TE Connectivity Ltd. — Fiscal 2020 Form 10-K
Reporting period: Fiscal year ended September 25, 2020 (52 weeks). The filing also reports unaudited fourth-quarter results; fiscal Q4 should not be confused with the full-year figures below. The company designs and manufactures connectivity and sensor products across Transportation Solutions, Industrial Solutions, and Communications Solutions.
Financial performance
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Net sales | $12.172 billion | $13.448 billion |
| Gross margin | $3.735 billion; 30.7% | $4.394 billion; 32.7% |
| Operating income | $537 million; 4.4% margin | $1.978 billion; 14.7% margin |
| Income from continuing operations | Loss of $259 million | Income of $1.946 billion |
| Net income | Loss of $241 million; diluted EPS $(0.73) | Income of $1.844 billion; diluted EPS $5.42 |
| Cash from continuing operating activities | $1.991 billion | $2.454 billion |
| Capital expenditures | $560 million | $749 million |
| Total debt at year-end | $4.146 billion | $3.965 billion |
| Cash and cash equivalents at year-end | $945 million | $927 million |
FY 2020 sales fell 9.5% (9.9% organically), reflecting COVID-19 disruption, lower volume, currency translation, and $173 million of price erosion. Gross margin declined as lower volume, price erosion, and reduced manufacturing productivity outweighed lower material costs. Operating results included a $900 million goodwill impairment and $257 million of restructuring charges. The unusually high $783 million income tax expense, including Swiss tax reform impacts and deferred-tax valuation allowances, contributed to the annual net loss.
Continuing operating cash flow less capital expenditures was approximately $1.431 billion in FY 2020, versus $1.705 billion in FY 2019 (calculated from the reported figures). The company reported $1.5 billion of unused revolving credit commitments and no borrowings under the facility at year-end. Debt principal payments due in FY 2021 were $693 million. Total contractual cash obligations were $6.122 billion, including debt principal, interest, leases, and purchase obligations.
Segments and fourth-quarter results
- Transportation Solutions: FY sales $6.845 billion, down 12.5%; operating loss $93 million versus income of $1.226 billion in FY 2019. Automotive represented 72% of segment sales.
- Industrial Solutions: FY sales $3.713 billion, down 6.1%; operating income $412 million, down from $543 million.
- Communications Solutions: FY sales $1.614 billion, down 3.5%; operating income $218 million, up from $209 million.
- FY 2020 Q4: Sales were $3.261 billion; income from continuing operations was $228 million; net income was $230 million; diluted EPS was $0.69. FY 2019 Q4 sales were $3.300 billion and net income was $372 million.
Material changes, outlook, and risks
- The $900 million impairment followed reduced sales and profitability expectations for the Sensors reporting unit amid COVID-19 and lower projected global auto production. Remaining Sensors goodwill was $511 million; the annual fourth-quarter impairment test identified no further impairment.
- FY 2020 acquisitions included approximately 72% of First Sensor AG and four other businesses, for combined cash consideration of approximately $336 million, net of cash acquired. The First Sensor minority shareholders have put rights and may receive cash compensation; timing and amount are uncertain.
- Management forecast FY 2021 Q1 sales of approximately $3.2 billion and diluted continuing-operations EPS of approximately $0.83. It expected slight sales growth year over year, with growth in Transportation and Communications partly offset by Industrial declines. The outlook assumed current currency rates and commodity prices.
- Management expected commercial aerospace to decline by more than 20% in FY 2021 versus FY 2020 and anticipated continued near-term weakness in automotive and commercial aerospace. It also expected FY 2021 capital spending of approximately 5% of sales and about $200 million in restructuring charges, with approximately $250 million of related spending.
- COVID-19 caused significant sales and operating impacts and may further affect demand, facilities, supply chains, liquidity, and results. Other key exposures include automotive cyclicality, pricing pressure, raw-material availability and prices, foreign exchange, China and geopolitical risks, cybersecurity, tax uncertainty, litigation, and environmental remediation.
- Environmental investigation and remediation costs were estimated at $16 million to $45 million; $20 million was accrued. SubCom-related performance guarantees and letters of credit totaled about $600 million at year-end and may remain outstanding through FY 2025; the company said it did not expect to have to perform.
Investor facts to verify
- Whether demand recovery and management’s FY 2021 Q1 sales and EPS forecast materialized, especially in automotive, commercial aerospace, and industrial markets.
- Underlying profitability excluding the $900 million impairment, restructuring costs, and substantial FY 2020 tax items; review the associated non-GAAP reconciliations and assumptions.
- Cash generation, working-capital needs, debt maturities, and liquidity available to meet FY 2021 obligations, including First Sensor minority-shareholder payments.
- Recoverability of deferred tax assets: the company reported a $4.429 billion valuation allowance and $6.730 billion of gross deferred tax assets.
- Exposure from SubCom guarantees, environmental sites, and other contingencies, as well as progress and realized savings from restructuring.
Audit and controls: Deloitte & Touche LLP issued unqualified opinions on the financial statements and internal control over financial reporting. The auditors identified goodwill valuation for Sensors and realizability of deferred tax assets as critical audit matters.