Item 2. Management’s Discussion and Analysis
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 on Form 10-Q. 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”).
The following discussion includes organic net sales growth (decline) which is a non-GAAP financial measure. See “Non-GAAP Financial Measure” for additional information regarding this measure.
Ov erview
TE Connectivity Ltd. (“TE Connectivity” or the “Company,” which may be referred to as “we,” “us,” or “our”) is a global industrial technology leader creating a safer, sustainable, productive, and connected future. 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 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 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
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 .
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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 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.
Outlook
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.
We are monitoring the current macroeconomic environment and its potential effects on our customers and the end markets we serve, including developments related to the COVID-19 pandemic. We have taken actions to manage costs and will continue to closely manage our costs in line with economic conditions. Additionally, we 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.”
Acquisition
During the first quarter of fiscal 2021, we acquired one business for a cash purchase price of $106 million, net of cash acquired. The acquisition was reported as part of our Industrial Solutions segment from the date of acquisition. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions.
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Results of Operations
Net Sales
The following table presents our net sales and the percentage of total net sales by segment:
For the
Quarters Ended
December 25,
December 27,
2020
2019
($ in millions)
Transportation Solutions
$
2,224
63
%
$
1,868
59
%
Industrial Solutions
873
25
927
29
Communications Solutions
425
12
373
12
Total
$
3,522
100
%
$
3,168
100
%
The following table provides an analysis of the change in our net sales by segment:
Change in Net Sales for the Quarter Ended December 25, 2020
versus Net Sales for the Quarter Ended December 27, 2019
Net Sales
Organic Net Sales
Growth (Decline)
Growth (Decline)
Translation
Acquisitions
($ in millions)
Transportation Solutions
$
356
19.1
%
$
233
12.3
%
$
76
$
47
Industrial Solutions
(54)
(5.8)
(78)
(8.4)
21
3
Communications Solutions
52
13.9
43
11.5
9
—
Total
$
354
11.2
%
$
198
6.2
%
$
106
$
50
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 $26 million in the first quarter of fiscal 2021.
See further discussion of net sales below under “Segment Results.”
Net Sales by Geographic Region. Our business operates in three geographic regions—Asia–Pacific, Europe/Middle East/Africa (“EMEA”), and the Americas—and our results of operations are influenced by changes in foreign currency exchange rates. Increases or decreases in the value of the U.S. dollar, compared to other currencies, will directly affect our reported results as we translate those currencies into U.S. dollars at the end of each fiscal period.
Approximately 60% of our net sales were invoiced in currencies other than the U.S. dollar in the first quarter of fiscal 2021.
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The following table presents our net sales and the percentage of total net sales by geographic region (1) :
For the
Quarters Ended
December 25,
December 27,
2020
2019
($ in millions)
Asia–Pacific
$
1,293
37
%
$
1,113
35
%
EMEA
1,316
37
1,097
35
Americas
913
26
958
30
Total
$
3,522
100
%
$
3,168
100
%
(1) Net sales to external customers are attributed to individual countries based on the legal entity that records the sale.
The following table provides an analysis of the change in our net sales by geographic region:
Change in Net Sales for the Quarter Ended December 25, 2020
versus Net Sales for the Quarter Ended December 27, 2019
Net Sales
Organic Net Sales
Growth (Decline)
Growth (Decline)
Translation
Acquisitions
($ in millions)
Asia–Pacific
$
180
16.2
%
$
128
11.5
%
$
52
$
—
EMEA
219
20.0
101
9.0
73
45
Americas
(45)
(4.7)
(31)
(3.2)
(19)
5
Total
$
354
11.2
%
$
198
6.2
%
$
106
$
50
Cost of Sales and Gross Margin
The following table presents cost of sales and gross margin information:
For the
Quarters Ended
December 25,
December 27,
2020
2019
Change
($ in millions)
Cost of sales
$
2,376
$
2,138
$
238
As a percentage of net sales
67.5
%
67.5
%
Gross margin
$
1,146
$
1,030
$
116
As a percentage of net sales
32.5
%
32.5
%
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, silver, and palladium. We expect to purchase approximately 180 million pounds of copper, 115,000 troy ounces
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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:
For the
Quarters Ended
December 25,
December 27,
Measure
2020
2019
Copper
Lb.
$
2.88
$
2.84
Gold
Troy oz.
1,599
1,354
Silver
Troy oz.
19.70
16.26
Palladium
Troy oz.
2,137
1,793
Operating Expenses
The following table presents operating expense information:
For the
Quarters Ended
December 25,
December 27,
2020
2019
Change
($ in millions)
Selling, general, and administrative expenses
$
361
$
367
$
(6)
As a percentage of net sales
10.2
%
11.6
%
Restructuring and other charges, net
$
167
$
24
$
143
Selling, General, and Administrative Expenses. 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. We are committed to continuous productivity improvements, and we 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 future growth.
