TE Connectivity Plc (Tyco Electronics Ltd.) - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 27, 2009, and the six months ended March 27, 2009. The company, formerly Tyco Electronics Ltd., is a global provider of engineered electronic components, network solutions, specialty products, undersea telecommunication systems, and wireless systems. Effective January 1, 2009, the company established a new "Specialty Products" reporting segment. The company is also pursuing a "Swiss Continuation" to change its place of incorporation from Bermuda to Switzerland, subject to shareholder approval.
Key Financial Metrics
| Metric | Quarter Ended Mar 27, 2009 | Six Months Ended Mar 27, 2009 |
|---|---|---|
| Net Sales | $2,456 million | $5,265 million |
| Gross Income | $440 million (17.9% margin) | $994 million (18.9% margin) |
| Operating Loss | $(3,802) million | $(3,823) million |
| Net Loss | $(3,238) million | $(3,275) million |
| Diluted EPS (Net Loss) | $(7.07) | $(7.14) |
| Cash and Equivalents | $722 million | $722 million (Ending Balance) |
| Total Debt | $2,915 million | $2,915 million (Ending Balance) |
| Operating Cash Flow | $424 million (Quarter) | $457 million (Six Months) |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 32.9% in the quarter and 27.1% for the six months compared to the prior year periods. This was driven by a 28.4% organic decline due to reduced end-market demand (particularly in automotive and consumer electronics) and a 4.5% negative impact from foreign currency exchange rates.
- Goodwill Impairment: The company recorded a non-cash goodwill impairment charge of $3,547 million. This included a full impairment of $2,088 million for the Automotive reporting unit and partial impairments for Communications and Industrial Solutions ($1,347 million) and Circuit Protection ($112 million).
- Restructuring and Litigation: Restructuring and other charges totaled $198 million for the quarter and $275 million for the six months, primarily for headcount reductions. Pre-Separation litigation charges were $135 million for the quarter and $144 million for the six months, related to securities class action settlements.
- State of New York Contract: The company recorded $111 million in pre-tax charges related to the termination of a contract with the State of New York, including a $61 million impairment of network construction costs and a $50 million charge for a letter of credit drawdown.
Guidance, Outlook, and Risks
- Outlook: Management anticipates a decrease in net sales in the third quarter of fiscal 2009 compared to the prior year due to continued declines in end-market demand and supply chain inventory reductions. Operating income is expected to be lower due to unfavorable factory cost absorption.
- Divestitures: On April 16, 2009, the company entered into an agreement to sell its Wireless Systems business for $675 million in cash, expecting a pre-tax gain of approximately $55 million. This business will be classified as discontinued operations.
- Restructuring Plan: The company expects to incur total restructuring charges of approximately $350 million in fiscal 2009 to simplify its global manufacturing footprint.
- Risks: Significant risks include further goodwill impairments if economic conditions deteriorate, potential additional drawdowns on the State of New York letter of credit (up to an additional $50 million), and uncertainties regarding the resolution of pre-Separation securities litigation and tax matters.
Investor Verification Checklist
- Goodwill Valuation: Verify the assumptions used in the discounted cash flow analysis for the remaining goodwill balances in the Communications and Industrial Solutions and Circuit Protection units.
- State of New York Litigation: Monitor the status of the lawsuit filed by the company against the State of New York and the potential for the State to draw the remaining $50 million on the standby letter of credit.
- Wireless Systems Sale: Confirm the closing of the $675 million sale of the Wireless Systems business and the final working capital adjustments.
- Pre-Separation Litigation Reserve: Review the adequacy of the $375 million reserve established for remaining securities litigation claims and the receivable from Tyco International and Covidien.
- Liquidity Position: Assess the company's ability to meet debt covenants (Debt/EBITDA ratio) given the significant operating losses and the suspension of the commercial paper program.