What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-01-28 compared with 2020-07-30 · 115 added, 253 removed, 257 unchanged (59% of the section changed)

10 unchanged sentences

Our broad range of connectivity and sensor solutions, proven in the harshest environments, enable advancements in transportation, industrial applications, medical technology, energy, data communications, and the home.

The third quarter and first nine months of fiscal 2020 included the following:

● Our net sales decreased 24.8% in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019 due primarily to sales declines in the Transportation Solutions and Industrial Solutions segments.

In the first nine months of fiscal 2020, our net sales decreased 12.2% as compared to the same period of fiscal 2019 with sales declines across all segments.

On an organic basis, our net sales decreased 25.0% and 11.7% during the third quarter and first nine months of fiscal 2020, respectively, as compared to the same periods of fiscal 2019.

Our net sales declines included significant unfavorable impacts from the COVID-19 pandemic.

The first quarter of fiscal 2021 included the following:

● Our net sales increased 11.2% in the first quarter of fiscal 2021 as compared to the first quarter of fiscal 2020 due primarily to sales growth in the Transportation Solutions segment.

On an organic basis, our net sales increased 6.2% during the first quarter of fiscal 2021 as compared to the same period of fiscal 2020.

● Our net sales by segment were as follows:

● Transportation Solutions —Our net sales decreased 36.2% and 15.9% in the third quarter and first nine months of fiscal 2020, respectively, due to sales declines in all end markets.

● Industrial Solutions —Our net sales decreased 13.9% and 6.3% in the third quarter and first nine months of fiscal 2020, respectively, primarily as a result of sales declines in the aerospace, defense, oil, and gas and the industrial equipment end markets.

● Communications Solutions —Our net sales increased 2.9% and decreased 8.3% in the third quarter and first nine months of fiscal 2020, respectively.

The sales increase in the third quarter of fiscal 2020 resulted primarily from sales increases in the data and devices end market.

The sales decrease in the first nine months of fiscal 2020 was due to sales declines in both the appliances and the data and devices end markets.

● Net cash provided by continuing operating activities was $1,272 million in the first nine months of fiscal 2020.

● We acquired approximately 72% of the outstanding shares of First Sensor AG (“First Sensor”), a provider of sensing solutions based in Germany, during the first nine months of fiscal 2020 .

● During the first nine months of fiscal 2020, we recorded a goodwill impairment charge of $900 million related to the Sensors reporting unit in our Transportation Solutions segment.

● Transportation Solutions —Our net sales increased 19.1% in the first quarter of fiscal 2021 due to sales increases in the automotive end market and, to a lesser degree, the commercial transportation and sensors end markets.

● Industrial Solutions —Our net sales decreased 5.8% in the first quarter of fiscal 2021 primarily as a result of sales declines in the aerospace, defense, oil, and gas and the medical end markets, partially offset by sales increases in the industrial equipment end market.

● Communications Solutions —Our net sales increased 13.9% in the first quarter of fiscal 2021 due to sales increases in both the appliances and the data and devices end markets.

● Net cash provided by continuing operating activities was $640 million in the first quarter of fiscal 2021.

COVID-19 Pandemic and Economic Conditions

A novel strain of coronavirus (“COVID-19”) was first identified in China in December 2019 and subsequently declared a pandemic by the World Health Organization.

To date, COVID-19 has surfaced in nearly all regions around the world and resulted in travel restrictions and business slowdowns or shutdowns in affected areas.

The COVID-19 pandemic negatively affected our sales and operating results during the second and third quarters of fiscal 2020, and we expect that COVID-19 will have a material impact on our financial condition and results of operations in the near term and may have a material impact on our financial condition, liquidity, and results of operations in future periods.

COVID-19 is currently impacting, and we expect that COVID-19 will continue to impact, our business operations globally, causing disruption in our suppliers’ and customers’ supply chains, some of our business locations to reduce or suspend operations, and a reduction in demand for certain products from direct customers or end markets.

Accordingly, while a number of our businesses are operating as essential businesses, some have had and continue to have adjusted, reduced, or suspended operating activities at certain locations.

In addition, COVID-19 may have far-reaching impacts on many additional aspects of our operations, directly and indirectly, including with respect to its impacts on customer behaviors, business and manufacturing operations, inventory, our employees, and the market generally, and the scope and nature of these impacts continue to evolve each day.

We expect to continue to assess the evolving impact of the COVID-19 pandemic and intend to adjust our operations accordingly.

For example, throughout our operations, we have enacted additional health and safety measures for the protection of our employees, including providing personal protective equipment, enhanced cleaning and sanitizing of our facilities, and remote working arrangements.

We expect that COVID-19 will negatively impact several of the markets we serve, in particular the automotive and commercial aerospace markets .

We are expecting reduced sales volumes in these markets in the near term relative to prior year and may experience reduced sales volumes in these markets in future periods.

However, we expect an overall increase in our net sales in the fourth quarter of fiscal 2020 as compared to the third quarter of fiscal 2020.

The COVID-19 pandemic has affected nearly all regions around the world and resulted in business slowdowns or shutdowns and travel restrictions in affected areas.

The pandemic negatively affected our sales and operating results during fiscal 2020 and the first quarter of fiscal 2021, and we expect that it will continue to have an impact on some of our businesses in the near term and may have a material impact on our financial condition, liquidity, and results of operations in future periods .

The COVID-19 pandemic is currently impacting, and we expect that it will continue to impact, our business operations globally, causing further disruption in our suppliers’ and customers’ supply chains, some of our business locations to reduce or suspend operations, and a reduction in demand for certain products from direct customers or end markets.

While a number of our businesses are operating as essential businesses, some have had and continue to have adjusted, reduced, or suspended operating activities at certain locations.

In addition, the pandemic has had and may continue to have far-reaching impacts on many additional aspects of our operations, both directly and indirectly, including with respect to its impacts on customer behaviors, business and manufacturing operations, inventory, our employees, and the market generally, and the scope and nature of these impacts continue to evolve.

