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TEL > SEC Filings for TEL > Form 10-K on 15-Nov-2013All Recent SEC Filings

Show all filings for TE CONNECTIVITY LTD.

Form 10-K for TE CONNECTIVITY LTD.


15-Nov-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the accompanying notes included elsewhere in this Annual Report. The following discussion may contain forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this Annual Report, particularly in "Risk Factors" and "Forward-Looking Information."

Our Consolidated Financial Statements have been prepared in U.S. Dollars, in accordance with accounting principles generally accepted in the U.S. ("GAAP").

Organic net sales growth and free cash flow are non-GAAP financial measures which are discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations. We believe these non-GAAP financial measures, together with GAAP financial measures, provide useful information to investors because they reflect the financial measures that management uses in evaluating the underlying results of our operations. See "Non-GAAP Financial Measures" for more information about these non-GAAP financial measures, including our reasons for including the measures and material limitations with respect to the usefulness of the measures.

Overview

We are a world leader in connectivity. We design and manufacture products to connect power, data, and signal in a broad array of industries including automotive, energy, industrial, broadband communications, consumer devices, healthcare, and aerospace and defense. We help our customers solve the need for more energy efficiency, always-on communications, and ever-increasing productivity.

Effective for the first quarter of fiscal 2013, we reorganized our management and segments to align the organization around our strategy. We now operate through four reporting segments: Transportation Solutions, Network Solutions, Industrial Solutions, and Consumer Solutions. See Notes 1 and 23 to the Consolidated Financial Statements for additional information regarding our segments. Prior period segment results have been restated to conform to the current segment reporting structure.

Our business and operating results have been and will continue to be affected by worldwide economic conditions. Our sales are dependent on certain industry end markets that are impacted by


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consumer as well as industrial and infrastructure spending, and our operating results can be affected by changes in demand in those markets.

Overall, our fiscal 2013 net sales and organic net sales were consistent with fiscal 2012 levels. On an organic basis, our sales into industrial- and infrastructure-based markets declined, primarily as a result of weakness in the subsea communications and data communications end markets in the Network Solutions segment and the industrial end market in the Industrial Solutions segment. Also, on an organic basis, our sales into consumer-based markets increased with growth in the automotive end market in the Transportation Solutions segment, partially offset by declines in the consumer devices and appliances end markets in the Consumer Solutions segment.

Overall, our net sales decreased 3.6% in fiscal 2012 as compared to fiscal 2011. On an organic basis, net sales decreased 2.7% in fiscal 2012 from fiscal 2011 levels. On an organic basis, our sales into industrial- and infrastructure-based markets decreased, primarily as a result of weakness in the data communications, subsea communications, and telecom networks end markets in the Network Solutions segment and the industrial end market in the Industrial Solutions segment. Our sales into consumer-based markets experienced modest growth, on an organic basis, as growth in the automotive end market in the Transportation Solutions segment was partially offset by declines in the appliances and consumer devices end markets in the Consumer Solutions segment.

The acquisition of Deutsch in April 2012 benefited the automotive and aerospace, defense, and marine end markets in the Transportation Solutions and Industrial Solutions segments, respectively, and contributed net sales of $327 million in fiscal 2012. Also, Deutsch contributed incremental net sales of $320 million in the first six months of fiscal 2013 over the same period of fiscal 2012. Fiscal 2011 included an additional week which contributed $267 million in net sales and $0.08 per share to diluted earnings per share. ADC, which was acquired in December 2010, contributed net sales of $843 million, of which $24 million related to the additional week, during fiscal 2011. Also, the acquisition of ADC resulted in incremental net sales of $154 million in the first quarter of fiscal 2012 over the same period of fiscal 2011.

The March 2011 earthquake, subsequent tsunami, and aftershocks in Japan caused disruptions in our customers' operations and the supply chains that support their operations. We estimate that our fiscal 2011 net sales and diluted earnings per share were negatively impacted by $99 million and $0.07 per share, respectively, as a result of these disruptions. Our facilities in Japan were not materially damaged, and we did not experience further negative impacts after 2011.

