TE Connectivity Ltd. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 29, 2013; comparisons are with the periods ended March 30, 2012. Amounts are in U.S. dollars unless noted. The company reorganized its reportable segments in fiscal 2013; prior-period segment figures were recast.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $3.265 billion, up 0.5% | $6.399 billion, down 0.3% |
| Organic sales growth (non-GAAP) | Down 4.0% | Down 4.2% |
| Gross margin | $1.052 billion; 32.2% of sales, versus 31.4% | $2.041 billion; 31.9%, versus 30.6% |
| Operating income | $359 million, versus $385 million | $652 million, versus $746 million |
| Net income attributable to TE Connectivity | $277 million, versus $257 million | $554 million, versus $517 million |
| Diluted EPS | $0.65, versus $0.60 | $1.30, versus $1.20 |
| Operating cash flow | Not separately stated for the quarter | $837 million, versus $729 million |
| Free cash flow (non-GAAP) | Not separately stated for the quarter | $657 million, versus $451 million |
Quarterly operating income fell despite higher gross margin, reflecting substantially higher restructuring charges. Excluding restructuring and acquisition-related costs, management said operating income increased in both the quarter and first half. Productivity gains and lower material costs supported gross margin, partly offset by price erosion.
Cash and cash equivalents were $1.073 billion at March 29, down from $1.589 billion at September 28, 2012. Total debt was $3.030 billion, down from $3.711 billion; net debt was approximately $1.957 billion. Current assets were $5.864 billion and current liabilities $3.901 billion. The $1.5 billion revolving facility had no borrowings; the company reported compliance with debt covenants.
Segments and material changes
| Segment | Quarter sales / change | Quarter operating income / margin |
|---|---|---|
| Transportation Solutions | $1.385 billion; up 8.7% | $241 million; 17.4% |
| Network Solutions | $725 million; down 11.0% | $19 million; 2.6% |
| Industrial Solutions | $736 million; up 3.5% | $78 million; 10.6% |
| Consumer Solutions | $419 million; down 6.7% | $21 million; 5.0% |
Reported sales were supported by the Deutsch acquisition, which contributed $172 million in the quarter and $320 million in the first half; foreign exchange reduced sales by $26 million and $70 million, respectively. Organic weakness was most pronounced in Network Solutions, including subsea communications, and Industrial Solutions’ industrial end market. Transportation benefited from automotive demand and Deutsch.
Six-month operating cash flow improved by $108 million, and free cash flow increased by $206 million, primarily due to improved working capital. Financing used $1.120 billion, including $714 million of long-term debt repayments, $365 million of share repurchases, and $177 million of shareholder distributions and dividends.
Outlook, unusual items, and risks
- Guidance: Fiscal Q3 2013 sales of $3.325–$3.425 billion and diluted EPS of $0.65–$0.69. Fiscal 2013 sales of $13.075–$13.375 billion and diluted EPS of $2.80–$2.92. Outlook assumes foreign exchange rates and commodity prices consistent with current levels.
- Restructuring: The company initiated headcount reductions and manufacturing-site closures across segments. It reported $173 million of net restructuring and other charges for the first half; the notes describe $196 million of charges for the fiscal 2013 program and approximately $232 million of expected charges for that program. Management separately expected approximately $275 million of net restructuring charges in fiscal 2013, with about $100 million in annualized savings expected by the end of fiscal 2015. These figures reflect different disclosures and scopes.
- Tax settlement and earnings: First-half results included a $331 million tax benefit and $231 million of other expense related to settlement of undisputed pre-separation tax matters. The tax benefit materially affected reported earnings. A separate IRS dispute over historical intercompany debt remains unresolved; the company says an adverse outcome could materially affect results, financial position, or cash flows.
- Contingencies: The company recorded a $241 million liability under its tax-sharing agreement. It disclosed a disputed Com-Net contingent payment of up to $80 million, for which no liability was recorded because payment was not considered probable or reasonably estimable. Environmental remediation costs were estimated at $13–$24 million, with $14 million recorded. Management did not expect ordinary-course legal proceedings to have a material effect.
- Business risks: Management cited weakness in industrial, telecom, data communications, subsea, appliance, and consumer-device markets; exposure to economic cycles, customer investment, pricing, raw-material costs, foreign exchange, and execution of restructuring savings. Fiscal 2013 capital spending was expected to be 4–5% of sales.
Important facts for investors to verify
- Whether the fiscal 2013 sales and EPS outlook was achieved, and how much depended on automotive growth versus continued weakness in other markets.
- The underlying operating trend excluding restructuring and acquisition costs, especially in Network and Consumer Solutions.
- Cash conversion and working-capital sustainability; free cash flow is a company-defined non-GAAP measure and includes adjustments disclosed in the filing.
- Restructuring spending, savings realization, and the reconciliation between the program-specific $232 million estimate and the broader fiscal-year estimate.
- Developments in the unresolved IRS intercompany-debt dispute and related tax-sharing obligations, as well as the approaching 2014 debt maturity.