TE Connectivity Ltd. — FY2012 Form 10-K
Reporting period: Fiscal year ended September 28, 2012 (52 weeks); the filing also reports fourth-quarter results. TE Connectivity designs and manufactures connectivity products serving transportation, communications, industrial, energy, and network markets. Fiscal 2012 reporting segments were Transportation Solutions, Communications and Industrial Solutions, and Network Solutions.
Financial performance
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $13.282 billion | $13.778 billion |
| Gross margin | $4.046 billion; 30.5% | $4.271 billion; 31.0% |
| Operating income | $1.518 billion; 11.4% of sales | $1.687 billion; 12.2% of sales |
| Net income attributable to TE Connectivity | $1.112 billion | $1.245 billion |
| Diluted EPS | $2.59 | $2.81 |
| Cash from continuing operations | $1.888 billion | $1.722 billion |
| Free cash flow (non-GAAP) | $1.434 billion | $1.342 billion |
| Capital expenditures | $533 million | $574 million |
Sales fell 3.6% reported and 2.7% organically. Reported sales were also reduced by $338 million from currency translation and by comparison with FY2011’s extra week ($267 million); acquisitions contributed $481 million, including $327 million from Deutsch. Cash and cash equivalents were $1.589 billion at year-end, total debt was $3.711 billion, working capital was $2.499 billion, and equity was $7.977 billion. Current assets were $6.503 billion and current liabilities $4.004 billion. A $1.5 billion revolving credit facility was undrawn; the company reported compliance with debt covenants. The 6.00% senior notes due October 2012 were paid after year-end.
Performance changes and business developments
- Transportation Solutions sales rose 6.7% to $6.007 billion, including $327 million from Deutsch; operating income was nearly flat at $847 million and margin declined to 14.1% from 15.1%.
- Communications and Industrial Solutions sales fell 14.3% to $3.990 billion; operating income declined to $337 million from $515 million and margin fell to 8.4% from 11.1%. Weakness affected industrial, data communications, consumer devices, and appliance markets.
- Network Solutions sales fell 5.9% to $3.285 billion; operating income increased to $334 million from $324 million, and margin rose to 10.2% from 9.3%. Telecom network and subsea project activity weakened.
- Gross margin declined amid lower sales, higher material costs, and unfavorable product mix, partly offset by manufacturing productivity. Operating income also reflected acquisition-related and restructuring costs.
- TE acquired Deutsch in April 2012 for approximately $2.05 billion net of cash acquired. Deutsch contributed $327 million in sales and a $54 million operating loss, including acquisition accounting, acquisition/integration, and restructuring charges.
- The company sold Touch Solutions and TE Professional Services. Discontinued operations produced a $51 million net loss, including a $65 million tax charge on the Touch Solutions sale and a $28 million impairment of TE Professional Services.
Outlook, risks, and unusual items
- Management forecast FY2013 sales of $13.4–$14.0 billion and diluted EPS of $2.61–$2.91. First-quarter FY2013 sales guidance was $3.15–$3.25 billion and diluted EPS $0.43–$0.47.
- Management expected automotive and aerospace/defense/marine gains, including incremental Deutsch sales, to be offset by continued weakness in industrial, appliance, and energy markets. Automotive production and broadband network spending were expected to be broadly flat; weaker broadband equipment spending and subsea project activity were anticipated near term.
- In response to weaker conditions, management expected approximately $200 million of FY2013 restructuring charges, about $150 million of cash spending, and approximately $75 million in annualized savings by the end of FY2015. FY2013 capital spending was expected at 4–5% of sales.
- FY2012 included a $107 million tax benefit from reducing a valuation allowance. Unrecognized tax benefits were $1.795 billion, with $1.335 billion of accrued interest and penalties. A disputed pre-separation IRS matter could materially affect results or financial position if resolved adversely; management said it was adequately reserved.
- Other principal risks include cyclical demand and reliance on automotive (39% of sales), competitive price pressure, volatile raw material costs, currency exposure (54% of sales invoiced in non-U.S. currencies), acquisition integration, environmental obligations, and global supply-chain and geopolitical disruption. Management estimated environmental remediation costs of $13–$23 million, with a best estimate of $14 million.
- Fiscal 2013 segment reporting was reorganized into Transportation, Industrial, Consumer, and Network Solutions; historical segment results in this filing use the prior structure. Goodwill impairment testing found no impairment in FY2012. Deloitte issued unqualified opinions on the financial statements and internal control; Deutsch was excluded from management’s internal-control assessment during integration.
Important facts for investors to verify
- Whether FY2013 sales, EPS, and restructuring savings guidance were achieved, and how the new segment structure changes reported trends.
- Organic demand recovery and margin performance, particularly in Communications and Industrial Solutions and Network Solutions.
- Deutsch integration, realized synergies, and the extent to which acquisition-related costs and operating losses persist.
- Debt maturities and cash available after the acquisition, distributions, repurchases, and the post-year-end note repayment.
- Developments in the disputed pre-separation tax matter, other uncertain tax positions, and the potential cash-tax consequences of permanently reinvested foreign earnings.
- Reconciliation and limitations of management’s non-GAAP organic sales growth and free cash flow measures to GAAP results.