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. For fiscal 2021, we expect total restructuring charges to be approximately $200 million and total spending, which will be funded with cash from operations, to be approximately $250 million.
See Note 2 to the Condensed Consolidated Financial Statements for additional information regarding net restructuring and other charges.
Operating Income
The following table presents operating income and operating margin information:
For the
Quarters Ended
December 25,
December 27,
2020
2019
Change
($ in millions)
Operating income
$
448
$
471
$
(23)
Operating margin
12.7
%
14.9
%
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Operating income included the following:
For the
Quarters Ended
December 25,
December 27,
2020
2019
(in millions)
Acquisition-related charges:
Acquisition and integration costs
$
8
$
7
Charges associated with the amortization of acquisition-related fair value adjustments
1
—
9
7
Restructuring and other charges, net
167
24
Total
$
176
$
31
See discussion of operating income below under “Segment Results.”
Non-Operating Items
The following table presents select non-operating information:
For the
Quarters Ended
December 25,
December 27,
2020
2019
Change
($ in millions)
Income tax expense
$
60
$
447
$
(387)
Effective tax rate
13.8
%
95.1
%
Income Taxes. 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
Transportation Solutions
Net Sales. The following table presents the Transportation Solutions segment’s net sales and the percentage of total net sales by industry end market (1) :
For the
Quarters Ended
December 25,
December 27,
2020
2019
($ in millions)
Automotive
$
1,629
73
%
$
1,405
75
%
Commercial transportation
331
15
258
14
Sensors
264
12
205
11
Total
$
2,224
100
%
$
1,868
100
%
(1) Industry end market information is presented consistently with our internal management reporting and may be revised periodically as management deems necessary.
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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 December 25, 2020
versus Net Sales for the Quarter Ended December 27, 2019
Net Sales
Organic Net Sales
Growth
Growth
Translation
Acquisition
($ in millions)
Automotive
$
224
15.9
%
$
161
11.3
%
$
63
$
—
Commercial transportation
73
28.3
65
24.9
8
—
Sensors
59
28.8
7
3.2
5
47
Total
$
356
19.1
%
$
233
12.3
%
$
76
$
47
Net sales in the Transportation Solutions segment increased $356 million, or 19.1%, in the first quarter of fiscal 2021 from the first quarter of fiscal 2020 due to organic net sales growth of 12.3%, the positive impact of foreign currency translation of 4.2%, and sales contributions from an acquisition of 2.6%. Our organic net sales by industry end market were as follows:
● Automotive— Our organic net sales increased 11.3% in the first quarter of fiscal 2021 due primarily to content gains and the favorable impacts associated with the replenishment of inventory in the supply chain. Our organic net sales increased 12.9% in the EMEA region, 11.0% in the Asia–Pacific region, and 8.7% in the Americas region.
● Commercial transportation— Our organic net sales increased 24.9% in the first quarter of fiscal 2021 as a result of growth across all regions due primarily to content gains.
● Sensors— Our organic net sales increased 3.2% in the first quarter of fiscal 2021 due to strength in transportation applications.
Operating Income. The following table presents the Transportation Solutions segment’s operating income and operating margin information:
For the
Quarters Ended
December 25,
December 27,
2020
2019
Change
($ in millions)
Operating income
$
308
$
316
$
(8)
Operating margin
13.8
%
16.9
%
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.
For the
Quarters Ended
December 25,
December 27,
2020
2019
(in millions)
Acquisition-related charges:
Acquisition and integration costs
$
4
$
5
Charges associated with the amortization of acquisition-related fair value adjustments
1
—
5
5
Restructuring and other charges, net
118
4
Total
$
123
$
9
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Industrial Solutions
Net Sales. The following table presents the Industrial Solutions segment’s net sales and the percentage of total net sales by industry end market (1) :
For the
Quarters Ended
December 25,
December 27,
2020
2019
($ in millions)
Aerospace, defense, oil, and gas
$
250
28
%
$
309
33
%
Industrial equipment
295
34
263
28
Medical
156
18
179
20
Energy
172
20
176
19
Total
$
873
100
%
$
927
100
%
(1) Industry end market information is presented consistently with our internal management reporting and may be revised periodically as management deems necessary.
