TE Connectivity Ltd. — Form 10-Q Summary
Reporting period: Second quarter and six months ended March 30, 2012; fiscal 2012. Financial amounts are in U.S. dollars unless noted. The filing is unaudited.
Business context
TE Connectivity designs and manufactures products connecting and protecting power and data flows. It reports three segments: Transportation Solutions, Communications and Industrial Solutions, and Network Solutions. The company said results were affected by varied end-market demand, foreign exchange, material costs, and worldwide economic conditions.
Key financial results
| Metric | Quarter ended Mar. 30, 2012 | Prior-year quarter | Six months ended Mar. 30, 2012 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $3.249 billion | $3.339 billion | $6.419 billion | $6.446 billion |
| Gross margin | $1.021 billion (31.4%) | $1.008 billion (30.2%) | $1.964 billion (30.6%) | $1.999 billion (31.0%) |
| Operating income | $385 million (11.8%) | $392 million (11.7%) | $746 million (11.6%) | $782 million (12.1%) |
| Net income attributable to TE Connectivity | $257 million | $299 million | $517 million | $564 million |
| Diluted EPS | $0.60 | $0.67 | $1.20 | $1.26 |
- Quarterly organic sales fell 1.3%; reported sales declined 2.7%, including a $47 million adverse currency impact. Six-month organic sales declined 2.2%; reported sales declined 0.4%.
- Quarterly continuing-operations income was $268 million, versus $292 million; six-month continuing-operations income was $508 million, versus $556 million. The quarter included a $10 million after-tax loss from discontinued operations; the prior-year quarter had $8 million of income.
- Quarterly gross margin improved chiefly through manufacturing productivity and comparison with prior-year ADC purchase-accounting charges. Six-month gross margin and operating income declined, mainly reflecting lower volume and higher material costs, partly offset by productivity.
- Operating cash flow from continuing operations was $676 million for six months, versus $669 million. Capital expenditures were $270 million, versus $227 million. Company-defined free cash flow was $449 million, versus $454 million.
Balance sheet, debt and liquidity
- At March 30, 2012, cash and cash equivalents were $2.866 billion; total debt was $3.972 billion, including $1.285 billion classified as current. Long-term debt was $2.687 billion. Cash less total debt was approximately $1.106 billion of net debt.
- Total current assets were $8.311 billion and current liabilities $4.371 billion. Shareholders’ equity was $7.674 billion; total liabilities were $11.346 billion.
- Cash increased from $1.218 billion at September 30, 2011. Financing cash flow was $1.183 billion for the six months, including $569 million of commercial paper and $748 million of long-term debt proceeds. Investing cash flow was a $271 million use.
- The company had no borrowings under its $1.5 billion revolving credit facility and reported compliance with debt covenants. The facility includes a maximum 3.5-to-1 consolidated debt-to-EBITDA covenant.
Material changes versus prior comparable periods
- Transportation Solutions grew: quarterly sales rose 7.4% to $1.457 billion and operating income rose to $227 million from $211 million. Six-month sales rose 7.3% to $2.862 billion and operating income rose to $450 million from $400 million, supported by automotive and aerospace, defense and marine demand.
- Communications and Industrial Solutions weakened: quarterly sales fell 12.2% to $975 million and operating income fell to $75 million from $135 million. Six-month sales fell 13.3% to $1.949 billion and operating income to $136 million from $306 million. Management cited weakness and inventory corrections in industrial and data communications, and softer consumer-device and appliance demand.
- Network Solutions quarterly sales fell 6.2% to $817 million, while operating income increased to $83 million from $46 million, partly because the prior-year quarter included ADC acquisition-related and purchase-accounting charges. Six-month sales rose 5.2% to $1.608 billion, including $154 million of incremental ADC sales; operating income was $160 million versus $76 million. Organic sales declined in both periods, with subsea and telecom weakness.
- Debt rose by $1.305 billion from September 30, 2011, reflecting new notes and commercial paper raised in advance of the subsequent Deutsch acquisition. No shares were repurchased under the authorization during the six months; dividends and distributions paid were $153 million.
Outlook, management commentary and unusual items
- Management forecast third-quarter fiscal 2012 sales of $3.55–$3.65 billion and diluted EPS of $0.58–$0.62. Full-year fiscal 2012 sales guidance was $13.5–$13.8 billion and diluted EPS $2.50–$2.60. Guidance assumes then-current foreign-exchange and commodity rates and includes Deutsch.
- Management expected automotive production growth to support Transportation Solutions, while continued data-communications and industrial weakness and lower telecom-carrier spending and subsea project activity would weigh on other segments. The company was monitoring customer demand and managing costs and capital resources.
- On April 3, 2012, after quarter-end, TE acquired Deutsch for approximately $2.05 billion net of cash acquired, including repayment of about $660 million of Deutsch debt. Management expected Deutsch sales of about $190 million in the third quarter and $370 million in fiscal second half. Initial purchase accounting and pro forma results were not yet available.
- The company classified Touch Solutions and TE Professional Services as discontinued operations and held for sale. It recorded a $28 million pretax impairment on TE Professional Services. Subsequent sale agreements provided for $24 million cash for TE Professional Services and $380 million cash for Touch Solutions, with contingent earn-outs for Touch Solutions; a roughly $65 million tax charge was expected on that sale.
- Restructuring charges were $50 million for the six months. Management expected approximately $100 million of fiscal-2012 restructuring charges and about $135 million in annualized savings; expected fiscal-2012 cash spending across restructuring actions was approximately $185 million. Fiscal-2012 actions primarily involved headcount reductions, especially in Communications and Industrial Solutions.
- Discontinued-operations results also included a $25 million court judgment recovery related to the former Wireless Systems business. Uncertain tax positions remained a material uncertainty: the balance sheet included $2.264 billion of income-tax liabilities, and accrued interest and penalties related to uncertain tax positions totaled $1.290 billion. The company noted unresolved IRS disputes and stated ultimate resolution could materially affect results, financial position or cash flows.
- Other disclosed exposures included an $80 million disputed contingent Com-Net purchase-price claim, $377 million of letters of credit and guarantees, and environmental remediation reserves of $12 million (estimated probable range $11–$21 million). Management did not expect ordinary legal proceedings or these environmental reserves to have a material effect.
Most important facts for investors to verify
- Whether quarterly and full-year sales and EPS guidance was achieved, particularly given the stated end-market softness and reliance on seasonal recovery.
- Deutsch’s completed purchase accounting, actual contribution to sales and earnings, integration costs, and effect on debt and liquidity.
- Closing proceeds, earn-out terms and expected tax consequences of the Touch Solutions and TE Professional Services divestitures.
- Progress, cash costs and realized savings from restructuring, compared with management’s estimates.
- Developments in IRS examinations, disputed pre-separation tax matters, indemnification recoveries and the substantial recorded tax-related liabilities.
- Debt maturities, commercial-paper funding, covenant headroom and cash available after the Deutsch acquisition and shareholder distributions.