TE Connectivity Ltd. — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016. This is an annual filing, not a standalone quarterly report; FY2016 included 53 weeks versus 52 weeks in FY2015. Fourth-quarter figures are noted separately below. Amounts are in U.S. dollars.
Business context and reporting period
TE Connectivity designs and manufactures connectivity and sensor products. Its three reportable segments are Transportation Solutions, Industrial Solutions, and Communications Solutions. Transportation represented 53% of FY2016 sales, Industrial 26%, and Communications 21%. No single customer accounted for a significant share of sales.
Key financial metrics
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $12.238 billion | $12.233 billion |
| Organic sales growth (non-GAAP) | 1.5% | 3.8% |
| Gross margin | $4.033 billion; 33.0% | $4.087 billion; 33.4% |
| Operating income / margin | $1.902 billion / 15.5% | $1.749 billion / 14.3% |
| Income from continuing operations | $1.941 billion | $1.238 billion |
| Net income | $2.009 billion | $2.420 billion |
| Diluted EPS from continuing operations | $5.26 | $3.01 |
| Cash from continuing operating activities | $2.019 billion | $1.619 billion |
| Free cash flow (non-GAAP) | $1.585 billion | $1.076 billion |
| Capital expenditures | $628 million | $600 million |
| Total debt | $4.070 billion | $3.884 billion |
FY2016 fourth-quarter sales were $3.332 billion, continuing-operations income was $437 million, and diluted continuing-operations EPS was $1.22. The quarter included an additional week.
At year-end, cash and cash equivalents were $647 million, down from $3.329 billion; current assets were $4.775 billion and current liabilities $3.066 billion. Shareholders’ equity was $8.485 billion, compared with $9.585 billion. The $1.5 billion revolving credit facility was undrawn, and the company reported compliance with debt covenants.
Material changes versus FY2015
- Reported sales were essentially flat. Organic growth of 1.5%, acquisition/divestiture contributions, and the additional week were substantially offset by $254 million of unfavorable currency translation. Price erosion reduced organic sales by $188 million.
- Transportation sales rose 2.4% to $6.503 billion; Industrial sales rose 1.1% to $3.215 billion; Communications sales fell 6.8% to $2.520 billion. Communications weakness reflected data-and-devices declines and the CPD divestiture.
- Gross margin declined by $54 million and 0.4 percentage points, with unfavorable mix and pricing partly offset by lower material costs. Operating income increased, including the effect of the CPD sale gain.
- Net income fell despite higher continuing-operations income, principally because FY2015 included a large gain from the sale of the Broadband Network Solutions business.
- Cash fell by $2.682 billion as operating cash was more than offset by investing and financing outflows, including acquisitions, dividends, and share repurchases.
Outlook, commentary, risks and unusual items
- Management forecast FY2017 sales of $12.3–$12.9 billion and diluted continuing-operations EPS of $3.84–$4.14. Q1 FY2017 sales guidance was $2.95–$3.05 billion and diluted continuing-operations EPS was $0.84–$0.88. The forecast assumed foreign-exchange rates and commodity prices near then-current levels.
- Management expected Transportation and Industrial growth, partly offset by Communications declines, and cited acquisition contributions and automotive content gains. It was monitoring macroeconomic conditions, including the proposed UK exit from the EU, and emphasized cost control.
- Tax items materially affected reported earnings: FY2016 included a $1.135 billion income-tax benefit from settlement of historical IRS matters, a related $604 million other expense under the Tax Sharing Agreement, a $91 million valuation-allowance charge, and an $83 million net benefit from other tax settlements. These items make reported earnings less representative of underlying operations.
- FY2016 included a $144 million pre-tax gain on the CPD sale, completed for $333 million net cash proceeds. Four acquisitions, including Creganna, cost $1.3 billion net of acquired cash; purchase-price allocations remained preliminary.
- Restructuring charges were $125 million. Management expected approximately $150 million of annualized savings from FY2016 actions by the end of FY2017, with FY2017 restructuring charges expected to be similar and cash spending of about $110 million.
- Key risks include automotive and industrial cyclicality, price pressure and competition, foreign exchange exposure (54% of sales invoiced in non-U.S. currencies; the company elected not to hedge this revenue exposure), raw-material costs, China exposure, acquisition integration, and tax and regulatory uncertainty. Environmental remediation costs were estimated at $17–$42 million, with a best estimate of $20 million. Management did not expect pending legal proceedings, individually or in aggregate, to have a material financial effect.
- Approximately $6.9 billion of cash, cash equivalents, and intercompany deposits was designated permanently reinvested; changing that designation could result in up to approximately $1.5 billion of tax expense. The company stated it did not currently need to repatriate those funds.
Most important facts for investors to verify
- How much of FY2016 continuing-operations earnings and EPS reflects the IRS settlement, related Tax Sharing Agreement expense, other tax settlements, and CPD gain, rather than recurring performance.
- Whether FY2017 sales and EPS guidance was achieved, particularly given the expected Communications decline, currency assumptions, and acquisition contributions.
- Whether the targeted restructuring savings were realized and whether further charges or cash costs emerged.
- How the $1.3 billion FY2016 acquisition spend affected returns, integration, and the final purchase-price allocation.
- How the reduced year-end cash balance, $4.070 billion debt, upcoming principal payments, and substantial share repurchases affect liquidity and capital-allocation flexibility.
- Developments in tax examinations and permanently reinvested overseas funds, environmental remediation, and other disclosed contingencies.