TE Connectivity (then Tyco Electronics Ltd.) — Q1 Fiscal 2010
Reporting period: Quarter ended December 25, 2009; comparison is the quarter ended December 26, 2008. The filing is by Tyco Electronics Ltd., the company’s name at the time, and reports in U.S. dollars.
Financial performance
- Sales: $2.892 billion, up 6.6% reported year over year; organic growth was 1.6%. Currency translation added $163 million, while divestitures reduced sales by $27 million. Management also cited $54 million of price erosion.
- Profit and margins: Gross margin was $841 million, or 29.1% of sales, versus $724 million, or 26.7%. Operating income was $269 million (9.3% margin), compared with $83 million (3.1%). Continuing-operations income was $173 million; net income attributable to Tyco Electronics was $172 million, or $0.37 per diluted share. The prior-year quarter had a $37 million attributable net loss, including a $67 million discontinued-operations loss.
- Cash flow: Operating cash flow was $330 million versus $33 million. Capital expenditures were $76 million versus $115 million. Investing cash outflow was $64 million and financing cash outflow was $93 million. Cash increased $174 million to $1.695 billion.
- Liquidity and debt: Current assets were $5.820 billion and current liabilities $2.761 billion at quarter-end. Total debt was $2.415 billion, including $101 million current maturities; the company had no borrowings under its $1.425 billion revolving credit facility. It reported compliance with debt covenants, including a 3.5-to-1 maximum debt-to-EBITDA trigger.
- Other metrics: Effective tax rate was 28.5%, versus 30.4%. Backlog was $2.849 billion, up from $2.809 billion at September 25, 2009.
Material changes and segment results
- Electronic Components: Sales rose 17.6% to $1.911 billion; operating income improved to $163 million from an $18 million loss. Organic growth was 12.2%, driven mainly by automotive, whose sales rose 30.2% organically. Management attributed part of the automotive improvement to customer inventory replenishment and expected that replenishment to be complete in Q2.
- Network Solutions: Sales fell 7.5% to $422 million and operating income declined to $20 million from $44 million. Organic sales fell 14.8%, with weakness in energy, enterprise networks, and service providers.
- Specialty Products: Sales declined 2.5% to $358 million, while operating income rose to $51 million from $28 million, helped by lower restructuring charges and absence of prior-year product-liability costs.
- Undersea Telecommunications: Sales fell 24.2% to $201 million as projects completed; operating income was $35 million versus $38 million.
- Reported growth and earnings benefited from currency effects and comparison against prior-year charges, including approximately $50 million of foreign-currency hedge-related losses in SG&A and $9 million of pre-separation litigation charges. Restructuring and other charges were $66 million, including $12 million of impairment and a $3 million sale loss for the Dulmison product line.
Outlook, risks, and unusual items
- Management expected Q2 fiscal 2010 sales to be similar to Q1, anticipated marginal industrial and infrastructure market improvement over the next few quarters, and said consumer markets had improved from the prior year but remained below fiscal 2008 levels. No full-year sales or earnings guidance was stated in the provided filing text.
- Fiscal 2010 capital spending was expected to be approximately $400–$450 million. The company expected approximately $275 million of restructuring charges through fiscal 2011, about $300 million of restructuring cash spending in fiscal 2010, and annualized cost savings of approximately $100 million.
- Management said operating cash generation and other potential funding sources should meet anticipated capital needs for the foreseeable future, while noting capital-market availability and cost could be affected by market conditions.
- New York State contract litigation: The state had drawn $50 million under a letter of credit and could draw a further $50 million. The company disputed the state’s position; the state’s counterclaim alleged damages exceeding $275 million. The filing says the case was in discovery. Prior-year charges included $111 million related to this contract.
- Tax and legacy contingencies: The company recorded $1.242 billion of accrued interest and penalties on uncertain tax positions and a $339 million liability under the Tyco tax-sharing arrangements. Disputed IRS matters could have a material effect, though the company said the ultimate resolution was uncertain. The company also disclosed unresolved compliance/FCPA matters and potential shared liabilities; potential loss estimates were not available.
- Environmental remediation reserves were $15 million, within an estimated probable range of $12–$26 million. A separate Com-Net contingent purchase-price claim had a maximum exposure of $80 million; no liability was recorded because payment was not considered probable or estimable.
- In January 2010, after quarter-end, the company acquired Sensitive Object for approximately $62 million in cash, subject to adjustments.
Important facts for investors to verify
- Whether organic sales growth and automotive demand persist after the expected end of supply-chain inventory replenishment, and whether industrial, service-provider, and undersea demand recover.
- Whether restructuring charges, cash costs, timing, and the projected $100 million annualized savings develop as management expects.
- Progress, potential additional letter-of-credit draws, and financial exposure in the New York State dispute.
- Developments in IRS audits, uncertain-tax-position liabilities, FCPA/compliance matters, and the Tyco tax-sharing arrangements.
- Cash conversion, working-capital movements, capital spending, and debt-covenant headroom; the filing does not provide a clear current debt-to-EBITDA ratio.