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 2022 included the following:
● Our net sales increased 6.6% and 7.4% in the third quarter and first nine 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 10.6% and 9.0% during the third quarter and first nine 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 1.5% in the third 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 nine months of fiscal 2022, our net sales were flat as compared to the first nine months of fiscal 2021 as sales declines in the automotive and sensors end markets were offset by sales increases in the commercial transportation end market.
● Industrial Solutions —Our net sales increased 13.2% and 15.6% in the third quarter and first nine months of fiscal 2022, respectively, primarily as a result of sales increases in the industrial equipment end market.
● Communications Solutions —Our net sales increased 14.7% and 25.3% in the third quarter and first nine months of fiscal 2022, respectively, due primarily to sales increases in the data and devices end market.
● Net cash provided by operating activities was $1,524 million in the first nine 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 reduced
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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. The increased costs and supply chain implications resulting from the conflict 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 nine 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 nine 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 . 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. While certain of our operations were shut down in China for a period of time in fiscal 2022, we do not expect the COVID-19 pandemic to have a significant impact on our businesses globally 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 fourth quarter of fiscal 2022, we expect our net sales to be approximately $4.2 billion as compared to $3.8 billion in the fourth quarter of fiscal 2021. We expect diluted earnings per share from continuing operations to be approximately $1.79 per share in the fourth quarter of fiscal 2022. This outlook reflects the negative impact of foreign currency exchange rates on net sales and earnings per share of approximately $275 million and $0.11 per share, respectively, in the fourth quarter of fiscal 2022 as compared to the fourth quarter of fiscal 2021. Additionally, this outlook includes approximately $250 million in net sales and $0.10 earnings per share resulting from an additional week in the fourth quarter of fiscal 2022.
We expect our net sales to be approximately $16.1 billion in fiscal 2022 as compared to $14.9 billion in fiscal 2021. We expect diluted earnings per share from continuing operations to be approximately $7.04 per share in fiscal 2022. This
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outlook includes an additional week in fiscal 2022 and reflects the negative impact of foreign currency exchange rates on net sales and earnings per share of approximately $700 million and $0.17 per share, respectively, in fiscal 2022 as compared to fiscal 2021.
The above outlook is based on foreign currency exchange rates and commodity prices that are consistent with current levels.
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 nine months of fiscal 2022, we acquired two businesses for a combined cash purchase price of $141 million, net of cash acquired. The acquisitions were reported as part of our Communications Solutions segment from the date of acquisition. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions.
Results of Operations
Net Sales
The following table presents our net sales and the percentage of total net sales by segment:
For the
For the
Quarters Ended
Nine Months Ended
June 24,
June 25,
June 24,
June 25,
2022
2021
2022
2021
($ in millions)
Transportation Solutions
$
2,300
56
%
$
2,265
59
%
$
6,772
57
%
$
6,776
61
%
Industrial Solutions
1,134
28
1,002
26
3,268
27
2,827
25
Communications Solutions
663
16
578
15
1,882
16
1,502
14
Total
$
4,097
100
%
$
3,845
100
%
$
11,922
100
%
$
11,105
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 24, 2022
Change in Net Sales for the Nine Months Ended June 24, 2022
versus Net Sales for the Quarter Ended June 25, 2021
versus Net Sales for the Nine Months Ended June 25, 2021
Net Sales
Organic Net Sales
Acquisitions
Net Sales
Organic Net Sales
Acquisitions
Growth
Growth
Translation
(Divestiture)
Growth (Decline)
Growth
Translation
(Divestitures)
($ in millions)
Transportation Solutions
$
35
1.5
%
$
192
8.3
%
$
(157)
$
—
$
(4)
(0.1)
%
$
251
3.7
%
$
(255)
$
—
Industrial Solutions
132
13.2
125
12.7
(53)
60
441
15.6
380
13.5
(101)
162
Communications Solutions
85
14.7
92
15.9
(20)
13
380
25.3
378
25.1
(29)
31
Total
$
252
6.6
%
$
409
10.6
%
$
(230)
$
73
$
817
7.4
%
$
1,009
9.0
%
$
(385)
$
193
Net sales increased $252 million, or 6.6%, in the third quarter of fiscal 2022 as compared to the third quarter of fiscal 2021. The increase in net sales resulted from organic net sales growth of 10.6% and net sales contributions of 1.9% from acquisitions and a divestiture, partially offset by the negative impact of foreign currency translation of 5.9% due to the weakening of certain foreign currencies. In the third quarter of fiscal 2022, pricing actions positively affected organic net sales by $159 million.
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In the first nine months of fiscal 2022, net sales increased $817 million, or 7.4%, as compared to the first nine months of fiscal 2021. The increase in net sales resulted from organic net sales growth of 9.0% and net sales contributions of 1.8% from acquisitions and divestitures, partially offset by the negative impact of foreign currency translation of 3.4% due to the weakening of certain foreign currencies. Pricing actions positively affected organic net sales by $332 million in the first nine months of fiscal 2022.
See further discussion of net sales below under “Segment Results.”
Net Sales by Geographic Region. Our business operates in three geographic regions—Europe/Middle East/Africa (“EMEA”), Asia–Pacific, and the Americas—and our results of operations are influenced by changes in foreign currency exchange rates. Increases or decreases in the value of the U.S. dollar, compared to other currencies, will directly affect our reported results as we translate those currencies into U.S. dollars at the end of each fiscal period.
