Tyco Electronics Ltd. Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2009, ended June 26, 2009; comparisons are to the corresponding 2008 periods. The filing identifies the registrant as Tyco Electronics Ltd. (now domiciled in Switzerland), a global supplier of electronic components, network solutions, specialty products, and undersea telecommunications systems.
Financial performance
| Metric | Quarter ended June 26, 2009 | Quarter ended June 27, 2008 | Nine months ended June 26, 2009 | Nine months ended June 27, 2008 |
|---|---|---|---|---|
| Net sales | $2.508 billion | $3.782 billion | $7.558 billion | $10.797 billion |
| Gross income / margin | $587 million / 23.4% | $1.099 billion / 29.1% | $1.845 billion / 24.4% | $3.165 billion / 29.3% |
| Operating income (loss) | $64 million / 2.6% | $515 million / 13.6% | $(3.650) billion | $1.458 billion |
| Continuing-operations income (loss) | $26 million | $285 million | $(3.183) billion | $1.439 billion |
| Net income (loss) | $(74) million | $330 million | $(3.349) billion | $1.580 billion |
| Diluted EPS | $(0.16) | $0.68 | $(7.31) | $3.22 |
- Quarterly sales fell 33.7%; organic sales declined 28.4%. Nine-month sales fell 30.0%; organic sales declined 25.5%. Foreign exchange reduced sales by $166 million in the quarter and $429 million year to date.
- The nine-month operating loss included a $3.547 billion goodwill impairment, $329 million in restructuring and other charges, and $144 million in pre-Separation litigation charges. Goodwill impairment was concentrated in Electronic Components ($3.435 billion) and Specialty Products ($112 million).
- Continuing operating cash flow was $336 million for the quarter and $829 million for nine months. Nine-month capital expenditures were $270 million, implying operating cash flow less capex of approximately $559 million. Total operating cash flow, including discontinued operations, was $787 million.
- Cash and cash equivalents were $1.258 billion, versus $1.090 billion at September 26, 2008. Current assets were $5.558 billion and current liabilities $2.625 billion. Total debt was $2.579 billion, down from $3.181 billion; reported long-term debt was $2.578 billion. The company had no borrowings under its $1.425 billion effective revolving credit facility and reported compliance with debt covenants.
- At June 26, 2009, backlog was $2.523 billion, down from $3.122 billion at September 26, 2008.
Material changes and segment trends
- Sales declines and lower factory utilization weighed on gross margin, which fell 5.7 percentage points in the quarter. Management attributed pressure to reduced production and inventory reduction efforts; cost-cutting partially offset the effect.
- Quarterly sales decreased in Electronic Components to $1.424 billion, Network Solutions to $425 million, and Specialty Products to $340 million. Undersea Telecommunications sales rose to $319 million and operating income improved to $73 million, supported by project execution and mix.
- The Wireless Systems business was sold in May 2009 for $665 million net cash proceeds, with a reported $55 million pretax gain. Its results are presented as discontinued operations. The quarter included a $100 million after-tax discontinued-operations loss; the nine-month loss was $166 million.
- Effective June 25, 2009, the company continued its existence as a Swiss company after changing domicile from Bermuda. Specialty Products was established as a separate reporting segment during fiscal 2009.
Outlook, risks, and unusual items
- Management expected fourth-quarter fiscal 2009 sales to decline year over year, but increase slightly from the third quarter as consumer markets improved, partly offset by lower Undersea Telecommunications sales.
- Fiscal 2009 capital spending was expected to be approximately $350 million. Management forecast approximately $375 million of fiscal 2009 restructuring charges, about $300 million of restructuring cash spending, and $200 million of fiscal 2009 cost savings; annualized savings were expected to reach approximately $300 million. The company had reduced headcount by about 21,000 positions, or 22%, during the first nine months.
- The State of New York drew $50 million under a letter of credit tied to the former Wireless Systems network contract. The company recorded $111 million of related pretax charges in discontinued operations and disputed the State’s position; the State could draw up to another $50 million. The company had filed a claim seeking over $100 million in damages.
- Tax and legacy litigation exposures remain significant. The balance sheet included $2.372 billion of income taxes and $1.219 billion of accrued interest and penalties on uncertain tax positions. The company’s share of certain pre-Separation contingent liabilities is subject to agreements with Tyco International and Covidien. Environmental remediation reserves were $16 million; a separate $80 million Com-Net contingent purchase-price claim was not accrued because payment was considered neither probable nor estimable.
- Management said deteriorating pension-asset markets could materially affect future contributions or benefit costs. Foreign-exchange derivative losses were $176 million for the first nine months, largely offset by gains on remeasurement of underlying balances. Future goodwill impairment, weak end-market demand, currency movements, raw-material costs, and financing-market access were identified risks.
- A material weakness in internal control over financial reporting relating to income-tax accounting remained unremediated at quarter-end; management concluded disclosure controls were ineffective. The company said it had introduced remediation measures but required more time to demonstrate their effectiveness.
- After quarter-end, the company repurchased and cancelled $151 million principal amount of notes for $141 million plus accrued interest; it expected to record an approximately $22 million pretax gain in the following quarter. Shareholders had approved a $0.16-per-share capital-reduction distribution, expected in the quarter ending September 25, 2009; the board also recommended similar distributions for the first two quarters of fiscal 2010, subject to shareholder approval.
Key facts for investors to verify
- Whether demand and margins stabilized after the steep sales contraction, particularly in automotive, communications, computer, industrial, and consumer-related markets.
- Progress against restructuring targets, including realized savings, cash costs, headcount actions, and planned facility reductions.
- Resolution and remaining exposure in the New York contract dispute, including any further letter-of-credit draw and recovery through litigation.
- Developments in pre-Separation tax audits, uncertain tax positions, and securities/ERISA litigation, including whether shared liabilities or indemnities change.
- Whether pension-asset performance, foreign-exchange movements, or further goodwill impairment affect cash requirements and reported results.
- Execution of the announced debt tender, the expected gain, and the timing and approval of shareholder distributions.