We will continue to assess the evolving impact of the COVID-19 pandemic and intend to adjust our operations accordingly.

Throughout our operations, we have implemented additional health and safety measures for the protection of our employees, including providing personal protective equipment, enhanced cleaning and sanitizing of our facilities, and remote working arrangements.

The extent to which the pandemic will continue to impact our business and the markets we serve will depend on the success of, among other things, future developments and public health advancements, including the recent commencement of vaccine production and distribution.

We expect that the COVID-19 pandemic will continue to impact several of the markets we serve , in particular the commercial aerospace and medical markets in our Industrial Solutions segment;

however, we expect these markets to improve later in fiscal 2021.

See “Outlook” below for additional information.

In response to the current economic environment and our sales declines relative to prior year, we have taken and continue to focus on actions to manage costs.

These include restructuring and other cost reduction initiatives, such as reducing discretionary spending, cutting capital expenditures, reducing travel, and furloughing certain employees.

In response to the economic environment, we have taken and continue to focus on actions to manage costs.

These include restructuring and other cost reduction initiatives, such as reducing discretionary spending, capital expenditures, and travel.

We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, suppliers, shareholders, and the communities in which we operate.

On March 27, 2020, the U.S.

government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

The CARES Act provides certain relief to companies, including provisions relating to payroll tax credits, deferral of employer side social security taxes, net operating loss carryback periods, acceleration of alternative minimum tax credit refunds, modifications to the net interest deduction rules, and delayed minimum contributions with respect to defined benefit plans.

We do not expect the CARES Act to have a material effect on our results of operations, financial position, or liquidity.

For a further discussion of the risks and uncertainties relating to the COVID-19 pandemic for our results of operations and business condition, see “Part II.

Risk Factors” below.

We expect our net sales to increase approximately 10% in the fourth quarter of fiscal 2020 as compared to $2.5 billion in the third quarter of fiscal 2020.

This increase is driven primarily by expected growth of approximately 20% in the Transportation Solutions segment.

We expect a slight increase in our net sales in the Industrial Solutions segment in the

fourth quarter of fiscal 2020;

however, we expect this growth will be offset by modest declines in the Communications Solutions segment.

Within the Transportation Solutions segment, we expect our net sales growth in the automotive end market in the fourth quarter of fiscal 2020 to be driven by an approximate 40% increase in global automotive production as compared to the third quarter of fiscal 2020.

In the fourth quarter of fiscal 2020, we expect our net sales to be negatively impacted by residual supply chain disruptions resulting from the COVID-19 pandemic.

In the second quarter of fiscal 2021, we expect our net sales to be approximately $3.5 billion as compared to $3.2 billion in the second quarter of fiscal 2020.

This increase reflects sales growth in the Transportation Solutions segment and, to a lesser degree, the Communications Solutions segment, partially offset by sales declines in the Industrial Solutions segment relative to the second quarter of fiscal 2020.

We expect diluted earnings per share from continuing operations to be approximately $1.38 per share in the second quarter of fiscal 2021.

This outlook reflects the positive impact of foreign currency exchange rates on net sales and earnings per share of approximately $167 million and $0.09 per share, respectively, in the second quarter of fiscal 2021 as compared to the second quarter of fiscal 2020.

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

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See further discussion in “Liquidity and Capital Resources.”

We acquired approximately 72% of the outstanding shares of First Sensor for €181 million in cash (equivalent to $201 million), net of cash acquired, during the first nine months of fiscal 2020.

This business has been reported as part of our Transportation Solutions segment from the date of acquisition.

During the first nine months of fiscal 2020, we acquired three additional businesses for a combined cash purchase price of $124 million, net of cash acquired.

The acquisitions were reported as part of our Transportation Solutions and Industrial Solutions segments from the date of acquisition.

During the first quarter of fiscal 2021, we acquired one business for a cash purchase price of $106 million, net of cash acquired.

The acquisition was reported as part of our Industrial Solutions segment from the date of acquisition.

See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions.

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Quarters Ended

Nine Months Ended

($ in millions)

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

Change in Net Sales for the Quarter Ended June 26, 2020

Change in Net Sales for the Nine Months Ended June 26, 2020

versus Net Sales for the Quarter Ended June 28, 2019

versus Net Sales for the Nine Months Ended June 28, 2019

Organic Net Sales

Change in Net Sales for the Quarter Ended December 25, 2020

versus Net Sales for the Quarter Ended December 27, 2019

Organic Net Sales

1 unchanged sentence

Growth (Decline)

($ in millions)

2 unchanged sentences

Communications Solutions

Net sales decreased $841 million, or 24.8%, in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019.

The decrease in net sales resulted from organic net sales declines of 25.0% and the negative impact of foreign currency translation of 1.1% due to the weakening of certain foreign currencies, partially offset by sales contributions from acquisitions of 1.3%.

In the third quarter of fiscal 2020, our net sales declines included significant unfavorable impacts from the COVID-19 pandemic.

Price erosion adversely affected organic net sales by $42 million in the third quarter of fiscal 2020.

In the first nine months of fiscal 2020, net sales decreased $1,237 million, or 12.2%, as compared to the first nine months of fiscal 2019 due to organic net sales declines of 11.7% and the negative impact of foreign currency translation of 1.4% due to the weakening of certain foreign currencies, partially offset by sales contributions from acquisitions of 0.9%.

The significant unfavorable impacts of the COVID-19 pandemic were included in our net sales declines in the first nine months of fiscal 2020.

Price erosion adversely affected organic net sales by $136 million in the first nine months of fiscal 2020.

Net sales increased $354 million, or 11.2%, in the first quarter of fiscal 2021 as compared to the first quarter of fiscal 2020.

The increase in net sales resulted from organic net sales growth of 6.2%, the positive impact of foreign currency translation of 3.4% due to the strengthening of certain foreign currencies, and sales contributions from acquisitions of 1.6%.

