Business context and reporting period
TE Connectivity Ltd. (NYSE: TEL) filed this unaudited Form 10-Q for the second quarter and first six months of fiscal 2023, ended March 31, 2023. The company makes connectivity and sensor products serving transportation, industrial, communications, medical, energy, and other markets. Financial amounts below are in U.S. dollars; millions unless noted.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Net sales | $4,160 | $4,007 | $8,001 | $7,825 |
| Gross margin | $1,284; 30.9% | $1,337; 33.4% | $2,471; 30.9% | $2,567; 32.8% |
| Operating income | $537 | $705 | $1,039 | $1,377 |
| Net income | $433 | $560 | $830 | $1,126 |
| Diluted EPS | $1.36 | $1.71 | $2.60 | $3.43 |
- Reported sales grew 3.8% in Q2 and 2.2% for the half; organic sales grew 7.6% and 7.7%, respectively. Foreign currency translation reduced reported growth, while pricing actions contributed $166 million to Q2 and $295 million to first-half organic sales.
- Gross margin fell year over year, reflecting inflation in material and operating costs and adverse currency translation, partly offset by pricing. Operating margin was 12.9% in Q2 and 13.0% for the half, versus 17.6% in both prior-year periods. The current periods include substantially higher restructuring and other charges.
- Segment sales and operating income: Transportation Solutions sales were $2,483 in Q2 and $4,742 for the half; operating income was $333 and $615. Industrial Solutions sales were $1,191 and $2,251; operating income was $134 and $290. Communications Solutions sales were $486 and $1,008; operating income was $70 and $134.
- Operating cash flow was $1,215 for the first six months, compared with $945 a year earlier. Capital expenditures were $372; operating cash flow less capital expenditures was approximately $843. Cash and cash equivalents were $905 at March 31, versus $1,088 at September 30, 2022.
- Total debt was $4,202, broadly level with $4,206 at fiscal year-end; short-term debt was $286 and long-term debt $3,916. Current assets were $7,439 and current liabilities $4,393. Cash less total debt was approximately negative $3,297.
- Cash returned included $355 of dividends and $432 of share repurchases in the half. The approved dividend was $2.36 per share, payable in four quarterly installments of $0.59 beginning in Q3 FY2023. Repurchase authorization remaining was $1.2 billion.
Changes, outlook, and material items
- Transportation Solutions sales rose 7.3% in Q2, led by automotive; Industrial Solutions rose 11.5%, with strength in aerospace, energy, and medical. Communications Solutions sales fell 22.2%, as data-and-devices demand weakened amid supply-chain inventory corrections and appliances declined.
- Management attributed margin pressure to inflation and currency effects; price increases and productivity partly mitigated those pressures. Approximately 60% of first-half sales were invoiced in currencies other than the U.S. dollar.
- For Q3 FY2023, management expected net sales of approximately $4.0 billion, versus $4.1 billion in Q3 FY2022, and diluted continuing-operations EPS of approximately $1.56. The sales outlook reflected Communications declines partly offset by Transportation growth and assumed currency rates and commodity prices near current levels.
- A fiscal 2023 restructuring program generated $166 of charges in the first half; management expected approximately $250 of total fiscal-year restructuring charges and $225 of spending. Expected annualized savings from actions begun in the first half were approximately $125, anticipated by the end of fiscal 2025. The company also expected about $19 of further charges for this program.
- The company recorded a $60 pre-tax impairment on a held-for-sale Transportation business and a net $2 pre-tax charge related to two Industrial business divestitures. It acquired one Industrial business for $108, net of cash acquired.
- TE Connectivity issued $500 of 4.50% senior notes due February 2026 and repaid €550 of 1.10% notes at maturity. Commercial paper outstanding was $285 at a weighted-average 5.5% rate. The company reported compliance with debt covenants and no borrowings under its $1.5 billion revolving credit facility.
- Risks include ongoing U.S. trade-controls investigations following voluntary disclosures to BIS and DDTC, with DOJ also having contacted the company. Potential fines or penalties cannot yet be reasonably estimated; reserves may differ from final outcomes. Environmental remediation costs were estimated at a reasonably possible $17–$45 range, with $20 accrued.
- Management cited inflation, supply-chain disruption, foreign exchange, demand cyclicality, higher interest rates, geopolitical instability, and China/COVID-related uncertainty as risks. It said Russia and Ukraine were not a material portion of the business and had not significantly affected first-half results.
Key facts for investors to verify
- Whether the Q3 sales and EPS outlook was achieved, particularly given continued weakness in Communications Solutions.
- Whether pricing and productivity can offset inflation and currency pressure sufficiently to stabilize gross and operating margins.
- Execution, cash costs, timing, and realization of the restructuring program’s projected $125 annualized savings.
- Developments and potential financial consequences of the trade-controls investigations and the Milpitas environmental deficiencies.
- Working-capital trends, capital spending, cash generation, debt costs, and the company’s continued capacity for dividends and repurchases.