TE Connectivity Ltd. Form 10-Q Summary
Business context and reporting period
The filing is for the first quarter of fiscal 2018, ended December 29, 2017, with comparisons to the quarter ended December 30, 2016. The registrant named in the filing is TE Connectivity Ltd. The company makes connectivity and sensor products and reports Transportation Solutions, Industrial Solutions, and Communications Solutions.
Financial performance and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $3.480 billion | $3.063 billion |
| Gross margin | $1.177 billion; 33.8% | $1.067 billion; 34.8% |
| Operating income | $581 million; 16.7% margin | $495 million; 16.2% margin |
| Continuing-operations income (loss) | $(39) million; diluted EPS $(0.11) | $406 million; diluted EPS $1.13 |
| Net income (loss) | $(40) million; diluted EPS $(0.11) | $409 million; diluted EPS $1.14 |
| Operating cash flow | $350 million | $404 million |
| Capital expenditures | $241 million | $130 million |
- Reported sales rose 13.6%; organic sales increased 7.9%. Currency translation added $115 million and acquisitions added $62 million. Price erosion reduced organic sales by $44 million.
- Gross margin percentage fell 1.0 percentage point, despite higher gross profit; management cited higher volume and manufacturing productivity, partly offset by price erosion.
- Operating cash flow less capital expenditures was $109 million, compared with $274 million in the prior-year quarter.
- At December 29, cash was $704 million, total debt was $4.005 billion, and net debt was approximately $3.301 billion. Total debt was $4.344 billion at September 29, 2017. Current assets were $5.733 billion and current liabilities $3.635 billion.
Material changes and segment results
- Transportation Solutions sales increased 21.3% to $2.032 billion; operating income was $420 million versus $348 million. Growth came across automotive, commercial transportation, and sensors.
- Industrial Solutions sales increased 10.9% to $882 million; operating income rose to $102 million from $70 million. Industrial equipment was the principal growth driver; energy and aerospace/defense/oil/gas organic sales declined.
- Communications Solutions sales decreased 4.6% to $566 million; operating income fell to $59 million from $77 million. Subsea communications sales dropped 33.2%, attributed to lower project activity and production delays; appliances and data/devices grew.
- Operating expenses included $35 million of restructuring charges, down from $47 million. SG&A increased $16 million, while R&D increased $20 million.
Outlook, commentary, risks, and unusual items
- For Q2 FY2018, management expected sales of $3.55–$3.65 billion and diluted continuing-operations EPS of $1.18–$1.22. The guidance included estimated favorable currency effects of $123 million in sales and $0.06 per share versus the prior-year quarter.
- For FY2018, management expected sales of $14.1–$14.3 billion and diluted continuing-operations EPS of $3.61–$3.71. The outlook assumed currency rates and commodity prices consistent with then-current levels, and included estimated favorable currency effects of $228 million in sales and $0.11 per share.
- The $600 million income tax expense included a $567 million charge from the Tax Cuts and Jobs Act, primarily the remeasurement of U.S. deferred tax assets following the federal rate reduction. A $61 million benefit related to certain legal entity restructurings also affected the quarter. The resulting reported effective tax rate was 107% and drove the GAAP net loss despite higher operating income.
- Management said the tax law’s ultimate impact could differ as interpretation and regulatory guidance develop. The company recorded a $223 million deferred tax asset for interest carryforwards based on its interpretation of the new law; contrary guidance could require a tax charge. It did not expect the law to change fiscal 2018 cash taxes.
- Restructuring plans included approximately $150 million of net charges and $130 million of spending expected in FY2018. Fiscal 2018 actions were expected to generate about $20 million in annualized savings by the end of FY2019.
- The company repaid $708 million of 6.55% notes at maturity, repurchased $214 million of shares, and paid $141 million in dividends during the quarter. A $1.5 billion increase to the repurchase authorization was approved; $1.766 billion remained available at quarter-end. Management said cash from operations and other funding sources should meet anticipated needs, including $325 million of notes due in 2018.
- Environmental remediation costs were estimated at $15–$44 million, with a best estimate of $19 million. Outstanding letters of credit, guarantees, and surety bonds totaled $291 million. Management did not expect legal proceedings or these contingencies to have a material effect. No material changes to risk factors were reported; disclosure controls were deemed effective.
Important facts for investors to verify
- How much of sales growth and the FY2018 outlook reflects organic demand versus currency and acquisitions.
- Whether subsea communications project activity and production delays improve, and whether Communications Solutions margins recover.
- The eventual tax effects of the Tax Cuts and Jobs Act, especially the treatment of interest carryforwards and deferred tax assets.
- Progress and cash costs of restructuring, planned capital spending, share repurchases, and the upcoming $325 million debt maturity.
- Whether working-capital needs and elevated capital expenditures affect cash generation in subsequent quarters.