Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
TEL > SEC Filings for TEL > Form 10-Q on 24-Apr-2014All Recent SEC Filings

Show all filings for TE CONNECTIVITY LTD.

Form 10-Q for TE CONNECTIVITY LTD.


24-Apr-2014

Quarterly Report


ITEM 2. 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 Condensed Consolidated Financial Statements and the accompanying notes included elsewhere in this Quarterly 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 as a result of many factors, including but not limited to those under the heading "Forward-Looking Information" and "Part II. Item 1A. Risk Factors."

Our Condensed Consolidated Financial Statements have been prepared in United States ("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

TE Connectivity Ltd. ("TE Connectivity" or the "Company," which may be referred to as "we," "us," or "our") is 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.

During fiscal 2014, we realigned certain businesses, principally the Relay Products business, within our segment reporting structure to better align our product portfolio. The Relay Products business, which was previously included in the Consumer Solutions segment, has been moved to the Industrial Solutions segment. We continue to operate through four reporting segments: Transportation Solutions, Industrial Solutions, Network Solutions, and Consumer Solutions. See Note 16 to the Condensed 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 consumer as well as industrial and infrastructure spending, and our operating results can be affected by changes in demand in those markets.

Overall, our net sales increased 5.1% and 5.6% in the second quarter and first six months of fiscal 2014, respectively, as compared to the same periods of fiscal 2013. Increased net sales in the Transportation Solutions segment and, to a lesser degree, the Industrial Solutions segment were partially offset by declines in the Network Solutions and Consumer Solutions segments. On an organic basis, net sales increased 6.1% and 6.6% in the second quarter and first six months of fiscal 2014, respectively, as compared to the same periods of fiscal 2013. In the Transportation Solutions segment, our sales in the automotive end market increased 13.3% and 13.6% on an organic basis in the second quarter and first six months of fiscal 2014, respectively, with sales increases in all regions. In the Industrial Solutions segment, our organic net sales increased 4.4% and 5.3% in the second quarter and first six months of fiscal 2014, respectively, due primarily to growth in the industrial equipment and


Table of Contents

aerospace, defense, oil, and gas end markets, driven by the Asia-Pacific region. On an organic basis, our net sales decreased 1.3% and 0.5% in the Network Solutions segment in the second quarter and first six months of fiscal 2014, respectively, as growth in the telecom networks and enterprise networks end markets was more than offset by declines in the subsea communications and data communications end markets. In the Consumer Solutions segment, our organic net sales decreased 2.9% and 1.1% in the second quarter and first six months of fiscal 2014, respectively, as declines in the consumer devices end market were partially offset by increases in the appliances end market.

Outlook

In the third quarter of fiscal 2014, we expect net sales to be between $3.54 billion and $3.64 billion. This primarily reflects sales increases of approximately 8% to 10% in the Transportation Solutions segment and, to a lesser degree, sales increases in the Industrial Solutions segment, partially offset by sales decreases in the Network Solutions segment relative to the third quarter of fiscal 2013. In the Consumer Solutions segment, we expect our sales to be up slightly as compared to third quarter fiscal 2013 levels. In the Transportation Solutions segment, we expect our sales growth to outpace anticipated growth in global automotive production of approximately 2% in the third 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% to 12% in the aerospace, defense, oil, and gas end market and to increase, to a lesser degree, in the industrial equipment end market, and expect our sales in the energy end market to be consistent with third quarter fiscal 2013 levels. In the Consumer Solutions segment, we expect an increase in our sales in the appliances end market to be partially offset by a slight decline in our sales in the consumer devices end market in the third quarter of fiscal 2014 as compared to the third quarter of fiscal 2013. In the Network Solutions segment, we expect our sales decrease to be primarily driven by declines in our sales in the subsea communications end market. We expect diluted earnings per share to be in the range of $0.93 to $0.97 per share in the third quarter of fiscal 2014.

For fiscal 2014, we expect net sales to be between $13.8 billion and $14.1 billion, reflecting expected sales increases of approximately 10% to 12% in the Transportation Solutions segment and, to a lesser degree, sales increases in the Industrial Solutions segment, partially offset by sales decreases in the Network Solutions segment from fiscal 2013 levels. We expect our sales in the Consumer Solutions segment to be consistent with fiscal 2013 levels. In the Transportation Solutions segment, we expect our sales growth to outpace anticipated growth in global automotive production of approximately 5% from fiscal 2013 levels. In the Industrial Solutions segment, we expect our sales to increase in the aerospace, defense, oil, and gas and industrial equipment end markets in fiscal 2014, and expect our sales in the energy end market to be consistent with fiscal 2013 levels. In the Network Solutions segment, we expect our sales decrease in the subsea communications end market and, to a lesser degree, in the data communications end market to be partially offset by a sales increase in the telecom networks end market in fiscal 2014 as compared to fiscal 2013. We expect our net sales in the subsea communications end market to be approximately $300 million in fiscal 2014. In the Consumer Solutions segment, we expect our sales decline in the consumer devices end market to be offset by an increase in our sales in the appliances end market in fiscal 2014 as compared to fiscal 2013. We expect diluted earnings per share to be in the range of $3.62 to $3.74 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.")


