TE Connectivity Ltd. — Form 10-Q Summary
Business context and reporting period
TE Connectivity designs and manufactures connectivity and sensor products for transportation, industrial, communications, and other markets. This unaudited report covers the quarter and six months ended March 31, 2017, compared with the quarter and six months ended March 25, 2016. Unless stated otherwise, amounts are U.S. dollars.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $3.227 billion, up 9.3%; organic growth 8.2% | $6.290 billion, up 8.7%; organic growth 7.5% |
| Gross margin | $1.108 billion; 34.3% of sales, versus 32.6% | $2.173 billion; 34.5% of sales, versus 33.0% |
| Operating income and margin | $473 million; 14.7%, versus $535 million and 18.1% | $959 million; 15.2%, versus $933 million and 16.1% |
| Net income | $405 million, versus $380 million | $814 million, versus $733 million |
| Diluted EPS | $1.13, versus $1.03 | $2.27, versus $1.93 |
| Continuing operating cash flow | Not separately presented for the quarter | $925 million, versus $547 million |
- Quarterly sales growth was led by Transportation Solutions (+9.1%) and Industrial Solutions (+15.6%); Communications Solutions rose 2.1%. For the six months, the respective changes were +10.1%, +13.9%, and -0.9%.
- Gross margin improved primarily on higher volume and lower material costs, partly offset by price erosion. Price erosion reduced organic sales by $59 million in the quarter and $110 million over six months.
- Quarterly operating income declined despite higher sales, reflecting $59 million of restructuring charges in 2017 versus a $99 million net credit in the prior-year quarter, which included a $146 million pre-tax gain on the sale of the Circuit Protection Devices business. Prior-year six-month restructuring and other credits were $59 million.
- The six-month effective tax rate was 10.3%, versus 20.9%; the 2017 period included tax benefits from intercompany transactions and lapses of statutes of limitations. Quarterly rates were 8.8% and 25.0%, respectively.
- At March 31, cash was $773 million; current assets were $5.146 billion and current liabilities $3.935 billion. Total debt was $3.952 billion, comprising $879 million short-term and $3.073 billion long-term debt. The company had no borrowings under its $1.5 billion revolving credit facility and reported compliance with debt covenants.
- Six-month capital expenditures were $289 million. Cash dividends paid were $263 million and share repurchases were $205 million. The company reported $897 million remaining under its share repurchase authorization.
Outlook, commentary, and risks
- For fiscal Q3 2017, management forecast sales of $3.2–$3.3 billion and diluted EPS from continuing operations of $1.08–$1.12. The EPS outlook included an estimated $0.04 negative currency impact versus the prior-year quarter.
- For fiscal 2017, management forecast sales of $12.6–$12.8 billion and diluted EPS from continuing operations of $4.39–$4.47. The EPS outlook included an estimated $0.10 negative currency impact versus fiscal 2016. Forecasts assumed foreign exchange rates and commodity prices remained near current levels.
- A fiscal 2017 restructuring program is expected to cost approximately $120 million in total in the financial-statement note; management’s MD&A separately projected approximately $150 million of net restructuring charges during fiscal 2017. Annualized savings of about $130 million are expected, generally by fiscal 2019. Management expected approximately $110 million of fiscal 2017 cash spending. The difference between the program’s total expected charges and the fiscal-year charge estimate should be checked in the filing context.
- Management cited macroeconomic and end-market uncertainty, automotive demand, competition and pricing, raw-material costs and availability, foreign exchange, suppliers, acquisitions and divestitures, cybersecurity, regulation, and litigation as risks.
- Environmental remediation costs were estimated at $16–$42 million, with a best estimate of $19 million. The company reported $269 million in letters of credit, guarantees, and surety bonds. It also disclosed a French site’s wastewater discharge exceeding permit limits; corrective upgrades were agreed with authorities, and management did not expect monetary sanctions. Management said ordinary-course legal matters were not expected to have a material effect.
- TE Connectivity early adopted stock-compensation guidance, recording a $165 million cumulative adjustment to opening retained earnings. It expected adoption of the new revenue-recognition standard in fiscal 2019 and did not expect a material financial impact based on its initial assessment.
Important facts for investors to verify
- Reconcile the stated fiscal 2017 restructuring cost estimates: approximately $120 million total program charges in the note versus approximately $150 million of fiscal-year charges in MD&A.
- Assess the durability of organic sales growth and margin improvement, particularly the effects of price erosion, acquisitions, and the weaker Communications Solutions comparison after the CPD divestiture.
- Review the $708 million of 6.55% senior notes due October 2017, refinancing or repayment plans, and the increase in short-term debt.
- Evaluate the assumptions behind fiscal 2017 sales and EPS guidance, including currency and end-market conditions.
- Monitor restructuring execution and savings, environmental remediation, and the remaining tax matters and other contingencies.