quite some time when the whole sequester started. So, it's actually nice to see it burning (53:14) into revenue on the Defense side. And I think the momentum we have there is strong as well.

So, those are areas that I view you're going to continue to see growth out of (53:20)..

Thanks very much..

Thank you..

Thank you.

Can we have the next question, please?.

And we do have a question from the line of Matt Sheerin with Stifel. Please go ahead..

Yes. Thanks and good morning. Just a couple from me here, regarding the Sensor business and the fact that it hasn't been growing here, and I understand the industrial weakness that you've seen. It sounds like you're talking about some increase in bookings.

So could you update us on when you expect that to grow? And on the automotive side, the cross-selling, I know it takes two to three years in terms of these design cycles, but when do you expect, Tom, to see the payoff on the automotive side of things?.

I think, Matt, automotive, as you know, the cycle is a little bit longer, not as long as it used to be because everybody's designing faster these days, but I would say 2018. That's when these nice wins are going to really start to come in. And you'll see it in the Auto revenue line.

In the Industrial line, I think it will follow kind of industrial production. The design win nature there is very different. It's like the industrial market in general, much more fragmented, smaller revenue per design.

So, in there, it'll continue to build scale in the non-auto products and make sure that they we're growing with or slightly better than the market. But auto is where you can get significant chunks of business per design. So, we really feel good about that. Now, we're a little disappointed in the industrial market side of it.

But still very, very excited about the prospects of having sensors in the portfolio and what it does for us at every customer, every big OEM, we've always had a nice seat at the table, but it's like you get a bigger seat and sometimes a bigger table because it brings in the integrated solution opportunity. You've heard us talk about that.

We've had some tremendous design wins in Automotive with that. And it's starting to lend itself, I think, to the aerospace market. Terrence has talked before about the medical market when you pull together our interventional capability along with our core connector healing and protect, (55:45) and, wow, miniaturized sensors.

So, it's a pretty robust portfolio that we have that should bolster our growth rates in Industrial..

Okay. That's helpful. Thanks.

And just on the follow-up, could you update us on the CFO search?.

Sure. Well into it, as you would expect, and I expect in the not too distant future, we'll be making a choice. Always not over till it's over, but pleased with how things are running in the interim, very pleased, so haven't really skipped a beat..

Okay. Thanks a lot..

All right. Thank you, Matt.

Could we have the next question, please?.

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

Hi. Good morning. Your acquisition strategy clearly has been focused on the harsh environment side, in Industrial and Auto.

Curious if can you comment about if there's anything in the consumer area that you're looking in your pipeline or if there's further opportunities to divest pieces of that and just an update on your strategy with product exits, has that been working in terms of the margin improvement?.

Sure. Thanks. Well, you're absolutely right that the acquisition strategy is focused on harsh environments. And there's a lot of opportunity there. It's our wheelhouse, and it's where we can bring the most value to customers. So, that's where we're exclusively focused on our M&A at this point in time.

I would say that shifting over to the Data & Devices business to add on to what Terrence said, feeling good about the progress and the fact that we're going to see sequential growth in the fourth quarter for the first time in a long time.

Restructuring getting behind us, the margins moving up, we definitely see this business is getting on the improvement path, so encouraged about that.

We have to earn that one quarter at a time, so we're not getting carried away here, but the team's done a lot of hard work to reposition the business around our core connector capability, which is still very good, and very good products with attractive margins.

And as far as your point on the product exits, it'll probably blend in a little bit early next year.

(58:15) Terrence, you want to comment on that?.

Yeah. I think on the exits, Mario talked about it earlier to a question. Certainly, they've been a drag for the past two years. We see those probably through mid-2017 still being a little drag.

But when you look at it, it's really allowed the business to get focused, as Tom said, around the interconnect and connectivity strength that we have, as well as we're much more selective in the consumer space.

So, a lot of those exits have related to the consumer space, and making sure we're still consuming (58:45) our resources where we create value for our customers, as well as our shareholders..

Okay. And as a follow-up, has there been any slippage or impact from the recent move up in commodity prices like copper and gold? Thank you..

This is Mario. Not really, I mean, we have a hedging program that basically dilutes the volatility around the battles (59:12). Consistently, we are about 50% hedged. And we have higher hedges on the near term, so you're not going to see much of an impact on copper. (59:22).

Thank you..

Thank you, Mike.

Could we have the next question, please?.

And we do have a question from the line of Sherri Scribner with Deutsche Bank. Please go ahead..

Hi. Tom, I wanted to ask, you guys have been switching some of the business around with acquisitions and divestitures over the past couple of years.

How do you feel about the portfolio right now? Do you think you have the right mix of business? Is there any opportunity to do additional divestitures at this point?.

Sherri, thanks. No, I feel really, really good about the portfolio. As you know, it had quite a bit in it at one point in time and now we're up to the, say, 90% is connectivity and sensors. We often get asked about SubCom. It's an unusual business, for sure. There really isn't that much of a market.

There's no market really that we've seen in 10 years to sell it, but it's an exceptionally well-run business that's a clear world leader in what it does. And it's especially interesting these days, because the customer base is different.

And with cloud computing and mega data centers and fiber security and all those things driving what we think fit the needs for more trans-continental connectivity, SubCom can hold its own in our portfolio. But when you get past that, everything else is related.

So, more of what you'd see is tweaking the product lines, which you always have in a business as you try, hey, (1:00:56) here's a product line that maybe is commoditized, that we don't have any unique value. Let's price ourselves out of it or maybe sell it.

But for the most part, the most recent one being Circuit Protection, was kind of the big chunks that are available. Never say never, but really like the portfolio, I think you can see it in the margins.

The harsh businesses, if you look at those business, above company average margins, nicely, very dependable, highly engineered, really play to our strength as an engineering and manufacturing company.

And, as Terrence pointed out, with the acquisitions we just made, we just added $0.5 billion of harsh revenue into the portfolio over the last 90 days and at EBITDA margins well above the company average. And this is what we know best and do best, so it's what we're going to continue to emphasize..

Okay, great. And then, just in terms of an update on the buybacks, I think you're mostly done with the buybacks related to the BNS divestiture. Can you give us an update on your thoughts on buybacks? I think you have about $1.2 billion left at this point? Thanks..

Mario, you want to comment on that?.

Sure. Long-term, it's consistent with what we have communicated always. We expect to basically return two-thirds of our free cash flow through buybacks and dividends. So, you can do the math clearly, but the long-term expectation there should be some volatility around the quarters. As far as Q4 specifically, you should expect it to be similar to Q3..

Thank you..

Thank you, Sherri..

Thank you, Sherri..

Thank you, Sherri. Looks like there's no further questions..

So, please contact Investor Relations at TE if you have additional questions. And thank you for joining us this morning and have a great day..

Thanks everybody, and have a good summer..

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