Table of Contents

Acquisition

In April 2014, we entered into a definitive agreement to acquire the SEACON Group, a leading provider of underwater connector technology and systems, for $490 million in cash. The transaction, which is expected to close during fiscal 2014, is subject to certain regulatory approvals and other closing conditions.

Restructuring

We are committed to continuous productivity improvements and consistently evaluate opportunities to simplify our global manufacturing footprint, migrate facilities to lower-cost regions, reduce fixed costs, and eliminate excess capacity. 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 $28 million during the first six months of fiscal 2014 and expect to incur net restructuring charges of approximately $50 million during fiscal 2014. Cash spending related to restructuring was $87 million during the first six months of fiscal 2014, and we expect total spending, which will be funded with cash from operations, to be approximately $190 million in fiscal 2014. Total annualized cost savings related to all actions commenced in fiscal 2014 are estimated to be approximately $30 million and are expected to be realized by the end of fiscal 2016. Annualized cost savings related to actions commenced in fiscal 2013 are estimated 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.

Results of Operations

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


Raw material prices. We expect to purchase approximately 177 million pounds of copper, 131,000 troy ounces of gold, and 2.5 million troy ounces of silver in fiscal 2014. Prices continue to fluctuate. The following table sets forth the average copper, gold, and silver prices incurred, inclusive of the impact of commodity hedges.

                             For the Quarters Ended         For the Six Months Ended
                           March 28,       March 29,       March 28,        March 29,
               Measure        2014            2013           2014             2013
      Copper     Lb.       $      3.31     $      3.58    $       3.35     $       3.58
      Gold     Troy oz.    $     1,425     $     1,663    $      1,445     $      1,672
      Silver   Troy oz.    $     24.14     $     30.83    $      24.72     $      31.23


Foreign exchange. Approximately 56% 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 of each fiscal period.

Consolidated Operations

Net Sales. Net sales increased $166 million, or 5.1%, to $3,431 million in the second quarter of fiscal 2014 from $3,265 million in the second quarter of fiscal 2013. On an organic basis, net sales increased $196 million, or 6.1%, in the second quarter of fiscal 2014 from the second quarter of fiscal 2013 due primarily to increased net sales in the Transportation Solutions segment and, to a lesser degree, the Industrial Solutions segment, partially offset by decreased net sales in the Consumer


Table of Contents

Solutions and Network Solutions segments. Price erosion adversely affected organic sales by $62 million in the second quarter of fiscal 2014 as compared to the second quarter of fiscal 2013.

In the first six months of fiscal 2014, net sales increased $358 million, or 5.6%, to $6,757 million from $6,399 million in the first six months of fiscal 2013. On an organic basis, net sales increased $422 million, or 6.6%, in the first six months of fiscal 2014 as compared to the same period of fiscal 2013 as a result of net sales increases in the Transportation Solutions segment and, to a lesser degree, the Industrial Solutions segment. Price erosion adversely affected organic sales by $123 million in the first six months of fiscal 2014 as compared to the same period of fiscal 2013.

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:

                                For the Quarters Ended         For the Six Months Ended
                              March 28,        March 29,      March 28,        March 29,
                                 2014             2013           2014             2013
Europe/Middle East/Africa
("EMEA")                               37 %             35 %           36 %             34 %
Asia-Pacific                           32               33             33               34
Americas                               31               32             31               32

Total                                 100 %            100 %          100 %            100 %






    The following table provides an analysis of the change in our net sales by
geographic region:

                            Change in Net Sales for the Quarter Ended March 28, 2014                                Change in Net Sales for the Six Months Ended March 28, 2014
                              versus Net Sales for the Quarter Ended March 29, 2013                                  versus Net Sales for the Six Months Ended March 29, 2013
                     Organic(1)           Translation(2)     Divestitures            Total                  Organic(1)            Translation(2)     Divestitures              Total
                                                                                               ($ in millions)
EMEA            $     88          7.8 %     $          41      $        (5 )   $    124       10.8 %  $    155            7.2 %     $          88      $       (10 )   $    233           10.6 %
Asia-Pacific          90          8.6                 (25 )            (18 )         47        4.4         213           10.1                 (73 )            (34 )        106            4.9
Americas              18          1.7                 (22 )             (1 )         (5 )     (0.5 )        54            2.6                 (32 )             (3 )         19            0.9