In the first quarter of fiscal 2021, our net sales declines in the Industrial Solutions segment reflected significant unfavorable impacts from the COVID-19 pandemic.

Price erosion adversely affected organic net sales by $26 million in the first quarter of fiscal 2021.

See further discussion of net sales below under “Segment Results.”

Net Sales by Geographic Region.

Our business operates in three geographic regions—Europe/Middle East/Africa (“EMEA”), Asia–Pacific, and the Americas—and our results of operations are influenced by changes in foreign currency exchange rates.

Our business operates in three geographic regions—Asia–Pacific, Europe/Middle East/Africa (“EMEA”), and the Americas—and our results of operations are influenced by changes in foreign currency exchange rates.

Increases or decreases in the value of the U.S.

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Approximately 60% of our net sales were invoiced in currencies other than the U.S.

dollar in the first nine months of fiscal 2020.

dollar in the first quarter of fiscal 2021.

The following table presents our net sales and the percentage of total net sales by geographic region (1) :

Quarters Ended

Nine Months Ended

($ in millions)

1 unchanged sentence

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

Change in Net Sales for the Quarter Ended June 26, 2020

Change in Net Sales for the Nine Months Ended June 26, 2020

versus Net Sales for the Quarter Ended June 28, 2019

versus Net Sales for the Nine Months Ended June 28, 2019

Organic Net Sales

Change in Net Sales for the Quarter Ended December 25, 2020

versus Net Sales for the Quarter Ended December 27, 2019

Organic Net Sales

1 unchanged sentence

Growth (Decline)

($ in millions)

2 unchanged sentences

Quarters Ended

Nine Months Ended

($ in millions)

2 unchanged sentences

As a percentage of net sales

Gross margin decreased $403 million and $576 million in the third quarter and first nine months of fiscal 2020, respectively, as compared to the same periods of fiscal 2019.

The decreases were primarily a result of lower volume, price erosion, and lower manufacturing productivity, partially offset by lower material costs.

Gross margin as a percentage of net sales decreased to 27.7% in the third quarter of fiscal 2020 from 32.8% in the third quarter of fiscal 2019 and decreased to 31.0% in the first nine months of fiscal 2020 from 32.9% in the same period of fiscal 2019.

Gross margin increased $116 million in the first quarter of fiscal 2021 as compared to the same period of fiscal 2020 primarily as a result of higher volume and, to a lesser degree, positive foreign currency translation and lower material costs.

We use a wide variety of raw materials in the manufacture of our products.

Cost of sales and gross margin are subject to variability in raw material prices which continue to fluctuate for many of the raw materials we use, including copper, gold, and silver.

We expect to purchase approximately 160 million pounds of copper, 110,000 troy ounces of gold, and 2.3 million troy ounces of silver in fiscal 2020.

The following table presents the average prices incurred related to copper, gold, and silver:

Cost of sales and gross margin are subject to variability in raw material prices which continue to fluctuate for many of the raw materials we use, including copper, gold, silver, and palladium.

We expect to purchase approximately 180 million pounds of copper, 115,000 troy ounces

of gold, 2.5 million troy ounces of silver, and 15,000 troy ounces of palladium in fiscal 2021.

The following table presents the average prices incurred related to copper, gold, silver, and palladium:

Quarters Ended

Nine Months Ended

Operating Expenses

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Quarters Ended

Nine Months Ended

($ in millions)

2 unchanged sentences

Restructuring and other charges, net

Impairment of goodwill

Selling, General, and Administrative Expenses.

Selling, general, and administrative expenses decreased $35 million in the third quarter of fiscal 2020 from the third quarter of fiscal 2019 due primarily to reduced selling expenses.

In the first nine months of fiscal 2020, selling, general, and administrative expenses decreased $78 million from the same period of fiscal 2019 due primarily to reduced selling expenses, cost control measures and savings attributable to restructuring actions, and receipt of a lease termination incentive.

Selling, general, and administrative expenses as a percentage of net sales increased to 12.6% in the third quarter of fiscal 2020 from 10.5% in the third quarter of fiscal 2019 and increased to 11.7% in the first nine months of fiscal 2020 from 11.0% in the same period of fiscal 2019.

Selling, general, and administrative expenses decreased slightly in the first quarter of fiscal 2021 from the first quarter of fiscal 2020 due primarily to cost control measures and savings attributable to restructuring actions, partially offset by higher incentive compensation costs.

Restructuring and Other Charges, Net.

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These initiatives are designed to help us maintain our competitiveness in the industry, improve our operating leverage, and position us for future growth.

During fiscal 2020, we initiated a restructuring program associated with footprint consolidation and structural improvements, due in part to COVID-19, across all segments.

We incurred net restructuring charges of $144 million during the first nine months of fiscal 2020, of which $138 million related to the fiscal 2020 restructuring program.

Annualized cost savings related to the fiscal 2020 actions commenced during the first nine months of fiscal 2020 are expected to be approximately $140 million and are expected to be realized by the end of fiscal 2022.

During fiscal 2021 and 2020, we initiated restructuring programs associated with footprint consolidation and structural improvements, due in part to the COVID-19 pandemic, across all segments.

We incurred net restructuring charges of $149 million during the first quarter of fiscal 2021, of which $142 million related to the fiscal 2021 restructuring program.

Annualized cost savings related to the fiscal 2021 actions commenced during the first quarter of fiscal 2021 are expected to be approximately $60 million and are expected to be realized by the end of fiscal 2023.

Cost savings will be reflected primarily in cost of sales and selling, general, and administrative expenses.

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See Note 2 to the Condensed Consolidated Financial Statements for additional information regarding net restructuring and other charges.

Impairment of Goodwill.

As a result of current and projected declines in sales and profitability, due in part to the impact of COVID-19 and projected reductions in global automotive production, of the Sensors reporting unit of the Transportation Solutions segment during the second quarter of fiscal 2020, we determined that an indicator of impairment had occurred and goodwill impairment testing of this reporting unit was required.

