TE Connectivity Ltd. — FY2015 Form 10-K
Reporting period: Fiscal year ended September 25, 2015 (52 weeks). The filing is an annual report, not a standalone quarterly filing; selected fourth-quarter figures are included below. The company designs and manufactures connectivity and sensor products across Transportation Solutions, Industrial Solutions, and Communications Solutions.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $12.233 billion | $11.973 billion |
| Gross margin | $4.087 billion; 33.4% | $3.972 billion; 33.2% |
| Operating income | $1.749 billion; 14.3% margin | $1.805 billion; 15.1% margin |
| Continuing operations income | $1.238 billion; diluted EPS $3.01 | $1.614 billion; diluted EPS $3.87 |
| Net income | $2.420 billion; diluted EPS $5.89 | $1.781 billion; diluted EPS $4.27 |
| Cash from continuing operating activities | $1.619 billion | $1.804 billion |
| Free cash flow (non-GAAP) | $1.076 billion | $1.477 billion |
FY2015 reported sales rose 2.2%; organic sales grew 3.8%, while acquisitions added 5.9% and currency translation reduced sales by 7.5%. Price erosion reduced organic sales by $208 million. Gross margin improved 0.2 percentage points, but operating margin fell 0.8 points. Continuing operating cash flow declined by $185 million, principally due to working-capital changes.
Segment sales and operating income were: Transportation Solutions, $6.351 billion and $1.193 billion; Industrial Solutions, $3.179 billion and $352 million; Communications Solutions, $2.703 billion and $204 million. Organic sales increased 4.1% in Transportation and 8.4% in Communications, but were flat in Industrial. Transportation operating income fell $52 million, Industrial fell $79 million, and Communications rose $75 million.
Fourth quarter: Sales were $2.984 billion, compared with $3.072 billion in FY2014 Q4. Income from continuing operations was $136 million (diluted EPS $0.34); net income was $1.040 billion (diluted EPS $2.57), including $904 million of income from discontinued operations, net of tax, largely reflecting the BNS sale.
Liquidity, debt, and capital allocation
- At year-end, cash and cash equivalents were $3.329 billion; current assets were $7.887 billion and current liabilities $3.577 billion.
- Total debt was $3.903 billion, including $500 million due in FY2016. The company had no borrowings under its $1.5 billion revolving credit facility and reported compliance with debt covenants.
- Capital expenditures were $600 million. The company paid $502 million in dividends and cash distributions and repurchased approximately 18 million shares for $1.163 billion; $2.7 billion remained under the repurchase authorization.
- Management said operating cash and other available funding should cover foreseeable needs, including the $500 million FY2016 debt maturity. Approximately $5.2 billion in cash, cash equivalents, and intercompany deposits was considered permanently reinvested; changing that designation could result in up to $1.7 billion of tax expense.
Material changes and unusual items
- Sold Broadband Network Solutions (BNS) for $3.0 billion cash, recording a $1.105 billion pretax gain. Discontinued operations also included a $127 million pretax reserve/charge for a Com-Net judgment, which the company is appealing.
- Acquired Measurement Specialties for approximately $1.7 billion net of cash acquired; it contributed $548 million of FY2015 sales. The purchase added $1.064 billion of goodwill.
- Continuing operations income was affected by tax items: a $264 million benefit from settlements of undisputed tax matters for 2001–2010, offset in part by $216 million of tax charges from legal-entity restructuring and a $29 million charge related to BNS-related intercompany dividends. The reported income tax provision was $337 million.
- Restructuring and other charges totaled $152 million, versus $19 million in FY2014. Management expected about $75 million of restructuring charges and $90 million of total restructuring cash spending in FY2016; annualized savings from FY2015 actions were estimated at $80 million by the end of FY2017.
- After year-end, the company agreed to sell its Circuit Protection Devices business for $350 million cash, subject to adjustment and closing conditions; completion was expected in FY2016 Q2.
Outlook, commentary, and risks
- FY2016 guidance: sales of $12.0–$12.8 billion and diluted EPS of $3.61–$4.01. The 53-week year was expected to add about $200 million of sales and $0.05 EPS. Currency was expected to reduce sales by about $262 million and EPS by $0.10 versus FY2015.
- FY2016 Q1 guidance: sales of $2.7–$2.9 billion and diluted EPS of $0.62–$0.70. Management anticipated sales declines across all segments, continued weakness in China, and currency impacts of approximately $167 million in sales and $0.05 per share versus prior-year Q1.
- Management cited expected automotive sales growth for FY2016, but flat global automotive production; weakness in oil and gas, China, and data and devices; and supply-chain inventory reductions. Subsea communications growth was expected to be offset by declines in other Communications markets.
- Key exposures include automotive cyclicality (39% of FY2015 sales), competitive pricing and annual price erosion, foreign exchange (52% of sales invoiced in non-U.S. currencies; the company does not hedge this revenue exposure), raw-material availability and costs, China and oil-and-gas weakness, and integration/execution risk on acquisitions and divestitures.
- Material contingencies include an unresolved IRS dispute involving pre-separation intercompany debt. The IRS asserted taxes of $778 million, penalties of $154 million, withholding taxes of $105 million, and a further estimated $30 million partnership tax deficiency, before interest and other potential effects. Under the tax-sharing agreement, TE’s share of covered payments would generally be 31%; the company stated that it believes its reserves are appropriate. Environmental remediation costs were estimated at $16–$38 million, with a best estimate of $19 million.
Most important facts for investors to verify
- Whether FY2016 sales and EPS guidance is achieved, particularly given China demand, currency headwinds, and inventory adjustments.
- Underlying profitability and cash generation after separating the BNS gain, tax settlements, restructuring, acquisition costs, and other unusual items.
- Measurement Specialties integration and the realization of projected restructuring savings, alongside the impact of the CPD divestiture.
- Cash accessibility and potential tax costs on repatriation, plus repayment or refinancing of the $500 million FY2016 maturity.
- Progress and potential financial exposure from the IRS dispute and Com-Net appeal. Deloitte issued unqualified opinions on the financial statements and internal controls; however, Measurement Specialties was excluded from the internal-control assessment.