TE Connectivity Ltd. — Q1 FY2017 Form 10-Q
Reporting period: Quarter ended December 30, 2016; comparison is with the quarter ended December 25, 2015. Amounts are in U.S. dollars unless noted.
Business context and results
TE Connectivity designs and manufactures connectivity and sensor solutions. Sales growth came mainly from Transportation Solutions and Industrial Solutions; Communications Solutions declined. Reported sales growth includes acquisition and divestiture effects and currency movements.
- Revenue: $3.063 billion, up 8.1%; organic growth was 6.6%. Currency reduced sales by $25 million, while acquisitions and divestitures added a net $69 million. Price erosion reduced organic sales by $51 million.
- Profit and margins: Gross profit was $1.065 billion, up from $945 million; gross margin increased to 34.8% from 33.4%. Operating income was $486 million, up 22%, and operating margin rose to 15.9% from 14.0%. Continuing-operations income was $406 million versus $324 million; net income was $409 million versus $353 million. Diluted EPS from continuing operations was $1.13 versus $0.83; diluted net EPS was $1.14 versus $0.91.
- Cash flow and investment: Continuing operating cash flow was $404 million versus $391 million. Capital expenditures were $130 million versus $139 million; operating cash flow less capital expenditures was $274 million. Cash ended at $665 million, up $18 million during the quarter.
- Debt and liquidity: Total debt was $4.028 billion, down from $4.070 billion at September 30, 2016; cash less total debt was approximately $3.363 billion. Current assets were $4.809 billion and current liabilities $3.513 billion. The company had no borrowings on its $1.5 billion revolving credit facility and reported compliance with debt covenants.
- Capital returns: Dividends paid were $132 million ($0.37 per share). The company repurchased approximately 1.5 million shares under its program for $102 million; about $1.0 billion remained authorized.
Material changes versus the prior-year quarter
- Transportation Solutions sales rose 11.1% to $1.675 billion and operating income increased to $343 million from $261 million; segment margin rose to 20.5% from 17.3%.
- Industrial Solutions sales rose 12.1% to $795 million, largely reflecting acquisitions. Operating income was nearly flat at $67 million versus $66 million, while margin fell to 8.4% from 9.3%.
- Communications Solutions sales declined 3.9% to $593 million, primarily reflecting the Circuit Protection Devices divestiture and weaker subsea sales. Operating income was $76 million versus $71 million; margin increased to 12.8% from 11.5%.
- Continuing operating cash flow increased $13 million. The prior-year quarter included a $29 million after-tax discontinued-operations gain, compared with $3 million this quarter.
Outlook, commentary, and risks
- Q2 FY2017 outlook: Sales of $3.025–$3.125 billion and diluted continuing-operations EPS of $0.97–$1.01. Management estimated foreign exchange would reduce sales by about $63 million and EPS by $0.03 versus Q2 FY2016.
- FY2017 outlook: Sales of $12.2–$12.6 billion and diluted continuing-operations EPS of $4.04–$4.24. Management estimated foreign exchange would reduce sales by about $300 million and EPS by $0.14 versus FY2016. Outlook assumes currency rates and commodity prices remain near current levels.
- Management expected approximately 2% growth in global automotive production. It cited acquisition-driven Industrial Solutions growth, expected weakness in energy markets, and Communications Solutions pressure from the CPD divestiture. It was monitoring macroeconomic conditions, including the UK’s expected EU exit.
- Restructuring charges were $47 million this quarter. The company expected approximately $150 million of net restructuring charges and $110 million of cash spending in FY2017. Current actions were expected to generate about $60 million of annualized savings by the end of FY2018.
- A $708 million 6.55% senior note was reclassified to short-term debt and is due in October 2017. Management said operating cash and other available funding sources should cover anticipated needs, including repayment.
- Key risks include cyclical end markets, automotive demand, pricing pressure, raw-material costs and availability, foreign exchange, acquisitions and divestitures, suppliers, litigation, regulatory matters, and market access to financing. About 56% of sales were invoiced in currencies other than the U.S. dollar.
- Environmental remediation costs were estimated at $17–$42 million, with a best estimate of $20 million. The company disclosed wastewater discharges above permitted limits at a French manufacturing site; sanctions or remediation may result, though management did not expect a material financial effect. Outstanding letters of credit, guarantees, and surety bonds totaled $265 million.
- Q1 included a $30 million tax benefit from intercompany restructurings and a reduction in the U.S. tax-loss-carryforward valuation allowance. The company early-adopted share-based compensation guidance, increasing beginning retained earnings by $165 million.
Important facts for investors to verify
- Whether the Q2 and full-year sales and EPS outlooks were achieved, including the assumed foreign-exchange impact.
- Repayment or refinancing of the $708 million note due October 2017 and subsequent debt and liquidity levels.
- Realization and timing of restructuring savings, charges, and cash spending.
- Whether acquisition contributions, organic growth, and segment margins—particularly Industrial Solutions—persist.
- Developments in the French environmental matter, remediation estimates, and other legal or tax contingencies.