TE Connectivity Ltd. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 25, 2016; unaudited. The supplied filing identifies the registrant as TE Connectivity Ltd., rather than TE Connectivity Plc.
Business context and period
TE Connectivity designs and manufactures connectivity and sensor products. Its reportable segments are Transportation Solutions, Industrial Solutions, and Communications Solutions. The filing compares fiscal 2016 results with the corresponding 2015 periods.
Financial performance
| Metric | Quarter ended March 25, 2016 | Six months ended March 25, 2016 |
|---|---|---|
| Net sales | $2.952 billion, down 4.2% | $5.785 billion, down 5.6% |
| Gross margin | $962 million; 32.6% of sales, versus 34.1% | $1.907 billion; 33.0% of sales, versus 33.8% |
| Operating income | $535 million; 18.1% margin, versus $448 million and 14.5% | $933 million; 16.1% margin, versus $873 million and 14.2% |
| Income from continuing operations | $389 million, versus $316 million | $713 million, versus $751 million |
| Net income | $380 million, versus $599 million | $733 million, versus $1.071 billion |
| Diluted EPS | $1.03, versus $1.45 | $1.93, versus $2.59 |
Reported operating income benefited from a $146 million pretax gain on the sale of the Circuit Protection Devices (CPD) business. Excluding that gain and other specified special items, management said second-quarter Communications Solutions operating income declined, while first-half results improved. Prior-year net income included substantial discontinued-operations income associated with the Broadband Network Solutions (BNS) sale.
- Segment sales, quarter / six months: Transportation Solutions $1.608 billion / $3.115 billion; Industrial Solutions $738 million / $1.447 billion; Communications Solutions $606 million / $1.223 billion.
- Organic sales grew 3.2% in Transportation Solutions in the quarter, but declined 7.4% in Industrial Solutions and 8.3% in Communications Solutions. Automotive and sensors supported Transportation; industrial equipment, oil and gas, data and devices, and appliances were weak. Subsea communications grew.
- Foreign exchange reduced sales by $75 million in the quarter and $257 million in the first half. Management also cited price erosion of $50 million and $103 million, respectively.
Cash flow, liquidity, and debt
- Six-month net cash from continuing operating activities was $522 million, versus $555 million; total operating cash flow was $520 million, versus $693 million. Free cash flow, a non-GAAP measure, was $402 million, versus $296 million.
- Capital expenditures were $270 million. Management expected fiscal 2016 capital spending to be about 5% of sales.
- Cash and cash equivalents were $1.150 billion at March 25, down from $3.329 billion at September 25, 2015. Financing activities used $2.712 billion, including $2.523 billion for share repurchases and $245 million in dividends.
- Total debt was $3.884 billion, unchanged from September 25, 2015. The company issued $350 million of 3.7% notes due 2026 and repaid $500 million of floating-rate notes. It had $150 million of commercial paper outstanding and no borrowings under its $1.5 billion revolving credit facility. The company reported compliance with debt covenants.
- Current assets were $5.414 billion and current liabilities $3.097 billion. The filing states management believed available operating cash and potential funding sources would meet anticipated capital needs for the foreseeable future.
Changes, outlook, and management commentary
- In the second quarter, TE Connectivity sold CPD for $350 million, subject to working-capital adjustments; it received $261 million during the quarter and recorded a $146 million pretax gain. CPD was part of Communications Solutions.
- After quarter-end, on April 4, 2016, the company acquired Creganna Medical for approximately $900 million net of cash acquired, subject to final working-capital adjustment. Management expected approximately $60 million of third-quarter sales from the acquisition.
- For fiscal Q3 2016, management forecast sales of $3.0–$3.2 billion and diluted EPS of $0.90–$0.96. For fiscal 2016, it forecast sales of $12.1–$12.5 billion and diluted EPS of $3.92–$4.12. The fiscal-year outlook includes a 53rd week, estimated to add about $200 million in sales and $0.10 per share; estimated adverse currency impacts were $284 million in sales and $0.10 per share. Outlook assumes foreign exchange rates and commodity prices remain near current levels.
- Management cited uncertainty in China and broader macroeconomic conditions and said it was managing costs and monitoring capital availability. A restructuring program initiated in fiscal 2016 is expected to cost approximately $93 million in total, with actions expected to finish by fiscal 2019; annualized savings of about $65 million are expected by fiscal 2017.
Risks, contingencies, and unusual items
- Tax dispute: A proposed IRS resolution of the intercompany-debt tax dispute remained contingent. TE Connectivity paid the IRS $443 million and received $305 million in indemnification reimbursements from Tyco International and Covidien, for a net cash payment of $140 million. The company said it was adequately reserved; an adverse outcome could materially affect results, financial position, or cash flows.
- Com-Net litigation: A 2015 judgment against the company was $127 million plus costs and accruing interest. The company said it was reserved and appealing.
- Environmental matters: Probable remediation costs were estimated at $16–$43 million, with a best estimate of $19 million.
- Management did not expect ordinary-course legal proceedings, guarantees, or disposal-related indemnities to have a material adverse effect, but noted tax proceedings could be material. Outstanding letters of credit, guarantees, and surety and appeal bonds totaled $506 million.
- Other notable items include a $20 million additional pretax gain on the prior BNS divestiture in the first half and $15 million of investment write-offs during the first half.
Important facts for investors to verify
- Whether the reported operating-income improvement persists after excluding the CPD sale gain and other special items.
- Whether organic demand, pricing, and segment margins stabilize, particularly in Industrial and Communications Solutions.
- Whether the Creganna acquisition integrates as planned and delivers the forecast contribution and expected benefits.
- The final status and financial consequences of the IRS settlement, related tax-sharing reimbursements, and the Com-Net appeal.
- How cash balances and capital allocation evolve following substantial share repurchases, the new dividend commitment, and the Creganna acquisition.