TE Connectivity Ltd. — Q2 FY2022 Form 10-Q
Business context and period. TE Connectivity is a global industrial technology company providing connectivity and sensor solutions. This unaudited report covers the quarter and six months ended March 25, 2022; comparisons are with the corresponding 2021 periods. Financial amounts are in U.S. dollars.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $4.007 billion, up 7.2% reported and 8.4% organic | $7.825 billion, up 7.8% reported and 8.2% organic |
| Gross margin | $1.337 billion; 33.4% of sales, versus 32.4% | $2.567 billion; 32.8% of sales, versus 32.5% |
| Operating income | $705 million, versus $612 million; 17.6% margin versus 16.4% | $1.377 billion, versus $1.060 billion; 17.6% margin versus 14.6% |
| Net income | $560 million, versus $506 million | $1.126 billion, versus $887 million |
| Diluted EPS | $1.71, versus $1.51 | $3.43, versus $2.66 |
| Operating cash flow | Not separately reported for the quarter | $945 million, versus $1.220 billion |
Industrial Solutions and Communications Solutions led sales growth. For the quarter, their sales grew 12.9% and 23.8%, respectively; Transportation Solutions grew 1.2%. Six-month Transportation Solutions sales declined 0.9%. Foreign currency translation reduced total reported sales growth by 2.9 percentage points in the quarter and 2.1 points for the six-month period. Pricing actions added $121 million to quarterly organic sales and $173 million over six months. Higher volume and pricing lifted gross margin, partly offset by increased material costs.
Cash, liquidity, and capital
Cash and cash equivalents were $749 million at March 25, 2022, down from $1.203 billion at September 24, 2021. Total debt was $4.051 billion, versus $4.092 billion; it comprised $610 million short-term and $3.441 billion long-term debt. The company reported total current assets of $7.417 billion and current liabilities of $5.046 billion. Management said operating cash and, if needed, other funding sources should cover anticipated capital needs, including the €550 million notes due March 2023. The $1.5 billion revolving credit facility had no borrowings, and the company was in compliance with debt covenants.
Six-month operating cash flow fell by $275 million year over year, primarily because of higher incentive compensation payments and working capital needs, including a $411 million inventory cash outflow. Capital expenditures were $351 million, versus $284 million. Financing used $1.012 billion, including $708 million of share repurchases and $326 million of dividends. The company issued $600 million of 2.50% senior notes due 2032 and redeemed $500 million of 3.50% notes due 2022. It repurchased about five million shares for $752 million and had $839 million of authorization remaining. Shareholders approved a $2.24-per-share dividend payable in four quarterly installments of $0.56 beginning in Q3 FY2022.
Outlook, commentary, and risks
- Q3 FY2022 outlook: Net sales of approximately $3.9 billion and diluted continuing-operations EPS of approximately $1.71. China COVID-related shutdowns were expected to reduce year-over-year sales by about 300 basis points. Foreign exchange was expected to reduce sales by about $154 million and EPS by $0.02 versus Q3 FY2021. Outlook assumes current exchange rates and commodity prices.
- Costs and restructuring: Fiscal 2022 restructuring actions target footprint consolidation and cost improvements. The company expects about $50 million of annualized savings by fiscal 2024, approximately $150 million of total restructuring charges in fiscal 2022, and approximately $175 million of spending. It expects about $12 million of additional charges for fiscal 2022 actions and about $8 million remaining for fiscal 2021 actions.
- Macroeconomic and operating risks: The company suspended operations in Russia and paused operations in Ukraine. It reported higher transport, energy, and raw-material costs, partly mitigated by pricing and productivity; the conflict had not materially affected results in the first half, but future effects were uncertain. China COVID shutdowns affected operations and outlook. Supply-chain disruption, inflation and commodity availability, foreign exchange, automotive demand, and global economic and political conditions remain risks.
- Contingencies: TE Connectivity is investigating past compliance with U.S. trade controls and has made voluntary disclosures to BIS and DDTC. Agency investigations remain ongoing; possible penalties cannot yet be reasonably estimated, and current reserves may differ from the final outcome. Environmental remediation exposure was estimated at $18 million to $45 million, with $21 million accrued. SubCom-related guarantees and letters of credit totaled about $117 million and may remain outstanding through fiscal 2027; the company has contractual recourse and does not anticipate performing.
- Unusual tax items: Six-month tax expense included a $27 million deferred-tax-asset write-down, a $36 million benefit from an intercompany transaction, and $12 million of expense related to an acquired-entity tax audit; an $11 million indemnification receivable and other income was recorded for the audit matter. A roughly $4 billion increase in deferred tax assets and an equivalent valuation allowance had no reported income-statement or balance-sheet effect.
Investor verification priorities
- Check whether Q3 sales and EPS guidance was achieved, particularly given China shutdowns and foreign-exchange effects.
- Track inventory growth, working-capital cash use, and the conversion of earnings into operating cash flow.
- Assess whether pricing and productivity continue to offset material, energy, and transportation cost inflation.
- Monitor trade-control investigations, potential penalties, and changes to reserves as agency reviews progress.
- Verify restructuring charges, cash spending, and delivery of the expected savings, alongside upcoming debt maturities and shareholder distributions.