TE Connectivity Ltd. — Q3 Fiscal 2023 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2023; comparative periods ended June 24, 2022. Financial amounts are in U.S. dollars. Interim financial statements are unaudited.
Business context and performance
TE Connectivity makes connectivity and sensor products for transportation, industrial, communications, medical, energy, and other markets. It reports through Transportation Solutions, Industrial Solutions, and Communications Solutions. The quarter’s sales decline was driven mainly by Communications Solutions, while Transportation Solutions grew.
Key financial metrics
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Net sales | $3,998 million | $4,097 million | $11,999 million | $11,922 million |
| Gross margin | $1,299 million; 32.5% | $1,328 million; 32.4% | $3,770 million; 31.4% | $3,895 million; 32.7% |
| Operating income | $630 million | $719 million | $1,669 million | $2,096 million |
| Operating margin | 15.8% | 17.5% | 13.9% | 17.6% |
| Net income | $528 million | $594 million | $1,358 million | $1,720 million |
| Diluted EPS | $1.67 | $1.83 | $4.27 | $5.26 |
- Organic sales, a non-GAAP measure excluding currency translation and acquisition/divestiture effects, declined 1.4% in Q3 and grew 4.6% for the nine months. Pricing actions added $173 million and $468 million, respectively, to organic sales.
- Q3 segment sales: Transportation Solutions $2,433 million, up 5.8%; Industrial Solutions $1,141 million, up 1.3%; Communications Solutions $424 million, down 36.8%. Communications declines reflected market weakness and inventory corrections in data and devices, as well as weaker appliance demand.
- Q3 segment operating income was $425 million in Transportation Solutions, $150 million in Industrial Solutions, and $55 million in Communications Solutions. Communications operating margin fell to 13.0% from 25.5%, largely reflecting lower volume.
- Nine-month operating cash flow was $1,994 million, versus $1,524 million. Management attributed the increase primarily to working-capital changes, partly offset by lower pretax income. Capital expenditures were $538 million, compared with $556 million.
Liquidity, debt, and capital allocation
- At June 30, 2023, cash and cash equivalents were $1,131 million; current assets were $7,649 million and current liabilities $4,258 million.
- Total debt was $4,206 million, comprising $291 million of short-term debt and $3,915 million of long-term debt; total debt was unchanged from September 30, 2022. TEGSA had $288 million of commercial paper outstanding at a 5.3% weighted-average rate and no borrowings under its $1.5 billion revolving credit facility. The company reported compliance with debt covenants.
- During the nine months, the company issued $500 million of 4.50% senior notes due February 2026 and repaid €550 million of 1.10% notes at maturity.
- Cash dividends paid were $541 million and share repurchases totaled $621 million in the nine-month period. The approved FY2023 dividend is $2.36 per share in four quarterly installments; $1.1 billion remained under the repurchase authorization.
Changes, outlook, and management commentary
- Compared with the prior-year quarter, sales fell 2.4%, operating income declined $89 million, and diluted EPS fell $0.16. For the nine months, sales were up 0.6%, but operating income declined $427 million and diluted EPS declined $0.99. Lower volume, higher costs, currency effects, and increased restructuring charges affected profitability.
- Management expects Q4 FY2023 sales of approximately $4.0 billion and diluted EPS from continuing operations of approximately $1.63. Q4 FY2022 sales included an extra week contributing $306 million. The outlook assumes current currency rates and commodity prices and includes an estimated $68 million favorable currency impact on sales versus the prior-year quarter.
- The company cited inflation in transportation, energy, and raw materials, supply-chain disruptions, and inventory corrections in some end markets. It said pricing and productivity actions have helped mitigate cost pressures. It does not expect Russia/Ukraine or COVID-19 to have a significant global FY2023 impact, while noting possible future effects.
- Fiscal 2023 restructuring actions generated $208 million of net restructuring charges in the first nine months. Management expects approximately $250 million of total restructuring charges for FY2023 and approximately $200 million of total spending, funded from operating cash. Actions initiated in the first nine months are expected to yield about $150 million of annualized savings by the end of FY2025.
Risks, contingencies, and unusual items
- U.S. trade-control investigations remain ongoing following voluntary disclosures to BIS and DDTC; the Department of Justice has also contacted the company. Potential fines or penalties cannot yet be reasonably estimated, and the final outcome may differ from amounts reserved.
- Environmental remediation costs were estimated at a reasonably possible range of $16 million to $44 million; $20 million was accrued as the probable loss. Management did not expect the matter to materially affect results, financial position, or cash flows.
- Other unusual items included $60 million of impairment on a held-for-sale Transportation Solutions business and a net $12 million charge related to three divestitures. Nine-month restructuring and other charges totaled $283 million.
- Management said there were no material changes to disclosed risk factors and no significant changes in market-risk exposures. It identified economic and cyclical conditions, demand, raw-material costs and availability, currency, suppliers, cybersecurity, regulatory compliance, and litigation among relevant risks.
- Swiss implementation of the OECD global minimum tax is anticipated to take effect January 1, 2024; management is assessing potential effects, expected to affect the company beginning in fiscal 2025.
Important facts for investors to verify
- Whether Communications Solutions demand and customer inventory corrections stabilize, and whether Transportation and Industrial growth continues.
- How much of the planned $150 million annualized restructuring savings is realized, against expected charges and cash spending.
- Whether Q4 sales and EPS guidance is achieved, including the currency assumptions and prior-year extra-week comparison.
- Working-capital trends, especially receivables and inventories, and the sustainability of operating cash flow.
- Developments in trade-control investigations, potential penalties, environmental remediation estimates, and the future tax impact of the global minimum tax.