TE Connectivity Ltd. — Q3 FY2022 Form 10-Q
Business context and period. TE Connectivity designs and manufactures connectivity and sensor solutions serving transportation, industrial, communications, medical, energy, and other markets. This unaudited report covers the quarter ended June 24, 2022, and the first nine months of fiscal 2022; comparisons are with the periods ended June 25, 2021. Amounts are in U.S. dollars.
Financial performance
Unless noted otherwise, dollar amounts are in millions.
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Net sales | $4,097 | $3,845 | $11,922 | $11,105 |
| Gross margin | $1,328 | $1,268 | $3,895 | $3,624 |
| Operating income | $719 | $714 | $2,096 | $1,774 |
| Net income | $594 | $580 | $1,720 | $1,467 |
| Diluted EPS | $1.83 | $1.74 | $5.26 | $4.41 |
| Gross margin percentage | 32.4% | 33.0% | 32.7% | 32.6% |
| Operating margin | 17.5% | 18.6% | 17.6% | 16.0% |
- Q3 sales rose 6.6% reported and 10.6% organically; nine-month sales rose 7.4% reported and 9.0% organically. Currency translation reduced reported sales growth by 5.9% in Q3 and 3.4% for the nine months. Pricing actions added $159 million and $332 million to organic sales, respectively.
- Q3 segment sales were $2,300 million in Transportation Solutions (+1.5%), $1,134 million in Industrial Solutions (+13.2%), and $663 million in Communications Solutions (+14.7%). Nine-month sales were essentially flat in Transportation, while Industrial rose 15.6% and Communications rose 25.3%.
- Q3 gross margin percentage declined 0.6 percentage points, as pricing and volume benefits were more than offset by inflationary material and operating costs. For the nine months, it increased 0.1 points. Q3 operating margin fell 1.1 points; the nine-month margin increased 1.6 points.
- Operating cash flow was $1,524 million for the nine months, down from $1,902 million. The company attributed the decline mainly to higher working capital, including changes in accrued liabilities and higher incentive compensation payments. Capital expenditures were $556 million, versus $454 million.
- At June 24, cash and cash equivalents were $820 million; current assets were $7,583 million and current liabilities $5,058 million. Total debt was $4,202 million, comprising $822 million short-term and $3,380 million long-term debt. Total debt was $4,092 million at September 24, 2021.
- Nine-month financing cash outflows included $1,086 million of share repurchases and $506 million of dividends. The company repurchased approximately 8 million shares and had $2.0 billion remaining under its authorization after the board approved a $1.5 billion increase.
Material changes, outlook, and management commentary
- Industrial and Communications Solutions were the principal sources of growth. Industrial equipment and data and devices were particularly strong. Transportation Solutions sales were nearly flat for the nine-month period, with automotive and sensors weakness offset by commercial transportation growth.
- TE Connectivity issued $600 million of 2.50% senior notes due 2032 and redeemed $500 million of 3.50% notes due 2022. It had $237 million of commercial paper outstanding at a weighted-average rate of 1.92%; its $1.5 billion revolving credit facility had no borrowings, and the company reported compliance with debt covenants.
- The fiscal 2022 restructuring program is expected to generate approximately $75 million in annualized savings by the end of fiscal 2024. The company recorded $85 million of related charges in the first nine months, including $16 million in cost of sales; it expected approximately $150 million of fiscal 2022 restructuring charges and $160 million of spending.
- Outlook: Management expected Q4 FY2022 sales of approximately $4.2 billion and diluted continuing-operations EPS of approximately $1.79. Full-year FY2022 guidance was approximately $16.1 billion in sales and $7.04 diluted continuing-operations EPS. Guidance included an additional week in FY2022; management estimated adverse currency impacts versus FY2021 of $700 million in sales and $0.17 per share for the full year. Q4 guidance included estimated currency impacts of $275 million in sales and $0.11 per share, and approximately $250 million in sales and $0.10 per share from the extra week.
- Management said inflation, raw-material availability and costs, and supply-chain pressures remained relevant, with pricing and productivity actions partly mitigating cost increases. It described the effects of the Russia-Ukraine conflict as not significant to results through the first nine months, but future effects remained uncertain. COVID-19 continued to affect some China operations; management did not expect a significant global FY2022 impact but noted potential future effects.
Risks, contingencies, and unusual items
- The company disclosed ongoing investigations by U.S. trade-control agencies following voluntary disclosures of apparent violations. Potential fines or penalties could not yet be reasonably estimated; reserves had been recorded, but the ultimate outcome could differ.
- Environmental remediation costs were estimated at a reasonably possible range of $17 million to $45 million; $20 million was accrued as the probable loss. The company said it did not expect a material adverse effect from these costs.
- TE Connectivity continued to honor certain guarantees and letters of credit for its divested SubCom business, totaling approximately $116 million and expiring through fiscal 2027; it reported contractual recourse and did not anticipate having to perform. Other letters of credit, guarantees, and surety bonds totaled $134 million.
- Q3 other comprehensive loss was $333 million, principally reflecting currency translation losses of $225 million and cash-flow hedge losses of $112 million. This reduced comprehensive income despite higher net income.
- Nine-month tax expense included a $57 million benefit from an intercompany transaction, $27 million expense from remeasuring certain deferred tax assets following a local tax-rate change, and $12 million related to an acquired-entity tax audit. Management expected a total $75 million FY2022 tax benefit from the intercompany transaction.
- Other disclosed risks include economic slowdown, inflation and interest rates, automotive demand, foreign exchange, raw-material supply and pricing, customer and supplier conditions, China exposure, cyber and operational disruptions, litigation, and possible goodwill impairment. The filing reported no material change in risk factors other than the matters described.
Important facts for investors to verify
- Whether full-year sales and EPS guidance is achieved, particularly given the stated currency and extra-week effects and macroeconomic uncertainty.
- Whether pricing and productivity gains can continue to offset inflation and preserve margins, especially in Transportation Solutions.
- Working-capital trends, inventory growth, and operating cash conversion, alongside planned capital spending.
- The progress and cost of restructuring actions and realization of the expected annualized savings.
- Developments in the U.S. trade-control investigations, including any resulting penalties beyond current reserves.
- The company’s capital-allocation pace, including dividends, repurchases, and debt maturities, and its ability to maintain liquidity and covenant compliance.