TE Connectivity(TEL) - 2023 Q4 - Annual Report

Part I Business TE Connectivity is a global industrial technology leader providing a wide range of connectivity and sensor solutions across its Transportation, Industrial, and Communications segments - TE Connectivity is a global industrial technology leader specializing in connectivity and sensor solutions for harsh environments, serving markets like transportation, industrial applications, medical technology, energy, data communications, and home appliances[17] - The company operates through three reportable segments: Transportation Solutions, Industrial Solutions, and Communications Solutions[20] Net Sales by Segment (% of Total Net Sales) | Segment | Fiscal 2023 | Fiscal 2022 | Fiscal 2021 | | :--- | :--- | :--- | :--- | | Transportation Solutions | 60% | 56% | 60% | | Industrial Solutions | 28% | 28% | 26% | | Communications Solutions | 12% | 16% | 14% | | Total | 100% | 100% | 100% | - The Transportation Solutions segment is a leader in connectivity and sensor technologies for automotive, commercial transportation, and sensor applications[22][24] - The Industrial Solutions segment supplies products for connecting and distributing power, data, and signals across markets like industrial equipment, aerospace, defense, marine, energy, and medical[25][27] - The Communications Solutions segment provides electronic components for data and devices (e.g., data centers, smartphones) and appliances[26][28] Net Sales by Geographic Region (% of Total Net Sales) | Region | Fiscal 2023 | Fiscal 2022 | Fiscal 2021 | | :--- | :--- | :--- | :--- | | Europe/Middle East/Africa (EMEA) | 39% | 35% | 37% | | Asia–Pacific | 32% | 35% | 36% | | Americas | 29% | 30% | 27% | | Total | 100% | 100% | 100% | - Sales are conducted primarily through direct selling, which accounted for approximately 80% of total net sales in fiscal 2023, and also via third-party distributors[34] Backlog by Reportable Segment (Fiscal Year End) | Segment | 2023 (in millions) | 2022 (in millions) | | :--- | :--- | :--- | | Transportation Solutions | $2,981 | $3,179 | | Industrial Solutions | $2,448 | $2,432 | | Communications Solutions | $617 | $885 | | Total | $6,046 | $6,496 | - As of fiscal year-end 2023, the company employed approximately 90,000 people worldwide and has set a goal to have 30% of leadership roles filled by women by fiscal 2026[44][45] Key Sustainability Goals | Goal | Baseline Fiscal Year | Targeted Fiscal Year of Achievement | | :--- | :--- | :--- | | 70%+ reduction in absolute GHG emissions (Scopes 1 & 2) | 2020 | 2030 | | 15% reduction in water withdrawals at high-stress sites | 2021 | 2025 | | 15% reduction in hazardous waste disposed | 2021 | 2025 | | 80% renewable electricity use in operations | n/a | 2025 | Risk Factors The company faces risks from macroeconomic conditions, industry cyclicality, operational challenges, and complex global regulatory environments - Macroeconomic Risks: The business is affected by global economic conditions, trade tensions (U.S., China, EU), inflation, and higher interest rates, which could lead to customer order delays or cancellations and potential goodwill impairment charges[62][63] - Foreign Currency Risk: Approximately 60% of fiscal 2023 net sales were in non-U.S. dollar currencies, and a stronger U.S. dollar adversely affects reported results as this exposure is not hedged[65] - Geopolitical and China-Specific Risks: The company has 17 manufacturing sites in China, and approximately 20% of fiscal 2023 net sales were to customers in China, making it vulnerable to volatile economic conditions and trade policies[71] - Industry-Specific Risks: The company is highly dependent on the cyclical automotive industry (43% of FY2023 net sales), which is subject to significant price pressure and market downturns[78][79][80] - Operational Risks: The company is sensitive to raw material availability and cost, particularly for metals like copper, gold, and silver, and faces risks from product liability, cybersecurity, and supplier reliance[88][90][94] - Regulatory and Legal Risks: The company is investigating past compliance with U.S. trade controls and has made voluntary disclosures to the BIS and DDTC, which could result in fines or