TE Connectivity Ltd. — Fiscal 2019 Form 10-K
Reporting period: Fiscal year ended September 27, 2019 (52 weeks); fourth quarter ended September 27, 2019. The company designs and manufactures connectivity and sensor products across Transportation, Industrial, and Communications Solutions. Figures are in U.S. dollars unless noted.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $13.448 billion | $13.988 billion |
| Gross margin | $4.394 billion; 32.7% | $4.745 billion; 33.9% |
| Operating income | $1.978 billion; 14.7% margin | $2.331 billion; 16.7% margin |
| Income from continuing operations | $1.946 billion | $2.584 billion |
| Net income | $1.844 billion | $2.565 billion |
| Diluted EPS, continuing operations | $5.72 | $7.32 |
| Net cash from continuing operations | $2.454 billion | $2.301 billion |
Fiscal 2019 sales fell 3.9%; organic sales declined 1.7%, with foreign exchange translation reducing sales by 3.0% and acquisitions contributing 0.8%. Price erosion reduced organic sales by $108 million. Gross margin pressure reflected lower volume, mix, currency, and pricing, partly offset by lower material costs. SG&A declined to $1.490 billion from $1.594 billion, while restructuring charges rose to $255 million from $126 million.
- Transportation Solutions: Sales of $7.821 billion, down 5.7%; operating income $1.226 billion versus $1.578 billion. Automotive sales, 73% of segment revenue, were pressured by lower vehicle production.
- Industrial Solutions: Sales of $3.954 billion, up 2.5%; operating income $543 million versus $465 million. Aerospace, defense, oil, and gas organic sales grew 14.1%.
- Communications Solutions: Sales of $1.673 billion, down 9.2%; operating income $209 million versus $288 million. Data-and-devices and appliance markets both weakened.
Fourth quarter: Sales were $3.300 billion versus $3.509 billion in Q4 FY2018. Income from continuing operations was $376 million versus $1.674 billion; the prior-year quarter included a $1.222 billion tax benefit from legal-entity restructuring and intercompany transactions. Q4 operating income is not separately stated in the provided filing text.
Liquidity, debt, and capital allocation
- Year-end cash and cash equivalents were $927 million; total debt was $3.965 billion, including $570 million of short-term debt. The company reported $10.570 billion of shareholders’ equity.
- Continuing operating cash flow increased to $2.454 billion. Capital expenditures were $749 million, down from $935 million.
- A $1.5 billion revolving credit facility, maturing in November 2023, was undrawn at year-end. The company reported compliance with debt covenants; the leverage covenant triggers default if debt-to-EBITDA exceeds 3.75:1.
- $571 million of principal payments were scheduled for FY2020, including $350 million of floating-rate notes due June 2020. Contractual obligations totaled $6.126 billion, including debt principal, interest, leases, and purchase commitments.
- The company paid $608 million in dividends and repurchased approximately 12 million shares for $1.014 billion during FY2019; $1.5 billion remained authorized for repurchases.
- Cash, cash equivalents, and intercompany deposits designated as permanently reinvested totaled approximately $9.1 billion; a change in that intent could result in up to $1.0 billion of tax expense.
Outlook, commentary, and notable items
- FY2020 sales guidance was $12.7–$13.3 billion; first-quarter guidance was $3.0–$3.2 billion. FY2020 diluted EPS from continuing operations was forecast at $4.21–$4.61; first-quarter EPS at $0.93–$0.99.
- Management expected weakness in automotive and commercial transportation, and continued declines in Communications Solutions amid broad market softness and high distributor inventories. Industrial equipment weakness was expected to be partly offset by aerospace, defense, oil, and gas and energy growth.
- Currency was expected to reduce FY2020 sales by approximately $229 million and EPS by $0.11. The outlook assumes currency rates and commodity prices remain near current levels.
- Schaffhausen enacted Swiss tax reform in October 2019. The company expected an approximately $350 million deferred-tax-asset write-down in Q1 FY2020, excluded from its EPS outlook; other reform provisions were expected to raise the FY2020 effective tax rate by about 400 basis points.
- FY2019 restructuring actions were expected to generate approximately $220 million of annualized savings by the end of FY2021. FY2020 restructuring charges were estimated at $200–$250 million, with approximately $300 million of cash spending.
- The Subsea Communications business was sold for net proceeds of $297 million, with an $86 million pre-tax loss. TE retained approximately $1.55 billion of related performance guarantees and letters of credit, mostly expected to expire by FY2020; it has contractual recourse against the buyer and does not expect to have to perform.
- Three businesses were acquired for $296 million net of cash acquired. A tender offer accepted for approximately 72% of First Sensor AG shares; the transaction, including assumed debt and minority interest, was valued at approximately €307 million and was expected to close in FY2020, subject to conditions and approvals.
- Environmental remediation costs were estimated at a reasonably possible $15–$43 million; $18 million was accrued. The company said it did not expect pending legal proceedings, individually or together, to have a material financial effect.
Key investor verification points
- Track whether the FY2020 sales and EPS outlook materialized, particularly the expected auto-market and Communications Solutions declines.
- Assess the size and timing of the anticipated $350 million tax charge, the higher expected tax rate, and the company’s substantial deferred tax valuation allowance.
- Verify delivery of restructuring savings against charges and cash spending, and monitor gross and operating margin recovery.
- Review the First Sensor closing, integration, and financing, as well as FY2020 debt maturities and liquidity needs.
- Monitor potential exposure from SubCom guarantees, foreign-exchange movements, raw-material costs, pension funding, and environmental remediation.
Deloitte & Touche LLP issued unqualified opinions on the financial statements and internal control over financial reporting.