Outlook

We expect net sales in the first quarter of fiscal 2014 to be between $3.225 billion and $3.325 billion. This reflects sales increases in the Transportation Solutions segment and, to a lesser degree, the Industrial Solutions segment, partially offset by sales decreases in the Consumer Solutions and Network Solutions segments relative to the first quarter of fiscal 2013. In the Transportation Solutions segment, we expect our sales to increase approximately 10%, and we expect global automotive production to increase 3% in the first quarter of fiscal 2014 as compared to the same period of fiscal 2013. In the Industrial Solutions segment, we expect our sales to increase approximately 10% in the industrial end market with smaller increases in the aerospace, defense, and marine and energy end markets in the first quarter of fiscal 2014 as compared to the first quarter of fiscal 2013. In the Consumer Solutions segment, we expect our sales to decline in the consumer devices end market, with this decline partially offset by a modest increase in our sales in the appliances end market in the first quarter of fiscal 2014 as compared to the same period of fiscal 2013. In the Network Solutions segment, we expect our sales to decline during the first quarter of fiscal 2014, reflecting continued weakness in the subsea communications and data communications end markets. We expect this decline


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to be partially offset by sales increases in the telecom networks end market. We expect diluted earnings per share to be in the range of $0.71 to $0.75 per share in the first quarter of fiscal 2014.

For fiscal 2014, we expect net sales to be between $13.65 billion and $14.15 billion, reflecting expected sales increases in the Transportation Solutions and Industrial Solutions segments and, to a lesser degree, the Consumer Solutions segment from fiscal 2013 levels. In the Transportation Solutions segment, we expect our sales growth to exceed an anticipated increase in global automotive production of approximately 4% from fiscal 2013 levels. In the Industrial Solutions segment, we expect our sales to increase in fiscal 2014 from fiscal 2013 levels in all end markets, with growth primarily in the aerospace, defense, and marine end market due to strength in commercial aviation and oil and gas markets. In the Consumer Solutions segment, we expect a slight increase in our sales in the appliances end market in fiscal 2014 while our sales in the consumer devices end market are expected to be consistent with fiscal 2013 levels. In the Network Solutions segment, we expect our fiscal 2014 sales to be consistent with fiscal 2013 levels, with increased sales in the telecom networks end market offset by decreased sales in the data communications end market. We expect diluted earnings per share to be in the range of $3.41 to $3.71 per share in fiscal 2014.

The above outlook is based on foreign exchange rates and commodity prices that are consistent with current levels.

We are monitoring the current macroeconomic environment and its potential effects on our customers and the end markets we serve. Additionally, we continue to closely manage our costs in line with economic conditions. We also are managing our capital resources and monitoring capital availability to ensure that we have sufficient resources to fund future capital needs. (See further discussion in "Liquidity and Capital Resources.")

Acquisitions

On April 3, 2012, we acquired 100% of the outstanding shares of Deutsch. The total value paid for the transaction amounted to 1.55 billion (approximately $2.05 billion using an exchange rate of $1.33 per 1.00), net of cash acquired. The total value paid included $659 million related to the repayment of Deutsch's financial debt and accrued interest. The acquired Deutsch businesses have been reported in the Transportation Solutions and Industrial Solutions segments from the date of acquisition. During fiscal 2012, Deutsch contributed net sales of $327 million and an operating loss of $54 million to our Consolidated Statement of Operations. The operating loss included charges of $75 million associated with the amortization of acquisition-related fair value adjustments primarily related to acquired inventories and customer order backlog, acquisition costs of $21 million, restructuring charges of $14 million, and integration costs of $6 million.

In July 2010, we entered into an Agreement and Plan of Merger to acquire 100% of the outstanding stock of ADC, a provider of broadband communications network connectivity products and related solutions. On December 9, 2010, upon effecting a short-form merger under Minnesota law, we owned 100% of the outstanding shares of ADC for a total purchase price of approximately $1,263 million in cash (excluding cash acquired of $546 million) and $22 million representing the fair value of ADC share-based awards exchanged for TE Connectivity share options and stock appreciation rights. The acquired ADC businesses have been included in the Network Solutions segment from the date of acquisition. During fiscal 2011, ADC contributed net sales of $843 million and an operating loss of $53 million to our Consolidated Statement of Operations. The operating loss included restructuring charges of $80 million, charges of $39 million associated with the amortization of acquisition-related fair value adjustments primarily related to acquired inventories and customer order backlog, integration costs of $10 million, and acquisition costs of $9 million.

