01—Abstract
Summary
Summary of the 8-K filed July 24, 2024. Cited figures are marked; the original filing is the authoritative source.
TE Connectivity's fiscal Q3 2024 (quarter ended June 28, 2024) was a margin-driven quarter rather than a sales-growth one.
Net sales were $3.98 billiona, down 1% reported but up 2% organically and in line with guidance. Adjusted operating margin expanded 200 basis points year over year to a quarterly record 19.3%, which lifted adjusted EPS to $1.91 (up 8%), above the company's guidance. GAAP diluted EPS from continuing operations was $1.86, up 11%.
Orders of $4.1 billionb rose 4% year over year and 3% sequentially, with a book-to-bill of 1.04, led by Communications Solutions, where AI-related programs drove record orders. Segment performance was uneven. Communications Solutions grew sales 22% reported (24% organic) with roughly 600 basis points of margin expansion.
Transportation Solutions' adjusted margin rose to 21.0%c, although sales fell 4% reported and were flat organically, with Automotive up 4% organically despite lower auto production and Commercial Transportation and Sensors declining. Industrial Solutions was down 1% reported, with Industrial Equipment down 17% on customer destocking, partly offset by growth in Aerospace, Defense and Marine (up 18%), Energy and Medical. Cash generation was strong.
Year-to-date free cash flow was about $1.98 billiond, up 36%, and the company returned $1.8 billion to shareholders. Fourth-quarter guidance calls for sales of about $4.0 billion, adjusted EPS of about $1.94 (up 9%) and GAAP EPS of about $1.80. Management said this implies double-digit full-year adjusted EPS growth on roughly flat organic sales.
Nine-month GAAP EPS of $9.41 is heavily inflated by one-time Swiss tax benefits, so adjusted figures are the better guide to underlying earnings. The filing also references a proposed change of incorporation from Switzerland to Ireland, which investors should monitor.
02—Key points
Key Highlights
- Net sales of $3,979M were down 1% reported and up 2% organically, in line with guidance.
- Adjusted operating margin reached a record 19.3%, up 200 bps year over year; GAAP operating margin was 19.0%, up from 15.8%.
- Adjusted EPS of $1.91 beat guidance and rose 8% year over year; GAAP diluted EPS from continuing operations was $1.86, up 11%.
- Orders of $4.1B rose 4% year over year and 3% sequentially, with a 1.04 book-to-bill; Communications orders hit a record $799M, up 96% year over year.
- Year-to-date free cash flow of about $1.98B was up 36%, a record, and $1.8B was returned to shareholders year to date through buybacks and dividends.
- Q4 FY24 guidance: sales of ~$4.0B, adjusted EPS of ~$1.94 (up 9%) and GAAP EPS of ~$1.80; FX and tax are a combined $0.10 headwind.
- Nine-month GAAP EPS of $9.41 includes large one-time Swiss tax benefits (an $874M tax credit and a $262M deferred tax revaluation), so adjusted EPS of $5.62 is the cleaner comparison.
03—Questions
Frequently Asked Questions
Why did adjusted EPS grow only 8% when margins expanded 200 basis points?
Sales were essentially flat, and the reported figures were hurt by about $0.18 of year-over-year headwinds from foreign exchange and tax rates. The Q3 bridge shows operational performance adding $0.32, FX subtracting $0.06 and a higher tax rate subtracting $0.12. The adjusted effective tax rate rose to 23.1% from 18.2%, which absorbed much of the operating benefit.
Is the nine-month GAAP EPS of $9.41 a reliable measure of performance?
No. It includes roughly $4.03 per share of tax-related benefits, mainly an $874M Swiss tax credit and a $262M deferred tax asset revaluation tied to Swiss tax rate changes. Adjusted EPS of $5.62 for the nine months, up about 14% from $4.95, is a more representative measure of underlying earnings power.
What is driving the Communications Solutions segment and is it sustainable?
Growth was driven mainly by Data and Devices, which rose 31% reported on AI-related applications, while Appliances grew 9%. Orders reached a record $799M with a strong AI position across multiple customers. Management expects continued growth from accelerating AI programs, but this segment's results depend on a relatively small number of customers and AI-related demand.
What are the main weak spots in the business?
Industrial Equipment sales fell 17% reported (24% organic) due to ongoing destocking in customers' supply chains. Commercial Transportation (down 10% reported) and Sensors (down 15%) also declined, mainly on weakness in Europe and industrial applications. Management described Industrial margins as holding at current volume levels.
What does the proposed move from Switzerland to Ireland mean for investors?
The filing mentions only that a change of incorporation from Switzerland to Ireland is proposed, with risks that it may not be completed, may not deliver the expected advantages, or may affect the stock price, index inclusion or governance. It contains no details on timing, costs or expected tax effects, so investors should review the company's separate proxy and related filings for those terms.
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