TE Connectivity (then Tyco Electronics Ltd.) — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2010, ended June 25, 2010. Comparative periods ended June 26, 2009. Amounts are U.S. dollars; financial figures below are in millions unless noted.
Business context and financial performance
The company supplied engineered electronic components, network solutions, specialty products, and subsea communications systems through four segments. Results reflected a broad recovery in several end markets, particularly automotive, alongside continued weakness in subsea project activity.
| Metric | Quarter | Nine months | Comparable prior period |
|---|---|---|---|
| Net sales | $3,084 | $8,933 | $2,508; $7,558 |
| Gross margin | $985; 31.9% | $2,784; 31.2% | $587; 23.4%; $1,845; 24.4% |
| Operating income (loss) | $467; 15.1% margin | $1,134; 12.7% margin | $64; 2.6%; $(3,650); (48.3)% |
| Net income (loss) attributable to Tyco Electronics | $330; diluted EPS $0.72 | $806; diluted EPS $1.75 | $(77); $(3,356); diluted EPS $(0.17), $(7.33) |
| Operating cash flow | $375 | $1,205 | $330; $787 |
Revenue increased 23% for the quarter and 18% year to date; organic growth was 24.3% and 15.8%, respectively. Gross-margin gains were attributed mainly to cost reductions from prior restructuring. The prior-year nine-month operating loss included $3,547 million of goodwill impairment, $329 million of restructuring and other charges, and $144 million of pre-separation litigation charges. Prior-year results also included discontinued-operation losses.
Segments and material changes
- Electronic Components: Quarterly sales rose 46% to $2,074 million and operating income was $298 million, versus an $82 million loss. Automotive, industrial, and other end markets recovered strongly. Nine-month sales rose 38% to $5,969 million.
- Network Solutions: Quarterly sales increased 4% to $442 million and operating income rose to $60 million. Nine-month sales declined 2% to $1,258 million, reflecting weakness in energy and service-provider markets.
- Specialty Products: Quarterly sales increased 17% to $398 million and operating income rose to $66 million. Nine-month operating income was $166 million versus a $13 million loss, with the prior year including $112 million of goodwill impairment.
- Subsea Communications: Quarterly sales fell 47% to $170 million and operating income declined to $36 million; nine-month sales fell 35% to $579 million. Management cited completion of large projects and lower activity.
Price erosion reduced sales by $38 million in the quarter and $127 million year to date. Currency translation reduced quarterly sales by $18 million but increased nine-month sales by $250 million.
Cash, debt, liquidity, and capital allocation
- Cash and equivalents were $1,815 million, up from $1,521 million at fiscal year-end. Total debt was $2,415 million, nearly unchanged from $2,417 million; cash less total debt was approximately $(600) million.
- Current assets were $6,333 million and current liabilities $3,337 million (current ratio approximately 1.9). The company reported $1,425 million of effective revolving-credit capacity, with no borrowings outstanding. It was in covenant compliance; the facility includes a 3.5-to-1 maximum debt-to-EBITDA threshold.
- Nine-month operating cash flow increased to $1,205 million from $787 million. Capital expenditures were $249 million; management expected approximately $375 million for fiscal 2010. Working-capital investment, including higher receivables and inventories, partly offset improved earnings.
- The company repurchased shares for $373 million of cash and paid $218 million in distributions during the first nine months. It expected to fund the proposed ADC acquisition with approximately $1 billion of available cash and the balance through debt issuance.
Outlook, unusual items, and risks
- For fiscal 2010’s fourth quarter, management forecast sales of $3.05–$3.15 billion, up 13%–17% year over year at then-current exchange rates. It expected slightly lower consumer-market sales sequentially, modest industrial and infrastructure growth, and lower subsea project revenue. No earnings guidance was provided in the supplied filing text.
- Management expected approximately $115 million of restructuring charges during fiscal 2010 and 2011, about $190 million of total restructuring cash spending in fiscal 2010, and approximately $30 million of annualized savings from manufacturing simplification. Additional charges related to fiscal 2010 and 2009 actions were estimated at approximately $3 million and $14 million, respectively.
- On July 12, 2010, after quarter-end, the company agreed to acquire ADC Telecommunications for approximately $1.25 billion, or $12.75 per share in cash, subject to closing conditions and expected in fiscal 2011’s first quarter. It planned to use cash and issue debt. ADC shareholder litigation and integration, financing, regulatory, and synergy risks were disclosed.
- During the quarter, the company corrected prior-period income-tax accounting errors. It concluded prior statements were not materially misstated, but corrected the affected periods because the cumulative correction would be material to fiscal 2010. The filing reports a $124 million quarterly tax charge related primarily to proposed prior-year tax-return adjustments and accrued interest, partly offset by a $98 million benefit from completed non-U.S. audits.
- Tax uncertainty remained significant: accrued interest and penalties on uncertain tax positions totaled $1,202 million. IRS matters involving pre-separation tax years could produce a material effect, although the company said the ultimate outcome and impact were uncertain.
- The State of New York dispute over the former Wireless Systems contract remained unresolved. The State had drawn $50 million under a letter of credit and could draw up to another $50 million; its counterclaim alleged damages exceeding $275 million. The company disputed the claims. It also disclosed an unrecorded contingent Com-Net payment of up to $80 million, which it did not consider probable or estimable.
- Environmental remediation was estimated at $12–$24 million, with a $14 million reserve. The company also disclosed FCPA-related investigations with potential losses not estimable, and $377 million of outstanding letters of credit and guarantees.
Most important facts for investors to verify
- Whether sales recovery and margin improvement persisted, especially in automotive and other Electronic Components markets, and whether price erosion or raw-material costs offset gains.
- Whether the $3.05–$3.15 billion fourth-quarter sales outlook was achieved and how lower subsea activity affected results.
- ADC transaction funding, closing conditions, litigation, integration progress, and realized synergies; specifically, resulting debt and covenant headroom.
- Cash conversion and working-capital trends, alongside continued share repurchases, distributions, restructuring spending, and pension contributions.
- Developments in tax audits and tax-sharing recoveries, FCPA matters, and the New York and Com-Net disputes, including any changes to reserves or potential cash exposure.