Business context and reporting period
TE Connectivity Ltd. (NYSE: TEL) filed this unaudited Form 10-Q for the quarter and six months ended March 29, 2024, its fiscal second quarter and first half of fiscal 2024. The company supplies connectivity and sensor products across transportation, industrial, and communications markets. The filing registrant is TE Connectivity Ltd.; the company proposed merging into its Irish subsidiary, TE Connectivity plc, subject to shareholder approval and other closing conditions.
Financial performance and liquidity
Amounts are in U.S. dollars. Quarter and six-month comparisons are with the corresponding prior-year periods unless noted.
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $3.967 billion, down 4.6%; organic sales down 3.1% | $7.798 billion, down 2.5%; organic sales down 2.0% |
| Gross margin | $1.363 billion; 34.4% of sales, versus 30.9% | $2.687 billion; 34.5% of sales, versus 30.9% |
| Operating income and margin | $692 million; 17.4%, versus $537 million and 12.9% | $1.390 billion; 17.8%, versus $1.039 billion and 13.0% |
| Net income / diluted EPS | $541 million / $1.75, versus $433 million / $1.36 | $2.344 billion / $7.54, versus $830 million / $2.60 |
| Operating cash flow | Not separately presented | $1.429 billion, versus $1.215 billion |
| Capital spending | Not separately presented | $318 million, versus $372 million |
Sales declined across all three segments in the quarter. Transportation Solutions revenue fell 4.0%, Industrial Solutions 4.0%, and Communications Solutions 9.5%. First-half Transportation Solutions sales were approximately flat; Industrial Solutions fell 3.7% and Communications Solutions fell 13.4%. Industrial equipment weakness and inventory corrections were pronounced; aerospace, defense, marine, and medical markets grew.
Management attributed improved gross margin primarily to manufacturing productivity, with first-half results also benefiting from prior-year pricing. First-half operating cash flow rose by $214 million, mainly on higher pre-tax income, partly offset by working-capital changes. Investing cash outflow was $627 million and financing cash outflow was $1.284 billion, including $885 million of share repurchases and $365 million of dividends.
At March 29, 2024, cash was $1.176 billion and total debt was $4.196 billion, including $1.235 billion short-term and $2.961 billion long-term. Total debt was $4.211 billion at September 29, 2023. Commercial paper outstanding was $291 million at a 5.50% weighted-average rate. The company reported compliance with debt covenants and believes available resources will meet foreseeable needs. A new $1.5 billion revolving credit facility was entered into in April 2024, replacing the prior facility; there were no borrowings under the prior facility at quarter-end.
Material changes, outlook, and notable items
- Tax and earnings: The first-half income tax benefit was $959 million, including an $874 million benefit from a ten-year Swiss tax credit and a $262 million benefit from revaluing deferred tax assets after a Swiss tax-rate increase. A further $118 million benefit related to legal-entity restructuring. These items substantially elevated reported first-half income and EPS; the six-month effective tax rate was negative 69.2%.
- Third-quarter outlook: Management expects sales of approximately $4.0 billion, broadly consistent with the prior-year quarter, and diluted EPS from continuing operations of approximately $1.71. Expected growth in Communications and Industrial Solutions is projected to be offset by Transportation Solutions declines. Forecasts include estimated foreign-exchange headwinds of $63 million to sales and $0.06 per share.
- Other operating expectations: Management expects slight global vehicle-production growth for fiscal 2024 versus fiscal 2023, capital spending of about 5% of fiscal-year sales, and approximately $100 million of fiscal 2024 restructuring charges with about $200 million of related spending. Fiscal 2024 restructuring actions are expected to generate approximately $10 million of annualized savings, fully realized by fiscal 2025.
- Capital returns: The company repurchased about 6 million shares for $826 million in the first half and had $1.4 billion remaining under its authorization. Shareholders approved a $2.60-per-share dividend, payable in four quarterly installments of $0.65 beginning in the third quarter.
- Acquisition and restructuring: TE acquired approximately 98.7% of Schaffner Holding AG for CHF 294 million (about $339 million net of cash acquired). Purchase accounting remains provisional and valuation adjustments could be significant. Restructuring and other charges were $40 million for the quarter and $61 million for the first half, down from $119 million and $230 million, respectively, in the prior-year periods.
- Risks and contingencies: U.S. trade-control investigations following voluntary disclosures remain ongoing; the company cannot estimate potential penalties, and final outcomes may differ from reserves. Environmental remediation costs are estimated at $17–$43 million, with $20 million accrued. Management also cites economic and market cyclicality, inventory corrections, foreign exchange, raw-material costs, supply-chain reliance, geopolitical conditions, and a global minimum tax expected to affect the company beginning in fiscal 2025, with potentially material effects.
- Proposed incorporation change: The proposed Switzerland-to-Ireland merger was expected to go to shareholder vote in June 2024, with implementation anticipated during calendar 2024 if approved. The company reported $8 million of related costs in the first half and did not expect a material operational or financial-results change from the move.
Important facts for investors to verify
- How much of first-half earnings growth reflects the Swiss tax credit and other tax benefits, and what normalized tax rate and EPS may look like.
- Progress and potential financial exposure from the ongoing BIS, DDTC, and Department of Justice trade-compliance matters.
- Whether the expected third-quarter sales and EPS outlook is achieved, particularly as industrial-equipment demand and supply-chain inventory corrections evolve.
- Shareholder approval, timing, and final terms of the proposed Irish incorporation change.
- Final Schaffner purchase-price allocation, the realization of restructuring savings, and cash needs for restructuring, dividends, repurchases, and debt maturities.