TE Connectivity Ltd. — FY2011 Form 10-K
Reporting period: Fiscal year ended September 30, 2011. Fiscal 2011 contained 53 weeks; fiscal 2010 contained 52 weeks. The company designs and manufactures connectivity and protection products across Transportation Solutions, Communications and Industrial Solutions, and Network Solutions. It acquired ADC Telecommunications in December 2010 and changed its name from Tyco Electronics Ltd. to TE Connectivity Ltd. in March 2011.
Financial performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $14.312 billion | $12.070 billion |
| Gross margin | $4.422 billion; 30.9% | $3.777 billion; 31.3% |
| Operating income | $1.741 billion; 12.2% margin | $1.516 billion; 12.6% margin |
| Net income attributable to TE Connectivity | $1.245 billion | $1.103 billion |
| Diluted EPS attributable to TE Connectivity | $2.81 | $2.41 |
| Cash from continuing operations | $1.779 billion | $1.679 billion |
| Free cash flow, company-defined non-GAAP | $1.392 billion | $1.404 billion |
| Cash and cash equivalents at year-end | $1.219 billion | $1.990 billion |
| Total debt at year-end | $2.669 billion | $2.413 billion |
| Working capital | $3.231 billion | $3.271 billion |
Reported sales increased 18.6%; organic sales growth was 6.2%. Currency translation added $394 million, the extra week added $277 million, and ADC contributed $964 million. Price erosion reduced organic sales by $192 million. Gross margin percentage eased amid price erosion, higher materials costs, unfavorable mix, Japan-related disruption, and $41 million of ADC purchase-accounting charges. The company reported $149 million of restructuring and other charges and $19 million of ADC acquisition and integration costs.
Quarterly context: FY2011 fourth-quarter sales were $3.911 billion, versus $3.137 billion in FY2010 Q4; attributable continuing-operations income was $326 million versus $253 million, and diluted continuing-operations EPS was $0.75 versus $0.56. FY2011 Q4 included $84 million of net restructuring and other charges.
Segments and material changes
- Transportation Solutions: Sales of $5.629 billion, up 17.3%; operating income of $848 million versus $515 million; margin improved to 15.1% from 10.7%. Organic growth was led by automotive.
- Communications and Industrial Solutions: Sales of $5.071 billion, up 5.2%; operating income fell to $564 million from $682 million; margin declined to 11.1% from 14.1%. Consumer devices were weak, while industrial markets grew.
- Network Solutions: Sales of $3.612 billion, up 47.4%, largely reflecting ADC; operating income was $329 million versus $312 million, while margin fell to 9.1% from 12.7%. Organic sales growth was 3.3%.
ADC contributed an operating loss of $59 million, including restructuring, purchase-accounting amortization, and acquisition/integration costs. Management expected approximately $100 million of annualized ADC-related cost savings, with about 40% realized in FY2011 and the balance expected in FY2012.
Cash, debt, liquidity, and capital returns
Capital expenditures rose to $581 million from $385 million. Cash declined by $771 million during the year, reflecting investing and financing outflows that included the ADC acquisition, $865 million of share repurchases, and $296 million of shareholder distributions. The company had a $1.5 billion five-year revolving credit facility with no borrowings at year-end and reported compliance with debt covenants. Total debt included $716 million of 6.00% notes due 2012; the filing lists $719 million of debt maturities in FY2013 overall. Management said operating cash flow and other available funding were expected to meet anticipated capital needs.
Outlook, risks, and unusual items
- FY2012 guidance: sales of $14.3–$14.9 billion and diluted EPS of $3.00–$3.30. Q1 FY2012 guidance was sales of $3.4–$3.5 billion and diluted EPS of $0.66–$0.70. Guidance assumed then-current foreign exchange and commodity rates.
- Management expected FY2012 capital spending of 4%–5% of sales, approximately $102 million of pension and postretirement contributions, and approximately $90 million of net cash payments over the next 12 months for pre-separation tax matters. Manufacturing simplification actions were expected to result in approximately $60 million of FY2012 restructuring charges.
- The March 2011 Japan earthquake and tsunami reduced estimated FY2011 sales by $99 million and diluted EPS by $0.07; management expected no further impact in FY2012.
- Key exposures include economic and end-market cyclicality, especially automotive; competition and ongoing pricing pressure; raw-material costs and availability; foreign currency; ADC integration and synergy delivery; and disruption to global supply chains.
- Tax matters remain a significant uncertainty: the balance sheet included $1.783 billion of unrecognized tax benefits and $1.287 billion of accrued interest and penalties. The company remains primarily liable for certain pre-separation taxes despite sharing arrangements with Tyco International and Covidien.
- In litigation concerning a former wireless-network contract, New York alleged damages exceeding $275 million; the State had drawn $50 million on a letter of credit and could draw up to another $50 million. A separate Com-Net matter involved a disputed potential $80 million payment; no liability was recorded because payment was not considered probable or reasonably estimable. Environmental remediation reserves were $13 million, within an estimated $12–$24 million range.
- The company reported an unqualified audit opinion and effective internal control over financial reporting, including ADC in the annual assessment.
Most important facts for investors to verify
- How much of reported sales growth and EPS reflected organic performance versus ADC, currency, the additional fiscal week, and nonrecurring items.
- Whether ADC integration delivers the forecast cost savings and improves Network Solutions’ margin.
- Whether price erosion and rising material costs continue to pressure gross and segment margins.
- The cash-flow and financing impact of tax examinations, including the pre-separation tax-sharing arrangements and related liabilities.
- Developments in the New York contract litigation and any additional letter-of-credit draw, as well as the unrecorded Com-Net contingency.
- Whether FY2012 guidance, restructuring plans, capital spending, and shareholder distributions remain achievable under changing market, currency, and commodity conditions.