penalties[108][109][110] - Swiss Jurisdiction Risks: As a Swiss corporation, TE Connectivity faces less flexibility in capital management, and distributions to shareholders may be subject to Swiss withholding tax[115][118][121][128] - Tax Risks: The OECD's 15% global minimum corporate tax, effective in Switzerland on January 1, 2024, is expected to materially increase the company's cash taxes and effective tax rate starting in fiscal 2025[129] Unresolved Staff Comments The company reports that there are no unresolved staff comments - None[132] Cybersecurity This item is reported as not applicable - Not applicable[133] Properties The company operates 104 principal manufacturing facilities globally, occupying approximately 27 million square feet of owned and leased space - As of fiscal year-end 2023, the company owned approximately 17 million sq. ft. and leased 10 million sq. ft. of floor space worldwide[134] Principal Manufacturing Facilities by Segment and Region (FY2023) | Region | Transportation Solutions | Industrial Solutions | Communications Solutions | Total | | :--- | :--- | :--- | :--- | :--- | | EMEA | 20 | 20 | 2 | 42 | | Asia–Pacific | 9 | 6 | 9 | 24 | | Americas | 10 | 26 | 2 | 38 | | Total | 39 | 52 | 13 | 104 | Legal Proceedings The company is involved in various legal proceedings that are not expected to materially affect its financial condition - The company is subject to various legal proceedings and claims in the normal course of business but does not expect the outcomes to have a material effect on its results, financial position, or cash flows[136][137] - An environmental matter at the Silicon Microstructures, Inc. (SMI) site in California is being addressed with authorities and is not anticipated to have a material adverse effect[138][139] Mine Safety Disclosures This item is reported as not applicable - Not applicable[140] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common shares trade on the NYSE, and it actively repurchased shares during the fourth quarter of fiscal 2023 - The company's common shares are listed on the New York Stock Exchange (NYSE) under the trading symbol 'TEL'[143] Cumulative Total Shareholder Return Comparison (FY2018-2023) | | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | TE Connectivity Ltd. | $100.00 | $107.73 | $113.20 | $173.60 | $135.02 | $153.89 | | S&P 500 Index | $100.00 | $103.72 | $117.72 | $161.39 | $131.92 | $160.44 | | Dow Jones U.S. Electrical Components and Equipment Index | $100.00 | $96.28 | $100.92 | $146.51 | $121.47 | $153.94 | Issuer Purchases of Equity Securities (Quarter Ended Sep 29, 2023) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans | | :--- | :--- | :--- | :--- | :--- | | Jul 1–Jul 28, 2023 | 428,261 | $142.15 | 428,200 | $999,101,703 | | Jul 29–Sep 1, 2023 | 1,067,083 | $133.55 | 1,060,900 | $857,423,534 | | Sep 2–Sep 29, 2023 | 964,156 | $126.54 | 963,800 | $735,467,902 | | Total | 2,459,500 | $132.30 | 2,452,900 | | Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2023 saw a slight sales decrease to $16.03 billion but organic growth of 1.0%, while operating income declined due to higher costs and restructuring charges Overview Fiscal 2023 net sales decreased 1.5% to $16.034 billion, though organic sales grew 1.0% driven by pricing actions and cost controls - Fiscal 2023 net sales decreased 1.5% from fiscal 2022, but increased 1.0% on an organic basis, driven by a decline in Communications Solutions offset by growth in Transportation Solutions[156] - The company has been mitigating inflationary cost pressures for transportation, energy, and raw materials through price increases and productivity measures[155] - In August 2023, the company agreed to acquire Schaffner Holding AG, a Swiss-based leader in electromagnetic solutions, for approximately $350 million, with the deal expected to close in Q1 fiscal 2024[160] - For the first quarter of fiscal 2024, the company expects net sales of approximately $3.85 billion and diluted EPS from continuing operations of approximately $1.59[157] Results of Operations Net sales fell 1.5% to $16.034 billion due to negative currency translation, while operating margin contracted to 14.4% from 16.9% Fiscal 2023 vs. 2022 Net Sales Change Analysis (in millions) | Segment | Net