TE Connectivity Ltd. — FY2018 Form 10-K Summary
Business context and reporting period
TE Connectivity designs and manufactures connectivity and sensor products serving transportation, industrial, and communications markets. This annual report covers the 52-week fiscal year ended September 28, 2018; fiscal 2017 was also 52 weeks. The filing’s “2018 Q4” reference corresponds to the fourth quarter within this annual reporting period, not a standalone quarterly filing.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $13.988 billion | $12.185 billion |
| Operating income / margin | $2.331 billion / 16.7% | $1.876 billion / 15.4% |
| Gross margin | $4.745 billion / 33.9% | $4.183 billion / 34.3% |
| Income from continuing operations | $2.584 billion | $1.540 billion |
| Net income | $2.565 billion | $1.683 billion |
| Diluted EPS, continuing operations | $7.32 | $4.30 |
| Cash from continuing operating activities | $2.301 billion | $2.273 billion |
- Sales increased 14.8%; organic sales growth was 9.2%, with positive currency translation of 3.6% and acquisition contribution of 2.0%. Price erosion reduced sales by $180 million.
- All continuing segments grew: Transportation Solutions sales rose 17.8%, Industrial Solutions 10.0%, and Communications Solutions 12.4%. Transportation accounted for 59% of sales.
- Operating income rose 24.3%, while gross margin contracted 0.4 percentage points. Higher volume and favorable currency supported gross profit; price erosion and higher material costs were pressures.
- Capital expenditures were $935 million, up from $679 million. Cash and equivalents were $848 million, down from $1.218 billion. Total debt was $4.000 billion, down from $4.344 billion; $963 million of principal was due in FY2019. The $1.5 billion revolving credit facility had no borrowings.
- Total assets were $20.386 billion and shareholders’ equity was $10.831 billion at year-end. Cash from continuing operations modestly exceeded FY2017 despite higher working-capital needs and incentive compensation payments.
Material changes and unusual items
- FY2018 continuing-operations income benefited from a $344 million income tax benefit, including a $1.222 billion tax benefit from certain legal-entity restructurings and intercompany transactions, partly offset by $567 million of expense related to the U.S. Tax Cuts and Jobs Act. The reported effective tax rate was negative 15.4%; earnings therefore include significant tax-driven effects.
- FY2018 Q4 continuing-operations income was $1.674 billion and net income was $1.661 billion. The quarter included the $1.222 billion tax benefit. FY2018 Q1, by contrast, included $567 million of tax expense related to the tax law.
- Restructuring and other charges, net, were $126 million in FY2018, including $140 million of restructuring charges. Management expects about $125 million of annualized savings from FY2018 actions by the end of FY2020; FY2019 restructuring charges were expected to be similar to FY2018.
- TE agreed to sell Subsea Communications (SubCom) for $325 million in September 2018; the sale closed in November 2018, after year-end. SubCom was reported as discontinued operations. FY2018 included a $19 million impairment, and the company expected an additional pretax loss on sale of about $90 million. TE retained guarantees associated with existing projects.
- Share repurchases were $966 million in FY2018; dividends paid were $588 million. The approved annual dividend rate increased to $1.76 per share.
Outlook, risks, and contingencies
- Management forecast FY2019 sales of $13.9–$14.3 billion and diluted continuing-operations EPS of $5.20–$5.40. The outlook assumed current currency and commodity levels and included estimated adverse currency effects of about $400 million on sales and $0.16 per share on EPS.
- For FY2019 Q1, management forecast sales of $3.33–$3.43 billion and diluted continuing-operations EPS of $1.09–$1.13, with estimated adverse currency effects of $75 million on sales and $0.04 per share on EPS. It expected global automotive production to decline about 2% in the quarter.
- Key exposures include automotive and other cyclical end-market demand, pricing pressure and historical annual price erosion of 1–2%, raw-material availability and prices, foreign currency, China and broader geopolitical/trade risks, supplier dependence, competition, cybersecurity, and environmental and legal matters.
- Environmental investigation and remediation costs were estimated at a reasonably possible $15–$42 million; $17 million was accrued. The company also disclosed $566 million of unrecognized tax benefits and $60 million of related accrued interest and penalties.
- SubCom-related existing guarantees and letters of credit totaled approximately $1.7 billion, mostly expected to expire within two years; TE could also be required to issue up to $300 million of new guarantees for certain post-sale projects. Management said it did not expect to have to perform, but contractual recourse and exposure merit monitoring.
- Management stated that cash generation and available funding should meet foreseeable capital needs, including FY2019 debt maturities. Approximately $11.6 billion of cash, cash equivalents, and intercompany deposits was considered permanently reinvested; changing that intent could trigger up to $0.9 billion of tax expense.
Important facts for investors to verify
- Separate underlying operating growth from the unusually large FY2018 tax benefit, and assess the tax assumptions behind FY2019 EPS guidance.
- Track organic growth, segment margins, price erosion, and whether planned restructuring savings materialize as scheduled.
- Confirm the final SubCom sale working-capital adjustment, the realized loss on sale, and the company’s continuing guarantee obligations.
- Review liquidity against the $963 million of FY2019 debt principal, planned capital spending of 5–6% of sales, dividends, and buybacks.
- Monitor foreign-exchange sensitivity, commodity costs, automotive production, and working-capital conversion against management’s outlook.