TE Connectivity Ltd. — Form 10-Q Summary
Business context and period: TE Connectivity is a global manufacturer of connectivity and sensor solutions. This unaudited filing covers the fiscal second quarter and six months ended March 29, 2019, compared with the periods ended March 30, 2018. Unless noted, amounts are in U.S. dollars.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $3.412 billion, down 4.2% year over year; organic sales down 0.5% | $6.759 billion, down 2.0%; organic sales up 0.7% |
| Gross margin | $1.118 billion; 32.8%, versus 34.0% | $2.232 billion; 33.0%, versus 34.4% |
| Operating income and margin | $530 million; 15.5%, versus $621 million and 17.4% | $1.014 billion; 15.0%, versus $1.207 billion and 17.5% |
| Income from continuing operations | $429 million, versus $490 million | $812 million, versus $457 million |
| Net income and diluted EPS | $439 million; $1.29, versus $490 million and $1.38 | $715 million; $2.09, versus $450 million and $1.27 |
| Cash from operating activities | Not separately stated in the supplied filing text | $853 million total; $883 million from continuing operations, versus $727 million total and $645 million continuing |
Quarterly sales declines reflected primarily foreign-currency translation, which reduced sales by 4.3%; price erosion reduced organic sales by $27 million. For the six-month period, currency translation reduced sales by 3.3%, while acquisition contributions were 0.6%. Gross margin weakened mainly from unfavorable product mix and currency effects, partly offset by lower material costs. SG&A expense fell to $373 million for the quarter and $762 million for six months, reflecting cost control, restructuring savings, and lower incentive compensation.
Segments
- Transportation Solutions: Quarterly sales fell 7.6% to $1.971 billion and six-month sales fell 5.0% to $3.957 billion, primarily because of automotive weakness. Operating income was $316 million for the quarter and $648 million for six months.
- Industrial Solutions: Quarterly sales rose 3.6% to $1.007 billion and six-month sales rose 4.4% to $1.935 billion, led by aerospace, defense, oil, and gas. Operating income was $137 million for the quarter and $237 million for six months.
- Communications Solutions: Quarterly sales fell 4.8% to $434 million and six-month sales fell 1.3% to $867 million. Appliance-market weakness weighed on results; data and devices grew organically over six months. Operating income was $77 million for the quarter and $129 million for six months.
Liquidity, debt, and capital allocation
- At March 29, 2019, cash and cash equivalents were $565 million, down from $848 million at fiscal year-end. Total debt was $3.982 billion, versus $4.000 billion; short-term debt was $612 million and long-term debt $3.370 billion.
- TE Connectivity had $360 million of commercial paper outstanding and no borrowings under its $1.5 billion revolving credit facility. The facility matures in November 2023; the company reported compliance with debt covenants.
- Six-month capital expenditures were $401 million. The company received $297 million net cash proceeds from the SubCom sale. Operating, investing, and financing activities produced net cash of $853 million, used $85 million, and used $1.052 billion, respectively; cash decreased $283 million.
- Six-month share repurchases totaled $739 million in cash flow statements; the equity note reports a $684 million repurchase value for approximately 9 million shares. Dividends paid were $299 million. The company had $1.8 billion remaining under its repurchase authorization and approved a $1.84-per-share dividend payable in four quarterly installments.
Material changes, outlook, and risks
- Outlook: Fiscal third-quarter sales were forecast at $3.4–$3.5 billion and diluted EPS from continuing operations at $1.13–$1.17. Fiscal 2019 sales guidance was $13.55–$13.75 billion and diluted EPS guidance $4.88–$4.98. Management estimated foreign-exchange headwinds of about $120 million of sales and $0.06 EPS for Q3, and $400 million of sales and $0.16 EPS for fiscal 2019, versus prior-year periods.
- Fiscal 2019 expectations reflected weaker automotive production, particularly in China and EMEA, and pressure in Communications Solutions. Management expected global automotive production to decline about 5%. Industrial Solutions growth in aerospace, defense, oil, and gas was expected to be partly offset by softness in energy and industrial equipment.
- Management initiated incremental restructuring, primarily in Transportation Solutions, in response to market weakness. Total fiscal 2019 restructuring charges were expected to be about $250 million, including approximately $100 million of incremental charges; expected cash spending was about $140 million. Annualized savings from fiscal 2019 actions were estimated at approximately $100 million by the end of fiscal 2021.
- The SubCom business was sold for $297 million net proceeds, with an $86 million pretax loss on sale, mainly reflecting currency translation losses and guarantee obligations. TE Connectivity continued to honor existing SubCom project guarantees totaling approximately $1.7 billion at quarter-end, mostly expected to expire within two years, and could be required to issue up to $300 million of additional guarantees for new projects. The company stated it had recourse against SubCom and did not anticipate having to perform.
- Environmental remediation costs were estimated at a reasonably possible range of $14–$44 million, with $17 million accrued. Management did not expect the disclosed legal proceedings or environmental matters to have a material adverse effect.
- The company adopted tax accounting guidance for intra-entity asset transfers, recording a $443 million reduction to beginning accumulated earnings. Prior-year six-month tax expense included $567 million related to the U.S. Tax Cuts and Jobs Act, explaining much of the year-over-year improvement in reported six-month net income. Proposed Swiss tax reform was not reflected in results or outlook and could have a material impact if enacted.
- Management said operating cash and potential funding sources should meet anticipated needs, including a $250 million note maturity in 2019. It cited macroeconomic conditions, automotive demand, pricing, raw-material costs, currency movements, suppliers, cybersecurity, regulation, litigation, and debt restrictions among material risks. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether sales and margins stabilize amid automotive weakness, currency pressure, and lower fiscal 2019 guidance; assess segment trends and the organic-sales measure alongside GAAP sales.
- Execution, timing, cash costs, and realized savings from the expanded restructuring program.
- Exposure and recourse associated with the $1.7 billion of SubCom guarantees and potential additional guarantees of up to $300 million.
- Cash generation and liquidity after buybacks, dividends, capital spending, and upcoming debt maturities; confirm the treatment and reconciliation of reported share repurchase amounts.
- Potential effects of Swiss tax reform and resolution of approximately $130 million of unrecognized tax benefits management estimated could be resolved within 12 months.