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 December 25, 2020
versus Net Sales for the Quarter Ended December 27, 2019
Net Sales
Organic Net Sales
Growth (Decline)
Growth (Decline)
Translation
Acquisition
($ in millions)
Aerospace, defense, oil, and gas
$
(59)
(19.1)
%
$
(68)
(22.0)
%
$
6
$
3
Industrial equipment
32
12.2
21
7.7
11
—
Medical
(23)
(12.8)
(24)
(13.4)
1
—
Energy
(4)
(2.3)
(7)
(3.7)
3
—
Total
$
(54)
(5.8)
%
$
(78)
(8.4)
%
$
21
$
3
In the Industrial Solutions segment, net sales decreased $54 million, or 5.8%, in the first quarter of fiscal 2021 as compared to the first quarter of fiscal 2020 due primarily to organic net sales declines of 8.4%, partially offset by the positive impact of foreign currency translation of 2.3%. Net sales in the first quarter of fiscal 2021 included significant unfavorable impacts from the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
● Aerospace, defense, oil, and gas— Our organic net sales decreased 22.0% in the first quarter of fiscal 2021 due primarily to reduced demand in the commercial aerospace market.
● Industrial equipment— Our organic net sales increased 7.7% in the first quarter of fiscal 2021 due to growth in all regions primarily as a result of strength in factory automation and controls applications.
● Medical— Our organic net sales decreased 13.4% in the first quarter of fiscal 2021 due primarily to continued delays in elective procedures.
● Energy— Our organic net sales decreased 3.7% in the first quarter of fiscal 2021 as a result of declines across all regions due primarily to weakness in the utility market.
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Operating Income. The following table presents the Industrial Solutions segment’s operating income and operating margin information:
For the
Quarters Ended
December 25,
December 27,
2020
2019
Change
($ in millions)
Operating income
$
76
$
115
$
(39)
Operating margin
8.7
%
12.4
%
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.
For the
Quarters Ended
December 25,
December 27,
2020
2019
(in millions)
Acquisition and integration costs
$
4
$
2
Restructuring and other charges, net
38
15
Total
$
42
$
17
Communications Solutions
Net Sales. The following table presents the Communications Solutions segment’s net sales and the percentage of total net sales by industry end market (1) :
For the
Quarters Ended
December 25,
December 27,
2020
2019
($ in millions)
Data and devices
$
234
55
%
$
219
59
%
Appliances
191
45
154
41
Total
$
425
100
%
$
373
100
%
(1) Industry end market information is presented consistently with our internal management reporting and may be revised periodically as management deems necessary.
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 December 25, 2020
versus Net Sales for the Quarter Ended December 27, 2019
Net Sales
Organic Net Sales
Growth
Growth
Translation
($ in millions)
Data and devices
$
15
6.8
%
$
10
4.7
%
$
5
Appliances
37
24.0
33
21.1
4
Total
$
52
13.9
%
$
43
11.5
%
$
9
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Net sales in the Communications Solutions segment increased $52 million, or 13.9%, in the first quarter of fiscal 2021 as compared to the first quarter of fiscal 2020 due primarily to organic net sales growth of 11.5%. Our organic net sales by industry end market were as follows:
● Data and devices —Our organic net sales increased 4.7% in the first quarter of fiscal 2021 primarily as a result of market strength and market share gains in high-speed cloud applications.
● Appliances— Our organic net sales increased 21.1% in the first quarter of fiscal 2021 due to sales growth in all regions primarily attributable to benefits from home investments.
Operating Income. The following table presents the Communications Solutions segment’s operating income and operating margin information:
For the
Quarters Ended
December 25,
December 27,
2020
2019
Change
($ in millions)
Operating income
$
64
$
40
$
24
Operating margin
15.1
%
10.7
%
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.
For the
Quarters Ended
December 25,
December 27,
2020
2019
(in millions)
Restructuring and other charges, net
$
11
$
5
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 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 continued uncertainty surrounding the duration and scope of the 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.
Cash Flows from Operating Activities
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.
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Cash Flows from Investing Activities
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 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.
Cash Flows from Financing Activities and Capitalization
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 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. The Credit Facility and our other debt agreements contain other customary covenants. None of our covenants are presently considered restrictive to our operations. 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 $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
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. In addition to being the issuer of our debt securities, TEGSA owns, directly or indirectly, all of our operating subsidiaries. The following tables present
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summarized financial information, excluding investments in and equity in earnings of our non-guarantor subsidiaries, for TE Connectivity Ltd. and TEGSA on a combined basis.
December 25,
September 25,
2020
2020
(in millions)
Balance Sheet Data:
Total current assets
$
219
$
134
Total noncurrent assets (1)
3,281
3,282
Total current liabilities
997
1,237
Total noncurrent liabilities (2)
24,052
23,549
(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.
