TE Connectivity Ltd. — FY2023 Form 10-K
Reporting period: Fiscal year ended September 29, 2023 (52 weeks). Fiscal 2022 comprised 53 weeks, including an additional fourth-quarter week that contributed an estimated $306 million of sales. The filing is an annual report, not a standalone Q4 report; it does not provide a clear standalone Q4 financial summary in the supplied text. TE Connectivity is a Swiss-domiciled global supplier of connectivity and sensor solutions, reporting in U.S. dollars across Transportation, Industrial, and Communications Solutions.
Financial performance and liquidity
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net sales | $16.034 billion | $16.281 billion |
| Gross margin | $5.055 billion; 31.5% | $5.244 billion; 32.2% |
| Operating income / margin | $2.304 billion; 14.4% | $2.756 billion; 16.9% |
| Net income | $1.910 billion | $2.428 billion |
| Diluted EPS | $6.03 | $7.47 |
| Operating cash flow | $3.132 billion | $2.468 billion |
| Capital expenditures | $732 million | $768 million |
| Cash and cash equivalents at year-end | $1.661 billion | $1.088 billion |
| Total debt at year-end | $4.211 billion | $4.206 billion |
- Reported sales declined 1.5%; organic sales increased 1.0%. Currency translation reduced sales by $422 million, while pricing actions added $607 million to organic sales. The extra week in FY2022 also complicates the reported comparison.
- Gross margin fell 0.7 percentage points, with higher material and operating costs, lower volume, and currency effects outweighing pricing benefits. Operating margin fell 2.5 percentage points.
- Operating cash flow increased $664 million, primarily reflecting working-capital changes, partly offset by lower pretax income. Operating cash flow less capital expenditures was approximately $2.4 billion in FY2023 (calculated from reported figures).
- Year-end current assets were $7.892 billion and current liabilities $4.463 billion. The company reported $1.5 billion of revolving-credit commitments and no revolver borrowings; its $330 million of commercial paper was outstanding at a 5.50% weighted-average rate. Net debt was approximately $2.55 billion (calculated as total debt less cash).
- FY2023 shareholder returns included $725 million of dividends and $946 million of share repurchases. The approved annual dividend was $2.36 per share, payable in four installments.
Material changes versus the prior comparable period
- Transportation Solutions: Sales rose 4.0% to $9.588 billion, led by automotive organic growth; segment operating income was $1.451 billion versus $1.534 billion, and margin was 15.1% versus 16.6%.
- Industrial Solutions: Sales rose 1.4% to $4.551 billion. Growth in aerospace, defense and marine, energy, and medical was partly offset by an 8.1% organic decline in industrial equipment. Operating income was $602 million versus $607 million.
- Communications Solutions: Sales fell 26.3% to $1.895 billion as data-and-devices and appliances demand weakened amid inventory corrections and market declines. Operating income declined to $251 million from $615 million; margin fell to 13.2% from 23.9%.
- FY2023 included $340 million of restructuring and other charges, versus $141 million in FY2022. This included $260 million of restructuring charges and $77 million of impairment and net divestiture charges; a separate $68 million impairment related to a held-for-sale Transportation business is disclosed.
- Interest expense increased to $80 million from $66 million; the effective tax rate rose to 16.0% from 11.2%. Net income declined about 21% and diluted EPS about 19%.
Outlook, management commentary, risks, and contingencies
- For Q1 FY2024, management expected sales of approximately $3.85 billion and diluted EPS from continuing operations of approximately $1.59. Transportation and Industrial growth was expected to be largely offset by Communications declines. The sales outlook includes an estimated $17 million favorable currency effect; currency was expected to reduce EPS by about $0.02 versus Q1 FY2023.
- FY2023 restructuring actions are expected to generate approximately $200 million of annualized savings, fully realized by the end of FY2026. Management expected approximately $100 million of restructuring charges and $175 million of cash spending in FY2024. FY2024 capital spending was expected to be about 5% of sales.
- A tender offer for Schaffner Holding AG, valued at approximately CHF 320 million (about $350 million), had been accepted for roughly 89% of outstanding shares as of November 10, 2023. Closing remained subject to customary conditions, including regulatory approvals, and was expected in Q1 FY2024.
- Key exposures include automotive and industrial cyclicality, price competition and historical annual price erosion of 1%–2%, raw-material availability and cost, foreign exchange, China and geopolitical risks, supply-chain disruptions, cybersecurity, product liability, and changing environmental and trade regulations. About 43% of FY2023 sales were to automotive customers and about 20% to customers in China. Approximately 60% of sales were invoiced in currencies other than the U.S. dollar; the company says it does not hedge this sales exposure.
- Trade compliance: The company made voluntary disclosures of apparent U.S. trade-control violations and is cooperating with the BIS and DDTC; the DOJ has also contacted the company. Investigations were ongoing, and potential fines or penalties could not yet be reasonably estimated, although reserves had been recorded.
- Other contingencies: Environmental investigation and remediation costs were estimated at a reasonably possible $17 million–$45 million; $20 million was accrued. The company also disclosed $198 million of letters of credit, guarantees, and surety bonds, plus $27 million of performance guarantees associated with the Subsea Communications divestiture; it did not expect material effects from these guarantees.
- Deferred tax assets were a significant estimation matter: gross deferred tax assets were $10.178 billion and the valuation allowance was $7.416 billion. The auditor identified realizability of deferred tax assets as a critical audit matter. A Swiss global minimum tax was expected to take effect January 1, 2024, with potential company effects beginning in FY2025; management was still evaluating the impact.
- The company reported effective disclosure controls and internal control over financial reporting, and the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Assess whether Communications Solutions’ steep sales and margin declines have stabilized, and whether forecast segment growth and the Q1 FY2024 outlook were achieved.
- Track the conversion of announced pricing and restructuring savings into margins and cash flow, including the FY2024 restructuring cash spend.
- Confirm Schaffner’s closing terms, final consideration, and subsequent contribution to results.
- Monitor outcomes and reserve adequacy for the U.S. trade-control investigations, environmental matters, and significant tax judgments, including the valuation allowance and global minimum tax.
- Review debt maturities, refinancing needs, commercial-paper costs, and the balance between acquisitions, dividends, and share repurchases.