Sales Growth (Decline) | Organic Net Sales Growth (Decline) | Translation | Acquisitions (Divestiture) | | :--- | :--- | :--- | :--- | :--- | | Transportation Solutions | $369 | $665 | $(296) | $— | | Industrial Solutions | $61 | $153 | $(78) | $(14) | | Communications Solutions | $(677) | $(648) | $(48) | $19 | | Total | $(247) | $170 | $(422) | $5 | - Net sales decrease of 1.5% in fiscal 2023 was primarily due to a 2.6% negative impact from foreign currency translation, partially offset by 1.0% organic growth driven by $607 million in pricing actions[165] Key Financial Metrics (FY2023 vs FY2022) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $16,034M | $16,281M | $(247)M | | Gross Margin | 31.5% | 32.2% | -0.7 p.p. | | Operating Income | $2,304M | $2,756M | $(452)M | | Operating Margin | 14.4% | 16.9% | -2.5 p.p. | | Effective Tax Rate | 16.0% | 11.2% | +4.8 p.p. | - Restructuring and other charges increased significantly to $340 million in fiscal 2023 from $141 million in fiscal 2022, contributing to the decline in operating income[169] - The company is monitoring the OECD's 15% global minimum corporate tax, which is expected to be effective in Switzerland on Jan 1, 2024 and impact the company in fiscal 2025, potentially materially affecting its tax rate and cash taxes[180] Segment Results Transportation and Industrial segments grew organically, while the Communications segment experienced a significant sales decline due to market weakness Transportation Solutions: Net Sales by End Market (in millions) | End Market | Fiscal 2023 | Fiscal 2022 | | :--- | :--- | :--- | | Automotive | $6,951 | $6,527 | | Commercial transportation | $1,525 | $1,582 | | Sensors | $1,112 | $1,110 | | Total | $9,588 | $9,219 | - Transportation Solutions organic net sales grew 7.2%, led by a 10.2% increase in the automotive market due to global vehicle production growth and increased content per vehicle[186][188] Industrial Solutions: Net Sales by End Market (in millions) | End Market | Fiscal 2023 | Fiscal 2022 | | :--- | :--- | :--- | | Industrial equipment | $1,706 | $1,904 | | Aerospace, defense, and marine | $1,178 | $1,087 | | Energy | $883 | $804 | | Medical | $784 | $695 | | Total | $4,551 | $4,490 | - Industrial Solutions organic net sales grew 3.4%, with strong performance in aerospace (up 12.8%), medical (up 13.1%), and energy (up 9.6%) offsetting an 8.1% decline in industrial equipment[193] Communications Solutions: Net Sales by End Market (in millions) | End Market | Fiscal 2023 | Fiscal 2022 | | :--- | :--- | :--- | | Data and devices | $1,162 | $1,606 | | Appliances | $733 | $966 | | Total | $1,895 | $2,572 | - Communications Solutions organic net sales decreased 25.2%, with a 27.2% decline in data and devices and a 21.8% decline in appliances, both due to reduced demand from inventory corrections and market declines[200][202] Liquidity and Capital Resources The company maintained a strong liquidity position, with operating cash flow increasing to $3.13 billion and $1.67 billion returned to shareholders - Net cash provided by operating activities increased to $3,132 million in FY2023 from $2,468 million in FY2022, primarily due to changes in working capital levels[208] - Capital expenditures were $732 million in FY2023, and are expected to be approximately 5% of net sales in fiscal 2024[210] - Total debt was $4.21 billion at fiscal year-end 2023, stable with the prior year, following the issuance of $500 million of 4.50% senior notes[213][214] - The company has a $1.5 billion revolving credit facility maturing in June 2026, which was undrawn at year-end, and was in compliance with all debt covenants[215][217] - In fiscal 2023, the company returned significant capital to shareholders, paying $725 million in dividends and repurchasing 8 million common shares for $946 million[219][222] - As of fiscal year-end 2023, approximately $2.6 billion of cash, cash equivalents, and intercompany deposits held by foreign subsidiaries are considered permanently reinvested[207] Critical Accounting Policies and Estimates Key accounting estimates involve revenue recognition, goodwill impairment, income taxes, and pension plan assumptions - Revenue Recognition: Revenue is recognized when control of products transfers