For the
For the
Quarter Ended
Fiscal Year Ended
December 25,
September 25,
2020
2020
(in millions)
Statement of Operations Data:
Loss from continuing operations
$
(64)
$
(206)
Net loss
(58)
(202)
Commitments and Contingencies
Legal Proceedings
In the normal course of business, we are subject to various legal proceedings and claims, including patent infringement claims, product liability matters, employment disputes, disputes on agreements, other commercial disputes, environmental matters, antitrust claims, and tax matters, including non-income tax matters such as value added tax, sales and use tax, real estate tax, and transfer tax. 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.
Guarantees
In certain instances, we have guaranteed the performance of third parties and provided financial guarantees for uncompleted work and financial commitments. The terms of these guarantees vary with end dates ranging from fiscal 2021 through the completion of such transactions. The guarantees would be triggered in the event of nonperformance, and the potential exposure for nonperformance under the guarantees would not have a material effect on our results of operations, financial position, or cash flows.
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In disposing of assets or businesses, we often provide representations, warranties, and/or indemnities to cover various risks including unknown damage to assets, environmental risks involved in the sale of real estate, liability for investigation and remediation of environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not expect that these uncertainties will have a material adverse effect on our results of operations, financial position, or cash flows.
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 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.
Critical Accounting Policies and Estimates
The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses.
Our accounting policies for revenue recognition, goodwill and other intangible assets, income taxes, and pension are based on, among other things, judgments and assumptions made by management. 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. There were no significant changes to this information during the first quarter of fiscal 2021.
Non-GAAP Financial Measure
Organic Net Sales Growth (Decline)
We present organic net sales growth (decline) as we believe it is appropriate for investors to consider this adjusted financial measure in addition to results in accordance with GAAP. Organic net sales growth (decline) represents net sales growth (decline) (the most comparable GAAP financial measure) excluding the impact of foreign currency exchange rates, and acquisitions and divestitures that occurred in the preceding twelve months, if any. Organic net sales growth (decline) is a useful measure of our performance because it excludes items that are not completely under management’s control, such as the impact of changes in foreign currency exchange rates, and items that do not reflect the underlying growth of the company, such as acquisition and divestiture activity.
Organic net sales growth (decline) provides useful information about our results and the trends of our business. Management uses this measure to monitor and evaluate performance. Also, management uses this measure together with GAAP financial measures in its decision-making processes related to the operations of our reportable segments and our overall company. It is also a significant component in our incentive compensation plans. We believe that investors benefit from having access to the same financial measures that management uses in evaluating operations. The tables presented in “Results of Operations” and “Segment Results” provide reconciliations of organic net sales growth (decline) to net sales growth (decline) calculated in accordance with GAAP.
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. 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
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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
Certain statements in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These statements are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include, among others, the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities, potential operating performance improvements, acquisitions, divestitures, the effects of competition, and the effects of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believe,” “expect,” “plan,” “intend,” “anticipate,” “estimate,” “predict,” “potential,” “continue,” “may,” and “should,” or the negative of these terms or similar expressions.
Forward-looking statements involve risks, uncertainties, and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. Investors should not place undue reliance on any forward-looking statements. We do not have any intention or obligation to update forward-looking statements after we file this report except as required by law.
The following and other risks, which are described in greater detail in “Part I. Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended September 25, 2020, and in this report, could cause our results to differ materially from those expressed in forward-looking statements:
● conditions in the global or regional economies and global capital markets, and cyclical industry conditions;
● conditions affecting demand for products in the industries we serve, particularly the automotive industry;
● risk of future goodwill impairment;
● competition and pricing pressure;
● market acceptance of our new product introductions and product innovations and product life cycles;
● raw material availability, quality, and cost;
● fluctuations in foreign currency exchange rates and impacts of offsetting hedges;
● financial condition and consolidation of customers and vendors;
● reliance on third-party suppliers;
● risks associated with current and future acquisitions and divestitures;
● global risks of business interruptions due to natural disasters or other disasters such as the COVID-19 pandemic, which have and could continue to negatively impact our results of operations as well as customer behaviors, business, and manufacturing operations as well as our facilities and the facilities of our suppliers, and other aspects of our business;
● global risks of political, economic, and military instability, including volatile and uncertain economic conditions in China;
● risks associated with security breaches and other disruptions to our information technology infrastructure;
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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;
● risks of litigation;
● our ability to operate within the limitations imposed by our debt instruments;
● the possible effects on us of various non-U.S. and U.S. legislative proposals and other initiatives that, if adopted, could materially increase our worldwide corporate effective tax rate and negatively impact our U.S. government contracts business;
● various risks associated with being a Swiss corporation;
● the impact of fluctuations in the market price of our shares; and
● the impact of certain provisions of our articles of association on unsolicited takeover proposals.
There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business.