TE Connectivity Plc annual report, FY2010

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TE Connectivity (then Tyco Electronics Ltd.) — FY2010 10-K and Q4 summary

Reporting period: Fiscal year ended September 24, 2010; fiscal Q4 ended on that date. This is an annual 10-K, not a standalone quarterly filing. The registrant named in the filing is Tyco Electronics Ltd., a Swiss corporation.

Business context

The company designs and manufactures engineered electronic components, network solutions, specialty products, and subsea communications systems. Its four FY2010 reporting segments were Electronic Components, Network Solutions, Specialty Products, and Subsea Communications. Electronic Components contributed 67% of annual sales; automotive represented about 35% of total sales. The company operated in more than 20 countries and served customers in over 150 countries.

Financial performance and liquidity

  • FY2010 revenue: $12.070 billion, up 17.7% from $10.256 billion in FY2009; organic sales growth was 16.7%. Sales remained below FY2008’s $14.373 billion.
  • FY2010 earnings: Operating income was $1.516 billion, versus an operating loss of $3.474 billion in FY2009. Gross margin was $3.777 billion, or 31.3% of sales, compared with 24.7% in FY2009. Net income attributable to Tyco Electronics was $1.103 billion, or $2.41 diluted EPS; continuing-operations income attributable to the company was $1.059 billion, or $2.32 diluted EPS.
  • Q4 FY2010: Sales were $3.137 billion, compared with $2.698 billion in Q4 FY2009. Income from continuing operations attributable to the company was $253 million; discontinued operations contributed $44 million, producing net income of $297 million and diluted EPS of $0.66. Q4 FY2009 net income was $91 million and diluted EPS was $0.20.
  • Cash flow: Operating cash flow was $1.679 billion, up from $1.329 billion in FY2009. Investing activities used $442 million, including $385 million of capital expenditures; financing activities used $779 million. Cash increased $469 million to $1.990 billion.
  • Liquidity and debt: Current assets were $6.731 billion and current liabilities $3.460 billion, yielding reported working capital of $3.271 billion. Total debt was $2.413 billion, nearly unchanged from $2.417 billion in FY2009; long-term debt was $2.307 billion. The $1.425 billion revolving credit facility had no borrowings outstanding; $100 million of commercial paper was outstanding. The company reported compliance with debt covenants.
  • Capital returns and investment: FY2010 share repurchases were $488 million and shareholder distributions were $289 million. Capital expenditures rose to $385 million from $328 million. R&D, development, and engineering expense was $585 million.

Material changes versus prior periods

  • The sales recovery was led by Electronic Components: segment sales rose 35.4% to $8.070 billion, with broad improvement, particularly in automotive. Specialty Products sales increased 9.5% to $1.549 billion. Network Solutions sales were essentially flat at $1.727 billion. Subsea Communications sales fell 37.6% to $724 million as large projects completed in FY2009 and project activity declined.
  • Management attributed improved gross margin to higher sales, manufacturing productivity, product mix, and restructuring savings. FY2009 results were heavily affected by $3.547 billion of goodwill impairment charges; no goodwill impairment was recorded in FY2010.
  • FY2010 included $137 million of net restructuring and other charges, $8 million of acquisition and integration costs, and $177 million of other income, primarily related to the Tax Sharing Agreement. The tax provision was $493 million and included significant prior-period tax adjustments and audit-related items.
  • FY2010 also included $44 million of discontinued-operations income, mainly from favorable resolution of litigation contingencies related to a previously sold business. A FY2010 accounting review identified tax errors; the company corrected affected prior periods and said those prior-period statements were not materially misstated.
  • Effective FY2011, the company reorganized its segments into Transportation Connectivity, Communications and Industrial Solutions, and Network Solutions; Subsea Communications was folded into Network Solutions.

Guidance, management commentary, risks, and contingencies

  • Outlook: Management forecast FY2011 sales of $12.8–$13.2 billion, an increase of 6%–9%, and diluted EPS of $2.80–$3.00, including about $0.05 per share from the additional fiscal week. Q1 FY2011 sales guidance was $3.05–$3.15 billion and diluted EPS guidance $0.63–$0.67. Guidance assumed then-current foreign exchange and commodity rates and excluded the anticipated ADC acquisition.
  • ADC acquisition: The company agreed to acquire ADC Telecommunications for approximately $1.25 billion. As of October 18, 2010, about 89% of ADC shares had been tendered; closing remained subject to conditions, including regulatory approvals. The company expected to fund the purchase with about $1 billion of available cash and the balance through borrowing.
  • Operating risks: Results remain exposed to cyclical demand—especially automotive, telecommunications, computer, and consumer electronics—pricing pressure, raw-material availability and prices, foreign exchange, customer and supplier consolidation, and execution of new products and acquisitions. Management cited historical annual price erosion of about 1%–2%. Automotive sales had improved but remained below FY2008 levels.
  • Legal and other contingencies: In the New York first-responder network dispute, the State had drawn $50 million on a letter of credit and could draw up to another $50 million; it counterclaimed for damages exceeding $275 million. The company disputed the claim. A separate Com-Net matter involved an $80 million maximum contingent purchase-price claim, for which no liability was recorded because payment was not considered probable or estimable. The company also disclosed ongoing pre-separation tax audits and FCPA-related reviews; it recorded $1.689 billion of unrecognized tax benefits and $1.252 billion of accrued interest and penalties. Environmental remediation reserves were $14 million, within an estimated $14–$24 million range.
  • Controls and audit: Management and Deloitte & Touche reported effective internal control over financial reporting at September 24, 2010; the auditor issued an unqualified opinion on the financial statements.

Most important facts for investors to verify

  • Whether the FY2011 sales and EPS outlook was achieved, and how much growth was organic versus currency, acquisition, or other effects.
  • ADC transaction completion, financing, integration costs, synergies, and the effect on leverage and earnings; the stated guidance excluded ADC.
  • Whether the strong FY2010 margin recovery and cash generation were sustainable, particularly given automotive exposure and the decline in subsea project revenue.
  • Developments in the New York contract dispute, including any further letter-of-credit draw, and the Com-Net claim.
  • Resolution of tax audits and uncertainties, including potential cash payments, the large recorded tax balances, and the implications of the identified accounting corrections.
  • Restructuring execution and cash requirements: management expected about $130 million of restructuring-related cash spending and approximately $30 million of restructuring charges in FY2011.