TE Connectivity Ltd. — Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2022. The filing is an annual report, not a standalone Q4 report; FY2022 included 53 weeks, with a 14-week fourth quarter. The registrant is TE Connectivity Ltd., a Swiss-incorporated industrial technology company traded on the NYSE as TEL.
Business context
TE Connectivity makes connectivity and sensor products for transportation, industrial, and communications markets. FY2022 sales were 56% Transportation Solutions, 28% Industrial Solutions, and 16% Communications Solutions. No customer accounted for a significant share of sales.
Key financial metrics
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $16.281 billion | $14.923 billion |
| Gross margin | $5.244 billion; 32.2% | $4.887 billion; 32.7% |
| Operating income | $2.756 billion; 16.9% margin | $2.434 billion; 16.3% margin |
| Income from continuing operations | $2.427 billion | $2.255 billion |
| Net income | $2.428 billion | $2.261 billion |
| Diluted EPS | $7.47 | $6.79 |
| Cash from continuing operations | $2.468 billion | $2.676 billion |
| Capital expenditures | $768 million | $690 million |
| Cash and cash equivalents | $1.088 billion | $1.203 billion |
| Total debt | $4.206 billion | $4.092 billion |
Operating cash flow less capital expenditures was approximately $1.700 billion in FY2022, down from approximately $1.986 billion in FY2021. At year end, current assets were $7.268 billion and current liabilities were $4.632 billion. Debt included $370 million of commercial paper; the company had no borrowings under its $1.5 billion revolving credit facility. Cash and cash equivalents plus reported debt imply net debt of approximately $3.118 billion, using simple subtraction.
Changes versus the prior year
- Reported sales increased 9.1%; organic sales growth was 12.1%, a non-GAAP measure. The additional fiscal week contributed $306 million in sales.
- Foreign currency translation reduced sales by $723 million; acquisitions and divestitures contributed $278 million. Pricing actions added $509 million to organic sales.
- Industrial Solutions sales rose 17.6% and Communications Solutions sales rose 20.8%; Transportation Solutions sales rose 2.7%. Communications and Industrial operating margins improved, while Transportation’s declined to 16.6% from 17.0%.
- Gross margin decreased 0.5 percentage points, as inflationary material and operating costs and currency effects partly offset higher volume and pricing. Operating margin increased 0.6 percentage points.
- Operating cash flow fell $208 million, primarily due to higher working capital, despite higher pretax income. FY2022 share repurchases were $1.409 billion and dividend payments were $685 million.
Outlook, commentary and risks
- For Q1 FY2023, management expected sales of approximately $3.75 billion and diluted continuing-operations EPS of approximately $1.31. Compared with Q1 FY2022, foreign exchange was expected to reduce sales by about $400 million and EPS by $0.19. Management also expected currency translation to reduce FY2023 sales by approximately $1 billion versus FY2022.
- Management cited inflation, supply-chain disruptions, a strong U.S. dollar, and uneven end-market demand. The Russia-Ukraine conflict had not materially affected FY2022 results; its future impact remained uncertain. COVID-related shutdowns affected some China operations during the year.
- Restructuring and related charges were $153 million in FY2022. Actions initiated in the year were expected to generate approximately $120 million in annualized savings by the end of FY2025. Management expected approximately $150 million in FY2023 restructuring charges and $165 million in related spending.
- Fiscal 2022 income tax expense was $306 million, with an 11.2% effective tax rate. A $7.112 billion valuation allowance offset gross deferred tax assets of $9.791 billion; realizability depends on future taxable income and management estimates.
- U.S. trade-control investigations remain ongoing following voluntary disclosures to BIS and DDTC; the company has also been contacted by DOJ. Potential fines or penalties cannot yet be reasonably estimated, and the final outcome may differ from amounts reserved.
- Environmental investigation and remediation costs were estimated at $17 million to $44 million; $20 million was accrued. The company also disclosed ordinary-course litigation and guarantees, which management did not expect to have a material financial effect.
- Management stated liquidity and operating cash flows should meet anticipated needs, including repayment of €550 million of 1.10% notes due March 2023. Contractual debt principal due in FY2023 was $914 million. The company reported compliance with debt covenants.
Important facts for investors to verify
- How much future sales and earnings may be affected by foreign exchange, given the FY2023 currency impact estimates.
- Whether operating cash flow recovers as working capital normalizes, and how FY2023 capital spending compares with management’s expectation of approximately 5% of sales.
- The basis for the substantial deferred-tax-asset valuation allowance and the potential effect of future changes in taxable-income expectations.
- Developments, reserves, and potential penalties in the U.S. trade-control investigations.
- Execution and cash costs of restructuring, and whether expected annualized savings are achieved.
- Debt repayment and liquidity plans, including the FY2023 maturities and commercial-paper balance.