TE Connectivity Ltd. — Form 10-Q Summary
Business context and reporting period. TE Connectivity designs and manufactures connectivity and sensor products for transportation, industrial, communications, medical, energy, and other markets. This unaudited quarterly report covers the third quarter ended June 30, 2017 and the first nine months of fiscal 2017; comparisons are to periods ended June 24, 2016. All financial amounts below are in U.S. dollars unless noted.
Financial results
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $3.367 billion, up 7.9%; organic growth 8.3% | $9.657 billion, up 8.4%; organic growth 7.7% |
| Gross margin | $1.138 billion; 33.8% of sales, versus 32.7% | $3.311 billion; 34.3% of sales, versus 32.9% |
| Operating income and margin | $536 million; 15.9%, versus $452 million and 14.5% | $1.495 billion; 15.5%, versus $1.385 billion and 15.6% |
| Income from continuing operations | $432 million, versus $791 million | $1.244 billion, versus $1.504 billion |
| Net income / diluted EPS | $435 million / $1.22, versus $839 million / $2.32 | $1.249 billion / $3.48, versus $1.572 billion / $4.21 |
| Continuing-operations diluted EPS | $1.21, versus $2.19 | $3.47, versus $4.03 |
- Cash flow: Nine-month cash from continuing operating activities was $1.449 billion, up from $1.262 billion. Capital expenditures were $452 million, compared with $420 million. Cash and cash equivalents rose to $755 million from $647 million at fiscal year-end.
- Debt and liquidity: Total debt was $3.991 billion, down from $4.070 billion. Current assets were $5.354 billion and current liabilities $3.872 billion. The company reclassified $708 million of 6.55% notes due in October 2017 to short-term debt. A $1.5 billion revolving credit facility was undrawn; the company reported compliance with debt covenants.
- Capital returns: Nine-month dividends paid were $405 million and share repurchases totaled $386 million. A $1.60-per-share annual dividend was approved, payable in four quarterly installments; the first $0.40 installment was paid in the quarter. $716 million remained available under the repurchase authorization.
Material changes versus the prior comparable period
- Sales grew in all three segments. Quarterly / nine-month segment sales growth was: Transportation Solutions 6.8% / 9.0%; Industrial Solutions 6.6% / 11.2%; Communications Solutions 12.4% / 3.6%.
- Gross margin improved, attributed primarily to higher volume and lower material costs, partly offset by price erosion. Quarterly operating margin also improved, while the nine-month margin was slightly lower.
- Reported earnings are not directly comparable with 2016: the prior-year quarter and nine-month periods included major tax-related benefits and expenses from resolution of pre-separation tax matters, including a $1.135 billion income tax benefit and $604 million of related other expense. The filing reports 2016 tax benefits of $1.019 billion for the quarter and $831 million for nine months.
- Current-period restructuring and other charges were $19 million for the quarter and $125 million for nine months; the comparable nine-month 2016 figure was a $28 million net credit, including a $143 million gain on the sale of the Circuit Protection Devices business.
- Industrial Solutions benefited from acquisitions, including the $77 million MicroGroup acquisition in the quarter. Nine-month Communications Solutions sales were affected by the prior-year CPD divestiture.
Outlook, management commentary, and risks
- Fiscal 2017 outlook: Net sales of $12.85–$12.95 billion and diluted EPS from continuing operations of $4.54–$4.56. Management cited expected sales growth across all segments. Foreign exchange was expected to reduce fiscal 2017 sales by about $124 million and EPS by about $0.07 versus fiscal 2016.
- Fourth-quarter outlook: Net sales of $3.2–$3.3 billion and continuing-operations diluted EPS of $1.07–$1.09. Comparisons with fiscal 2016 are affected by an extra week in that prior-year quarter, which contributed $238 million of sales and $0.13 per diluted share.
- Management said it is monitoring macroeconomic conditions, managing costs, and maintaining capital resources. Fiscal 2017 capital spending was expected to be approximately 5% of sales.
- Restructuring actions are intended to consolidate manufacturing footprint and improve productivity. Management expected approximately $145 million of annualized savings, generally realized by the end of fiscal 2019; fiscal 2017 restructuring charges were expected to be about $150 million, with approximately $90 million of cash spending during the year.
- Key stated risks include global economic and end-market conditions, especially automotive; competition and pricing pressure; raw-material costs and availability; currency movements; supplier and customer risks; acquisition and divestiture execution; cybersecurity, legal, environmental, and regulatory matters; and debt-covenant limitations. The company reported no material changes to its previously disclosed risk factors or market-risk exposures.
- Environmental remediation costs were assessed as probable in a range of $16–$43 million, with a best estimate of $19 million. The company reported $285 million of letters of credit, guarantees, and surety bonds, and said it did not expect legal proceedings or these obligations to have a material adverse effect.
- The company early adopted share-based compensation guidance, recording a $165 million cumulative adjustment to beginning accumulated earnings. Adoption of revenue-recognition guidance was planned for fiscal 2019; management did not expect a material impact based on its initial assessment.
Important facts for investors to verify
- Whether reported sales growth and margins persist after separating organic growth from acquisition, currency, and divestiture effects.
- Whether the fiscal 2017 sales and EPS outlook is achieved, including the effect of the prior-year extra week and foreign exchange.
- Timing and cash cost of the $708 million note maturity, and the company’s refinancing or repayment plans.
- Delivery of the projected restructuring savings and the remaining charges and cash outlays.
- Exposure to tax-sharing matters, environmental remediation, raw-material prices, and other disclosed contingencies.