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 third quarter and first nine months of fiscal 2021 included the following:
● Our net sales increased 50.9% and 24.6% in the third quarter and first nine months of fiscal 2021, respectively, as compared to the same periods of fiscal 2020 due to sales growth in the Transportation Solutions segment and, to a lesser degree, the Communications Solutions and Industrial Solutions segments. On an organic basis, our net sales increased 45.0% and 19.0% during the third quarter and first nine months of fiscal 2021, respectively, as compared to the same periods of fiscal 2020.
● Our net sales by segment were as follows:
● Transportation Solutions —Our net sales increased 80.5% and 36.1% in the third quarter and first nine months of fiscal 2021, respectively, with sales increases in all end markets.
● Industrial Solutions —Our net sales increased 15.8% in the third quarter of fiscal 2021 primarily as a result of sales increases in the industrial equipment end market. In the first nine months of fiscal 2021, our net sales increased 2.7% due primarily to sales increases in the industrial equipment end market, partially offset by declines in the aerospace, defense, oil, and gas end market.
● Communications Solutions —Our net sales increased 35.0% and 27.6% in the third quarter and first nine months of fiscal 2021, respectively, due to sales increases in both the appliances and the data and devices end markets.
● Net cash provided by operating activities was $1,902 million in the first nine months of fiscal 2021.
COVID-19 Pandemic
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 had a significant, negative impact on our sales and
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operating results during fiscal 2020 and continued to negatively affect certain of our businesses in fiscal 2021. We do not expect that it will continue to have a significant impact on our businesses in the near term .
The COVID-19 pandemic impacted 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. In addition, the pandemic had 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. We assessed the impact of the COVID-19 pandemic and adjusted our operations and businesses, a number of which are operating as essential businesses, and will continue to do so if necessary. Throughout our operations, we 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 future developments which may include the further spread of the virus, variant strains of the virus, and the resumption of high levels of infections and hospitalizations as well as the success of public health advancements, including vaccine production and distribution. Although we do not expect the COVID-19 pandemic to have a significant impact on our businesses in the near term, it may have a negative impact on our financial condition, liquidity, and results of operations in future periods.
In response to the pandemic and resulting 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 fourth quarter of fiscal 2021, we expect our net sales to be approximately $3.8 billion as compared to $3.26 billion in the fourth quarter of fiscal 2020. This increase reflects sales growth in the Transportation Solutions and Communications Solutions segments and, to a lesser degree, the Industrial Solutions segment. We expect diluted earnings per share from continuing operations to be approximately $1.55 per share in the fourth quarter of fiscal 2021. This outlook reflects the positive impact of foreign currency exchange rates on net sales and earnings per share of approximately $82 million and $0.03 per share, respectively, in the fourth quarter of fiscal 2021 as compared to the fourth quarter of fiscal 2020.
For fiscal 2021, we expect our net sales to be approximately $14.9 billion as compared to $12.17 billion in fiscal 2020. This increase reflects sales growth in the Transportation Solutions segment and, to a lesser degree, the Communications Solutions and Industrial Solutions segments relative to fiscal 2020. We expect diluted earnings per share from continuing operations to be approximately $5.94 per share in fiscal 2021. This outlook reflects the positive impact of foreign currency exchange rates on net sales and earnings per share of approximately $473 million and $0.18 per share, respectively, in fiscal 2021 as compared to 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, including any developments related to the COVID-19 pandemic, and its potential effects on our customers and the end markets we serve. 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.”
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Acquisitions
During the first nine months of fiscal 2021, we acquired two businesses for a combined cash purchase price of $125 million, net of cash acquired. The acquisitions were reported as part of our Industrial Solutions segment from the date of acquisition. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions.
