01—Abstract
Summary
Summary of the 10-K filed November 12, 2019. Cited figures are marked; the original filing is the authoritative source.
TE Connectivity's fiscal 2019 (ended September 27, 2019) was a year of top-line contraction and margin pressure, with net sales falling 3.9% to $13.4 billiona (organic decline of 1.7%, with 3.0 points of FX translation drag).
Gross margin contracted to 32.7% from 33.9%, and operating income fell 15% to $1.98 billionb (operating margin 14.7% vs. 16.7%), driven by lower volume, unfavorable mix, price erosion, and $255 million of restructuring charges. Net income declined to $1.84 billion ($5.42 diluted EPS) from $2.57 billion, though the GAAP tax line was a $15 million benefit that flattered results, including a $216 million Swiss Tax Reform benefit and a $90 million audit settlement benefit. Excluding these items, underlying earnings pressure was more pronounced.
Cash generation remained solid, with operating cash flow from continuing operations of $2.45 billionc and capital expenditures of $749 million, leaving healthy free cash flow that supported $608 million in dividends and $1.09 billion in share repurchases. Total debt was stable at $3.97 billion, the Credit Facility remained undrawn, and the company reported approximately $9.1 billion of cash and intercompany deposits held by subsidiaries that it considers permanently reinvested. Shareholders' equity was $10.6 billion, and the deferred tax asset valuation allowance grew to $4.97 billion, a significant item to monitor.
Management's fiscal 2020 outlook calls for net sales of $12.7 billion to $13.3 billiond and diluted EPS from continuing operations of $4.21 to $4.61, reflecting expected declines in automotive and communications end markets. The company also flagged an expected approximately $350 million income tax charge in Q1 fiscal 2020 from Swiss Tax Reform implementation, which is excluded from guidance, and a pending First Sensor acquisition valued at about €307 million. Investors should weigh the near-term earnings reset and tax-driven volatility against a durable cash-generative franchise with a diversified customer base.
02—Key points
Key Highlights
- Net sales declined 3.9% to $13.4 billion (organic -1.7%, FX -3.0%); Transportation Solutions fell 5.7%, Communications Solutions fell 9.2%, and Industrial Solutions rose 2.5%.
- Gross margin compressed to 32.7% from 33.9%, and operating margin fell to 14.7% from 16.7%, with operating income down 15% to $1.98 billion.
- Net income fell to $1.84 billion ($5.42 diluted EPS) from $2.57 billion; the low effective tax rate was helped by a $216 million Swiss Tax Reform benefit and a $90 million audit settlement benefit.
- Operating cash flow from continuing operations was $2.45 billion, with capex of $749 million; the company returned about $1.7 billion to shareholders through dividends ($608 million) and buybacks ($1.09 billion).
- Fiscal 2020 guidance: net sales of $12.7–13.3 billion and diluted EPS from continuing operations of $4.21–4.61, with a roughly $350 million Swiss tax charge expected in Q1 fiscal 2020 and excluded from guidance.
- Balance sheet remains sound: total debt of $3.97 billion, undrawn $1.5 billion revolving credit facility, and about $9.1 billion of cash and intercompany deposits designated as permanently reinvested.
- Restructuring charges rose to $255 million, with a new program targeting about $220 million in annualized savings by fiscal 2021, and the company completed the divestiture of its Subsea Communications business for $297 million in net proceeds.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2019, TE Connectivity plc kept $0.14.
- Revenue$13.45B100.0%
- Cost of revenue−$9.05B67.3%
- Gross profit$4.39B32.7%
- Operating costs−$2.42B18.0%
- Operating income$1.98B14.7%
- Interest, other & tax−$134.0M1.0%
- Net income$1.84B13.7%
Where FY2019 revenue went
$13.45B- Cost of revenue: $9.05B, 67% of revenue
- Net income: $1.84B, 14% of revenue
- R&D: $572.0M, 4.3% of revenue
- SG&A: $1.49B, 11% of revenue
- Other operating costs: $354.0M, 2.6% of revenue
- Interest, other & tax: $134.0M, 1.0% of revenue
Kept 14% as net incomeOther operating costs $354.0M · 2.6%Interest, other & tax $134.0M · 1.0%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2019filed November 12, 2019Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $13.45B$13.99B | −3.9% |
| Cost of Revenue | $9.05B$9.24B | −2.0% |
| Gross Profit | $4.39B$4.75B | −7.4% |
| R&D Expenses | $572.00M$606.00M | −5.6% |
| SG&A Expenses | $1.49B$1.59B | −6.5% |
| Operating Income | $1.98B$2.33B | −15.1% |
| Interest Expense | $68.00M$107.00M | −36.4% |
| Net Income | $1.84B$2.56B | −28.1% |
| EPS (Basic) | $5.46$7.33 | −25.5% |
| EPS (Diluted) | $5.42$7.27 | −25.4% |
| Shares Outstanding (Basic) | 338.00M350.00M | −3.4% |
| Shares Outstanding (Diluted) | 340.00M353.00M | −3.7% |
05—Questions
Frequently Asked Questions
Why did TE Connectivity's profitability decline in fiscal 2019?
Operating margin fell to 14.7% from 16.7% due to lower volume (especially in automotive and communications), unfavorable product mix, price erosion of about $108 million, and negative foreign currency translation, partially offset by lower material costs and reduced SG&A. Restructuring charges of $255 million also weighed on operating income.
Why did the tax line show a benefit despite strong pre-tax income?
The company recorded a $15 million net income tax benefit on $1.93 billion of pre-tax income. This was driven by a $216 million benefit from Swiss Tax Reform (reducing the valuation allowance) and a $90 million benefit from a non-U.S. tax audit settlement, partially offset by other charges. These items are non-recurring, and management expects an approximately 400 basis point increase in the effective tax rate for fiscal 2020 along with a roughly $350 million write-down charge in Q1 fiscal 2020.
What is the outlook for fiscal 2020?
Management expects net sales of $12.7–13.3 billion versus $13.4 billion in fiscal 2019, citing automotive production declines and weakness in data/devices and appliances. Diluted EPS from continuing operations is guided to $4.21–4.61, and first-quarter EPS to $0.93–0.99. The outlook excludes the approximately $350 million Swiss tax charge and reflects about $229 million of FX headwinds to sales.
How exposed is TE Connectivity to the automotive industry and China?
Automotive customers represented about 42% of fiscal 2019 net sales, and the Transportation Solutions segment (58% of sales) is 73% automotive. China accounted for about 18% of net sales, and the company operates 18 principal manufacturing sites there. These concentrations make the company sensitive to global auto production cycles and Chinese economic and regulatory conditions.
Is the dividend and capital return program sustainable?
Dividends paid were $1.80 per share in fiscal 2019 (rising to $1.84 declared for the fiscal year), totaling $608 million. Free cash flow of roughly $1.7 billion (operating cash flow less capex) covered dividends and about $1.1 billion of buybacks, though total shareholder returns were slightly above free cash flow, funded partly by cash balances and debt. The board has $1.5 billion of remaining repurchase authorization. Swiss withholding-tax efficiency of distributions depends on future Swiss rules, which the filing flags as a risk.
06—Continue