to customers, with estimates for variable consideration like rebates based on expected values and historical data[237][239] - Goodwill and Intangibles: Goodwill is tested for impairment annually at the reporting unit level using a discounted cash flow approach, and the Q4 2023 test found no impairment[242][243][245][246] - Income Taxes: The company has significant deferred tax assets, against which a valuation allowance of $7.4 billion was recorded at year-end 2023 due to uncertainty about their realization[248][249][458] - Pension Plans: Pension obligations and expenses are determined using actuarial assumptions, with a 25-basis-point change in the discount rate estimated to impact pension obligations by approximately $57-60 million[252][254] Quantitative and Qualitative Disclosures About Market Risk The company uses derivative instruments to manage exposure to foreign currency, interest rate, and commodity price risks - The company uses derivative financial instruments, including cross-currency swaps and forward contracts, to manage exposure to foreign currency, interest rate, and commodity price risks[268] - Foreign Currency Exposure: A hypothetical 10% change in underlying currencies would alter the unrealized value of foreign currency derivative contracts by $368 million, which would generally be offset by gains or losses on the underlying transactions[270] - Commodity Exposure: The company uses commodity swap contracts to hedge expected purchases of key metals, with hedges having a notional value of $459 million at fiscal year-end 2023[273] Financial Statements and Supplementary Data This section references the consolidated financial statements, related notes, and the independent auditor's report - This item references the location of the company's Consolidated Financial Statements, related notes, and the report of the independent registered public accounting firm, Deloitte & Touche LLP[275] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of September 29, 2023 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 29, 2023[277] - Management concluded that the company's internal control over financial reporting was effective as of September 29, 2023, based on the COSO framework (2013)[278] - Deloitte & Touche LLP issued an unqualified attestation report on the company's internal control over financial reporting as of September 29, 2023[280] Other Information Two executive officers adopted Rule 10b5-1(c) trading plans during the fourth quarter of fiscal 2023 - In the quarter ended September 29, 2023, CEO Terrence R. Curtin and President of Communications Solutions Aaron K. Stucki each adopted a Rule 10b5-1(c) trading plan for the sale of company securities[282][285] Part III Directors, Executive Officers and Corporate Governance Information is incorporated by reference from the 2024 Proxy Statement, and the company has adopted a Guide to Ethical Conduct - Information required for this item is incorporated by reference from the company's definitive proxy statement for its 2024 Annual General Meeting of Shareholders[287] - The company has adopted a Guide to Ethical Conduct that applies to all employees, officers, and directors, and meets the requirements of a 'code of ethics' as defined by SEC and NYSE rules[288] Executive Compensation Information concerning executive compensation is incorporated by reference from the company's 2024 Proxy Statement - Information regarding executive compensation is incorporated by reference from the 2024 Proxy Statement[289] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership is incorporated by reference, with details provided on equity compensation plans Equity Compensation Plan Information as of Fiscal Year End 2023 | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 7,223,872 | $107.36 | 12,555,452 | | Equity compensation plans not approved by security holders | 415,435 | $82.54 | — | | Total | 7,639,307 | | 12,555,452 | Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the 2024 Proxy Statement - Information for this item is incorporated by reference from the 2024 Proxy Statement[293] Principal Accountant Fees and Services Information concerning principal accountant fees and services is incorporated by reference from the 2024 Proxy Statement - Information for this item is incorporated by reference from the 2024 Proxy Statement[294] Part IV Exhibits and Financial Statement Schedules This section provides an index of all exhibits filed with or incorporated by reference into the Form 10-K - This section lists the financial statements, financial statement schedules, and exhibits filed as part of the annual report, including governance documents, debt agreements, and management compensation plans[297] Form 10-K Summary The company reports that there is no Form 10-K summary - None[302] Financial Statements Reports of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued unqualified opinions on the financial statements and internal controls, identifying the realizability of deferred tax assets as a critical audit matter - Deloitte & Touche LLP issued an unqualified opinion, stating the financial statements are fairly presented in conformity with U.S. GAAP[313] - The firm also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of September 29, 2023[314][323] - A critical audit matter was identified concerning the realizability of deferred tax assets, due to significant management judgment required to estimate future taxable income needed to realize a portion of the company's $10.2 billion in gross deferred tax assets, which have a valuation allowance of $7.4 billion[317][318][319][320] Consolidated Financial Statements Fiscal 2023 net sales were $16.034 billion with net income of $1.910 billion, and the company generated $3.132 billion in cash from operations Consolidated Statement of Operations Highlights (in millions, except per share data) | | Fiscal 2023 | Fiscal 2022 | Fiscal 2021 | | :--- | :--- | :--- | :--- | | Net sales | $16,034 | $16,281 | $14,923 | | Gross margin | $5,055 | $5,244 | $4,887 | | Operating income | $2,304 | $2,756 | $2,434 | | Net income | $1,910 | $2,428 | $2,261 | | Diluted earnings per share | $6.03 | $7.47 | $6.79 | Consolidated Balance Sheet Highlights (in millions) | | Fiscal Year End 2023 | Fiscal Year End 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $1,661 | $1,088 | | Total current assets | $7,892 | $7,268 | | Total assets | $21,712 | $20,782 | | Total current liabilities | $4,463 | $4,632 | | Total liabilities | $10,057 | $9,885 | | Total shareholders' equity | $11,551 | $10,802 | Consolidated Statement of Cash Flows Highlights (in millions) | | Fiscal 2023 | Fiscal 2022 | Fiscal 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $3,132 | $2,468 | $2,676 | | Net cash used in investing activities | $(768) | $(878) | $(1,037) | | Net cash used in financing activities | $(1,793) | $(1,684) | $(1,386) | Notes to Consolidated Financial Statements The notes detail key financial activities, including restructuring charges, acquisitions, debt, and significant tax considerations - Restructuring: In fiscal 2023, the company recorded net restructuring charges of $260 million, primarily for cost structure improvements across all segments, with total restructuring reserves at year-end of $320 million[381][382][390] - Acquisitions & Divestitures: During fiscal 2023, one business was acquired for $110 million and three were sold for $48 million, while a pre-tax impairment charge of $68 million was recorded for a business held for sale[391][394] - Goodwill: The carrying amount of goodwill was $5.463 billion at fiscal year-end 2023, and the annual impairment test in the fourth quarter determined that no impairment existed[399][401] - Debt: Total debt was $4.211 billion at year-end 2023, and the company's $1.5 billion revolving credit facility was undrawn[406][407] - Income Taxes: The company has gross deferred tax assets of $10.2 billion, primarily from $8.5 billion in tax loss and credit carryforwards, against which a valuation allowance of $7.4 billion has been recorded[457][458] - Shareholder Returns: In fiscal 2023, the company paid $725 million in dividends and repurchased 8 million shares for $946 million, with $735 million remaining under the share repurchase authorization at year-end[474][476] - Share-Based Compensation: Total share-based compensation expense was $123 million in fiscal 2023, with $135 million of unrecognized compensation expense related to nonvested awards at year-end[481][484][487][491]