TE Connectivity Ltd. — FY2014 Form 10-K Summary
Reporting period: Fiscal year ended September 26, 2014 (52 weeks); filed November 12, 2014. The filing reports annual results and quarterly data, including fiscal Q4. TE Connectivity designs and manufactures connectivity and sensor products across Transportation, Industrial, Network, and Consumer Solutions. Figures are in U.S. dollars unless stated otherwise.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $13.912 billion | $13.280 billion |
| Gross margin | $4.692 billion; 33.7% | $4.329 billion; 32.6% |
| Operating income | $2.045 billion | $1.556 billion |
| Net income attributable to TE Connectivity | $1.781 billion | $1.276 billion |
| Diluted EPS | $4.27 | $3.02 |
| Cash from operating activities | $2.083 billion | $2.046 billion |
| Free cash flow (non-GAAP) | $1.730 billion | $1.500 billion |
| Capital expenditures | $673 million | $615 million |
Reported sales rose 4.8%; organic sales increased 4.6%, while price erosion reduced organic sales by $257 million. Gross-margin improvement reflected productivity and higher volume, partly offset by pricing pressure. Operating income included $59 million of restructuring and other charges and $31 million of acquisition and integration costs. FY2014 income tax expense was $207 million, despite a $282 million tax benefit from reducing a valuation allowance.
At year-end, cash and cash equivalents were $2.457 billion, current assets $7.544 billion, current liabilities $3.954 billion, and total assets $20.152 billion. Total debt was $3.948 billion, up from $3.014 billion; equity was $9.013 billion. The company had a $1.5 billion revolving credit facility with no borrowings outstanding and reported compliance with debt covenants. Debt maturities included $667 million in FY2015 and $500 million in FY2016.
Segment results and notable changes
| Segment | FY2014 sales | FY2014 operating income | Sales change vs. FY2013 |
|---|---|---|---|
| Transportation Solutions | $6.090 billion | $1.283 billion | +11.0% |
| Industrial Solutions | $3.302 billion | $446 million | +6.6% |
| Network Solutions | $2.918 billion | $163 million | -4.8% |
| Consumer Solutions | $1.602 billion | $153 million | -1.7% |
Transportation led growth, with organic automotive sales up 10.4%. Industrial growth reflected recovery in industrial equipment and strength in aerospace and oil and gas. Network sales declined, especially in subsea communications (organic decline of 28.7%) and data communications. Consumer-device weakness was partly offset by appliance growth. Network and Consumer operating income improved from FY2013, when restructuring charges were substantially higher.
In fiscal Q4, sales were $3.575 billion versus $3.432 billion a year earlier. Net income was $663 million and diluted EPS was $1.59; results included a $282 million income-tax benefit from the valuation-allowance reduction. Q4 diluted EPS a year earlier was $0.92 and included significant tax-related items, so reported year-over-year comparisons are affected by unusual tax adjustments.
Outlook, capital allocation, and risks
- FY2015 guidance: sales of $14.7–$15.3 billion and diluted EPS of $3.99–$4.29. Management estimated adverse foreign-exchange effects of approximately $400 million on sales and $0.15 per share versus FY2014. Guidance assumed exchange rates and commodity prices near then-current levels.
- For FY2015 Q1, management projected sales of $3.46–$3.56 billion and diluted EPS of $0.95–$0.99, including estimated foreign-exchange headwinds of about $100 million in sales and $0.03 per share.
- On October 9, 2014, after year-end, the company acquired Measurement Specialties for approximately $1.7 billion net of cash acquired. Management expected about $600 million of FY2015 sales contribution; purchase accounting and pro forma results were not yet complete in this filing. FY2014 included six acquisitions for $528 million net of cash acquired, including SEACON.
- Management expected FY2015 restructuring charges of approximately $65 million and cash spending of about $105 million. It cited estimated annualized savings of $115 million from FY2013 actions by the end of FY2015 and $30 million from FY2014 actions by the end of FY2016.
- Shareholder distributions were $443 million in FY2014; the company repurchased shares for $604 million and had $874 million of authorization remaining. Cash dividends/distributions paid per share were $1.08.
- Key exposures include automotive cyclicality (44% of sales), persistent price erosion, raw-material availability and prices, foreign exchange (55% of sales invoiced in non-U.S. currencies), customer and supplier concentration, and acquisition integration. The company reported no single customer accounted for a significant share of sales.
Contingencies and unusual items
- Pre-separation tax dispute: The IRS challenged intercompany-debt interest deductions associated with Tyco International tax years 1997–2000. Notices cited $778 million of additional taxes, $154 million of penalties, $105 million of withholding taxes, and an estimated additional $30 million partnership deficiency, excluding interest and possible subsequent-period effects. TE Connectivity, Tyco International, and Covidien share certain liabilities 31%, 27%, and 42%, respectively. The matter was being contested; a Tax Court trial was set for February 2016. The company said it believed its reserves were appropriate, but an adverse outcome could be material. FY2014 net cash payments for pre-separation tax matters were $179 million.
- Tax balances and repatriation: Unrecognized tax benefits were $1.597 billion, with $1.136 billion of accrued interest and penalties. Approximately $5.5 billion of cash, cash equivalents, and intercompany deposits was considered permanently reinvested; changing that intention could trigger up to approximately $1.7 billion of tax expense.
- Environmental remediation: Estimated probable costs were $18–$40 million, with a best estimate and recorded liability of $21 million.
- Other claims: A disputed Com-Net contingent purchase-price claim could reach $80 million; no liability was recorded because management considered payment neither probable nor reasonably estimable. Management did not expect ordinary-course legal matters overall to have a material effect, while identifying tax proceedings as a possible material exposure.
- Fiscal 2014 included the $282 million tax benefit; FY2013 included a $331 million tax benefit from settlement of undisputed historical tax matters and $231 million of related other expense under the tax-sharing agreement. These items materially affect earnings comparisons.
Important facts for investors to verify
- How much of FY2014 earnings and EPS growth reflects operating improvement versus the $282 million tax benefit and other tax-related items?
- Whether the FY2015 sales and EPS guidance is achieved, particularly after the Measurement Specialties acquisition and under the stated foreign-exchange assumptions.
- Progress in Network Solutions, especially subsea and data communications, and sustainability of segment margin improvements.
- Cash conversion and debt after the $1.7 billion acquisition, near-term maturities, and the company’s capacity to sustain dividends and repurchases.
- Developments in the IRS dispute, related reserves and payments, and any change in the assumed tax treatment of permanently reinvested overseas cash.
- Acquisition integration, expected savings, restructuring cash costs, and the timing and realization of projected cost reductions.