Total           $    196          6.1 %     $          (6 )    $       (24 )   $    166        5.1 %  $    422            6.6 %     $         (17 )    $       (47 )   $    358            5.6 %


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

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

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

                               For the Quarters Ended         For the Six Months Ended
                             March 28,        March 29,      March 28,        March 29,
                                2014             2013           2014             2013
 Transportation Solutions             46 %             42 %           44 %             41 %
 Industrial Solutions                 23               23             23               23
 Network Solutions                    20               22             21               23
 Consumer Solutions                   11               13             12               13

Total 100 % 100 % 100 % 100 %


Table of Contents

The following table provides an analysis of the change in our net sales by segment:

                               Change in Net Sales for the Quarter Ended March 28, 2014                                 Change in Net Sales for the Six Months Ended March 28, 2014
                                 versus Net Sales for the Quarter Ended March 29, 2013                                   versus Net Sales for the Six Months Ended March 29, 2013
                        Organic(1)            Translation(2)     Divestitures            Total                  Organic(1)            Translation(2)     Divestitures              Total
                                                                                                  ($ in millions)
Transportation
Solutions         $    184           13.3 %      $          2      $         -     $    186       13.4 %  $    360           13.6 %     $           2      $         -     $    362           13.7 %
Industrial
Solutions               33            4.4                   2               (4 )         31        4.1          78            5.3                   4               (8 )         74            5.0
Network
Solutions               (9 )         (1.3 )                (8 )            (20 )        (37 )     (5.1 )        (7 )         (0.5 )               (12 )            (39 )        (58 )         (4.0 )
Consumer
Solutions              (12 )         (2.9 )                (2 )              -          (14 )     (3.5 )        (9 )         (1.1 )               (11 )              -          (20 )         (2.5 )


Total             $    196            6.1 %      $         (6 )    $       (24 )   $    166        5.1 %  $    422            6.6 %     $         (17 )    $       (47 )   $    358            5.6 %


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

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

Gross Margin. In the second quarter of fiscal 2014, gross margin was $1,173 million, reflecting a $121 million increase from gross margin of $1,052 million in the second quarter of fiscal 2013. In the first six months of fiscal 2014, gross margin increased $249 million to $2,290 million as compared to $2,041 million in the first six months of fiscal 2013. The increases in gross margin resulted primarily from higher volume, improved manufacturing productivity and, to a lesser degree, lower materials costs, partially offset by price erosion. Gross margin as a percentage of net sales increased to 34.2% in the second quarter of fiscal 2014 from 32.2% in the second quarter of fiscal 2013. In the first six months of fiscal 2014, gross margin as a percentage of net sales increased to 33.9% from 31.9% in the same period of fiscal 2013.

Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased $33 million to $471 million in the second quarter of fiscal 2014 from $438 million in the second quarter of fiscal 2013. Selling, general, and administrative expenses increased $72 million to $938 million in the first six months of fiscal 2014 as compared to $866 million in the same period of fiscal 2013. The increases in selling, general, and administrative expenses resulted primarily from increased selling expenses to support higher sales levels and increased incentive compensation costs, partially offset by savings attributable to restructuring actions. Selling, general, and administrative expenses as a percentage of net sales increased to 13.7% in the second quarter of fiscal 2014 from 13.4% in the same period of fiscal 2013. In the first six months of fiscal 2014, selling, general, and administrative expenses as a percentage of net sales increased to 13.9% from 13.5% in the same period of fiscal 2013.

Restructuring and Other Charges, Net. Net restructuring and other charges were $21 million and $81 million in the second quarters of fiscal 2014 and 2013, respectively. Net restructuring and other charges were $28 million and $173 million in the first six months of fiscal 2014 and 2013, respectively. During fiscal 2014, we initiated a restructuring program primarily associated with headcount reductions in the Network Solutions segment. During fiscal 2013, we initiated a restructuring program associated with headcount reductions and manufacturing site closures impacting all segments. See Note 2 to the Condensed Consolidated Financial Statements for additional information regarding net restructuring and other charges.