As discussed in Note 1 to the Condensed Consolidated Financial Statements, during the second quarter of fiscal 2020, we adopted Accounting Standards Update (“ASU”) No.

2017-04, Simplifying the Test for Goodwill Impairment , which simplifies the subsequent measurement of goodwill by eliminating step 2 of the goodwill impairment test.

Under the new standard, goodwill impairment is measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill.

We determined the fair value of the Sensors reporting unit to be $1.0 billion as of March 27, 2020.

This valuation was based on a discounted cash flows analysis incorporating our estimate of future operating performance, which we consider to be a level 3 unobservable input in the fair value hierarchy, and was corroborated using a market approach valuation.

The goodwill impairment test indicated that the carrying value of the reporting unit exceeded its fair value by $900 million.

As a result, we recorded a partial impairment charge of $900 million in the second quarter of fiscal 2020.

The Sensors reporting unit had a remaining goodwill allocation of $626 million as of March 27, 2020.

There were no triggering events identified in the third quarter of fiscal 2020 and therefore no goodwill

impairment testing was required.

See Note 6 to the Condensed Consolidated Financial Statements for additional information regarding the impairment of goodwill.

Operating Income

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Quarters Ended

Nine Months Ended

($ in millions)

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Quarters Ended

Nine Months Ended

(in millions)

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Restructuring and other charges, net

Impairment of goodwill

See discussion of operating income below under “Segment Results.”

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Quarters Ended

Nine Months Ended

($ in millions)

Interest expense

Income tax expense (benefit)

Income tax expense

Effective tax rate

Income (loss) from discontinued operations, net of income taxes

Interest Expense.

Interest expense decreased $19 million in the first nine months of fiscal 2020 as compared to the same period of fiscal 2019 due primarily to the cross-currency swap program that hedges our net investment in certain foreign operations.

The aggregate notional value of the contracts under this program was $1,776 million at June 26, 2020.

Under the terms of these contracts, we receive interest in U.S.

dollars at a weighted-average rate of 2.56% per annum and pay no interest.

See Note 11 to the Condensed Consolidated Financial Statements for additional information regarding our cross-currency swap program.

Income Taxes.

See Note 13 to the Condensed Consolidated Financial Statements for discussion of items impacting income tax expense and the effective tax rate for the third quarters and first nine months of fiscal 2020 and 2019, including an increase to the valuation allowance for certain non-U.S.

deferred tax assets, the Switzerland Federal Act on Tax Reform and AHV Financing, and the termination of the Tax Sharing Agreement.

Income (Loss) from Discontinued Operations, Net of Income Taxes.

During the first nine months of fiscal 2019, we sold our Subsea Communications (“SubCom”) business for net cash proceeds of $297 million and incurred a pre-tax loss on sale of $86 million.

The SubCom business met the held for sale and discontinued operations criteria and was reported as such in all periods presented on the Condensed Consolidated Financial Statements.

Prior to reclassification to discontinued operations, the SubCom business was included in the Communications Solutions segment.

The net sales of the business were $41 million in the first nine months of fiscal 2019 which represented one month of activity.

See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding discontinued operations.

See Note 12 to the Condensed Consolidated Financial Statements for discussion of items impacting income tax expense and the effective tax rate for the first quarters of fiscal 2021 and 2020, including the Switzerland Federal Act on Tax Reform and AHV Financing in fiscal 2020.

Segment Results

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Quarters Ended

Nine Months Ended

($ in millions)

2 unchanged sentences

The following table provides an analysis of the change in the Transportation Solutions segment’s net sales by industry end market:

Change in Net Sales for the Quarter Ended June 26, 2020

Change in Net Sales for the Nine Months Ended June 26, 2020

versus Net Sales for the Quarter Ended June 28, 2019

versus Net Sales for the Nine Months Ended June 28, 2019

Organic Net Sales

Change in Net Sales for the Quarter Ended December 25, 2020

versus Net Sales for the Quarter Ended December 27, 2019

Organic Net Sales

Growth (Decline)

($ in millions)

Commercial transportation

Net sales in the Transportation Solutions segment decreased $713 million, or 36.2%, in the third quarter of fiscal 2020 from the third quarter of fiscal 2019 due to organic net sales declines of 37.3% and the negative impact of foreign currency translation of 1.1%, partially offset by sales contributions from acquisitions of 2.2%.

In the third quarter of fiscal 2020, our net sales declines included significant unfavorable impacts from the COVID-19 pandemic.

Our organic net sales by industry end market were as follows:

● Automotive— Our organic net sales decreased 42.8% in the third quarter of fiscal 2020 with declines of 64.2% in the Americas region, 55.4% in the EMEA region, and 18.3% in the Asia–Pacific region.

Our overall organic net sales decreased due to declines in global automotive production .

● Commercial transportation— Our organic net sales decreased 24.1% in the third quarter of fiscal 2020 as a result of market weakness in the Americas and EMEA regions, partially offset by growth in the Asia–Pacific region.

● Sensors— Our organic net sales decreased 22.1% in the third quarter of fiscal 2020 due to weakness across all markets.

In the first nine months of fiscal 2020, net sales in the Transportation Solutions segment decreased $945 million, or 15.9%, as compared to the first nine months of fiscal 2019 as a result of organic net sales declines of 16.0% and the negative impact of foreign currency translation of 1.5%, partially offset by sales from acquisitions of 1.6%.

Net sales declines in the first nine months of fiscal 2020 included the significant unfavorable impacts of the COVID-19 pandemic.

Net sales in the Transportation Solutions segment increased $356 million, or 19.1%, in the first quarter of fiscal 2021 from the first quarter of fiscal 2020 due to organic net sales growth of 12.3%, the positive impact of foreign currency translation of 4.2%, and sales contributions from an acquisition of 2.6%.

