01—Abstract
Summary
Summary of the 10-K filed December 14, 2007. Cited figures are marked; the original filing is the authoritative source.
Tyco Electronics Ltd. (TEL) filed its first Form 10-K as a standalone public company for fiscal 2007 (year ended September 28, 2007), following its June 29, 2007 spin-off from Tyco International.
Fiscal 2007 net sales grew 9.4% to $13.46 billiona (5.8% organic), but the company posted a net loss of $554 million, driven by an $887 million allocated net charge for the Tyco International securities class action settlement, $410 million of losses from discontinued operations (mainly a $585 million pre-tax impairment on the Power Systems business), $232 million of allocated debt-retirement losses, and $99 million of restructuring charges. Operating income fell to $753 million (5.6% margin) from $1,448 million, and diluted EPS was $(1.11). The balance sheet expanded materially, with total assets of $23.7 billion and total equity of $11.4 billion, but leverage increased.
Total debt was $3.38 billionb after the September 2007 issuance of $2.05 billion in senior notes and borrowings under a bridge and revolving facility. Cash rose to $936 million, and operating cash flow was $1.54 billion, against capital expenditures of $892 million that included a $280 million purchase of cable-laying vessels. The company initiated a $0.14 quarterly dividend and a $750 million share repurchase authorization, with no repurchases yet made.
Investors should weigh several open risks: a material weakness in internal control over income tax accounting that had not been remediated, a 31% share of unresolved legacy Tyco International tax liabilities and securities litigation (including a possible $3 billionc maximum exposure on the tax-sharing guarantee and a pending IRS dispute with roughly $1 billion of adjustments still being appealed), a pending FCPA baseline review, and continued raw material inflation in copper and gold. The planned divestiture of Power Systems, for $100 million, is expected to reduce consolidated sales by about 15% overall once other exits are included.
02—Key points
Key Highlights
- Net sales rose 9.4% to $13.46 billion in fiscal 2007, with 5.8% organic growth and a 3.5% currency benefit, led by Undersea Telecommunications (+88%) and Electronic Components (+7.7%).
- Net loss of $554 million (EPS $(1.11)), driven by an $887 million allocated class action settlement charge, $410 million of losses from discontinued operations, and $232 million of allocated debt-retirement losses.
- Operating income fell to $753 million (5.6% margin) from $1,448 million in fiscal 2006, with gross margin down 120 basis points to 25.6% due to raw material costs and mix.
- Total debt rose to $3.38 billion after the September 2007 issuance of $2.05 billion of senior notes (6.00% 2012, 6.55% 2017, 7.125% 2037), and bridge and revolving facilities were used to fund the class action escrow.
- Material weakness in internal control over income tax accounting remained unremediated at fiscal year-end 2007, and the company is not yet subject to Section 404 compliance until fiscal 2008.
- Potential divestitures, including Power Systems ($100 million sale expected to close in fiscal 2008), could reduce consolidated net sales by roughly 15%; restructuring of about $130 million is planned for fiscal 2008.
- The company initiated a $0.14 quarterly dividend and authorized a $750 million share repurchase program, with no shares repurchased in fiscal 2007.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2007, TE Connectivity plc lost $0.04.
- Revenue$12.57B100.0%
- Cost of revenue−$8.86B70.4%
- Gross profit$3.72B29.6%
- Operating costs−$3.06B24.4%
- Operating income$655.0M5.2%
- Interest, other & tax−$1.21B9.6%
- Net income−$554.0M4.4%
Where FY2007 revenue went
$12.57B- Cost of revenue: $8.86B, 70% of revenue
- Other operating costs: $1.55B, 12% of revenue
- SG&A: $1.51B, 12% of revenue
- Operating income: $655.0M, 5.2% of revenue
Kept 5.2% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2007filed December 14, 2007Financial Statements
| Revenue | $12.57B |
| Cost of Revenue | $8.86B |
| Gross Profit | $3.72B |
| SG&A Expenses | $1.51B |
| Operating Income | $655.00M |
| Interest Expense | $232.00M |
| Net Income | -$554.00M |
| EPS (Basic) | $-1.11 |
| EPS (Diluted) | $-1.11 |
| Shares Outstanding (Basic) | 497.00M |
| Shares Outstanding (Diluted) | 497.00M |
05—Questions
Frequently Asked Questions
Why did Tyco Electronics report a net loss in fiscal 2007 despite growing sales?
The net loss of $554 million reflected several large non-operating or one-time items: an $887 million allocated net charge for the Tyco International securities class action settlement (for which no tax benefit was recorded), $410 million of after-tax losses from discontinued operations primarily from the Power Systems impairment, and $232 million of allocated loss on debt retirement. Excluding these items, the underlying business continued to grow, with organic sales up 5.8%.
How much financial exposure does TEL have from legacy Tyco International liabilities?
TEL assumed 31% of certain Tyco International contingent liabilities, including securities litigation and tax matters. It has recorded a $2.99 billion class action settlement liability, offset by a $2.06 billion receivable from Tyco International and Covidien, and $928 million in escrow. Under the tax sharing agreement, TEL is primary obligor for legacy tax liabilities and recorded a $296 million FIN 45 guarantee liability. The company states its maximum potential tax liability could reach $3 billion if other parties defaulted, which management considers remote. The IRS also proposed civil fraud penalties of $30 million to $50 million, and about $1 billion of additional proposed adjustments are under appeal.
What are the main risks to the balance sheet and cash flow going forward?
Key risks include higher leverage after the September 2007 debt issuance and bridge facility, $1.25 billion of floating-rate debt, a $1.24 billion long-term income tax liability, and contingent litigation and tax exposures that could require material payments. Operating cash flow was $1.54 billion in fiscal 2007, reduced by a $163 million IRS advance payment, and capital spending is expected at 4% to 5% of sales annually. The company also committed $500 to $550 million to build the New York statewide radio network over five years.
How concentrated is TEL's customer and end-market exposure?
The company has no customer exceeding 10% of sales. Automotive represents about 30% of sales, telecommunications 19%, computers 8%, and energy 7%. Roughly 67% of sales come from outside the U.S., and China accounted for about 12% of sales. Electronic Components generates 75% of revenue, so the company is heavily dependent on automotive and telecom cycles and on continued price erosion of 2% to 4% per year that it must offset through cost reductions.
What is the outlook for margins and restructuring?
Management is pursuing manufacturing consolidation to move production to low-cost countries, with expected restructuring charges of about $130 million in fiscal 2008 and up to $250 million over fiscal 2009 to 2010. Gross margin pressure from copper (up from $1.53 to $3.20 per pound over two years) and gold continues, and only part of these costs has been passed through to customers. Management expects the Power Systems divestiture to produce a gain of about $40 million in fiscal 2008.
06—Continue