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TE Connectivity's (TEL) Q2 Earnings Beat, Revenues Fall Y/Y

Zacks Equity Research
·5 mins read

TE Connectivity Ltd. TEL reported second-quarter fiscal 2020 adjusted earnings of $1.29 per share, beating the Zacks Consensus Estimate by 30.3%. Further, the figure was higher than management’s guided range of $1.22-$1.28.

However, the bottom line declined 9.1% on a year-over-year basis but improved 6.6% sequentially.

Net sales in the reported quarter were $3.2 billion, which surpassed the Zacks Consensus Estimate by 9.7%. Further, the figure came within the company’s guided range of $3.1 billion to $3.3 billion. It also surged 0.9% from the prior quarter. However, the top line declined 6% from the year-ago quarter.

The year-over-year decline in the top line can be attributed to weakness in all the key end-markets, which affected the performance of Transportation, Industrial and Communication segments during the reported quarter. Moreover, coronavirus-induced disruptions remained concerns.

Nevertheless, the company’s global manufacturing strategy and high levels of automation in factories acted as tailwinds during the reported quarter.

Notably, the company’s total orders came in at $3.4 billion during the reported quarter.

Although the company witnessed sequential improvement of 3.9% in its fiscal second quarter orders, it has been declining since March.

The company has withdrawn full fiscal 2020 guidance owing to uncertainty in the overall demand environment induced by the coronavirus pandemic.

Moreover, supply chain disruptions are expected to result in a headwind of $100 million in fiscal third-quarter 2020.

Nevertheless, continued solid execution of the company’s strategic plans especially cost reduction and footprint consolidation initiatives, are likely to remain positives. Further, investments in content growth, and recovery in China and auto market are expected to aid the company’s performance in the days ahead.

TE Connectivity Ltd. Price, Consensus and EPS Surprise

TE Connectivity Ltd. Price, Consensus and EPS Surprise
TE Connectivity Ltd. Price, Consensus and EPS Surprise

TE Connectivity Ltd. price-consensus-eps-surprise-chart | TE Connectivity Ltd. Quote


Top-Line in Detail

TE Connectivity operates in three organized segments.

Transportation Solutions: The company generated sales worth $1.86 billion (58.1% of net sales) in the reported quarter, down 5.8% on a year-over-year basis. This can be attributed to weakness in auto production globally, which resulted in a year-over-year decline of 4% in automotive sales. Further, sluggishness in commercial transportation and industrial markets led to year-over-year decline of 11% in the company’s sensor business.

Additionally, weakness in all regions led to decline of 9% in sales of its commercial transportation business on a year-over-year basis.

Industrial Solutions: This segment generated sales of $962 million (30.1% of net sales), which fell 4.5% year over year. This was primarily driven by inventory destocking, which led to year-over-year decline of 14% in the industrial equipment business.

Although the company witnessed growth in defense market, sluggish commercial aerospace market led to 4% decline in the aerospace, defense and marine business from the year-ago quarter.

Nevertheless, TE Connectivity experienced improvement of 6% in medical year over year courtesy of solid traction across interventional medical applications. Additionally, the company witnessed year-over-year growth of 2% in energy, owing to investments for upgraded infrastructure.

Communications Solutions: This segment generated sales of $376 million (11.8% of net sales), declining 13.4% year over year. This can be attributed to inventory destocking, which resulted in a decline of 13% in data & devices and 14% in appliances solutions on a year-over-year basis.

Operating Details

Per the company, gross margin came in 32.2%, contracting 60 basis points (bps) from the year-ago quarter.

We note that R&D expenses were $158 million, which decreased 4.8% year over year. Further, selling, general, and administrative expenses came in at $352 million, down 5.6% year over year. Further, restructuring costs decreased 47.6% from the year-ago quarter to $22 million in the reported quarter.

However, acquisition and integration expenses totaled $12 million, up 71.4% from the year-ago quarter.

Consequently, adjusted operating margin came in at 16.2%, contracting 80 bps from the prior-year quarter.

Balance Sheet & Cash Flow

As of Mar 27, 2020, TE Connectivity’s cash and cash equivalents were $796 million, higher than $742 million as of Dec 27, 2019.

Long-term debt was $3.75 billion, up from $3.41 billion in the previous quarter.

The company generated $481 million of cash from operation in the reported quarter, up from with $411 million in the prior quarter.

Further, free cash flow of $311 million was generated in the reported quarter. Additionally, TE Connectivity paid out $433 million to shareholders through share repurchases and dividend payments.

Guidance

Due to expected sluggish end-market demand conditions as a result of coronavirus pandemic, the company anticipates net sales to be down 25% sequentially in third-quarter fiscal 2020.

TE Connectivity anticipates transportation and commercial aerospace markets to be significantly impacted by coronavirus-induced disruptions.

Further, auto production is expected to decline in the ongoing quarter.

The Zacks Consensus Estimate for fiscal third quarter sales is pegged at $2.78 billion.

Zacks Rank & Stocks to Consider

Currently, TE Coonectivity carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Pixelworks, Inc. PXLW, Netlist, Inc. NLST and Citrix Systems, Inc. CTXS. While Pixelworks and Netlist sport a Zacks Rank #1 (Strong Buy), Citrix carries a Zacks Rank #2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term earnings growth rate for Pixelworks, Netlist and Citrix is currently pegged at 20%, 15% and 7.85%, respectively.

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