TE Connectivity Ltd. — FY2013 Form 10-K Summary
Reporting period: Fiscal year ended September 27, 2013 (52 weeks). The filing also provides unaudited fourth-quarter results. TE Connectivity designs and manufactures connectivity products for transportation, communications, industrial, energy, consumer, and other markets. Effective in FY2013, it reorganized into Transportation, Network, Industrial, and Consumer Solutions segments. Amounts below are in U.S. dollars.
Financial performance
| Metric | FY2013 | FY2012 | Change / context |
|---|---|---|---|
| Net sales | $13.280 billion | $13.282 billion | Essentially flat; organic sales declined 1.3% ($171 million) |
| Gross margin | $4.329 billion; 32.6% | $4.046 billion; 30.5% | Improved productivity and lower material costs helped; price erosion was a partial offset |
| Operating income | $1.556 billion | $1.518 billion | Up 2.5%; FY2013 included $311 million restructuring charges and $14 million acquisition/integration costs |
| Net income attributable to TE Connectivity | $1.276 billion | $1.112 billion | FY2013 included significant tax-sharing and tax-settlement effects |
| Diluted EPS | $3.02 | $2.59 | Continuing-operations EPS was also $3.02 versus $2.70 |
| Operating cash flow | $2.046 billion | $1.947 billion | Free cash flow, a non-GAAP measure, was $1.500 billion versus $1.434 billion |
| Capital expenditures | $615 million | $533 million | FY2014 spending expected at 4%–5% of sales |
| Total debt / cash | $3.014 billion / $1.403 billion | $3.711 billion / $1.589 billion | Debt declined $697 million; FY2013 net debt was approximately $1.611 billion |
| Liquidity | Current assets $6.309 billion; current liabilities $3.924 billion; working capital $2.385 billion | Working capital $2.499 billion | Current ratio approximately 1.61 |
Fourth quarter: Net sales were $3.432 billion, gross margin $1.156 billion, income from continuing operations attributable to the company $387 million, and diluted EPS from continuing operations $0.92. Restructuring and other charges were $71 million.
Segments and material changes
- Transportation Solutions: Sales rose 7.0% to $5.485 billion; operating income rose to $972 million and margin to 17.7% from 14.7%. Organic sales grew 4.9%, led by automotive.
- Network Solutions: Sales fell 7.4% to $3.066 billion; operating income declined to $136 million and margin to 4.4% from 7.5%. Weakness in subsea and data communications, lower volume, and pricing pressure weighed on results.
- Industrial Solutions: Sales increased 0.7% to $3.007 billion, including Deutsch acquisition contribution; organic sales fell 4.1%. Operating income decreased to $359 million and margin to 11.9%, reflecting lower organic volume and price erosion.
- Consumer Solutions: Sales declined 7.3% to $1.722 billion; operating income fell to $89 million and margin to 5.2%. Organic sales decreased 5.8%, primarily amid weakness in consumer devices and appliances.
FY2013 gross margin improved despite flat reported sales. Price erosion reduced organic sales by $207 million. Foreign exchange reduced sales by $115 million; the Deutsch acquisition added $284 million of reported sales year over year. SG&A increased to $1.773 billion, partly due to Deutsch, incentive compensation, and asset impairment charges. Research, development, and engineering expense was $675 million. No single customer accounted for a significant share of sales; automotive represented approximately 41% of total sales.
Outlook, risks, and unusual items
- Management outlook: FY2014 sales forecast at $13.65–$14.15 billion and diluted EPS at $3.41–$3.71. Q1 FY2014 sales forecast at $3.225–$3.325 billion and diluted EPS at $0.71–$0.75. The forecast assumes foreign exchange rates and commodity prices near then-current levels. Management expected Transportation and Industrial growth, with Network sales roughly flat for the year.
- Restructuring: FY2013 net restructuring charges were $314 million (reported restructuring and other charges, net, were $311 million after a divestiture gain). Management expected approximately $50 million of restructuring charges and $175 million of cash spending in FY2014. Annualized savings of about $115 million were expected by the end of FY2015.
- Tax matters: FY2013 included a $331 million income-tax benefit tied to settlement of undisputed pre-separation tax matters and $231 million of related other expense under the tax-sharing agreement. A major IRS dispute remains: asserted taxes, penalties, and withholding taxes total $1.037 billion, plus interest, with TE’s share governed by a 31% allocation under the agreement. The company says it believes its reserve is appropriate, but an adverse resolution could be material. It also expects approximately $182 million of net cash payments related to pre-separation tax matters over the next 12 months.
- Liquidity and capital allocation: The $1.5 billion revolving facility had no borrowings at year-end; $350 million of commercial paper was outstanding. The company reported covenant compliance. It repurchased approximately $829 million of shares and paid $384 million in dividends and distributions during FY2013. A $300 million 5.95% note redemption was called after year-end; the board also authorized a $1 billion increase to the buyback program.
- Other exposures: Key risks include cyclical demand and automotive concentration, continued price erosion, raw-material availability and costs, foreign exchange, customer/vendor consolidation, supply interruptions, and competition. Approximately $4.5 billion of cash and intercompany deposits was considered permanently reinvested; management estimated up to $1.5 billion of tax expense if that intent changed. Environmental remediation was estimated at $13 million (within a $12–$24 million range). Ordinary-course litigation was not expected to be material, except for the tax proceedings and the disputed $80 million Com-Net contingent purchase-price claim, for which no liability was recorded.
- Controls and audit: Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting; management reported disclosure controls and internal controls effective at year-end.
Most important facts for investors to verify
- How much of FY2013’s earnings and EPS improvement reflects recurring operations versus the unusual tax benefit and related tax-sharing expense.
- Developments, potential exposure, and reserve adequacy in the IRS intercompany-debt dispute and other pre-separation tax matters.
- Whether the FY2014 sales and EPS outlook is achieved, particularly given continued Network and consumer-market weakness and its stated currency and commodity assumptions.
- Whether restructuring costs, cash spending, and the expected $115 million annualized savings track management’s timeline.
- Segment margin trends, especially the Network Solutions decline and the sustainability of Transportation Solutions’ improvement.
- Debt maturities, cash availability across subsidiaries, repatriation tax considerations, and the effects of buybacks and distributions on liquidity.