TE Connectivity Ltd. — Q1 Fiscal 2021 Form 10-Q
Reporting period: Quarter ended December 25, 2020; comparisons are with the quarter ended December 27, 2019. Amounts are U.S. dollars unless stated otherwise. The interim financial statements are unaudited.
Business context and performance
TE Connectivity designs and manufactures connectivity and sensor products serving transportation, industrial, medical, energy, communications, and other markets. Sales increased as transportation and communications growth more than offset weakness in Industrial Solutions. Management said COVID-19 continued to affect operations and certain end markets.
Key financial metrics
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net sales | $3.522 billion | $3.168 billion |
| Gross margin | $1.146 billion; 32.5% | $1.030 billion; 32.5% |
| Operating income / margin | $448 million; 12.7% | $471 million; 14.9% |
| Income from continuing operations | $375 million | $23 million |
| Net income | $381 million | $26 million |
| Diluted EPS, continuing operations | $1.13 | $0.07 |
| Cash from continuing operating activities | $640 million | $411 million |
Net sales grew 11.2% reported and 6.2% organically; foreign currency translation contributed 3.4% and acquisitions 1.6%. Gross margin dollars rose with higher volume, favorable currency translation, and lower material costs, while the gross margin percentage was unchanged. Operating income fell $23 million, primarily reflecting restructuring and other charges of $167 million versus $24 million a year earlier.
Cash and cash equivalents were $1.098 billion at quarter-end. Total debt was $4.201 billion, including $685 million short-term and $3.516 billion long-term debt. The company reported no borrowings under its $1.5 billion revolving credit facility and was in compliance with debt covenants. Operating cash flow improved primarily due to working capital. Capital expenditures were $142 million; investing cash outflow was $246 million and financing cash outflow was $252 million. Dividends paid were $159 million and share repurchases were $119 million in cash-flow reporting.
Material changes and segment results
- Transportation Solutions: Sales rose 19.1% to $2.224 billion, with organic growth of 12.3%, led by automotive and commercial transportation. Operating income was $308 million versus $316 million; reported results included $118 million of restructuring charges.
- Industrial Solutions: Sales declined 5.8% to $873 million, including an 8.4% organic decline. Aerospace/defense/oil/gas and medical were weak; industrial equipment grew. Operating income fell to $76 million from $115 million.
- Communications Solutions: Sales increased 13.9% to $425 million, including 11.5% organic growth, with growth in appliances and data and devices. Operating income rose to $64 million from $40 million.
The effective tax rate was 13.8%, compared with 95.1% in the prior-year quarter. The prior-year period included $355 million of tax expense related primarily to Swiss tax reform and deferred-tax-asset remeasurement; the current quarter included a $29 million tax benefit from an approved tax-method change. This makes the large year-over-year increase in net income and EPS substantially tax-driven and not directly comparable.
Outlook, risks, and unusual items
- For Q2 FY2021, management expected sales of approximately $3.5 billion and diluted EPS from continuing operations of approximately $1.38. The forecast included estimated favorable foreign exchange impacts of $167 million to sales and $0.09 per share versus Q2 FY2020; it assumed exchange rates remained near current levels.
- Management expected fiscal 2021 capital spending of approximately 5% of net sales. Fiscal 2021 restructuring charges were expected to total approximately $200 million, with cash spending of approximately $250 million. The new fiscal 2021 actions were expected to generate approximately $60 million in annualized savings by the end of fiscal 2023.
- COVID-19 remained a material uncertainty, including potential supply-chain disruption, operating restrictions, and weaker demand. Management expected commercial aerospace and medical markets to improve later in fiscal 2021, while noting the outlook remained uncertain.
- The company was investigating past compliance with U.S. trade controls and making voluntary disclosures to the Bureau of Industry and Security. The investigation was ongoing; potential fines or penalties could not be estimated for materiality.
- Environmental remediation costs were estimated at a reasonably possible range of $16 million to $46 million; $19 million was accrued. The company also disclosed SubCom-related guarantees and letters of credit, including existing project guarantees valued at approximately $280 million, expected to expire through fiscal 2025; it said it did not anticipate having to perform.
- Liquidity planning included payment after quarter-end of $250 million of senior notes due January 2021 and a €350 million senior-note maturity due June 2021. Management said available resources were sufficient for foreseeable capital needs but noted pandemic-related uncertainty.
Important facts for investors to verify
- Whether the Q2 sales and EPS outlook was achieved, particularly given its stated foreign-exchange assumptions and COVID-19 exposure.
- Progress, cash costs, completion timing, and realized savings from restructuring programs; reported operating income was burdened by unusually high charges.
- Demand recovery in Industrial Solutions, especially commercial aerospace and medical, and whether transportation growth is sustainable.
- Developments and any potential financial consequences of the U.S. trade-controls investigation.
- Cash generation, working-capital trends, debt maturities, covenant headroom, and the company’s ability to meet guarantees and environmental obligations.