TE Connectivity Ltd. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2021, ended June 25, 2021. Comparative periods ended June 26, 2020. Amounts are in U.S. dollars unless stated otherwise. The filing identifies the registrant as TE Connectivity Ltd.
Financial results
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Net sales | $3.845 billion | $2.548 billion | $11.105 billion | $8.911 billion |
| Gross margin | $1.268 billion; 33.0% | $707 million; 27.7% | $3.624 billion; 32.6% | $2.766 billion; 31.0% |
| Operating income (margin) | $714 million (18.6%) | $134 million (5.3%) | $1.774 billion (16.0%) | $190 million (2.1%) |
| Continuing-operations income (loss) | $581 million | $(58) million | $1.461 billion | $(487) million |
| Net income (loss) | $580 million | $(41) million | $1.467 billion | $(471) million |
| Diluted EPS from continuing operations | $1.74 | $(0.18) | $4.39 | $(1.46) |
Q3 sales rose 50.9% year over year, including 45.0% organic growth and a 5.4% favorable currency effect. Nine-month sales increased 24.6%, including 19.0% organic growth, favorable currency translation, and acquisition/divestiture effects. Management noted that the prior-year comparisons included significant adverse COVID-19 impacts. Higher volume was the main driver of improved gross profit and operating results; productivity and currency also contributed. Raw-material prices and supply constraints were increasing.
- Segment sales, Q3 / nine months: Transportation Solutions $2.265 billion / $6.776 billion; Industrial Solutions $1.002 billion / $2.827 billion; Communications Solutions $578 million / $1.502 billion.
- Segment operating income, Q3 / nine months: Transportation $433 million / $1.139 billion; Industrial $148 million / $335 million; Communications $133 million / $300 million. Transportation growth was led by automotive and commercial transportation; industrial equipment and communications appliances also grew strongly. Aerospace, defense, oil and gas remained weak, as did nine-month medical sales.
Cash flow, balance sheet and capital allocation
- Operating cash flow was $1.902 billion for the first nine months, up from $1.272 billion. Higher pre-tax income and accounts payable partly drove the increase; growth in accounts receivable and inventory absorbed cash.
- Capital expenditures were $454 million. Management expected FY2021 capital spending of approximately 4–5% of net sales.
- Cash and equivalents were $1.416 billion at June 25, 2021, versus $945 million at September 25, 2020. Current assets were $7.394 billion and current liabilities $4.662 billion (approximately 1.6x current ratio).
- Total debt was $4.134 billion, compared with $4.146 billion at fiscal year-end; cash less total debt was approximately $2.718 billion. Debt included $505 million short-term and $3.629 billion long-term. A $500 million note was due February 2022.
- The company issued €550 million of 0.00% senior notes due 2029, repaid notes maturing in 2021, and extended its $1.5 billion revolving credit facility to June 2026. No facility borrowings were outstanding; the company reported compliance with debt covenants.
- Nine-month cash uses included $483 million of dividends and $518 million of share repurchases in the cash-flow statement. The equity note reports repurchases of $591 million for the period; the filing’s repurchase-value measure differs from cash-flow timing. The board added $1.5 billion to the authorization, with $1.9 billion remaining at quarter-end. Quarterly dividend was $0.50 per share.
Outlook, commentary and risks
- Management forecast Q4 FY2021 sales of approximately $3.8 billion and diluted continuing-operations EPS of approximately $1.55. FY2021 guidance was sales of approximately $14.9 billion and diluted continuing-operations EPS of approximately $5.94. The estimates assumed exchange rates near then-current levels; management estimated favorable currency effects versus FY2020 of $82 million and $0.03 per share for Q4, and $473 million and $0.18 per share for FY2021.
- FY2021 restructuring charges were expected to total approximately $200 million, with approximately $200 million of cash spending. The FY2021 actions were expected to produce about $75 million in annualized savings by the end of FY2023; additional charges of approximately $20 million were expected to complete those actions. FY2020 restructuring actions had approximately $22 million of further charges expected.
- COVID-19 had adversely affected FY2020 and some FY2021 businesses. Management did not expect a significant near-term impact, but warned that future effects remained uncertain, including potential renewed infections, supply-chain disruption and changes in demand. Risks also include raw-material availability and cost, customer and supplier conditions, automotive demand, currency, competition, acquisitions, cyber disruption, and regulatory and trade compliance matters.
- The company was cooperating with U.S. agencies investigating voluntary disclosures of apparent trade-control violations. Investigations were ongoing; potential fines or penalties could not be reasonably estimated, and final outcomes could differ from reserves. Environmental remediation costs were estimated at $18–$47 million, with $21 million accrued.
- Other contingencies include $135 million of letters of credit, guarantees and surety bonds, plus approximately $129 million of legacy SubCom performance guarantees expected to expire through FY2025. Management did not expect ordinary legal proceedings or these guarantees to have a material adverse effect.
- Prior-year comparisons were affected by a $900 million goodwill impairment, significant tax charges related to Swiss tax reform and deferred-tax valuation allowances. These items materially distort year-over-year earnings comparisons.
Key facts for investors to verify
- Whether strong organic growth and margin recovery persist beyond comparisons against COVID-affected prior-year results.
- Delivery against Q4 and FY2021 sales and EPS guidance, including assumptions for currency and end-market demand.
- Effects of input-cost inflation, material availability, and working-capital needs on gross margin and cash conversion.
- Actual restructuring spending, timing and realization of the expected $75 million annualized savings.
- Final outcome and financial exposure from the U.S. trade-control investigations and environmental matters.
- Debt repayment, liquidity and capital allocation, including dividends, buybacks and the February 2022 note maturity.