See Note 5 to the Consolidated Financial Statements for additional information regarding acquisitions.


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Restructuring

We plan to continue to simplify our global manufacturing footprint by migrating facilities from higher-cost to lower-cost countries, consolidating within countries, and transferring product lines to lower-cost countries. These initiatives are designed to help us maintain our competitiveness in the industry, improve our operating leverage, and position us for growth in the years ahead. In connection with these initiatives and in response to market conditions, we incurred net restructuring charges of $314 million during fiscal 2013 and expect to incur net restructuring charges of approximately $50 million during fiscal 2014. Cash spending related to restructuring was $151 million during fiscal 2013, and we expect total spending, which will be funded with cash from operations, to be approximately $175 million in fiscal 2014. Annualized cost savings related to these actions are expected to be approximately $115 million and are expected to be realized by the end of fiscal 2015. Cost savings will be reflected primarily in cost of sales and selling, general, and administrative expenses.

Discontinued Operations

During fiscal 2012, we sold our Touch Solutions business for net cash proceeds of $380 million and recognized an insignificant pre-tax gain on the transaction. Also, during fiscal 2012, we sold our TE Professional Services business for net cash proceeds of $28 million and recognized an insignificant pre-tax gain on the transaction. See Note 4 to the Consolidated Financial Statements for additional information regarding discontinued operations.

Results of Operations

Key business factors that influenced our results of operations for the periods discussed in this report include:


Raw material prices. We purchased approximately 172 million pounds of copper, 133,000 troy ounces of gold, and 2.5 million troy ounces of silver in fiscal 2013. Prices continue to fluctuate. The following table sets forth the average prices incurred related to copper, gold, and silver.

                                                   Fiscal
                              Measure     2013      2012      2011
                     Copper        Lb.   $  3.51   $  3.90   $  3.99
                     Gold     Troy oz.   $ 1,613   $ 1,599   $ 1,382
                     Silver   Troy oz.   $ 29.18   $ 34.30   $ 30.27

In fiscal 2014, we expect to purchase copper, gold, and silver in quantities similar to fiscal 2013 levels.


Foreign exchange. Approximately 53% of our net sales are invoiced in currencies other than the U.S. Dollar. Our results of operations are influenced by changes in foreign currency exchange rates. Increases or decreases in the value of the U.S. Dollar, compared to other currencies, will directly affect our reported results as we translate those currencies into U.S. Dollars at the end


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of each fiscal period. The percentage of net sales in fiscal 2013 by major currencies invoiced was as follows:

                        Currencies                Percentage
                        U.S. Dollar                        47 %
                        Euro                               28
                        Japanese Yen                        6
                        Chinese Renminbi                    6
                        Korean Won                          4
                        Brazilian Real                      2
                        British Pound Sterling              2
                        All others                          5

                        Total                             100 %

Consolidated Operations

Net Sales. Net sales were $13,280 million and $13,282 million in fiscal 2013 and 2012, respectively. On an organic basis, net sales decreased $171 million, or 1.3%, in fiscal 2013 from fiscal 2012 as increased net sales in the Transportation Solutions segment were more than offset by decreases in the Network Solutions, Industrial Solutions, and Consumer Solutions segments. Price erosion adversely affected organic sales by $207 million in fiscal 2013. Foreign currency exchange rates negatively impacted net sales by $115 million, or 0.9%, in fiscal 2013. Deutsch, which was acquired on April 3, 2012, contributed incremental net sales of $320 million during the first six months of fiscal 2013 over the same period of fiscal 2012.

Net sales decreased $496 million, or 3.6%, to $13,282 million in fiscal 2012 from $13,778 million in fiscal 2011. On an organic basis, net sales decreased $372 million, or 2.7%, in fiscal 2012 as compared to fiscal 2011 as a result of decreased net sales in the Network Solutions segment and, to a lesser degree, the Industrial Solutions and Consumer Solutions segments. Foreign currency exchange rates negatively impacted net sales by $338 million, or 2.4%, in fiscal 2012. Fiscal 2011 included an additional week which contributed $267 million in net sales. Deutsch contributed net sales of $327 million during fiscal 2012. Also, the acquisition of ADC on December 8, 2010 resulted in incremental net sales of $154 million in the first quarter of fiscal 2012 over the same period of fiscal 2011.

