TE Connectivity Ltd. — Q1 Fiscal 2022 Form 10-Q
Business context and reporting period. The filing covers the quarter ended December 24, 2021, compared with the quarter ended December 25, 2020. TE Connectivity designs and manufactures connectivity and sensor solutions across transportation, industrial, communications, medical, energy, and other markets. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 FY2022 | Prior-year quarter |
|---|---|---|
| Net sales | $3,818 | $3,522 |
| Gross margin | $1,230; 32.2% | $1,146; 32.5% |
| Operating income | $672; 17.6% | $448; 12.7% |
| Income from continuing operations | $567 | $375 |
| Net income | $566 | $381 |
| Diluted EPS | $1.72 | $1.14 |
| Cash provided by operating activities | $532 | $640 |
- Sales grew 8.4% reported and 8.0% organically. Acquisitions and divestitures contributed 1.7 percentage points; currency translation reduced growth by 1.3 points.
- Gross margin dollars increased, mainly on higher volume and pricing, but gross margin percentage declined 0.3 percentage points as higher material costs partly offset those benefits. Operating income rose substantially, with lower restructuring charges a significant contributor.
- Operating cash flow declined $108 million, primarily due to higher incentive compensation payments and inventory investment, partly offset by higher pretax income. Capital expenditures were $172 million; operating cash flow less capital expenditures was $360 million.
- At December 24, cash and cash equivalents were $982 million, total debt was $4.003 billion, and net debt was approximately $3.021 billion. Current assets were $7.244 billion and current liabilities $4.274 billion. The company had no borrowings under its $1.5 billion revolving credit facility and reported compliance with debt covenants.
- Inventories rose to $2.845 billion from $2.511 billion at fiscal year-end. Total debt decreased from $4.092 billion at September 24, 2021.
Material changes and segment results
- Transportation Solutions: Sales decreased 3.0% to $2.158 billion, mainly from lower automotive sales amid reduced global vehicle production. Segment operating income was $395 million, versus $308 million; reported results benefited from much lower restructuring charges, while underlying income was pressured by lower volume and higher material costs.
- Industrial Solutions: Sales increased 21.3% to $1.059 billion, led by industrial equipment. Segment operating income rose to $123 million from $76 million, primarily reflecting higher volume.
- Communications Solutions: Sales increased 41.4% to $601 million, supported by data and devices and appliances. Segment operating income rose to $154 million from $64 million, primarily on higher volume.
- Net restructuring and other charges were $12 million, compared with $167 million a year earlier. The prior-year quarter included substantial fiscal 2021 restructuring charges. Q1 FY2022 also included $12 million of restructuring-related charges in cost of sales.
- The company repurchased approximately 2 million shares for $246 million under its repurchase program and paid dividends of $0.50 per share. At quarter-end, $1.3 billion remained authorized for repurchases.
Outlook, management commentary, and risks
- For Q2 FY2022, management expected sales of approximately $3.8 billion and diluted continuing-operations EPS of approximately $1.52. The sales outlook anticipated growth in Industrial and Communications Solutions, partly offset by Transportation Solutions declines, including an approximately 5% decline in global automotive production.
- The Q2 outlook included an estimated foreign-exchange headwind of $111 million to sales and $0.03 per share to EPS versus Q2 FY2021. It also included approximately $25 million of tax expense from a Swiss tax-rate reduction enacted December 27, 2021, related to writing down deferred tax assets.
- For fiscal 2022, management expected capital spending of approximately 5% of sales and total restructuring charges of approximately $150 million, with restructuring spending of approximately $190 million. Fiscal 2022 restructuring actions were expected to produce about $28 million in annualized savings by the end of fiscal 2024.
- Management said it believed operating cash generation and other funding sources would meet foreseeable capital needs. It noted ongoing monitoring of macroeconomic conditions, customer demand, supply chains, and capital availability. COVID-19 disruption remained a potential risk despite no expected significant near-term impact.
- Higher raw-material prices and availability, including copper, precious metals, and other inputs, could affect margins. Other stated risks include automotive demand, foreign exchange, supplier and customer conditions, acquisitions, cybersecurity, political and economic instability, litigation, and environmental and trade compliance.
- Trade-control investigations following voluntary disclosures to U.S. authorities remained ongoing. Potential fines or penalties could not yet be reasonably estimated, and final amounts may differ from current reserves. Environmental remediation costs were estimated at $18 million to $46 million, with $21 million accrued.
- The company also disclosed ongoing ordinary-course legal matters and $118 million of SubCom-related performance guarantees and letters of credit, expected to expire through fiscal 2025; management did not expect to have to perform on those guarantees.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in the prior annual report.
Most important facts for investors to verify
- Whether automotive production and supply-chain conditions continue to constrain Transportation Solutions sales and whether the Q2 sales and EPS outlook was achieved.
- Whether volume, pricing, and cost actions can offset inflation in materials and preserve or improve gross margin percentage.
- Whether the lower year-over-year restructuring burden is sustainable and whether planned savings materialize; the reported operating-income increase also reflects the prior-year restructuring comparison.
- Whether inventory growth converts into sales and cash, and whether operating cash flow recovers after the quarter’s working-capital and compensation outflows.
- The outcome and potential financial exposure of the trade-control investigations, including whether reserves prove adequate, and developments in environmental and other contingencies.
- The impact of the enacted Swiss tax-rate reduction and other tax items on reported earnings and the effective tax rate.