Our organic net sales by industry end market were as follows:

● Automotive— Our organic net sales decreased 15.8% in the first nine months of fiscal 2020 with declines of 21.7% in the Americas region, 20.1% in the EMEA region, and 8.3% in the Asia–Pacific region.

Our overall organic net sales decreased as a result of declines in global automotive production;

however, our sales decreased at a lesser rate than global automotive production due to content gains and customer inventory builds.

● Commercial transportation— Our organic net sales decreased 16.9% in the first nine months of fiscal 2020 due to market weakness in the Americas and EMEA regions, partially offset by growth in the Asia–Pacific region.

● Sensors— Our organic net sales decreased 16.2% in the first nine months of fiscal 2020 as a result of weakness across all markets.

Operating Income (Loss).

The following table presents the Transportation Solutions segment’s operating income (loss) and operating margin information:

● Automotive— Our organic net sales increased 11.3% in the first quarter of fiscal 2021 due primarily to content gains and the favorable impacts associated with the replenishment of inventory in the supply chain.

Our organic net sales increased 12.9% in the EMEA region, 11.0% in the Asia–Pacific region, and 8.7% in the Americas region.

● Commercial transportation— Our organic net sales increased 24.9% in the first quarter of fiscal 2021 as a result of growth across all regions due primarily to content gains.

● Sensors— Our organic net sales increased 3.2% in the first quarter of fiscal 2021 due to strength in transportation applications.

Operating Income.

The following table presents the Transportation Solutions segment’s operating income and operating margin information:

Quarters Ended

Nine Months Ended

($ in millions)

Operating income (loss)

Operating income

Operating margin

Operating income (loss) in the Transportation Solutions segment decreased $309 million and $1,247 million in the third quarter and first nine months of fiscal 2020, respectively, as compared to the same periods of fiscal 2019.

The Transportation Solutions segment’s operating income (loss) included the following:

Operating income in the Transportation Solutions segment decreased slightly in the first quarter of fiscal 2021 as compared to the same period of fiscal 2020.

Excluding the items below, operating income increased primarily as a result of higher volume.

Quarters Ended

Nine Months Ended

(in millions)

Acquisition-related charges:

Acquisition and integration costs

Charges associated with the amortization of acquisition-related fair value adjustments

Restructuring and other charges, net

Impairment of goodwill

Excluding these items, operating income decreased in the third quarter and first nine months of fiscal 2020 as compared to the same periods of fiscal 2019 primarily as a result of lower volume and, to a lesser degree, price erosion and lower manufacturing productivity, partially offset by lower material costs.

Industrial Solutions

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Quarters Ended

Nine Months Ended

($ in millions)

3 unchanged sentences

The following table provides an analysis of the change in the Industrial Solutions segment’s net sales by industry end market:

Change in Net Sales for the Quarter Ended June 26, 2020

Change in Net Sales for the Nine Months Ended June 26, 2020

versus Net Sales for the Quarter Ended June 28, 2019

versus Net Sales for the Nine Months Ended June 28, 2019

Organic Net Sales

Change in Net Sales for the Quarter Ended December 25, 2020

versus Net Sales for the Quarter Ended December 27, 2019

Organic Net Sales

1 unchanged sentence

Growth (Decline)

($ in millions)

1 unchanged sentence

Industrial equipment

In the Industrial Solutions segment, net sales decreased $140 million, or 13.9%, in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019 due to organic net sales declines of 12.7% and the negative impact of foreign currency translation of 1.2%.

Net sales declines in the third quarter of fiscal 2020 included significant unfavorable impacts from the COVID-19 pandemic.

Our organic net sales by industry end market were as follows:

● Aerospace, defense, oil, and gas— Our organic net sales decreased 21.9% in the third quarter of fiscal 2020 due primarily to weakness in the commercial aerospace and the defense markets.

● Industrial equipment— Our organic net sales decreased 12.7% in the third quarter of fiscal 2020 as a result of market weakness in the Americas and EMEA regions, partially offset by growth in the Asia–Pacific region.

● Medical— Our organic net sales decreased 8.5% in the third quarter of fiscal 2020 due primarily to delays in elective procedures.

● Energy— Our organic net sales increased 0.5% in the third quarter of fiscal 2020 primarily as a result of growth in the EMEA region, partially offset by declines in the Americas region.

In the first nine months of fiscal 2020, net sales in the Industrial Solutions segment decreased $186 million, or 6.3%, as compared to the same period of fiscal 2019 as a result of organic net sales declines of 5.0% and the negative impact of foreign currency translation of 1.3%.

The significant unfavorable impacts of the COVID-19 pandemic were included in our net sales declines in the first nine months of fiscal 2020.

In the Industrial Solutions segment, net sales decreased $54 million, or 5.8%, in the first quarter of fiscal 2021 as compared to the first quarter of fiscal 2020 due primarily to organic net sales declines of 8.4%, partially offset by the positive impact of foreign currency translation of 2.3%.

Net sales in the first quarter of fiscal 2021 included significant unfavorable impacts from the COVID-19 pandemic.

Our organic net sales by industry end market were as follows:

● Aerospace, defense, oil, and gas— Our organic net sales decreased 6.0% in the first nine months of fiscal 2020 due primarily to weakness in the commercial aerospace and the defense markets.

● Industrial equipment— Our organic net sales decreased 13.4% in the first nine months of fiscal 2020 due to market weakness in industrial applications across all regions.

● Medical— Our organic net sales increased 1.3% in the first nine months of fiscal 2020 primarily as a result of strength in interventional medical applications, partially offset by delays in elective procedures.

● Energy— Our organic net sales increased 5.8% in the first nine months of fiscal 2020 due to growth across all regions.

● Aerospace, defense, oil, and gas— Our organic net sales decreased 22.0% in the first quarter of fiscal 2021 due primarily to reduced demand in the commercial aerospace market.