Results of Operations
Net Sales
The following table presents our net sales and the percentage of total net sales by segment:
For the
For the
Quarters Ended
Nine Months Ended
June 25,
June 26,
June 25,
June 26,
2021
2020
2021
2020
($ in millions)
Transportation Solutions
$
2,265
59
%
$
1,255
49
%
$
6,776
61
%
$
4,980
56
%
Industrial Solutions
1,002
26
865
34
2,827
25
2,754
31
Communications Solutions
578
15
428
17
1,502
14
1,177
13
Total
$
3,845
100
%
$
2,548
100
%
$
11,105
100
%
$
8,911
100
%
The following table provides an analysis of the change in our net sales by segment:
Change in Net Sales for the Quarter Ended June 25, 2021
Change in Net Sales for the Nine Months Ended June 25, 2021
versus Net Sales for the Quarter Ended June 26, 2020
versus Net Sales for the Nine Months Ended June 26, 2020
Net Sales
Organic Net Sales
Acquisition
Net Sales
Organic Net Sales
Acquisitions
Growth
Growth
Translation
(Divestitures)
Growth
Growth (Decline)
Translation
(Divestitures)
($ in millions)
Transportation Solutions
$
1,010
80.5
%
$
921
71.6
%
$
89
$
—
$
1,796
36.1
%
$
1,438
28.4
%
$
269
$
89
Industrial Solutions
137
15.8
109
12.6
33
(5)
73
2.7
(8)
(0.4)
84
(3)
Communications Solutions
150
35.0
134
30.8
16
—
325
27.6
285
24.1
40
—
Total
$
1,297
50.9
%
$
1,164
45.0
%
$
138
$
(5)
$
2,194
24.6
%
$
1,715
19.0
%
$
393
$
86
Net sales increased $1,297 million, or 50.9%, in the third quarter of fiscal 2021 as compared to the third quarter of fiscal 2020. The increase in net sales resulted primarily from organic net sales growth of 45.0% and the positive impact of foreign currency translation of 5.4% due to the strengthening of certain foreign currencies. In the third quarter of fiscal 2020, our net sales included significant, unfavorable impacts from the COVID-19 pandemic.
In the first nine months of fiscal 2021, net sales increased $2,194 million, or 24.6%, as compared to the first nine months of fiscal 2020 due to organic net sales growth of 19.0%, the positive impact of foreign currency translation of 4.5% due to the strengthening of certain foreign currencies, and net sales contributions of 1.1% from acquisitions and divestitures. The significant, unfavorable impacts of the COVID-19 pandemic were included in our net sales in the first nine months of fiscal 2020. Price erosion adversely affected organic net sales by $47 million in the first nine months of fiscal 2021.
See further discussion of net sales below under “Segment Results.”
Net Sales by Geographic Region. Our business operates in three geographic regions—Asia–Pacific, Europe/Middle East/Africa (“EMEA”), and the Americas—and our results of operations are influenced by changes in foreign currency exchange rates. Increases or decreases in the value of the U.S. dollar, compared to other currencies, will directly affect our reported results as we translate those currencies into U.S. dollars at the end of each fiscal period.
Approximately 60% of our net sales were invoiced in currencies other than the U.S. dollar in the first nine months of fiscal 2021.
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The following table presents our net sales and the percentage of total net sales by geographic region (1) :
For the
For the
Quarters Ended
Nine Months Ended
June 25,
June 26,
June 25,
June 26,
2021
2020
2021
2020
($ in millions)
Asia–Pacific
$
1,384
36
%
$
1,032
41
%
$
4,013
36
%
$
3,136
35
%
EMEA
1,413
37
777
30
4,119
37
3,062
34
Americas
1,048
27
739
29
2,973
27
2,713
31
Total
$
3,845
100
%
$
2,548
100
%
$
11,105
100
%
$
8,911
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 June 25, 2021
Change in Net Sales for the Nine Months Ended June 25, 2021
versus Net Sales for the Quarter Ended June 26, 2020
versus Net Sales for the Nine Months Ended June 26, 2020
Net Sales
Organic Net Sales
Acquisition
Net Sales
Organic Net Sales
Acquisitions
Growth
Growth
Translation
(Divestitures)
Growth
Growth
Translation
(Divestitures)
($ in millions)
Asia–Pacific
$
352
34.1
%
$
294
27.9
%
$
61
$
(3)
$
877
28.0
%
$
705
22.3
%
$
178
$
(6)
EMEA
636
81.9
552
69.3
89
(5)
1,057
34.5
715
22.8
264
78
Americas
309
41.8
318
42.9
(12)
3
260
9.6
295
10.8
(49)
14
Total
$
1,297
50.9
%
$
1,164
45.0
%
$
138
$
(5)
$
2,194
24.6
%
$
1,715
19.0
%
$
393
$
86
Cost of Sales and Gross Margin
The following table presents cost of sales and gross margin information:
For the
For the
Quarters Ended
Nine Months Ended
June 25,
June 26,
June 25,
June 26,
2021
2020
Change
2021
2020
Change
($ in millions)
Cost of sales
$
2,577
$
1,841
$
736
$
7,481
$
6,145
$
1,336
As a percentage of net sales
67.0
%
72.3
%
67.4
%
69.0
%
Gross margin
$
1,268
$
707
$
561
$
3,624
$
2,766
$
858
As a percentage of net sales
33.0
%
27.7
%
32.6
%
31.0
%
Gross margin increased $561 million and $858 million in the third quarter and first nine months of fiscal 2021, respectively, as compared to the same periods of fiscal 2020. The increases were primarily as a result of higher volume and, to a lesser degree, improved manufacturing productivity and the positive impact of foreign currency translation.
We use a wide variety of raw materials in the manufacture of our products and cost of sales and gross margin are subject to variability in raw material prices. As markets recover from the COVID-19 pandemic, increases in consumer demand have led to shortages and price increases in some of our input materials. During the third quarter and first nine months of fiscal 2021, copper, gold, silver, and palladium prices as well as the prices of certain other raw materials have
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increased from prior year levels. The following table presents the average prices incurred related to copper, gold, silver, and palladium:
For the
For the
Quarters Ended
Nine Months Ended
June 25,
June 26,
June 25,
June 26,
Measure
2021
2020
2021
2020
Copper
Lb.
$
3.41
$
2.78
$
3.07
$
2.80
Gold
Troy oz.
1,735
1,411
1,664
1,380
Silver
Troy oz.
22.92
15.97
21.11
16.13
Palladium
Troy oz.
2,438
1,998
2,229
2,020
We expect to purchase approximately 200 million pounds of copper, 125,000 troy ounces of gold, 2.7 million troy ounces of silver, and 15,000 troy ounces of palladium in fiscal 2021.
Operating Expenses
The following table presents operating expense information:
For the
For the
Quarters Ended
Nine Months Ended
June 25,
June 26,
June 25,
June 26,
2021
2020
Change
2021
2020
Change
($ in millions)
Selling, general, and administrative expenses
$
366
$
321
$
45
$
1,128
$
1,040
$
88
As a percentage of net sales
9.5
%
12.6
%
10.2
%
11.7
%
Restructuring and other charges, net
$
11
$
98
$
(87)
$
195
$
144
$
51
Impairment of goodwill
—
—
—
—
900
(900)
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased $45 million in the third quarter of fiscal 2021 from the third quarter of fiscal 2020 due primarily to increased selling expenses to support higher sales levels, higher incentive compensation costs due to improved operational performance, and the negative impact of foreign currency translation, partially offset by savings attributable to restructuring actions and gains on the sale of real estate. In the first nine months of fiscal 2021, selling, general, and administrative expenses increased $88 million from the same period of fiscal 2020 due primarily to higher incentive compensation costs, the negative impact of foreign currency translation, and increased selling expenses, partially offset by savings attributable to cost control measures and restructuring actions and gains on the sale of real estate.
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 across all segments to optimize our manufacturing footprint and improve the cost structure of the organization. We incurred net restructuring charges of $170 million during the first nine months of fiscal 2021, of which $162 million related to the fiscal 2021 restructuring program. Annualized cost savings related to the fiscal 2021 actions commenced during the first nine months of fiscal 2021 are expected to be approximately $75 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 $200 million.
See Note 2 to the Condensed Consolidated Financial Statements for additional information regarding net restructuring and other charges.
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Impairment of Goodwill. During the first nine months of fiscal 2020, we recorded a goodwill impairment charge of $900 million related to the Sensors reporting unit in our Transportation Solutions segment.
Operating Income
The following table presents operating income and operating margin information:
For the
For the
Quarters Ended
Nine Months Ended
June 25,
June 26,
June 25,
June 26,
2021
2020
Change
2021
2020
Change
($ in millions)
Operating income
$
714
$
134
$
580
$
1,774
$
190
$
1,584
Operating margin
18.6
%
5.3
%
16.0
%
2.1
%
Operating income included the following:
For the
For the
Quarters Ended
Nine Months Ended
June 25,
June 26,
June 25,
June 26,
2021
2020
2021
2020
(in millions)
Acquisition-related charges:
Acquisition and integration costs
$
9
$
8
$
23
$
27
Charges associated with the amortization of acquisition-related fair value adjustments
—
—
3
—
9
8
26
27
Restructuring and other charges, net
11
98
195
144
Impairment of goodwill
—
—
—
900
Total
$
20
$
106
$
221
$
1,071
See discussion of operating income below under “Segment Results.”
Non-Operating Items
The following table presents select non-operating information:
For the
For the
Quarters Ended
Nine Months Ended
June 25,
June 26,
June 25,
June 26,
2021
2020
Change
2021
2020
Change
($ in millions)
Income tax expense
$
124
$
185
$
(61)
$
290
$
674
$
(384)
Effective tax rate
17.6
%
145.7
%
16.6
%
360.4
%
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 third quarters and first nine months of fiscal 2021 and 2020, including the Switzerland Federal Act on Tax Reform and AHV Financing and an increase to the valuation allowance for certain non-U.S. deferred tax assets in fiscal 2020.
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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
For the
Quarters Ended
Nine Months Ended
June 25,
June 26,
June 25,
June 26,
2021
2020
2021
2020
($ in millions)
Automotive
$
1,600
71
%
$
797
63
%
$
4,859
72
%
$
3,567
71
%
Commercial transportation
382
17
233
19
1,095
16
785
16
Sensors
283
12
225
18
822
12
628
13
Total
$
2,265
100
%
$
1,255
100
%
$
6,776
100
%
$
4,980
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 Transportation Solutions segment’s net sales by industry end market:
Change in Net Sales for the Quarter Ended June 25, 2021
Change in Net Sales for the Nine Months Ended June 25, 2021
versus Net Sales for the Quarter Ended June 26, 2020
versus Net Sales for the Nine Months Ended June 26, 2020
Net Sales
Organic Net Sales
Net Sales
Organic Net Sales
Growth
Growth
Translation
Growth
Growth
Translation
Acquisition
($ in millions)
Automotive
$
803
100.8
%
$
738
90.2
%
$
65
$
1,292
36.2
%
$
1,083
29.9
%
$
209
$
—
Commercial transportation
149
63.9
136
56.3
13
310
39.5
274
34.3
36
—
Sensors
58
25.8
47
20.3
11
194
30.9
81
12.5
24
89
Total
$
1,010
80.5
%
$
921
71.6
%
$
89
$
1,796
36.1
%
$
1,438
28.4
%
$
269
$
89
Net sales in the Transportation Solutions segment increased $1,010 million, or 80.5%, in the third quarter of fiscal 2021 from the third quarter of fiscal 2020 due primarily to organic net sales growth of 71.6%. In the third quarter of fiscal 2020, our net sales 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 increased 90.2% in the third quarter of fiscal 2021 with increases of 194.4% in the Americas region, 133.4% in the EMEA region, and 41.7% in the Asia–Pacific region. Our growth across all regions resulted primarily from increases in global automotive production and content gains.
● Commercial transportation— Our organic net sales increased 56.3% in the third quarter of fiscal 2021 with growth across all regions as a result of market growth and content gains.
● Sensors— Our organic net sales increased 20.3% in the third quarter of fiscal 2021 due primarily to strength in transportation applications.
In the first nine months of fiscal 2021, net sales in the Transportation Solutions segment increased $1,796 million, or 36.1%, as compared to the first nine months of fiscal 2020 primarily as a result of organic net sales growth of 28.4%. Net sales in the first nine months of fiscal 2020 included the significant, unfavorable impacts of the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
● Automotive— Our organic net sales increased 29.9% in the first nine months of fiscal 2021 with increases of 35.8% in the Americas region, 32.0% in the EMEA region, and 25.4% in the Asia–Pacific region. Our overall
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organic net sales growth was attributable primarily to increases in global automotive production and content gains.
● Commercial transportation— Our organic net sales increased 34.3% in the first nine months of fiscal 2021 due to growth across all regions resulting from market growth and content gains.
● Sensors— Our organic net sales increased 12.5% in the first nine months of fiscal 2021 as a result of strength across all markets.
Operating Income (Loss). The following table presents the Transportation Solutions segment’s operating income (loss) and operating margin information:
For the
For the
Quarters Ended
Nine Months Ended
June 25,
June 26,
June 25,
June 26,
2021
2020
Change
2021
2020
Change
($ in millions)
Operating income (loss)
$
433
$
(1)
$
434
$
1,139
$
(291)
$
1,430
Operating margin
19.1
%
(0.1)
%
16.8
%
(5.8)
%
Operating income (loss) in the Transportation Solutions segment increased $434 million and $1,430 million in the third quarter and first nine months of fiscal 2021, respectively, as compared to the same periods of fiscal 2020. Excluding the items below, operating income (loss) increased primarily as a result of higher volume and, to a lesser degree, improved manufacturing productivity.
For the
For the
Quarters Ended
Nine Months Ended
June 25,
June 26,
June 25,
June 26,
2021
2020
2021
2020
(in millions)
Acquisition-related charges:
Acquisition and integration costs
$
5
$
6
$
12
$
21
Charges associated with the amortization of acquisition-related fair value adjustments
—
—
3
—
5
6
15
21
Restructuring and other charges, net
2
55
130
77
Impairment of goodwill
—
—
—
900
Total
$
7
$
61
$
145
$
998
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
For the
Quarters Ended
Nine Months Ended
June 25,
June 26,
June 25,
June 26,
2021
2020
2021
2020
($ in millions)
Aerospace, defense, oil, and gas
$
260
26
%
$
265
31
%
$
777
27
%
$
892
32
%
Industrial equipment
377
37
265
31
1,011
36
808
30
Medical
178
18
161
19
495
18
526
19
Energy
187
19
174
19
544
19
528
19
Total
$
1,002
100
%
$
865
100
%
$
2,827
100
%
$
2,754
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 Industrial Solutions segment’s net sales by industry end market:
Change in Net Sales for the Quarter Ended June 25, 2021
Change in Net Sales for the Nine Months Ended June 25, 2021
versus Net Sales for the Quarter Ended June 26, 2020
versus Net Sales for the Nine Months Ended June 26, 2020
Net Sales
Organic Net Sales
Acquisition
Net Sales
Organic Net Sales
Acquisition
Growth (Decline)
Growth (Decline)
Translation
(Divestitures)
Growth (Decline)
Growth (Decline)
Translation
(Divestitures)
($ in millions)
Aerospace, defense, oil, and gas
$
(5)
(1.9)
%
$
(18)
(6.9)
%
$
8
$
5
$
(115)
(12.9)
%
$
(152)
(17.1)
%
$
21
$
16
Industrial equipment
112
42.3
96
35.5
16
—
203
25.1
162
19.6
41
—
Medical
17
10.6
16
9.9
1
—
(31)
(5.9)
(33)
(6.3)
2
—
Energy
13
7.5
15
8.7
8
(10)
16
3.0
15
2.9
20
(19)
Total
$
137
15.8
%
$
109
12.6
%
$
33
$
(5)
$
73
2.7
%
$
(8)
(0.4)
%
$
84
$
(3)
In the Industrial Solutions segment, net sales increased $137 million, or 15.8%, in the third quarter of fiscal 2021 as compared to the third quarter of fiscal 2020 due primarily to organic net sales growth of 12.6% and the positive impact of foreign currency translation of 3.8%. Net sales 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 6.9% in the third quarter of fiscal 2021 due primarily to declines in the commercial aerospace market, partially offset by strength in the defense market.
● Industrial equipment— Our organic net sales increased 35.5% in the third 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 increased 9.9% in the third quarter of fiscal 2021 primarily as a result of market growth attributable to increases in interventional medical procedures.
● Energy— Our organic net sales increased 8.7% in the third quarter of fiscal 2021 due primarily to growth in the Americas region driven by growth in solar applications.
In the first nine months of fiscal 2021, net sales in the Industrial Solutions segment increased $73 million, or 2.7%, as compared to the first nine months of fiscal 2020 primarily as a result of the positive impact of foreign currency translation of 3.1%. In the first nine months of fiscal 2020, our net sales included significant, unfavorable impacts of the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
● Aerospace, defense, oil, and gas— Our organic net sales decreased 17.1% in the first nine months of fiscal 2021 primarily as a result of declines in the commercial aerospace market, partially offset by strength in the defense market.
● Industrial equipment— Our organic net sales increased 19.6% in the first nine months of fiscal 2021 with growth in all regions due primarily to strength in factory automation and controls applications.
● Medical— Our organic net sales decreased 6.3% in the first nine months of fiscal 2021 due primarily to delays in elective procedures during the first six months of fiscal 2021.
● Energy— Our organic net sales increased 2.9% in the first nine months of fiscal 2021 primarily as a result of growth in the Americas region attributable to strength in solar applications.
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Operating Income. The following table presents the Industrial Solutions segment’s operating income and operating margin information:
For the
For the
Quarters Ended
Nine Months Ended
June 25,
June 26,
June 25,
June 26,
2021
2020
Change
2021
2020
Change
($ in millions)
Operating income
$
148
$
70
$
78
$
335
$
327
$
8
Operating margin
14.8
%
8.1
%
11.9
%
11.9
%
Operating income in the Industrial Solutions segment increased $78 million and $8 million in the third quarter and first nine months of fiscal 2021, respectively, as compared to the same periods of fiscal 2020. Excluding the items below, operating income increased in the third quarter of fiscal 2021 primarily as a result of higher volume. Excluding the items below, operating income increased slightly in the first nine months of fiscal 2021 as compared to the first nine months of fiscal 2020.
For the
For the
Quarters Ended
Nine Months Ended
June 25,
June 26,
June 25,
June 26,
2021
2020
2021
2020
(in millions)
Acquisition and integration costs
$
4
$
2
$
11
$
6
Restructuring and other charges, net
6
40
49
56
Total
$
10
$
42
$
60
$
62
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
For the
Quarters Ended
Nine Months Ended
June 25,
June 26,
June 25,
June 26,
2021
2020
2021
2020
($ in millions)
Data and devices
$
329
57
%
$
276
64
%
$
841
56
%
$
713
61
%
Appliances
249
43
152
36
661
44
464
39
Total
$
578
100
%
$
428
100
%
$
1,502
100
%
$
1,177
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 June 25, 2021
Change in Net Sales for the Nine Months Ended June 25, 2021
versus Net Sales for the Quarter Ended June 26, 2020
versus Net Sales for the Nine Months Ended June 26, 2020
Net Sales
Organic Net Sales
Net Sales
Organic Net Sales
Growth
Growth
Translation
Growth
Growth
Translation
($ in millions)
Data and devices
$
53
19.2
%
$
46
16.1
%
$
7
$
128
18.0
%
$
108
15.0
%
$
20
Appliances
97
63.8
88
56.9
9
197
42.5
177
37.7
20
Total
$
150
35.0
%
$
134
30.8
%
$
16
$
325
27.6
%
$
285
24.1
%
$
40
Net sales in the Communications Solutions segment increased $150 million, or 35.0%, in the third quarter of fiscal 2021 as compared to the third quarter of fiscal 2020 due primarily to organic net sales growth of 30.8%. In the third quarter
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of fiscal 2020, our net sales included the unfavorable impacts of the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
● Data and devices —Our organic net sales increased 16.1% in the third quarter of fiscal 2021 primarily as a result of market strength in all regions as well as content growth and market share gains in high-speed cloud applications.
● Appliances— Our organic net sales increased 56.9% in the third quarter of fiscal 2021 due to sales growth in all regions attributable primarily to market improvements and market share gains.
In the first nine months of fiscal 2021, net sales in the Communications Solutions segment increased $325 million, or 27.6%, as compared to the first nine months of fiscal 2020 primarily as a result of organic net sales growth of 24.1%. Net sales in the first nine months of fiscal 2020 included the unfavorable impacts of the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
● Data and devices —Our organic net sales increased 15.0% in the first nine months of fiscal 2021 due primarily to market strength in all regions as well as content growth and market share gains in high-speed cloud applications.
● Appliances— Our organic net sales increased 37.7% in the first nine months of fiscal 2021 as a result of sales growth in all regions due primarily to market improvements and market share gains.
Operating Income. The following table presents the Communications Solutions segment’s operating income and operating margin information:
For the
For the
Quarters Ended
Nine Months Ended
June 25,
June 26,
June 25,
June 26,
2021
2020
Change
2021
2020
Change
($ in millions)
Operating income
$
133
$
65
$
68
$
300
$
154
$
146
Operating margin
23.0
%
15.2
%
20.0
%
13.1
%
Operating income in the Communications Solutions segment increased $68 million and $146 million in the third quarter and first nine months of fiscal 2021, respectively, as compared to the same periods of fiscal 2020. Excluding the item below, operating income increased due primarily to higher volume and, to a lesser degree, improved manufacturing productivity.
For the
For the
Quarters Ended
Nine Months Ended
June 25,
June 26,
June 25,
June 26,
2021
2020
2021
2020
(in millions)
Restructuring and other charges, net
$
3
$
3
$
16
$
11
Liquidity and Capital Resources
Our ability to fund our future capital needs will be affected by our ongoing ability to generate cash from operations and may be affected by our access to 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 $500 million of 3.50% senior notes due in February 2022. 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. We will continue to monitor financial markets and respond as necessary to changing
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conditions, including any developments related to the COVID-19 pandemic. We believe that we have sufficient financial resources and liquidity which will enable us to meet our ongoing working capital and other cash flow needs.
Cash Flows from Operating Activities
In the first nine months of fiscal 2021, net cash provided by operating activities increased $630 million to $1,902 million from $1,272 million in the first nine months of fiscal 2020. The increase resulted primarily from higher pre-tax income and increased accounts payable levels driven by higher production volumes, partially offset by the impact of increased sales on accounts receivable levels. The amount of income taxes paid, net of refunds, during the first nine months of fiscal 2021 and 2020 was $291 million and $195 million, respectively.
Cash Flows from Investing Activities
Capital expenditures were $454 million and $439 million in the first nine months of fiscal 2021 and 2020, respectively. We expect fiscal 2021 capital spending levels to be approximately 4-5% 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 2021, we acquired two businesses for a combined cash purchase price of $125 million, net of cash acquired. We acquired four businesses, including First Sensor AG, for a combined cash purchase price of $325 million, net of cash acquired, during the first nine months of fiscal 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 June 25, 2021 and September 25, 2020 was $4,134 million and $4,146 million, respectively. See Note 7 to the Condensed Consolidated Financial Statements for additional information regarding debt.
During the first nine months of fiscal 2021, Tyco Electronics Group S.A. (“TEGSA”), our wholly-owned subsidiary, repaid, at maturity, $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.
During the first nine months of fiscal 2021, TEGSA issued €550 million aggregate principal amount of 0.00% senior notes due in February 2029. 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.
TEGSA has a five-year unsecured senior revolving credit facility (“Credit Facility”) with total commitments of $1.5 billion. The Credit Facility was amended in June 2021 primarily to extend the maturity date from November 2023 to June 2026. The amended Credit Facility contains customary provisions for the replacement of London Interbank Offered Rate (“LIBOR”) with successor rates and amends certain representations, warranties, and covenants applicable to us and TEGSA as obligors under the credit agreement. TEGSA had no borrowings under the Credit Facility at June 25, 2021 or September 25, 2020.
Borrowings under the Credit Facility bear interest at a rate per annum equal to, at the option of TEGSA, (1) LIBOR or, upon a phase-out of LIBOR, an alternative benchmark rate, (2) an alternate base rate equal to the highest of (i) Bank of America, N.A.’s base rate, (ii) the federal funds effective rate plus 1 / 2 of 1%, and (iii) one-month LIBOR, or an alternative benchmark rate, plus 1%, (3) an alternative currency daily rate, or (4) an alternative currency term rate, plus, in each case, an applicable margin based upon the senior, unsecured, long-term debt rating of TEGSA. TEGSA is required to pay an annual facility fee. Based on the applicable credit ratings of TEGSA, this fee ranges from 5.0 to 12.5 basis points of the lenders’ commitments under the Credit Facility.
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
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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 June 25, 2021, 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.
In March 2021, our shareholders approved a dividend payment to shareholders of $2.00 per share, payable in four equal quarterly installments of $0.50 per share beginning in the third quarter of fiscal 2021 and ending in the second quarter of fiscal 2022.
Payments of common share dividends to shareholders were $483 million and $466 million in the first nine months of fiscal 2021 and 2020, respectively.
During the third quarter of fiscal 2021, our board of directors authorized an increase of $1.5 billion in the share repurchase program. We repurchased approximately 5 million of our common shares for $591 million and approximately 6 million of our common shares for $505 million under the share repurchase program during the first nine months of fiscal 2021 and 2020, respectively. At June 25, 2021, we had $1.9 billion 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 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.
June 25,
September 25,
2021
2020
(in millions)
Balance Sheet Data:
Total current assets
$
107
$
134
Total noncurrent assets (1)
2,533
3,282
Total current liabilities
1,225
1,237
Total noncurrent liabilities (2)
24,024
23,549
(1) Includes $2,517 million and $3,275 million as of June 25, 2021 and September 25, 2020, respectively, of intercompany loans receivable from non-guarantor subsidiaries.
(2) Includes $20,348 million and $20,016 million as of June 25, 2021 and September 25, 2020, respectively, of intercompany loans payable to non-guarantor subsidiaries.
For the
For the
Nine Months Ended
Fiscal Year Ended
June 25,
September 25,
2021
2020
(in millions)
Statement of Operations Data:
Loss from continuing operations
$
(295)
$
(206)
Net loss
(288)
(202)
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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 have made voluntary disclosures of apparent trade controls violations to the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) and the U.S. State Department’s Directorate of Defense Trade Controls (“DDTC”). We are cooperating with the BIS and DDTC on these matters, and both our internal assessment and the resulting investigations by the agencies remain ongoing. We are unable to predict the timing and final outcome of the agencies’ investigations. An unfavorable outcome may include fines or penalties imposed in response to our disclosures, but we are not yet able to reasonably estimate the extent of any such fines or penalties. While we have reserved for potential fines and penalties relating to these matters based on our current understanding of the facts, the investigations into these matters have yet to be completed and the final outcome of such investigations and related fines and penalties may differ from amounts currently reserved.
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.
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 June 25, 2021, we had outstanding letters of credit, letters of guarantee, and surety bonds of $135 million, excluding those related to our Subsea Communications (“SubCom”) business which are discussed below.
During 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 performance guarantees and letters of credit had a combined value of approximately $129 million as of June 25, 2021 and are expected to expire at various dates through fiscal 2025. During the first nine months of fiscal 2021, we amended our agreement with SubCom and removed the requirement to issue new performance guarantees. 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.
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Our accounting policies for revenue recognition, goodwill and other intangible assets, income taxes, and pension plans 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 nine months 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 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;
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● 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 impacted 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;
● 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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.