TE Connectivity Ltd. — Q1 Fiscal 2023 Form 10-Q
Reporting period: Quarter ended December 30, 2022; comparison is with the quarter ended December 24, 2021. Amounts are in U.S. dollars. TE Connectivity designs and manufactures connectivity and sensor solutions for transportation, industrial, medical, energy, data communications, and other markets.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $3.841 billion | $3.818 billion | +0.6%; organic growth 8.2% |
| Gross margin | $1.187 billion; 30.9% | $1.230 billion; 32.2% | Down $43 million; 1.3 percentage points |
| Operating income | $502 million; 13.1% margin | $672 million; 17.6% margin | Down $170 million |
| Net income | $397 million | $566 million | Down $169 million |
| Diluted EPS | $1.24 ($1.25 continuing operations) | $1.72 ($1.72 continuing operations) | Lower year over year |
| Operating cash flow | $581 million | $532 million | Up $49 million |
| Capital expenditures | $183 million | $172 million | Up $11 million |
Gross-margin pressure reflected unfavorable currency translation and inflation in material and operating costs, partly offset by pricing. Operating income also reflected $111 million in restructuring and other charges, versus $12 million a year earlier. Income tax expense was $87 million, with a 17.9% effective tax rate, compared with $110 million and 16.2%.
Segments
- Transportation Solutions: Sales $2.259 billion, up 4.7% reported and 14.4% organically; operating income $282 million versus $395 million. Automotive organic sales grew 19.6%, while segment earnings were pressured by inflation, currency, and restructuring charges.
- Industrial Solutions: Sales $1.060 billion, up 0.8% reported and 6.8% organically; operating income $156 million versus $120 million. Growth included aerospace, defense and marine, energy, and medical markets.
- Communications Solutions: Sales $522 million, down 14.1% reported and 11.4% organically; operating income $64 million versus $157 million. Declines in appliances and data and devices reflected weaker markets and elevated distributor inventories.
Balance sheet, debt, and liquidity
At December 30, 2022, cash and cash equivalents were $793 million, total debt was $4.218 billion ($820 million short-term and $3.398 billion long-term), and shareholders’ equity was $11.364 billion. Current assets of $7.318 billion exceeded current liabilities of $4.420 billion. Cash less total debt was approximately $3.425 billion net debt. Total debt was nearly unchanged from $4.206 billion at September 30, 2022.
Cash decreased by $295 million during the quarter to $793 million. Operating cash flow was $581 million; investing activities used $265 million, including $183 million of capital expenditures and $109 million for an acquisition; financing activities used $621 million, including $287 million of share repurchases and $178 million of dividends. Operating cash flow less capital expenditures was approximately $398 million.
The company had $231 million of commercial paper outstanding at a weighted-average rate of 4.70% and no borrowings under its $1.5 billion revolving credit facility, which matures in June 2026. It reported compliance with debt covenants and believes resources will meet foreseeable needs, including repayment of €550 million of 1.10% notes due March 2023. The filing expects fiscal 2023 capital spending of approximately 5% of sales.
Material changes and management outlook
- Reported sales growth was limited by $299 million of unfavorable currency translation; organic sales growth was 8.2%. Pricing actions added $129 million to organic sales. Management expected currency translation to reduce fiscal 2023 sales by approximately $400 million versus fiscal 2022.
- For Q2 FY2023, management forecast sales of approximately $3.9 billion and diluted continuing-operations EPS of approximately $1.44. The outlook anticipated growth in Transportation and Industrial Solutions, partly offset by a Communications Solutions decline, and currency impacts of approximately $165 million on sales and $0.11 per share versus Q2 FY2022.
- A new restructuring program generated $104 million of net restructuring charges in the quarter, primarily in Transportation and Communications. Annualized savings of approximately $86 million are expected, with realization by the end of fiscal 2025. Actions are expected to be completed by the end of fiscal 2024; management said further cost reductions or footprint consolidation may be considered. Fiscal 2023 restructuring charges and spending are expected to exceed fiscal 2022 levels.
- Management cited ongoing inflation, supply-chain disruption, foreign-exchange volatility, and uncertainty from the Russia-Ukraine conflict and COVID-19. Russia and Ukraine are not material markets for the company, and management reported no significant first-quarter impact from the conflict; future effects remain uncertain. The company suspended operations in Russia and reduced operations in Ukraine.
- The company acquired one Industrial Solutions business for $109 million, net of cash acquired. Purchase-price allocation was preliminary and may be adjusted, potentially significantly.
Risks, contingencies, and other notable items
- Trade-compliance investigations by the U.S. Department of Commerce and State Department remain ongoing; the Department of Justice has also contacted the company. Potential fines or penalties cannot yet be reasonably estimated, and final outcomes may differ from reserves recorded.
- Environmental remediation costs were estimated at a reasonably possible range of $17 million to $44 million; $20 million was accrued as the probable loss.
- Outstanding letters of credit, guarantees, and surety bonds totaled $170 million, plus approximately $59 million related to the former SubCom business, with the latter expected to expire through fiscal 2027.
- Management did not expect ordinary-course legal proceedings to materially affect results, financial position, or cash flows. No material changes to previously disclosed risk factors were reported.
- Approximately 60% of sales were invoiced in currencies other than the U.S. dollar. Market-risk exposures were reported as not significantly changed during the quarter.
Important facts for investors to verify
- Whether organic growth and pricing continue to offset reported-sales pressure from foreign exchange, and whether the Q2 sales and EPS outlook is achieved.
- Whether restructuring costs, timing, and the projected $86 million of annualized savings track management’s expectations.
- Whether Communications Solutions demand and distributor inventory levels stabilize, and whether Transportation Solutions margins recover despite inflation and currency headwinds.
- The final purchase-price allocation for the acquired business and any resulting material adjustments.
- Developments in trade-compliance investigations, potential penalties, and environmental remediation estimates.
- Cash generation, working-capital needs, debt maturities and refinancing, and continued spending on dividends and share repurchases.