01—Abstract
Summary
Summary of the 8-K filed January 24, 2024. Cited figures are marked; the original filing is the authoritative source.
TE Connectivity reported fiscal Q1 2024 results (quarter ended December 29, 2023) that were in line on sales and well ahead on profitability.
Net sales were $3.83 billiona, essentially flat year over year on a reported basis and down 1% organically. Adjusted operating margin expanded 290 basis points to 19.1%, which drove adjusted EPS of $1.84, up 20% year over year and above guidance. Orders rose 4% year over year to $3.8 billion, with growth in all three segments, and the book-to-bill ratio was 0.98.
GAAP diluted EPS from continuing operations of $5.76b is not representative of underlying performance. It includes a $3.99 per-share tax benefit, primarily an $874 million benefit from a ten-year tax credit obtained by a Swiss subsidiary and a $262 million benefit from revaluing deferred tax assets after a Swiss corporate tax rate increase. Investors should look to adjusted figures for run-rate earnings power.
Free cash flow of $570 millionc was a first-quarter record, up from $399 million a year earlier, and the company deployed roughly $1 billion, including about $600 million in shareholder returns and about $350 million for the Schaffner acquisition. Management guided fiscal Q2 2024 net sales to about $3.95 billion and adjusted EPS to about $1.82, up 10% year over year.
Segment trends were mixed: Transportation grew 5%d organically, led by automotive, Industrial declined 5% organically on weakness in Industrial Equipment, and Communications fell 17% organically on destocking and appliance weakness. Management expects Communications to ramp in the second half on AI-related programs and expects company-level margin strength to continue through fiscal 2024.
02—Key points
Key Highlights
- Net sales of $3.83B were flat reported and down 1% organically, in line with guidance; Transportation grew 5% organically, Industrial fell 5%, and Communications fell 17%.
- Adjusted EPS of $1.84 rose 20% year over year and beat guidance; GAAP diluted EPS of $5.76 was inflated by a $3.99 per-share one-time tax benefit, mainly an $874M Swiss tax credit and a $262M deferred tax revaluation.
- Adjusted operating margin expanded 290 basis points to 19.1% (GAAP 18.2%), with Transportation at 20.9% and Communications at 18.7%.
- Record first-quarter operating cash flow of $719M and free cash flow of $570M, up from $399M a year earlier.
- Orders of $3.8B rose 4% year over year with growth in all segments; book-to-bill was 0.98 and backlog remained near record levels.
- Capital deployment of about $1B in the quarter included about $600M returned to shareholders and about $350M for the Schaffner acquisition; cash ended at $1.17B against $4.2B of total debt.
- Q2 FY24 guidance calls for net sales of about $3.95B (up 3% sequentially) and adjusted EPS of about $1.82, up 10% year over year.
03—Questions
Frequently Asked Questions
Why is GAAP EPS of $5.76 so much higher than adjusted EPS of $1.84?
The difference is a one-time $3.99 per-share tax benefit. It consists mainly of an $874 million benefit from a ten-year tax credit obtained by a Swiss subsidiary and a $262 million benefit from revaluing deferred tax assets after Switzerland raised its corporate tax rate, plus a $118 million benefit tied to a legal entity restructuring. Management excludes these items from adjusted EPS, which better reflects ongoing operating performance.
How healthy is the underlying business given flat sales?
Profitability improved meaningfully even though sales were flat. Adjusted operating margin rose 290 basis points to 19.1%, driven by operational performance, and orders grew 4% year over year. The weakness is concentrated in Industrial Equipment and Communications (Data and Devices and Appliances), while Transportation and parts of Industrial such as Aerospace, Defense and Marine, Energy, and Medical grew.
What does the Q2 outlook imply for the rest of fiscal 2024?
Q2 guidance of about $3.95B in sales is roughly 5% below the $4.16B reported in the prior-year quarter, though it is up 3% sequentially. Adjusted EPS of about $1.82 would be up 10% year over year. Management expects Industrial growth in AD&M, Energy, and Medical, a slight decline in Transportation, and a second-half Communications revenue ramp tied to AI programs, with company-level margins remaining strong.
Is the Communications segment's weakness likely to persist?
Management attributes the decline to customer destocking in Data and Devices and broad market weakness in Appliances, with Communications sales down 17% organically. Management cited strong momentum in AI applications and expects AI programs to drive a second-half revenue ramp while maintaining high-teens segment margins. Investors should watch whether destocking ends as scheduled, since the company has not quantified the recovery timing.
04—Continue