TE Connectivity Ltd. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2020, ended June 26, 2020; filed July 30, 2020. Amounts are in U.S. dollars. The filing identifies the registrant as TE Connectivity Ltd.
Financial performance and position
| Metric | Quarter ended June 26, 2020 | Nine months ended June 26, 2020 |
|---|---|---|
| Net sales | $2.548 billion, down 24.8% year over year | $8.911 billion, down 12.2% |
| Gross margin | $707 million; 27.7% of sales, versus 32.8% | $2.766 billion; 31.0% of sales, versus 32.9% |
| Operating income | $134 million; 5.3% margin, versus $520 million | $190 million; 2.1% margin, versus $1.534 billion |
| Net income (loss) | $(41) million; diluted EPS $(0.12) | $(471) million; diluted EPS $(1.41) |
| Cash from continuing operations | Not provided for the quarter | $1.272 billion, versus $1.575 billion |
Quarterly sales fell 25.0% organically. Transportation Solutions sales declined 36.2%, Industrial Solutions 13.9%, while Communications Solutions increased 2.9%. In the nine-month period, sales declined across all three segments. Lower volume, price erosion and weaker manufacturing productivity reduced gross margin; lower material costs partly offset the impact.
At June 26, cash and cash equivalents were $474 million; current assets were $5.319 billion and current liabilities $3.727 billion. Short-term debt was $691 million and long-term debt $3.395 billion, or $4.086 billion total. Total debt was $3.965 billion at September 27, 2019. The company reported no commercial paper outstanding and no borrowings under its $1.5 billion revolving credit facility. It was in compliance with debt covenants.
For the first nine months, capital expenditures were $439 million; investing cash outflow was $748 million and financing cash outflow was $970 million. Cash declined $453 million from the start of the period to $474 million. The company paid $466 million in dividends and repurchased $505 million of shares.
Material changes and unusual items
- COVID-19 materially disrupted demand and operations, contributing to sharp sales declines, particularly in automotive and commercial transportation.
- A $900 million goodwill impairment was recorded in the second quarter for the Sensors reporting unit in Transportation Solutions. The company cited reduced sales and profitability expectations, including lower projected global automotive production. Remaining goodwill for that reporting unit was $626 million at March 27, 2020.
- Nine-month income tax expense was $674 million, including $355 million related primarily to Swiss tax reform and $170 million for an increased valuation allowance on certain non-U.S. deferred tax assets. The impairment generated only a $4 million tax benefit because the goodwill was primarily nondeductible.
- Nine-month restructuring charges were $144 million. Fiscal 2020 actions included $138 million of charges; management expected approximately $30 million of additional charges for those actions and approximately $10 million for fiscal 2019 actions.
- The company acquired approximately 72% of First Sensor AG and three other businesses during the nine-month period. First Sensor minority shareholders have options under a profit and loss transfer agreement that may require future payments; amount and timing are uncertain.
- Fiscal 2020 results include the adoption of lease accounting, which added approximately $520 million of right-of-use assets and related liabilities at adoption, without a material impact on earnings or cash flows.
Outlook, commentary and risks
Management expected fourth-quarter fiscal 2020 sales to increase approximately 10% from third-quarter sales of $2.5 billion, led by approximately 20% growth in Transportation Solutions. It expected global automotive production to rise approximately 40% quarter over quarter, with a slight Industrial Solutions increase offset by modest Communications Solutions declines. Residual COVID-19 supply-chain disruption was expected to remain a headwind. The outlook was based on foreign exchange rates consistent with then-current levels.
Management expected approximately $140 million of annualized savings from fiscal 2020 restructuring actions by the end of fiscal 2022. It forecast approximately $250 million of total restructuring charges and $265 million of related spending for fiscal 2020, and approximately $575 million of fiscal 2020 capital spending. Management believed available cash, operating cash flow and financing sources would meet foreseeable needs, including 2021 debt maturities and First Sensor minority-holder payments, but warned that COVID-19 could materially affect future liquidity and results.
Key risks include the duration and severity of COVID-19 and its effects on customer demand, suppliers and operations; automotive and commercial aerospace weakness; further goodwill impairment; foreign exchange, raw-material costs, pricing and competition; and access to financing. Environmental remediation costs were estimated at a reasonably possible $14 million to $45 million, with $18 million accrued. SubCom-related guarantees totaled approximately $1.2 billion and may expire through fiscal 2025; the company had recourse against the buyer and did not expect to perform. It also had $273 million of other letters of credit, guarantees and surety bonds. Management did not expect ordinary-course legal proceedings to have a material effect.
Important facts for investors to verify
- Whether the expected fourth-quarter sales recovery occurred, especially in automotive, and whether COVID-19 supply-chain and demand impacts persisted.
- Whether operating margins and cash generation stabilized after the significant volume decline and restructuring actions.
- Whether further impairment or deferred-tax valuation allowances were required as economic forecasts changed.
- The ultimate timing and cash cost of First Sensor minority-shareholder elections, and the company’s ability to meet upcoming debt maturities.
- Progress toward restructuring savings and actual restructuring charges and spending versus management’s estimates.
- Potential exposure under SubCom performance guarantees and environmental remediation accruals.