See further discussion of organic net sales below under "Results of Operations by Segment."

The following table sets forth the percentage of our total net sales by geographic region:

                                                          Fiscal
                                                   2013    2012    2011
                Europe/Middle East/Africa (EMEA)      34 %    34 %    36 %
                Asia-Pacific                          33      34      33
                Americas                              33      32      31

                Total                                100 %   100 %   100 %


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The following table provides an analysis of the change in our net sales compared to the prior fiscal year by geographic region:

                                                                                                  Fiscal
                                                     2013                                                                                    2012
                                 Change in Net Sales versus Prior Fiscal Year                                            Change in Net Sales versus Prior Fiscal Year
                                                                 Acquisition                                                                  Impact of
                     Organic(1)             Translation(2)      (Divestiture)         Total            Organic(1)         Translation(2)     53rd Week(3)    Acquisitions         Total
                                                                                              ($ in millions)
EMEA            $   (114 )       (2.5 )%      $           28      $        146   $   60      1.3 %  $  (214 )    (4.3 )%   $         (327 )   $        (96 )   $       181   $ (456 )   (9.2 )%
Asia-Pacific         (31 )       (0.7 )                 (113 )              (7 )   (151 )   (3.4 )      (15 )    (0.3 )                33              (89 )            52      (19 )   (0.4 )
Americas             (26 )       (0.6 )                  (30 )             145       89      2.1       (143 )    (3.3 )               (44 )            (82 )           248      (21 )   (0.5 )

Total           $   (171 )       (1.3 )%      $         (115 )    $        284   $   (2 )      - %  $  (372 )    (2.7 )%   $         (338 )   $       (267 )   $       481   $ (496 )   (3.6 )%


(1)
Represents the change in net sales resulting from volume and price changes, before consideration of acquisitions, divestitures, the impact of changes in foreign currency exchange rates, and the impact of the 53rd week in fiscal 2011.

(2)
Represents the change in net sales resulting from changes in foreign currency exchange rates.

(3)
Represents the impact of an additional week in fiscal 2011.

The following table sets forth the percentage of our total net sales by segment:

                                                      Fiscal
                                               2013    2012    2011
                    Transportation Solutions      41 %    39 %    36 %
                    Network Solutions             23      25      26
                    Industrial Solutions          23      22      23
                    Consumer Solutions            13      14      15

                    Total                        100 %   100 %   100 %

The following table provides an analysis of the change in our net sales compared to the prior fiscal year by segment:

                                                                                                    Fiscal
                                                       2013                                                                                    2012
                                   Change in Net Sales versus Prior Fiscal Year                                            Change in Net Sales versus Prior Fiscal Year
                                                                   Acquisition                                                                  Impact of
                       Organic(1)             Translation(2)      (Divestiture)         Total            Organic(1)         Translation(2)     53rd Week(3)    Acquisitions         Total
                                                                                                ($ in millions)
Transportation
Solutions         $    251          4.9 %       $          (54 )    $        160   $  357      7.0 %  $   325       6.6 %    $         (181 )   $       (102 )   $       174   $  216      4.4 %
Network
Solutions             (192 )       (5.8 )                  (16 )             (36 )   (244 )   (7.4 )     (374 )   (10.2 )               (66 )            (75 )           154     (361 )   (9.8 )
Industrial
Solutions             (122 )       (4.1 )                  (18 )             160       20      0.7       (181 )    (5.8 )               (76 )            (53 )           153     (157 )   (5.0 )
Consumer
Solutions             (108 )       (5.8 )                  (27 )               -     (135 )   (7.3 )     (142 )    (7.0 )               (15 )            (37 )             -     (194 )   (9.5 )

Total             $   (171 )       (1.3 )%      $         (115 )    $        284   $   (2 )      - %  $  (372 )    (2.7 )%   $         (338 )   $       (267 )   $       481   $ (496 )   (3.6 )%


(1)
Represents the change in net sales resulting from volume and price changes, before consideration of acquisitions, divestitures, the impact of changes in foreign currency exchange rates, and the impact of the 53rd week in fiscal 2011.