● Industrial equipment— Our organic net sales increased 7.7% in the first quarter of fiscal 2021 due to growth in all regions primarily as a result of strength in factory automation and controls applications.

● Medical— Our organic net sales decreased 13.4% in the first quarter of fiscal 2021 due primarily to continued delays in elective procedures.

● Energy— Our organic net sales decreased 3.7% in the first quarter of fiscal 2021 as a result of declines across all regions due primarily to weakness in the utility market.

Operating Income.

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Quarters Ended

Nine Months Ended

($ in millions)

1 unchanged sentence

Operating margin

Operating income in the Industrial Solutions segment decreased $86 million and $66 million in the third quarter and first nine months of fiscal 2020, respectively, as compared to the same periods of fiscal 2019.

The Industrial Solutions segment’s operating income included the following:

Operating income in the Industrial Solutions segment decreased $39 million in the first quarter of fiscal 2021 as compared to the same period of fiscal 2020.

Excluding the items below, operating income decreased due primarily to lower volume, partially offset by improved manufacturing productivity.

Quarters Ended

Nine Months Ended

(in millions)

Acquisition-related charges:

Acquisition and integration costs

Charges associated with the amortization of acquisition-related fair value adjustments

Restructuring and other charges, net

Excluding these items, operating income decreased in the third quarter and first nine months of fiscal 2020 as compared to the same periods of fiscal 2019 primarily as a result of lower volume and price erosion, partially offset by lower material costs.

Communications Solutions

1 unchanged sentence

Quarters Ended

Nine Months Ended

($ in millions)

2 unchanged sentences

The following table provides an analysis of the change in the Communications Solutions segment’s net sales by industry end market:

Change in Net Sales for the Quarter Ended June 26, 2020

Change in Net Sales for the Nine Months Ended June 26, 2020

versus Net Sales for the Quarter Ended June 28, 2019

versus Net Sales for the Nine Months Ended June 28, 2019

Organic Net Sales

Change in Net Sales for the Quarter Ended December 25, 2020

versus Net Sales for the Quarter Ended December 27, 2019

Organic Net Sales

Growth (Decline)

($ in millions)

Data and devices

Net sales in the Communications Solutions segment increased $12 million, or 2.9%, in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019 due primarily to organic net sales growth of 3.8%.

In the third quarter of fiscal 2020, the unfavorable impacts of the COVID-19 pandemic partially offset our net sales growth.

Our organic net sales by industry end market were as follows:

● Data and devices —Our organic net sales increased 12.7% in the third quarter of fiscal 2020 primarily a result of increased sales to cloud infrastructure customers.

● Appliances— Our organic net sales decreased 8.9% in the third quarter of fiscal 2020 due to market weakness across all regions.

In the first nine months of fiscal 2020, net sales in the Communications Solutions segment decreased $106 million, or 8.3%, as compared to the first nine months of fiscal 2019 primarily as a result of organic net sales declines of 7.6%.

Net sales declines in the first nine months of fiscal 2020 included the unfavorable impacts of the COVID-19 pandemic.

Net sales in the Communications Solutions segment increased $52 million, or 13.9%, in the first quarter of fiscal 2021 as compared to the first quarter of fiscal 2020 due primarily to organic net sales growth of 11.5%.

Our organic net sales by industry end market were as follows:

● Data and devices —Our organic net sales decreased 5.3% in the first nine months of fiscal 2020 due primarily to market weakness in the Americas and EMEA regions, partially offset by increased sales to cloud infrastructure customers.

● Appliances— Our organic net sales decreased 10.8% in the first nine months of fiscal 2020 primarily as a result of market weakness in all regions.

● Data and devices —Our organic net sales increased 4.7% in the first quarter of fiscal 2021 primarily as a result of market strength and market share gains in high-speed cloud applications.

● Appliances— Our organic net sales increased 21.1% in the first quarter of fiscal 2021 due to sales growth in all regions primarily attributable to benefits from home investments.

Operating Income.

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Quarters Ended

Nine Months Ended

($ in millions)

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Operating margin

Operating income in the Communications Solutions segment increased $9 million and decreased $31 million in the third quarter and first nine months of fiscal 2020, respectively, as compared to the same periods of fiscal 2019.

The Communications Solutions segment’s operating income included the following:

Operating income in the Communications Solutions segment increased $24 million in the first quarter of fiscal 2021 as compared to the same period of fiscal 2020.

Excluding the item below, operating income increased due primarily to higher volume, improved manufacturing productivity, and lower material costs.

Quarters Ended

Nine Months Ended

(in millions)

Restructuring and other charges, net

Excluding these items, operating income increased slightly in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019.

Excluding these items, operating income decreased in the first nine months of fiscal 2020 primarily as a result of price erosion and lower volume, partially offset by lower material costs.

Liquidity and Capital Resources

Our ability to fund our future capital needs will be affected by our ability to continue to generate cash from operations and may be affected by our ability to access the capital markets, money markets, or other sources of funding, as well as the capacity and terms of our financing arrangements.

We believe that cash generated from operations and, to the extent necessary, these other sources of potential funding will be sufficient to meet our anticipated capital needs for the foreseeable future, including the payments of $250 million of 4.875% senior notes due in January 2021 and €350 million of fixed-to-floating rate senior notes due in June 2021, and compensation payments to First Sensor minority shareholders.

We believe that cash generated from operations and, to the extent necessary, these other sources of potential funding will be sufficient to meet our anticipated capital needs for the foreseeable future, including the payment of €350 million of fixed-to-floating rate senior notes due in June 2021.

We may use excess cash to purchase a portion of our common shares pursuant to our authorized share repurchase program, to acquire strategic businesses or product lines, to pay dividends on our common shares, or to reduce our outstanding debt.

The cost or availability of future funding may be impacted by financial market conditions.

Payment of our $250 million of 4.875% senior notes due in January 2021 was made after the first quarter of fiscal 2021.

