Business context and reporting period
TE Connectivity Ltd. (NYSE: TEL) designs connectivity and sensor solutions for transportation, industrial, communications, medical, energy, and other markets. This unaudited Form 10-Q covers the quarter and first six months of fiscal 2021 ended March 26, 2021; comparisons are to periods ended March 27, 2020. Financial amounts below are U.S. dollars.
Key financial results
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales | $3.738 billion | $3.195 billion | $7.260 billion | $6.363 billion |
| Gross margin | $1.210 billion; 32.4% | $1.029 billion; 32.2% | $2.356 billion; 32.5% | $2.059 billion; 32.4% |
| Operating income (loss) | $612 million; 16.4% | $(415) million; (13.0)% | $1.060 billion; 14.6% | $56 million; 0.9% |
| Net income (loss) | $506 million | $(456) million | $887 million | $(430) million |
| Diluted EPS | $1.51 | $(1.37) | $2.66 | $(1.29) |
Quarterly sales rose 17.0% year over year, including 11.0% organic growth; first-half sales rose 14.1%, including 8.6% organic growth. Higher volume, favorable currency translation, lower material costs, and improved manufacturing productivity supported gross profit. Price erosion reduced organic sales by $20 million in Q2 and $46 million in the first half.
- Transportation Solutions: Q2 sales rose 23.2% to $2.287 billion, with growth across automotive, commercial transportation, and sensors. Segment operating income was $398 million.
- Industrial Solutions: Q2 sales declined 1.0% to $952 million and operating income fell to $111 million. Weakness in commercial aerospace, oil and gas, and medical markets outweighed growth in industrial equipment and energy.
- Communications Solutions: Q2 sales increased 32.7% to $499 million and operating income rose to $103 million, reflecting growth in data and devices and appliances.
Cash flow, debt, and liquidity
For the first six months, operating cash flow was $1.220 billion, up from $892 million, primarily due to higher pretax income and improved working capital. Capital expenditures were $284 million; operating cash flow less capital expenditures was approximately $936 million. Cash and equivalents were $1.748 billion at March 26, 2021, compared with $945 million at fiscal year-end. Total debt was $4.521 billion, versus $4.146 billion; cash exceeded short-term debt of $919 million, while long-term debt was $3.602 billion.
The company reported $1.5 billion of available commitments under its revolving credit facility and no borrowings under it. It was in compliance with debt covenants. Management said operating cash generation and other potential funding sources should meet foreseeable capital needs, including €350 million of notes due June 2021 and $500 million of notes due February 2022. Fiscal 2021 capital spending was expected at 4%–5% of sales.
Financing cash flows included $318 million of dividends, $259 million of share repurchases, $661 million of debt issuance proceeds, and $280 million of debt repayments. The company had $686 million remaining under its share repurchase authorization. A $2.00-per-share dividend was approved, payable in four quarterly installments of $0.50 beginning in Q3 FY2021.
Outlook, commentary, risks, and unusual items
- Q3 FY2021 outlook: Net sales of approximately $3.7 billion and diluted continuing-operations EPS of approximately $1.51. The outlook assumed current foreign-exchange rates; currency was expected to add about $108 million to sales and $0.01 per share versus Q3 FY2020.
- COVID-19: Management said pandemic disruption continued to affect some businesses, customers, suppliers, and end markets. Commercial aerospace was particularly weak, though management expected that market to stabilize in the second half of FY2021. Future effects remained uncertain.
- Restructuring: First-half net restructuring and other charges were $184 million, including $153 million for the FY2021 restructuring program. Management expected about $60 million of annualized savings from FY2021 actions by the end of FY2023, approximately $200 million of total FY2021 charges, and approximately $230 million of FY2021 cash spending. It expected further charges of about $20 million for FY2021 actions and $26 million for the FY2020 program.
- Prior-period comparison: Q2 FY2020 included a $900 million goodwill impairment in Transportation Solutions, a key reason for the prior-period operating and net losses. First-half FY2020 income tax expense included $355 million related primarily to Swiss tax reform; Q2 FY2020 also included a $31 million tax benefit related to pre-separation tax matters.
- Contingencies: U.S. trade-control investigations following voluntary disclosures to BIS and DDTC remained ongoing. Possible penalties could not yet be reasonably estimated; reserves had been recorded, but the final outcome could differ. Environmental remediation costs were estimated at $17 million–$47 million, with $20 million accrued. The company also had $130 million of legacy SubCom performance guarantees and letters of credit, expected to expire through FY2025; management did not expect to have to perform on them.
- Other risks: The filing identifies economic and industry cyclicality, automotive demand, raw-material availability and prices, currency movements, supplier and customer risks, competition, acquisitions, cybersecurity, regulation, litigation, and potential future goodwill impairment among risks. Management stated that ordinary-course legal proceedings were not expected to have a material effect.
Important facts for investors to verify
- Whether the Q3 sales and EPS outlook was achieved, and how much performance depended on favorable currency movements.
- Whether Transportation and Communications growth offsets continued weakness in Industrial Solutions, especially commercial aerospace and medical markets.
- Restructuring cash spending, timing of the stated savings, and any additional charges.
- The outcome and potential financial exposure from the BIS and DDTC investigations, for which penalties were not quantifiable.
- Near-term debt maturities, cash generation, and the effect of dividends and repurchases on liquidity.
- Working-capital trends: receivables and inventories increased from fiscal year-end, and the cash-flow statement shows substantial first-half cash investment in both.