(2)
Represents the change in net sales resulting from changes in foreign currency exchange rates.

(3)
Represents the impact of an additional week in fiscal 2011.

Gross Margin. In fiscal 2013, gross margin was $4,329 million, reflecting a $283 million increase from gross margin of $4,046 million in fiscal 2012. In fiscal 2012, gross margin included charges of $75 million associated with the amortization of acquisition-related fair value adjustments primarily related to acquired inventories and customer order backlog associated with Deutsch. Excluding this item, gross margin increased in fiscal 2013 as compared to fiscal 2012 due primarily to improved manufacturing productivity and, to a lesser degree, lower material costs, partially offset by price erosion. Gross margin as a percentage of net sales increased to 32.6% in fiscal 2013 from 30.5% in fiscal 2012.


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In fiscal 2012, gross margin was $4,046 million, reflecting a $225 million decrease from gross margin of $4,271 million in fiscal 2011. In fiscal 2012, gross margin included charges of $75 million associated with the acquisition of Deutsch, whereas in fiscal 2011, gross margin included similar charges of $39 million associated with the acquisition of ADC. Excluding these items, gross margin decreased in fiscal 2012 as compared to fiscal 2011. The decrease resulted from lower sales levels and, to a lesser degree, increased material costs, partially offset by improved manufacturing productivity. Gross margin as a percentage of net sales decreased to 30.5% in fiscal 2012 from 31.0% in fiscal 2011.

Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased $88 million to $1,773 million in fiscal 2013 from $1,685 million in fiscal 2012. The increase resulted primarily from additional selling, general, and administrative expenses of Deutsch, increased incentive compensation costs, and impairment charges on certain assets held for sale, partially offset by benefits attributable to restructuring actions. Selling, general, and administrative expenses as a percentage of net sales increased to 13.4% in fiscal 2013 from 12.7% in fiscal 2012.

Selling, general, and administrative expenses decreased $43 million to $1,685 million in fiscal 2012 from $1,728 million in fiscal 2011. The decrease resulted primarily from cost control measures and benefits attributable to restructuring actions, partially offset by the additional selling, general, and administrative expenses of Deutsch. Selling, general, and administrative expenses as a percentage of net sales increased to 12.7% in fiscal 2012 from 12.5% in fiscal 2011 primarily as a result of the decrease in sales.

Acquisition and Integration Costs. In connection with the acquisition of Deutsch, we incurred acquisition and integration costs of $14 million and $27 million during fiscal 2013 and 2012, respectively. In connection with the acquisition of ADC, we incurred acquisition and integration costs of $19 million during fiscal 2011.

Restructuring and Other Charges, Net. Net restructuring and other charges were $311 million, $128 million, and $136 million in fiscal 2013, 2012, and 2011, respectively. During fiscal 2013, we initiated a restructuring program associated with headcount reductions and manufacturing site closures impacting all segments. During fiscal 2012, we initiated a restructuring program to reduce headcount across all segments. Also, we initiated a restructuring program in the Transportation Solutions and Industrial Solutions segments associated with the acquisition of Deutsch. We initiated a restructuring program during fiscal 2011 which was primarily associated with the acquisition of ADC and related headcount reductions in the Network Solutions segment. Additionally, in fiscal 2011, we instituted reductions-in-force across all segments as a result of economic conditions. See Note 3 to the Consolidated Financial Statements for additional information regarding net restructuring and other charges.

Operating Income. Operating income was $1,556 million and $1,518 million in fiscal 2013 and 2012, respectively. Results for fiscal 2013 included $311 million of net restructuring and other charges and $14 million of acquisition and integration costs. Results for fiscal 2012 included $116 million of charges related to the acquisition of Deutsch, including $75 million of charges associated with the amortization of acquisition-related fair value adjustments primarily related to acquired inventories and customer order backlog, $27 million of acquisition and integration costs, and $14 million of net restructuring and other charges. Results for fiscal 2012 also included $114 million of additional net restructuring and other charges.

Operating income was $1,518 million and $1,687 million in fiscal 2012 and 2011, respectively. As discussed above, results for fiscal 2012 included $116 million of charges related to the acquisition of Deutsch. Results for . . .

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