Operating Income. In the second quarter of fiscal 2014, operating income was $510 million as compared to $359 million in the second quarter of fiscal 2013. Results for the second quarter of fiscal 2014 included $21 million of net restructuring and other charges and $1 million of acquisition and integration costs. Results for the second quarter of fiscal 2013 included $81 million of net restructuring and other charges and $3 million of acquisition and integration costs.

Operating income was $989 million and $652 million in the first six months of fiscal 2014 and 2013, respectively. Results for the first six months of fiscal 2014 included $28 million of net restructuring and other charges and $1 million of acquisition and integration costs. Results for the first


Table of Contents

six months of fiscal 2013 included $173 million of net restructuring and other charges and $8 million of acquisition and integration costs.

See further discussion of operating income below under "Results of Operations by Segment."

Non-Operating Items

Other Income (Expense), Net. We recorded net other income of $16 million and $9 million during the quarters ended March 28, 2014 and March 29, 2013, respectively, primarily consisting of income pursuant to the Tax Sharing Agreement with Tyco International Ltd. ("Tyco International") and Covidien plc ("Covidien"). See Note 7 to the Condensed Consolidated Financial Statements for further information regarding the Tax Sharing Agreement.

We recorded net other income of $48 million and net other expense of $217 million during the six months ended March 28, 2014 and March 29, 2013, respectively, primarily pursuant to the Tax Sharing Agreement with Tyco International and Covidien. The net other income in the six months ended March 28, 2014 included $18 million of income related to our share of a settlement agreement entered into by Tyco International with a former subsidiary, CIT Group Inc., which arose from a pre-separation claim for which we were entitled to 31% once resolved. The net other expense in the six months ended March 29, 2013 included $231 million related to the effective settlement of all undisputed tax matters for the period 1997 through 2000. See Note 8 to the Condensed Consolidated Financial Statements for additional information.

Income Taxes. We recorded tax provisions of $136 million and $60 million for the quarters ended March 28, 2014 and March 29, 2013, respectively. The tax provision for the quarter ended March 28, 2014 reflects income tax charges related to adjustments to prior year income tax returns, partially offset by tax benefits recognized in connection with the lapse of statutes of limitations for examinations of prior year income tax returns in certain non-U.S. locations. The tax provision for the quarter ended March 29, 2013 reflects tax benefits recognized in connection with the lapse of statutes of limitations for examinations of prior year income tax returns in certain non-U.S. locations, partially offset by charges related to adjustments to prior year income tax returns. In addition, the tax provision for the quarter ended March 29, 2013 reflects tax benefits recognized in connection with the extension of the U.S. research and development credit for fiscal 2012 enacted in January 2013 through the American Taxpayer Relief Act of 2012.

We recorded a tax provision of $263 million and an income tax benefit of $185 million for the six months ended March 28, 2014 and March 29, 2013, respectively. The tax provision for the six months ended March 28, 2014 reflects income tax charges related to adjustments to prior year income tax returns, as well as an income tax charge related to the impact of certain non-U.S. tax law changes and the associated increase in the valuation allowance for tax loss carryforwards. The tax benefit for the six months ended March 29, 2013 reflects a $331 million income tax benefit related to the effective settlement of all undisputed tax matters for the period 1997 through 2000. In addition, the tax benefit for the six months ended March 29, 2013 reflects tax benefits recognized in connection with the lapse of statutes of limitations for examinations of prior year income tax returns in certain non-U.S. locations, partially offset by charges related to adjustments to prior year income tax returns.


Table of Contents

Results of Operations by Segment

     Transportation Solutions

                           For the Quarters Ended         For the Six Months Ended
                         March 28,       March 29,       March 28,        March 29,
                            2014            2013           2014             2013
                                               ($ in millions)
     Net sales           $     1,571     $     1,385    $      3,011     $      2,649
     Operating income    $       347     $       241    $        643     $        433
     Operating margin           22.1 %          17.4 %          21.4 %           16.3 %

Quarter Ended March 28, 2014 Compared to Quarter Ended March 29, 2013

Net sales in the Transportation Solutions segment increased $186 million, or 13.4%, to $1,571 million in the second quarter of fiscal 2014 from $1,385 million in the second quarter of fiscal 2013. Organic net sales increased $184 million, or 13.3%, during the second quarter of fiscal 2014 as compared to the same period of fiscal 2013.

In the automotive end market, which is the Transportation Solutions segment's primary industry end market, our organic net sales increased 13.3% in the second quarter of fiscal 2014 as compared to the second quarter of fiscal 2013. The increase resulted from growth of 17.6% in the Asia-Pacific region, . . .

  Add TEL to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for TEL - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.