01—Abstract
Summary
Summary of the 8-K filed April 24, 2024. Cited figures are marked; the original filing is the authoritative source.
TE Connectivity reported fiscal Q2 2024 (quarter ended March 29, 2024) results that were in line with its sales guidance and ahead of its EPS guidance.
Net sales were $3.97 billiona, down 5% reported and down 3% organically year over year, but up 4% sequentially. Adjusted EPS of $1.86 rose 13% year over year, driven by an 250 basis point expansion in adjusted operating margin to 18.5%. GAAP diluted EPS from continuing operations was $1.75.
Orders of $4.0 billionb grew 6% sequentially, with sequential growth in all three segments. Management pointed to Communications Solutions (cloud and AI programs) and Transportation (EV/HEV, electronification) as drivers for future growth. Cash generation was strong.
First-half free cash flow reached $1.1 billionc, up 32% year over year and a company record for the first half. Operating cash flow was $1.4 billion, up 18%. The company returned about $1.2 billion to shareholders and spent about $350 million on the bolt-on acquisition of Schaffner year to date.
Year-to-date GAAP results were distorted by a $1.25 billiond net tax benefit in the first half, including an $874 million benefit from a Swiss subsidiary's ten-year tax credit, so GAAP first-half EPS of $7.54 is not a sound basis for comparison; adjusted first-half EPS was $3.71. For fiscal Q3 2024, TE guided to net sales of about $4.0 billion, adjusted EPS of about $1.85 (up 5% year over year), and GAAP EPS of about $1.71. Guidance includes a $0.15 year-over-year headwind from tax and currency.
Management expects Transportation and Communications to drive organic growth in Q3 and expects strong earnings growth and margin expansion for the full fiscal year. The filing also flags the proposed change of incorporation from Switzerland to Ireland as a forward-looking risk.
02—Key points
Key Highlights
- Net sales of $3.97B were in line with guidance, down 5% reported and down 3% organically year over year, but up 4% sequentially.
- Adjusted EPS of $1.86 beat guidance and rose 13% year over year; GAAP EPS from continuing operations was $1.75.
- Adjusted operating margin expanded 250 bps year over year to 18.5% (GAAP 17.4%), led by Transportation Solutions at 20.4% adjusted.
- Orders of $4.0B rose 6% sequentially, with growth in all segments; Communications showed design-win momentum in cloud and AI.
- First-half free cash flow of $1.1B was up 32% year over year and a first-half record; operating cash flow was $1.4B, up 18%.
- Capital returned to shareholders of about $1.2B year to date, plus about $350M spent on the Schaffner acquisition.
- Q3 FY24 guidance: sales of about $4.0B, adjusted EPS of about $1.85 (+5% YoY), GAAP EPS of about $1.71, with a $0.15 tax and FX headwind.
03—Questions
Frequently Asked Questions
Why is first-half GAAP EPS of $7.54 so much higher than adjusted EPS of $3.71?
The GAAP figure includes a $1.25 billion net income tax benefit in the first half. This consists of an $874 million benefit from a ten-year tax credit obtained by a Swiss subsidiary, a $262 million benefit from revaluing deferred tax assets after a Swiss corporate tax rate increase, and a $118 million benefit from a legal entity restructuring. These are one-time items excluded from adjusted EPS, so the adjusted figure is the better measure of underlying earnings.
Is the margin improvement sustainable, and which segments drove it?
Management attributed the 250 bps adjusted margin expansion to strong operational execution. Transportation Solutions adjusted margin was 20.4% and management expects to maintain roughly 20% going forward. Industrial Solutions was 15.1% adjusted, described as stable at current volume and mix. Communications Solutions was 17.3% adjusted, and management expects high-teens margins in the second half of FY24. Guidance for Q3 and full-year margin expansion suggests management views the improvement as durable.
Where is revenue weakest, and when do management expect a recovery?
Industrial Equipment was the weakest area, down 23% reported and 28% organically, due to customer destocking. Communications Solutions fell 10% reported, with Appliances down 16% amid market weakness in all regions. Management expects Communications to return to year-over-year growth in Q3, citing signs of supply chain normalization. Automotive and Commercial Transportation declines in North America and Europe were partly offset by growth in China.
What does the Q3 guidance imply for investors?
Q3 guidance calls for sales of about $4.0 billion, roughly flat versus the prior-year quarter's $3.998 billion, and adjusted EPS of about $1.85, up 5% from $1.77. Management cited a $0.15 year-over-year headwind from tax and currency, which is partly offset by operational performance and sales growth. Guidance also implies adjusted operating growth was expected to be driven by the Transportation and Communications segments.
Are there risks to note beyond the quarterly numbers?
The filing highlights a proposed change of incorporation from Switzerland to Ireland. Risks include the transaction not being completed, the anticipated benefits not materializing, potential declines in the stock price and index positioning, and Irish governance and regulatory regimes proving more challenging than expected. Other risks include auto and industrial demand, currency and commodity price fluctuations, geopolitical instability, and potential goodwill impairments. Net debt is modest, with total debt of about $4.2 billion against $1.2 billion of cash.
04—Continue