We will continue to monitor financial markets and respond as necessary to changing conditions, including future developments related to the COVID-19 pandemic.

There is uncertainty surrounding the duration and scope of the COVID-19 pandemic and it may have a material impact on our liquidity and financial conditions.

We believe that we have sufficient financial resources and liquidity which, along with managing expenses and capital structure flexibility, will enable us to meet our ongoing working capital and other cash flow needs during the COVID-19 pandemic and resulting period of economic uncertainty which will include reduced sales and net income levels for us relative to fiscal 2019.

For further information regarding the impact of COVID-19 on our liquidity and capital resources, see “Part II.

Risk Factors” in this report.

There is continued uncertainty surrounding the duration and scope of the pandemic and it may have a material impact on our liquidity and financial conditions.

Cash Flows from Operating Activities

In the first nine months of fiscal 2020, net cash provided by continuing operating activities decreased $303 million to $1,272 million from $1,575 million in the first nine months of fiscal 2019.

The decrease resulted primarily from lower pre-tax income and increased inventory levels, partially offset by the favorable effects of changes in accounts receivable levels and a reduction in income tax payments.

The amount of income taxes paid, net of refunds, during the first nine months of fiscal 2020 and 2019 was $195 million and $277 million, respectively.

In the first quarter of fiscal 2021, net cash provided by continuing operating activities increased $229 million to $640 million from $411 million in the first quarter of fiscal 2020.

The increase resulted primarily from improved working capital.

The amount of income taxes paid, net of refunds, during the first quarters of fiscal 2021 and 2020 was $85 million and $43 million, respectively.

Cash Flows from Investing Activities

Capital expenditures were $439 million and $570 million in the first nine months of fiscal 2020 and 2019, respectively.

We expect fiscal 2020 capital spending to be approximately $575 million.

Capital expenditures were $142 million and $176 million in the first quarters of fiscal 2021 and 2020, respectively.

We expect fiscal 2021 capital spending levels to be approximately 5% of net sales.

We believe our capital funding levels are adequate to support new programs, and we continue to invest in our manufacturing infrastructure to further enhance productivity and manufacturing capabilities.

During the first nine months of fiscal 2020, we acquired four businesses, including First Sensor, for a combined cash purchase price of $325 million, net of cash acquired.

During the first nine months of fiscal 2019, we acquired three businesses for a combined cash purchase price of $296 million, net of cash acquired.

During the first quarter of fiscal 2021, we acquired one business for a cash purchase price of $106 million, net of cash acquired.

We acquired two businesses for a combined cash purchase price of $112 million, net of cash acquired, during the first quarter of 2020.

See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions.

During the first nine months of fiscal 2019, we received net cash proceeds of $297 million related to the sale of our SubCom business.

See additional information in Note 3 to the Condensed Consolidated Financial Statements.

Cash Flows from Financing Activities and Capitalization

Total debt at June 26, 2020 and September 27, 2019 was $4,086 million and $3,965 million, respectively.

See Note 8 to the Condensed Consolidated Financial Statements for additional information regarding debt.

During the third quarter of fiscal 2020, Tyco Electronics Group S.A.

(“TEGSA”), our wholly-owned subsidiary, repaid, at maturity, $350 million of floating rate senior notes due in June 2020.

During the first nine months of fiscal 2020, TEGSA issued €550 million aggregate principal amount of 0.0% senior notes due in February 2025.

The notes are TEGSA’s unsecured senior obligations and rank equally in right of payment with all existing and any future senior indebtedness of TEGSA and senior to any subordinated indebtedness that TEGSA may incur.

Total debt at December 25, 2020 and September 25, 2020 was $4,201 million and $4,146 million, respectively.

Tyco Electronics Group S.A.

(“TEGSA”) has a five-year unsecured senior revolving credit facility (“Credit Facility”) with a maturity date of November 2023 and total commitments of $1.5 billion.

TEGSA had no borrowings under the Credit Facility at June 26, 2020 or September 27, 2019.

TEGSA had no borrowings under the Credit Facility at December 25, 2020 or September 25, 2020.

The Credit Facility contains a financial ratio covenant providing that if, as of the last day of each fiscal quarter, our ratio of Consolidated Total Debt to Consolidated EBITDA (as defined in the Credit Facility) for the then most recently concluded period of four consecutive fiscal quarters exceeds 3.75 to 1.0, an Event of Default (as defined in the Credit Facility) is triggered.

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None of our covenants are presently considered restrictive to our operations.

As of June 26, 2020, we were in compliance with all of our debt covenants and believe that we will continue to be in compliance with our existing covenants for the foreseeable future.

As of December 25, 2020, we were in compliance with all of our debt covenants and believe that we will continue to be in compliance with our existing covenants for the foreseeable future.

In addition to the Credit Facility, TEGSA is the borrower under our senior notes and commercial paper.

TEGSA’s payment obligations under its senior notes, commercial paper, and Credit Facility are fully and unconditionally guaranteed on an unsecured basis by its parent, TE Connectivity Ltd.

Payments of common share dividends to shareholders were $466 million and $454 million in the first nine months of fiscal 2020 and 2019, respectively.

In March 2020, our shareholders approved a dividend payment to shareholders of $1.92 per share, payable in four equal quarterly installments of $0.48 per share beginning in the third quarter of fiscal 2020 and ending in the second quarter of fiscal 2021.

We repurchased approximately 6 million of our common shares for $505 million and approximately 10 million of our common shares for $836 million under the share repurchase program during the first nine months of fiscal 2020 and 2019, respectively.

At June 26, 2020, we had $1.0 billion of availability remaining under our share repurchase authorization.

Payments of common share dividends to shareholders were $159 million and $154 million in the first quarters of fiscal 2021 and 2020, respectively.

We repurchased approximately 1 million of our common shares for $127 million and approximately 2 million of our common shares for $143 million under the share repurchase program during the first quarters of fiscal 2021 and 2020, respectively.

