TE Connectivity Ltd. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2024, ended December 29, 2023. Comparisons are with the quarter ended December 30, 2022. Amounts are in U.S. dollars unless stated otherwise.
Business context and performance
TE Connectivity supplies connectivity and sensor products for transportation, industrial, communications, and other markets. Total net sales were essentially flat year over year; organic sales declined 0.7%. Transportation Solutions growth was offset by declines in Industrial Solutions and Communications Solutions.
Key financial metrics
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Net sales | $3.831 billion | $3.841 billion |
| Gross margin | $1.324 billion; 34.6% of sales | $1.187 billion; 30.9% of sales |
| Operating income | $698 million; 18.2% margin | $502 million; 13.1% margin |
| Net income | $1.803 billion | $397 million |
| Diluted EPS | $5.76 | $1.24 |
| Operating cash flow | $719 million | $581 million |
Net income and EPS were substantially elevated by a $1.105 billion income tax benefit. The benefit included an $874 million Swiss tax credit benefit, a $262 million benefit from revaluing deferred tax assets after a Swiss tax-rate increase, and a $118 million benefit associated with a legal-entity restructuring, partly offset by other tax effects. The reported effective tax rate was negative 158.1%; earnings comparisons should account for these unusual tax items.
Gross margin improved mainly through manufacturing productivity and prior-year pricing actions, partly offset by lower volume. Selling, general, and administrative expense increased $32 million to $424 million, primarily due to inflation. Restructuring and other charges fell to $21 million from $111 million.
- Segment sales: Transportation Solutions $2.373 billion, up 5.0%; Industrial Solutions $1.025 billion, down 3.3%; Communications Solutions $433 million, down 17.0%.
- Operating income by segment: Transportation Solutions $478 million versus $282 million; Industrial Solutions $141 million versus $156 million; Communications Solutions $79 million versus $64 million.
- Cash flow and investment: Capital expenditures were $151 million. Cash used in investing was $468 million, including $349 million for an acquisition; cash used in financing was $745 million. Cash and cash equivalents ended the quarter at $1.170 billion, down $491 million from quarter-opening cash.
- Debt and liquidity: Total debt was $4.198 billion, including $613 million short-term and $3.585 billion long-term debt; cash was $1.170 billion. Commercial paper outstanding was $261 million at a 5.50% weighted-average rate. A $1.5 billion revolving credit facility had no borrowings, and the company reported compliance with debt covenants.
- Shareholder returns: The company repurchased approximately 3.24 million shares in open-market purchases for $420 million and paid $183 million in dividends. The board increased the repurchase authorization by $1.5 billion; $1.8 billion remained available.
Material changes versus the prior period
- Sales declined $10 million (0.3%) as organic declines and net acquisition/divestiture effects were largely offset by favorable currency translation. Prior-year pricing actions added $68 million to organic sales.
- Transportation Solutions benefited from automotive growth, while sensors declined amid market weakness and exits from certain lower-margin product lines.
- Industrial Solutions was affected by a 26.3% organic decline in industrial equipment, attributed to supply-chain inventory corrections. Medical and aerospace, defense, and marine markets grew.
- Communications Solutions declined in both data and devices and appliances, with management citing market weakness and inventory corrections.
- Operating cash flow rose $138 million, primarily from higher pre-tax income, partly offset by working-capital movements. Inventory increased to $2.783 billion from $2.552 billion at fiscal year-end.
Outlook, management commentary, risks, and unusual items
- For Q2 FY2024, management expected sales of approximately $3.95 billion and diluted continuing-operations EPS of approximately $1.75. It expected year-over-year sales declines in all segments, but sequential sales growth led by Industrial Solutions, partly offset by a slight Transportation Solutions decline. The outlook included estimated foreign-exchange impacts of $13 million on sales and $0.05 per share on EPS versus Q2 FY2023.
- Management expected slight growth in global vehicle production for fiscal 2024 and capital spending of approximately 5% of sales.
- Fiscal 2024 restructuring charges were expected to total approximately $100 million, with spending of approximately $175 million funded by operating cash flow. The new fiscal 2024 actions were expected to yield about $3 million of annualized savings by the end of fiscal 2025. The company also expected approximately $24 million of additional charges for its fiscal 2023 restructuring program.
- TE Connectivity acquired approximately 98.7% of Schaffner Holding AG for CHF 302 million (approximately $349 million net of cash acquired). The purchase-price allocation remained preliminary, and final valuation adjustments could be significant. It also sold a Transportation Solutions business for $38 million net proceeds and recorded an $11 million pre-tax loss.
- U.S. trade-control investigations are ongoing following voluntary disclosures to BIS and DDTC; the company has also been contacted by the Department of Justice. Potential fines or penalties cannot yet be reasonably estimated, and final outcomes could differ from recorded reserves.
- Environmental remediation costs were estimated at a reasonably possible range of $17 million to $44 million; $20 million was accrued. The company said ordinary-course litigation was not expected to have a material effect.
- Swiss and other countries’ implementation of the global minimum tax could affect the company beginning in fiscal 2025; management said the impact could be material to earnings, cash taxes, and the worldwide effective tax rate.
- Management cited economic and cyclical conditions, end-market demand, inventory corrections, raw-material availability and cost, currency movements, supply-chain reliance, acquisitions and divestitures, cybersecurity, litigation and regulatory compliance, and tax changes among risks. It reported no significant change in market-risk exposures or material change to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported earnings growth reflects the exceptional Swiss-related tax benefits, and what normalized tax rate and earnings might be appropriate?
- Whether the Q2 sales and EPS outlook is achieved, particularly given inventory corrections and weakness in Communications Solutions and industrial equipment.
- Final Schaffner purchase accounting, integration outcomes, and any resulting material adjustments.
- Developments in the BIS, DDTC, and DOJ trade-compliance investigations, including any changes to reserves or potential penalties.
- Restructuring cash spending, realized savings, working-capital trends, and the company’s ability to fund debt maturities, dividends, and repurchases.
- The eventual effects of global minimum-tax rules on cash taxes and the effective tax rate.