TE Connectivity Ltd. — FY2017 Form 10-K Summary
Business context and reporting period
TE Connectivity designs and manufactures connectivity and sensor products for transportation, industrial, communications, medical, energy, data and appliance markets. It reports three segments: Transportation Solutions, Industrial Solutions and Communications Solutions. Fiscal 2017 ended September 29, 2017, and comprised 52 weeks; fiscal 2016 comprised 53 weeks, a comparability factor in year-over-year results.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $13.113 billion | $12.238 billion |
| Gross margin | $4.450 billion; 33.9% | $4.033 billion; 33.0% |
| Operating income | $2.047 billion; 15.6% margin | $1.902 billion; 15.5% margin |
| Income from continuing operations | $1.673 billion | $1.941 billion |
| Net income | $1.683 billion | $2.009 billion |
| Diluted EPS from continuing operations | $4.67 | $5.26 |
| Cash from continuing operating activities | $2.322 billion | $2.044 billion |
| Capital expenditures | $702 million | $628 million |
| Total debt at fiscal year-end | $4.344 billion | $4.070 billion |
Operating cash flow less capital expenditures was approximately $1.620 billion in FY2017. At year-end, cash and cash equivalents were $1.218 billion, current assets $5.926 billion and current liabilities $3.847 billion. The company reported $9.751 billion of shareholders’ equity. The $708 million of 6.55% notes due in October 2017 was repaid after fiscal year-end. The $1.5 billion revolving credit facility had no borrowings outstanding at year-end.
Material changes versus the prior comparable period
- Sales grew 7.1% as reported and 6.0% organically. Acquisitions and divestiture effects contributed 1.8 percentage points; foreign currency translation reduced growth by 0.7 percentage points. FY2016’s extra week contributed an estimated $238 million of sales, so reported growth comparisons are affected by the shorter FY2017.
- Transportation Solutions sales rose 8.2% to $7.039 billion, led by automotive and commercial transportation. Industrial Solutions sales rose 9.1% to $3.507 billion, with substantial acquisition contribution; organic growth was 1.6%. Communications Solutions sales increased 1.9% to $2.567 billion, with organic growth offset in part by the CPD divestiture.
- Gross margin increased to 33.9% from 33.0%, primarily due to higher volume and lower material costs, partly offset by price erosion. Operating margin increased slightly to 15.6%.
- Net income and continuing-operations EPS declined despite higher sales and operating income. FY2016 included a large tax benefit from tax settlements; FY2017 did not. FY2016 also had higher other expense related to the Tax Sharing Agreement.
- Continuing operating cash flow increased $278 million. Cash balances rose from $647 million to $1.218 billion, while debt increased $274 million. FY2017 acquisitions cost $250 million, versus approximately $1.3 billion in FY2016.
Guidance, management commentary, risks and unusual items
- For FY2018, management forecast net sales of $13.7–$14.1 billion and diluted EPS from continuing operations of $4.78–$4.98. For Q1 FY2018, it forecast sales of $3.35–$3.45 billion and diluted continuing-operations EPS of $1.12–$1.16. The outlook assumed foreign exchange rates and commodity prices near then-current levels.
- Management expected growth in Transportation and Industrial Solutions, and more modest growth in Communications Solutions. It expected global automotive production to be flat in Q1 FY2018 and up approximately 1% for FY2018.
- FY2017 restructuring and other charges were $148 million, including $147 million of restructuring charges. The FY2017 restructuring program was expected to produce about $125 million of annualized savings by the end of FY2019. FY2018 restructuring charges were expected to be similar to FY2017, with approximately $130 million of total spending.
- Capital spending was expected to be approximately 5% of FY2018 sales. Expected FY2018 pension contributions were $62 million before any voluntary contributions.
- Key exposures include economic and end-market cyclicality, particularly automotive; sustained price erosion (historically 1%–2% annually); raw-material costs and availability; foreign exchange (about 55% of sales invoiced in non-U.S. currencies); customer and supplier concentration or consolidation; and acquisition integration and execution.
- The company disclosed $22 billion of cumulative undistributed subsidiary earnings considered permanently reinvested. Approximately $6.3 billion of cash and intercompany deposits were designated permanently reinvested; changing that intention was estimated to trigger about $1.2 billion of tax expense. The deferred-tax valuation allowance was $3.627 billion, and unrecognized tax benefits were $501 million, with $60 million of accrued interest and penalties.
- Environmental investigation and remediation costs were considered probable in a range of $15–$43 million, with a best estimate of $19 million. Management did not expect the disclosed legal matters, individually or in aggregate, to materially affect results, financial position or cash flows. The filing also identifies litigation, regulatory, cybersecurity, geopolitical and Swiss-law risks.
- FY2017 Q4 sales were $3.456 billion, continuing-operations income was $429 million, and diluted continuing-operations EPS was $1.21. FY2016 included unusual tax and divestiture items that affect quarterly comparisons.
Most important facts for investors to verify
- Whether organic sales growth and margin trends persist after accounting for FY2016’s extra week, acquisitions, divestitures and currency movements.
- Whether the projected FY2018 sales and EPS ranges are achieved, especially given automotive, subsea communications and industrial-market assumptions.
- Whether restructuring delivers the expected savings and whether FY2018 restructuring charges and cash spending remain near management’s estimates.
- How the repayment of the October 2017 notes affects debt, interest expense and liquidity, and whether debt covenants remain comfortably satisfied.
- Whether cash designated permanently reinvested can be accessed without material tax cost, and how tax audits, valuation allowances and tax-law changes affect earnings and cash flow.
- Whether working-capital needs, capital expenditures, pension obligations and environmental or other contingencies materially change cash generation.