At December 25, 2020, we had $868 million of availability remaining under our share repurchase authorization.

Summarized Guarantor Financial Information

In March 2020, the Securities and Exchange Commission adopted amendments to the financial disclosure requirements of Regulation S-X for subsidiary issuers and guarantors of registered debt securities and for affiliates whose securities are pledged as collateral for registered securities.

The amended disclosure requirements permit alternative disclosures of summarized financial information for subsidiary issuers and guarantors and allow for these disclosures to be made outside the Condensed Consolidated Financial Statements and accompanying notes.

We elected to early adopt these amendments in the third quarter of fiscal 2020.

As discussed above, our senior notes, commercial paper, and Credit Facility are issued by TEGSA and are fully and unconditionally guaranteed on an unsecured basis by TEGSA’s parent, TE Connectivity Ltd.

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Total noncurrent liabilities (2)

(1) Includes $2,626 million and $2,562 million as of June 26, 2020 and September 27, 2019, respectively, of intercompany loans receivable from non-guarantor subsidiaries.

(2) Includes $16,396 million and $16,033 million as of June 26, 2020 and September 27, 2019, respectively, of intercompany loans payable to non-guarantor subsidiaries.

Nine Months Ended

(1) Includes $3,277 million and $3,275 million as of December 25, 2020 and September 25, 2020, respectively, of intercompany loans receivable from non-guarantor subsidiaries.

(2) Includes $20,388 million and $20,016 million as of December 25, 2020 and September 25, 2020, respectively, of intercompany loans payable to non-guarantor subsidiaries.

Quarter Ended

Fiscal Year Ended

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Although it is not feasible to predict the outcome of these proceedings, based upon our experience, current information, and applicable law, we do not expect that the outcome of these proceedings, either individually or in the aggregate, will have a material effect on our results of operations, financial position, or cash flows.

Trade Compliance Matters

We are investigating our past compliance with relevant U.S.

trade controls and are making voluntary disclosures of apparent trade controls violations to the U.S.

Department of Commerce’s Bureau of Industry and Security (“BIS”).

We are cooperating with BIS, and both our internal assessment and the BIS investigation are ongoing.

We are unable to predict the final outcome of the BIS investigation or to reasonably estimate the time it may take to resolve these matters.

An unfavorable outcome may include fines or penalties imposed in response to our disclosures;

however, we are not yet able to estimate whether any such fines or penalties would be material to our financial condition and results of operations.

In certain instances, we have guaranteed the performance of third parties and provided financial guarantees for uncompleted work and financial commitments.

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We do not expect that these uncertainties will have a material adverse effect on our results of operations, financial position, or cash flows.

At June 26, 2020, we had outstanding letters of credit, letters of guarantee, and surety bonds of $273 million.

As discussed above, in the first nine months of fiscal 2019, we sold our SubCom business.

In connection with the sale, we contractually agreed to continue to honor performance guarantees and letters of credit related to the SubCom

business’ projects that existed as of the date of sale.

These guarantees had a combined value of approximately $1.2 billion as of June 26, 2020 and are expected to expire at various dates through fiscal 2025.

At December 25, 2020, we had outstanding letters of credit, letters of guarantee, and surety bonds of $252 million, of which $93 million related to our Subsea Communications (“SubCom”) business which was sold during fiscal 2019.

In connection with the SubCom sale, we contractually agreed to continue to honor performance guarantees and letters of credit related to the SubCom business’ projects that existed as of the date of sale.

These performance guarantees and letters of credit had a combined value of approximately $280 million as of December 25, 2020 and are expected to expire at various dates through fiscal 2025.

Also, under the terms of the definitive agreement, we are required to issue up to $300 million of new performance guarantees, subject to certain limitations, for projects entered into by the SubCom business following the sale for a period of up to three years.

As of June 26, 2020, there were no such new performance guarantees outstanding.

As of December 25, 2020, there were no new performance guarantees outstanding.

We have contractual recourse against the SubCom business if we are required to perform on any SubCom guarantees;

however, based on historical experience, we do not anticipate having to perform.

See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding the divestiture of the SubCom business.

Critical Accounting Policies and Estimates

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For additional information regarding these policies and the underlying accounting assumptions and estimates used in these policies, refer to the Consolidated Financial Statements and accompanying notes contained in our Annual Report on Form 10-K for the fiscal year ended September 25, 2020.

Except as set forth below, there were no significant changes to this information during the first nine months of fiscal 2020.

Goodwill and Other Intangible Assets

We adopted ASU No.

2017-04, an update to Accounting Standards Codification 350, Intangibles–Goodwill and Other , in the second quarter of fiscal 2020.

See Note 1 to the Condensed Consolidated Financial Statements for information regarding our goodwill and other intangible assets policy and the adoption of ASU No.

Accounting Pronouncements

See Note 1 to the Condensed Consolidated Financial Statements for information regarding recently adopted accounting pronouncements.

There were no significant changes to this information during the first quarter of fiscal 2021.

Non-GAAP Financial Measure

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Organic net sales growth (decline) is a non-GAAP financial measure and should not be considered a replacement for results in accordance with GAAP.

This non-GAAP financial measure may not be comparable to similarly-titled measures

reported by other companies.

This non-GAAP financial measure may not be comparable to similarly-titled measures reported by other companies.

The primary limitation of this measure is that it excludes the financial impact of items that would otherwise either increase or decrease our reported results.

This limitation is best addressed by using organic net sales growth (decline) in combination with net sales growth (decline) to better understand the amounts, character, and impact of any increase or decrease in reported amounts.

This limitation is best addressed by using organic net sales

growth (decline) in combination with net sales growth (decline) to better understand the amounts, character, and impact of any increase or decrease in reported amounts.

Forward-Looking Information

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● risks related to compliance with current and future environmental and other laws and regulations;

● risks associated with compliance with applicable antitrust or competition laws or applicable trade regulations;

● our ability to protect our intellectual property rights;

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis