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 second quarter and first six months of fiscal 2022 included the following:
● Our net sales increased 7.2% and 7.8% in the second quarter and first six months of fiscal 2022, respectively, as compared to the same periods of fiscal 2021 due primarily to sales growth in the Industrial Solutions and Communications Solutions segments. On an organic basis, our net sales increased 8.4% and 8.2% during the second quarter and first six months of fiscal 2022, respectively, as compared to the same periods of fiscal 2021.
● Our net sales by segment were as follows:
● Transportation Solutions —Our net sales increased 1.2% in the second quarter of fiscal 2022 due to sales increases in the automotive and commercial transportation end markets, partially offset by sales declines in the sensors end market. In the first six months of fiscal 2022, our net sales decreased 0.9% due primarily to sales declines in the automotive end market, partially offset by sales increases in the commercial transportation end market.
● Industrial Solutions —Our net sales increased 12.9% and 16.9% in the second quarter and first six months of fiscal 2022, respectively, primarily as a result of sales increases in the industrial equipment end market.
● Communications Solutions —Our net sales increased 23.8% and 31.9% in the second quarter and first six months of fiscal 2022, respectively, due to sales increases in both the data and devices and the appliances end markets.
● Net cash provided by operating activities was $945 million in the first six months of fiscal 2022.
Russia-Ukraine Military Conflict
We are monitoring the military conflict between Russia and Ukraine, escalating tensions in surrounding countries, and associated sanctions. We suspended our business operations in Russia, and our operations in Ukraine have been paused
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to focus on the safety of our employees. We have experienced increased costs for transportation, energy, and raw materials due in part to the negative impact of the Russia-Ukraine military conflict on the global economy. These increased costs and supply chain implications have not been significant to our business, and we have been able to partially mitigate them through price increases or productivity. Neither Russia nor Ukraine represents a material portion of our business, and the military conflict has not had a significant impact on our business, financial condition, or result of operations during the first six months of fiscal 2022.
The full impact of the military conflict on our business operations and financial performance remains uncertain. The extent to which the conflict may impact our business in future periods will depend on future developments, including the severity and duration of the conflict, its impact on regional and global economic conditions, and supply chain disruptions. We will continue to actively monitor the conflict and assess the related sanctions and other effects and may take further actions if necessary.
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 negative impact on certain of our businesses in fiscal 2021 and continued to impact certain of our operations in China in the first six months of fiscal 2022. The pandemic has not had a significant impact on our ability to staff our operations, and we do not expect that it will continue to have a significant impact on our businesses globally in fiscal 2022, with the exception of certain locations in China where operations are shutdown . 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 COVID-19 pandemic has impacted and continues to impact our business operations globally, causing disruption in our suppliers’ and customers’ supply chains, some of our business locations to reduce or suspend operations, and a reduction in demand for certain products from direct customers or end markets. 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 .
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. With the exception of shutdowns in China, we do not expect the COVID-19 pandemic to have a significant impact on our businesses in fiscal 2022. However, 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 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 third quarter of fiscal 2022, we expect our net sales to be approximately $3.9 billion as compared to $3.8 billion in the third quarter of fiscal 2021. We expect shutdowns in China related to the COVID-19 pandemic to negatively impact our net sales by approximately 300 basis points in the third quarter of fiscal 2022 as compared to the third quarter of fiscal 2021. We expect diluted earnings per share from continuing operations to be approximately $1.71 per share in the third quarter of fiscal 2022. This outlook reflects the negative impact of foreign currency exchange rates on net sales and earnings per share of approximately $154 million and $0.02 per share, respectively, in the third quarter of fiscal 2022 as compared to the third quarter of fiscal 2021. Also, this outlook is based on foreign currency exchange rates and commodity prices that are consistent with current levels.
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We are monitoring the current macroeconomic environment, including any continued impacts from the Russia-Ukraine military conflict and 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.”
Acquisition
During the first six months of fiscal 2022, we acquired one business for a cash purchase price of $127 million, net of cash acquired. The acquisition was reported as part of our Communications Solutions segment from the date of acquisition. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions.
Results of Operations
Net Sales
The following table presents our net sales and the percentage of total net sales by segment:
For the
For the
Quarters Ended
Six Months Ended
March 25,
March 26,
March 25,
March 26,
2022
2021
2022
2021
($ in millions)
Transportation Solutions
$
2,314
58
%
$
2,287
61
%
$
4,472
57
%
$
4,511
62
%
Industrial Solutions
1,075
27
952
26
2,134
27
1,825
25
Communications Solutions
618
15
499
13
1,219
16
924
13
Total
$
4,007
100
%
$
3,738
100
%
$
7,825
100
%
$
7,260
100
%
The following table provides an analysis of the change in our net sales by segment:
Change in Net Sales for the Quarter Ended March 25, 2022
Change in Net Sales for the Six Months Ended March 25, 2022
versus Net Sales for the Quarter Ended March 26, 2021
versus Net Sales for the Six Months Ended March 26, 2021
Net Sales
Organic Net Sales
Acquisitions
Net Sales
Organic Net Sales
Acquisitions
Growth
Growth
Translation
(Divestitures)
Growth (Decline)
Growth
Translation
(Divestitures)
($ in millions)
Transportation Solutions
$
27
1.2
%
$
101
4.5
%
$
(74)
$
—
$
(39)
(0.9)
%
$
59
1.3
%
$
(98)
$
—
Industrial Solutions
123
12.9
101
10.5
(28)
50
309
16.9
255
13.9
(48)
102
Communications Solutions
119
23.8
114
22.8
(8)
13
295
31.9
286
30.8
(9)
18
Total
$
269
7.2
%
$
316
8.4
%
$
(110)
$
63
$
565
7.8
%
$
600
8.2
%
$
(155)
$
120
Net sales increased $269 million, or 7.2%, in the second quarter of fiscal 2022 as compared to the second quarter of fiscal 2021. The increase in net sales resulted from organic net sales growth of 8.4% and net sales contributions of 1.7% from acquisitions and divestitures, partially offset by the negative impact of foreign currency translation of 2.9% due to the weakening of certain foreign currencies. In the second quarter of fiscal 2022, pricing actions positively affected organic net sales by $121 million.
In the first six months of fiscal 2022, net sales increased $565 million, or 7.8%, as compared to the first six months of fiscal 2021. The increase in net sales resulted from organic net sales growth of 8.2% and net sales contributions of 1.7% from acquisitions and divestitures, partially offset by the negative impact of foreign currency translation of 2.1% due to the weakening of certain foreign currencies. Pricing actions positively affected organic net sales by $173 million in the first six months of fiscal 2022.
See further discussion of net sales below under “Segment Results.”
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Net Sales by Geographic Region. Our business operates in three geographic regions—Europe/Middle East/Africa (“EMEA”), Asia–Pacific, and the Americas—and our results of operations are influenced by changes in foreign currency exchange rates. Increases or decreases in the value of the U.S. dollar, compared to other currencies, will directly affect our reported results as we translate those currencies into U.S. dollars at the end of each fiscal period.
Approximately 60% of our net sales were invoiced in currencies other than the U.S. dollar in the first six months of fiscal 2022.
The following table presents our net sales and the percentage of total net sales by geographic region (1) :
For the
For the
Quarters Ended
Six Months Ended
March 25,
March 26,
March 25,
March 26,
2022
2021
2022
2021
($ in millions)
EMEA
$
1,433
36
%
$
1,390
37
%
$
2,747
35
%
$
2,706
37
%
Asia–Pacific
1,411
35
1,336
36
2,881
37
2,629
36
Americas
1,163
29
1,012
27
2,197
28
1,925
27
Total
$
4,007
100
%
$
3,738
100
%
$
7,825
100
%
$
7,260
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 March 25, 2022
Change in Net Sales for the Six Months Ended March 25, 2022
versus Net Sales for the Quarter Ended March 26, 2021
versus Net Sales for the Six Months Ended March 26, 2021
Net Sales
Organic Net Sales
Acquisitions
Net Sales
Organic Net Sales
Acquisitions
Growth
Growth
Translation
(Divestitures)
Growth
Growth
Translation
(Divestitures)
($ in millions)
EMEA
$
43
3.1
%
$
100
7.2
%
(92)
$
35
$
41
1.5
%
$
106
3.8
%
$
(136)
$
71
Asia–Pacific
75
5.6
79
5.9
$
(16)
12
252
9.6
243
9.2
(16)
25
Americas
151
14.9
137
13.5
(2)
16
272
14.1
251
13.0
(3)
24
Total
$
269
7.2
%
$
316
8.4
%
$
(110)
$
63
$
565
7.8
%
$
600
8.2
%
$
(155)
$
120
Cost of Sales and Gross Margin
The following table presents cost of sales and gross margin information:
For the
For the
Quarters Ended
Six Months Ended
March 25,
March 26,
March 25,
March 26,
2022
2021
Change
2022
2021
Change
($ in millions)
Cost of sales
$
2,670
$
2,528
$
142
$
5,258
$
4,904
$
354
As a percentage of net sales
66.6
%
67.6
%
67.2
%
67.5
%
Gross margin
$
1,337
$
1,210
$
127
$
2,567
$
2,356
$
211
As a percentage of net sales
33.4
%
32.4
%
32.8
%
32.5
%
Gross margin increased $127 million and $211 million in the second quarter and first six months of fiscal 2022, respectively, as compared to the same periods of fiscal 2021. The increases were primarily a result of higher volume and the positive impacts of pricing actions, partially offset by higher material costs and, to a lesser degree, the negative 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. In recent years, raw material prices and availability have been impacted by worldwide events, including the COVID-19 pandemic and, more recently, the military conflict between Russia and Ukraine. As a result, we have experienced shortages and price increases in some of our input materials—including copper, gold, silver,
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and palladium—however, we have been able to initiate pricing actions which have partially offset these impacts. The following table presents the average prices incurred related to copper, gold, silver, and palladium:
For the
For the
Quarters Ended
Six Months Ended
March 25,
March 26,
March 25,
March 26,
Measure
2022
2021
2022
2021
Copper
Lb.
$
4.13
$
2.95
$
3.97
$
2.93
Gold
Troy oz.
1,831
1,659
1,814
1,629
Silver
Troy oz.
24.64
20.48
24.10
20.11
Palladium
Troy oz.
2,380
2,114
2,363
2,125
We expect to purchase approximately 225 million pounds of copper, 140,000 troy ounces of gold, 2.9 million troy ounces of silver, and 15,000 troy ounces of palladium in fiscal 2022.
Operating Expenses
The following table presents operating expense information:
For the
For the
Quarters Ended
Six Months Ended
March 25,
March 26,
March 25,
March 26,
2022
2021
Change
2022
2021
Change
($ in millions)
Selling, general, and administrative expenses
$
416
$
401
$
15
$
779
$
762
$
17
As a percentage of net sales
10.4
%
10.7
%
10.0
%
10.5
%
Restructuring and other charges, net
$
21
$
17
$
4
$
33
$
184
$
(151)
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased $15 million and $17 million in the second quarter and first six months of fiscal 2022, respectively, from the same periods of fiscal 2021 due primarily to increased selling expenses to support higher sales levels and incremental expenses attributable to recently acquired businesses, partially offset by lower 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 2022 and 2021, we initiated restructuring programs associated with footprint consolidation and cost structure improvements across all segments. We incurred net restructuring and related charges of $55 million during the first six months of fiscal 2022, of which $12 million was recorded in cost of sales. Annualized cost savings related to the fiscal 2022 actions commenced during the first six months of fiscal 2022 are expected to be approximately $50 million and are expected to be realized by the end of fiscal 2024. Cost savings will be reflected primarily in cost of sales and selling, general, and administrative expenses. For fiscal 2022, we expect total restructuring charges to be approximately $150 million and total spending, which will be funded with cash from operations, to be approximately $175 million.
See Note 2 to the Condensed Consolidated Financial Statements for additional information regarding net restructuring and other charges.
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Operating Income
The following table presents operating income and operating margin information:
For the
For the
Quarters Ended
Six Months Ended
March 25,
March 26,
March 25,
March 26,
2022
2021
Change
2022
2021
Change
($ in millions)
Operating income
$
705
$
612
$
93
$
1,377
$
1,060
$
317
Operating margin
17.6
%
16.4
%
17.6
%
14.6
%
Operating income included the following:
For the
For the
Quarters Ended
Six Months Ended
March 25,
March 26,
March 25,
March 26,
2022
2021
2022
2021
(in millions)
Acquisition-related charges:
Acquisition and integration costs
$
10
$
6
$
18
$
14
Charges associated with the amortization of acquisition-related fair value adjustments
—
2
8
3
10
8
26
17
Restructuring and other charges, net
21
17
33
184
Restructuring-related charges recorded in cost of sales
—
—
12
—
Total
$
31
$
25
$
71
$
201
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
Six Months Ended
March 25,
March 26,
March 25,
March 26,
2022
2021
Change
2022
2021
Change
($ in millions)
Income tax expense
$
136
$
106
$
30
$
246
$
166
$
80
Effective tax rate
19.5
%
17.3
%
17.9
%
15.9
%
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 second quarters and first six months of fiscal 2022 and 2021.
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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
Six Months Ended
March 25,
March 26,
March 25,
March 26,
2022
2021
2022
2021
($ in millions)
Automotive
$
1,653
71
%
$
1,630
71
%
$
3,173
71
%
$
3,259
72
%
Commercial transportation
394
17
382
17
759
17
713
16
Sensors
267
12
275
12
540
12
539
12
Total
$
2,314
100
%
$
2,287
100
%
$
4,472
100
%
$
4,511
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 March 25, 2022
Change in Net Sales for the Six Months Ended March 25, 2022
versus Net Sales for the Quarter Ended March 26, 2021
versus Net Sales for the Six Months Ended March 26, 2021
Net Sales
Organic Net Sales
Net Sales
Organic Net Sales
Growth (Decline)
Growth
Translation
Growth (Decline)
Growth (Decline)
Translation
($ in millions)
Automotive
$
23
1.4
%
$
80
4.9
%
$
(57)
$
(86)
(2.6)
%
$
(11)
(0.4)
%
$
(75)
Commercial transportation
12
3.1
21
5.4
(9)
46
6.5
57
7.9
(11)
Sensors
(8)
(2.9)
—
—
(8)
1
0.2
13
2.5
(12)
Total
$
27
1.2
%
$
101
4.5
%
$
(74)
$
(39)
(0.9)
%
$
59
1.3
%
$
(98)
Net sales in the Transportation Solutions segment increased $27 million, or 1.2%, in the second quarter of fiscal 2022 from the second quarter of fiscal 2021 due to organic net sales growth of 4.5%, partially offset by the negative impact of foreign currency translation of 3.3%. Our organic net sales by industry end market were as follows:
● Automotive— Our organic net sales increased 4.9% in the second quarter of fiscal 2022 with growth of 7.9% in the Americas region, 6.4% in the Asia–Pacific region, and 2.1% in the EMEA region. Our overall net sales increased due primarily to increased content per vehicle, despite declines in global automotive production.
● Commercial transportation— Our organic net sales increased 5.4% in the second quarter of fiscal 2022 primarily as a result of market growth in the EMEA and Americas regions.
● Sensors— Our organic net sales were flat in the second quarter of fiscal 2022 as growth in industrial applications was offset by declines in transportation applications.
In the first six months of fiscal 2022, net sales in the Transportation Solutions segment decreased $39 million, or 0.9%, as compared to the first six months of fiscal 2021 due to the negative impact of foreign currency translation of 2.2%, partially offset by organic net sales growth of 1.3%. Our organic net sales by industry end market were as follows:
● Automotive— Our organic net sales were essentially flat in the first six months of fiscal 2022 with declines of 7.6% in the EMEA region, largely offset by growth of 6.0% in the Asia–Pacific region and 1.4% in the Americas region. The impact of declines in global automotive production were offset by increased content per vehicle.
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● Commercial transportation— Our organic net sales increased 7.9% in the first six months of fiscal 2022 primarily as a result of market growth in the EMEA and Americas regions.
● Sensors— Our organic net sales increased 2.5% in the first six months of fiscal 2022 as growth in industrial applications was partially offset by declines in transportation applications.
Operating Income. The following table presents the Transportation Solutions segment’s operating income and operating margin information:
For the
For the
Quarters Ended
Six Months Ended
March 25,
March 26,
March 25,
March 26,
2022
2021
Change
2022
2021
Change
($ in millions)
Operating income
$
409
$
398
$
11
$
804
$
706
$
98
Operating margin
17.7
%
17.4
%
18.0
%
15.7
%
Operating income in the Transportation Solutions segment increased $11 million and $98 million in the second quarter and first six months of fiscal 2022, respectively, as compared to the same periods of fiscal 2021. Excluding the items below, operating income in the second quarter of fiscal 2022 increased slightly as the positive impacts of pricing actions were largely offset by higher material and utilities costs. Excluding the items below, operating income in the first six months of fiscal 2022 decreased primarily as a result of higher material and utilities costs, partially offset by the positive impacts of pricing actions.
For the
For the
Quarters Ended
Six Months Ended
March 25,
March 26,
March 25,
March 26,
2022
2021
2022
2021
(in millions)
Acquisition-related charges:
Acquisition and integration costs
$
4
$
3
$
7
$
7
Charges associated with the amortization of acquisition-related fair value adjustments
—
2
—
3
4
5
7
10
Restructuring and other charges, net
9
10
3
128
Total
$
13
$
15
$
10
$
138
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
Six Months Ended
March 25,
March 26,
March 25,
March 26,
2022
2021
2022
2021
($ in millions)
Industrial equipment
$
472
44
%
$
339
36
%
$
934
44
%
$
634
35
%
Aerospace, defense, oil, and gas
261
24
267
28
503
24
517
28
Energy
184
17
185
19
372
17
357
20
Medical
158
15
161
17
325
15
317
17
Total
$
1,075
100
%
$
952
100
%
$
2,134
100
%
$
1,825
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 March 25, 2022
Change in Net Sales for the Six Months Ended March 25, 2022
versus Net Sales for the Quarter Ended March 26, 2021
versus Net Sales for the Six Months Ended March 26, 2021
Net Sales
Organic Net Sales
Acquisition
Net Sales
Organic Net Sales
Acquisitions
Growth (Decline)
Growth (Decline)
Translation
(Divestitures)
Growth (Decline)
Growth (Decline)
Translation
(Divestitures)
($ in millions)
Industrial equipment
$
133
39.2
%
$
93
27.2
%
$
(13)
$
53
$
300
47.3
%
$
212
33.0
%
$
(25)
$
113
Aerospace, defense, oil, and gas
(6)
(2.2)
—
—
(5)
(1)
(14)
(2.7)
(6)
(1.4)
(8)
—
Energy
(1)
(0.5)
9
4.8
(8)
(2)
15
4.2
38
10.5
(12)
(11)
Medical
(3)
(1.9)
(1)
(1.2)
(2)
—
8
2.5
11
3.1
(3)
—
Total
$
123
12.9
%
$
101
10.5
%
$
(28)
$
50
$
309
16.9
%
$
255
13.9
%
$
(48)
$
102
In the Industrial Solutions segment, net sales increased $123 million, or 12.9%, in the second quarter of fiscal 2022 as compared to the second quarter of fiscal 2021 due to organic net sales growth of 10.5% and net sales contributions of 5.3% from an acquisition and divestitures, partially offset by the negative impact of foreign currency translation of 2.9%. Our organic net sales by industry end market were as follows:
● Industrial equipment— Our organic net sales increased 27.2% in the second quarter of fiscal 2022 due to growth in all regions primarily as a result of strength in factory automation and controls applications.
● Aerospace, defense, oil, and gas— Our organic net sales were flat in the second quarter of fiscal 2022 as declines in the defense market were largely offset by growth in the commercial aerospace market.
● Energy— Our organic net sales increased 4.8% in the second quarter of fiscal 2022 with growth across all regions and continued strength in renewable energy applications.
● Medical— Our organic net sales decreased 1.2% in the second quarter of fiscal 2022 due primarily to sales declines in interventional medical applications.
Net sales in the Industrial Solutions segment increased $309 million, or 16.9%, in the first six months of fiscal 2022 as compared to the first six months of fiscal 2021 due to organic net sales growth of 13.9% and net sales contributions of 5.6% from acquisitions and divestitures, partially offset by the negative impact of foreign currency translation of 2.6%. Our organic net sales by industry end market were as follows:
● Industrial equipment— Our organic net sales increased 33.0% in the first six months of fiscal 2022 as a result of growth in all regions due primarily to strength in factory automation and controls applications.
● Aerospace, defense, oil, and gas— Our organic net sales decreased 1.4% in the first six months of fiscal 2022 with declines in the defense and the oil and gas markets partially offset by growth in the commercial aerospace market.
● Energy— Our organic net sales increased 10.5% in the first six months of fiscal 2022 due to growth across all regions and continued strength in renewable energy applications.
● Medical— Our organic net sales increased 3.1% in the first six months of fiscal 2022 primarily as a result of market growth in interventional medical applications.
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Operating Income. The following table presents the Industrial Solutions segment’s operating income and operating margin information:
For the
For the
Quarters Ended
Six Months Ended
March 25,
March 26,
March 25,
March 26,
2022
2021
Change
2022
2021
Change
($ in millions)
Operating income
$
148
$
111
$
37
$
271
$
187
$
84
Operating margin
13.8
%
11.7
%
12.7
%
10.2
%
Operating income in the Industrial Solutions segment increased $37 million and $84 million in the second quarter and first six months of fiscal 2022, respectively, as compared to the same periods of fiscal 2021. Excluding the items below, operating income increased primarily as a result of higher volume and the positive impacts of pricing actions.
For the
For the
Quarters Ended
Six Months Ended
March 25,
March 26,
March 25,
March 26,
2022
2021
2022
2021
(in millions)
Acquisition-related charges:
Acquisition and integration costs
$
6
$
3
$
10
$
7
Charges associated with the amortization of acquisition-related fair value adjustments
—
—
8
—
6
3
18
7
Restructuring and other charges, net
10
5
20
43
Restructuring-related charges recorded in cost of sales
—
—
12
—
Total
$
16
$
8
$
50
$
50
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
Six Months Ended
March 25,
March 26,
March 25,
March 26,
2022
2021
2022
2021
($ in millions)
Data and devices
$
385
62
%
$
278
56
%
$
734
60
%
$
512
55
%
Appliances
233
38
221
44
485
40
412
45
Total
$
618
100
%
$
499
100
%
$
1,219
100
%
$
924
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 March 25, 2022
Change in Net Sales for the Six Months Ended March 25, 2022
versus Net Sales for the Quarter Ended March 26, 2021
versus Net Sales for the Six Months Ended March 26, 2021
Net Sales
Organic Net Sales
Net Sales
Organic Net Sales
Growth
Growth
Translation
Acquisition
Growth
Growth
Translation
Acquisition
($ in millions)
Data and devices
$
107
38.5
%
$
98
35.0
%
$
(4)
$
13
$
222
43.4
%
$
209
40.7
%
$
(5)
$
18
Appliances
12
5.4
16
7.3
(4)
—
73
17.7
77
18.4
(4)
—
Total
$
119
23.8
%
$
114
22.8
%
$
(8)
$
13
$
295
31.9
%
$
286
30.8
%
$
(9)
$
18
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Net sales in the Communications Solutions segment increased $119 million, or 23.8%, in the second quarter of fiscal 2022 as compared to the second quarter of fiscal 2021 due primarily to organic net sales growth of 22.8%. Our organic net sales by industry end market were as follows:
● Data and devices —Our organic net sales increased 35.0% in the second quarter of fiscal 2022 primarily as a result of market strength and growth in high-speed cloud applications.
● Appliances— Our organic net sales increased 7.3% in the second quarter of fiscal 2022 due to sales growth in the Americas and EMEA regions attributable primarily to share gains.
In the first six months of fiscal 2022, net sales in the Communications Solutions segment increased $295 million, or 31.9%, as compared to the first six months of fiscal 2021 due primarily to organic net sales growth of 30.8%. Our organic net sales by industry end market were as follows:
● Data and devices —Our organic net sales increased 40.7% in the first six months of fiscal 2022 due primarily to market strength and growth in high-speed cloud applications.
● Appliances— Our organic net sales increased 18.4% in the first six months of fiscal 2022 as a result of sales growth in the Americas and EMEA regions attributable primarily to share gains.
Operating Income. The following table presents the Communications Solutions segment’s operating income and operating margin information:
For the
For the
Quarters Ended
Six Months Ended
March 25,
March 26,
March 25,
March 26,
2022
2021
Change
2022
2021
Change
($ in millions)
Operating income
$
148
$
103
$
45
$
302
$
167
$
135
Operating margin
23.9
%
20.6
%
24.8
%
18.1
%
Operating income in the Communications Solutions segment increased $45 million and $135 million in the second quarter and first six months of fiscal 2022, respectively, as compared to the same periods of fiscal 2021. Excluding the items below, operating income increased due primarily to higher volume.
For the
For the
Quarters Ended
Six Months Ended
March 25,
March 26,
March 25,
March 26,
2022
2021
2022
2021
(in millions)
Acquisition and integration costs
$
—
$
—
$
1
$
—
Restructuring and other charges, net
2
2
10
13
Total
$
2
$
2
$
11
$
13
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 €550 million of 1.10% senior notes due in March 2023. 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 conditions. 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.
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Cash Flows from Operating Activities
In the first six months of fiscal 2022, net cash provided by operating activities decreased $275 million to $945 million from $1,220 million in the first six months of fiscal 2021. The decrease resulted primarily from the impact of higher incentive compensation payments and increased working capital levels, partially offset by higher pre-tax income. The amount of income taxes paid, net of refunds, during the first six months of fiscal 2022 and 2021 was $177 million and $181 million, respectively.
Cash Flows from Investing Activities
Capital expenditures were $351 million and $284 million in the first six months of fiscal 2022 and 2021, respectively. We expect fiscal 2022 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 six months of fiscal 2022, we acquired one business for a cash purchase price of $127 million, net of cash acquired. We acquired one business for a cash purchase price of $106 million, net of cash acquired, during the first six months of fiscal 2021. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions.
Cash Flows from Financing Activities and Capitalization
Total debt at March 25, 2022 and September 24, 2021 was $4,051 million and $4,092 million, respectively. See Note 7 to the Condensed Consolidated Financial Statements for additional information regarding debt.
During the second quarter of fiscal 2022, Tyco Electronics Group S.A. (“TEGSA”), our wholly-owned subsidiary, issued $600 million aggregate principal amount of 2.50% senior notes due in February 2032. 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.
During the first six months of fiscal 2022, TEGSA completed an early redemption of $500 million aggregate principal amount of 3.50% senior notes due in February 2022.
TEGSA has a five-year unsecured senior revolving credit facility (“Credit Facility”) with a maturity date of June 2026 and total commitments of $1.5 billion. TEGSA had no borrowings under the Credit Facility at March 25, 2022 or September 24, 2021.
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 March 25, 2022, 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 $326 million and $318 million in the first six months of fiscal 2022 and 2021, respectively.
In March 2022, our shareholders approved a dividend payment to shareholders of $2.24 per share, payable in four equal quarterly installments of $0.56 per share beginning in the third quarter of fiscal 2022 and ending in the second quarter of fiscal 2023.
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We repurchased approximately five million of our common shares for $752 million and approximately three million of our common shares for $309 million under the share repurchase program during the first six months of fiscal 2022 and 2021, respectively. At March 25, 2022, we had $839 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 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.
March 25,
September 24,
2022
2021
(in millions)
Balance Sheet Data:
Total current assets
$
252
$
452
Total noncurrent assets (1)
2,674
1,829
Total current liabilities
1,553
1,144
Total noncurrent liabilities (2)
16,159
12,443
(1) Includes $2,627 million and $1,810 million as of March 25, 2022 and September 24, 2021, respectively, of intercompany loans receivable from non-guarantor subsidiaries.
(2) Includes $12,726 million and $8,832 million as of March 25, 2022 and September 24, 2021, respectively, of intercompany loans payable to non-guarantor subsidiaries.
For the
For the
Six Months Ended
Fiscal Year Ended
March 25,
September 24,
2022
2021
(in millions)
Statement of Operations Data:
Loss from continuing operations
$
(3)
$
(486)
Net loss
(3)
(479)
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 2022 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 March 25, 2022, we had outstanding letters of credit, letters of guarantee, and surety bonds of $120 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
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sale. These performance guarantees and letters of credit had a combined value of approximately $117 million as of March 25, 2022 and are expected to expire at various dates through fiscal 2027. 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.
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.
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 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 “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” and the Consolidated Financial Statements and accompanying notes contained in our Annual Report on Form 10-K for the fiscal year ended September 24, 2021. There were no significant changes to this information during the first six months of fiscal 2022.
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.
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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 24, 2021, 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;
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● 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 continuing military conflict between Russia and Ukraine resulting from Russia’s invasion of Ukraine or escalating tensions in surrounding countries, and 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, increase global cash taxes, 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.
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.