Approximately 60% of our net sales were invoiced in currencies other than the U.S. dollar in the first nine months of fiscal 2022.
The following table presents our net sales and the percentage of total net sales by geographic region (1) :
For the
For the
Quarters Ended
Nine Months Ended
June 24,
June 25,
June 24,
June 25,
2022
2021
2022
2021
($ in millions)
EMEA
$
1,448
36
%
$
1,413
37
%
$
4,195
35
%
$
4,119
37
%
Asia–Pacific
1,402
34
1,384
36
4,283
36
4,013
36
Americas
1,247
30
1,048
27
3,444
29
2,973
27
Total
$
4,097
100
%
$
3,845
100
%
$
11,922
100
%
$
11,105
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 24, 2022
Change in Net Sales for the Nine Months Ended June 24, 2022
versus Net Sales for the Quarter Ended June 25, 2021
versus Net Sales for the Nine Months Ended June 25, 2021
Net Sales
Organic Net Sales
Acquisitions
Net Sales
Organic Net Sales
Acquisitions
Growth
Growth
Translation
(Divestiture)
Growth
Growth
Translation
(Divestitures)
($ in millions)
EMEA
$
35
2.5
%
$
152
10.7
%
$
(161)
$
44
$
76
1.8
%
$
258
6.2
%
$
(297)
$
115
Asia–Pacific
18
1.3
76
5.4
(72)
14
270
6.7
319
7.9
(88)
39
Americas
199
19.0
181
17.3
3
15
471
15.8
432
14.5
—
39
Total
$
252
6.6
%
$
409
10.6
%
$
(230)
$
73
$
817
7.4
%
$
1,009
9.0
%
$
(385)
$
193
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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 24,
June 25,
June 24,
June 25,
2022
2021
Change
2022
2021
Change
($ in millions)
Cost of sales
$
2,769
$
2,577
$
192
$
8,027
$
7,481
$
546
As a percentage of net sales
67.6
%
67.0
%
67.3
%
67.4
%
Gross margin
$
1,328
$
1,268
$
60
$
3,895
$
3,624
$
271
As a percentage of net sales
32.4
%
33.0
%
32.7
%
32.6
%
Gross margin increased $60 million and $271 million in the third quarter and first nine months of fiscal 2022, respectively, as compared to the same periods of fiscal 2021. The increases were primarily a result of the positive impact of pricing actions and higher volume, partially offset by inflationary pressure on material and operating costs.
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, 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
Nine Months Ended
June 24,
June 25,
June 24,
June 25,
Measure
2022
2021
2022
2021
Copper
Lb.
$
4.12
$
3.41
$
4.02
$
3.07
Gold
Troy oz.
1,850
1,735
1,826
1,664
Silver
Troy oz.
24.72
22.92
24.31
21.11
Palladium
Troy oz.
2,383
2,438
2,370
2,229
We expect to purchase approximately 215 million pounds of copper, 135,000 troy ounces of gold, 2.7 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
Nine Months Ended
June 24,
June 25,
June 24,
June 25,
2022
2021
Change
2022
2021
Change
($ in millions)
Selling, general, and administrative expenses
$
393
$
366
$
27
$
1,172
$
1,128
$
44
As a percentage of net sales
9.6
%
9.5
%
9.8
%
10.2
%
Restructuring and other charges, net
$
26
$
11
$
15
$
59
$
195
$
(136)
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased $27 million and $44 million in the third quarter and first nine months of fiscal 2022, respectively, from the same periods of fiscal 2021 due primarily to increased selling expenses to support higher sales levels, the impact of inflation, and incremental expenses attributable to recent acquisitions, partially offset by lower incentive compensation costs.
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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 $85 million during the first nine months of fiscal 2022, of which $16 million was recorded in cost of sales. Annualized cost savings related to the fiscal 2022 actions commenced during the first nine months of fiscal 2022 are expected to be approximately $75 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 $160 million.
See Note 2 to the Condensed Consolidated Financial Statements for additional information regarding net restructuring and other charges.
Operating Income
The following table presents operating income and operating margin information:
For the
For the
Quarters Ended
Nine Months Ended
June 24,
June 25,
June 24,
June 25,
2022
2021
Change
2022
2021
Change
($ in millions)
Operating income
$
719
$
714
$
5
$
2,096
$
1,774
$
322
Operating margin
17.5
%
18.6
%
17.6
%
16.0
%
Operating income included the following:
For the
For the
Quarters Ended
Nine Months Ended
June 24,
June 25,
June 24,
June 25,
2022
2021
2022
2021
(in millions)
Acquisition-related charges:
Acquisition and integration costs
$
11
$
9
$
29
$
23
Charges associated with the amortization of acquisition-related fair value adjustments
1
—
9
3
12
9
38
26
Restructuring and other charges, net
26
11
59
195
Restructuring-related charges recorded in cost of sales
4
—
16
—
Total
$
42
$
20
$
113
$
221
See discussion of operating income below under “Segment Results.”
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Non-Operating Items
The following table presents select non-operating information:
For the
For the
Quarters Ended
Nine Months Ended
June 24,
June 25,
June 24,
June 25,
2022
2021
Change
2022
2021
Change
($ in millions)
Income tax expense
$
116
$
124
$
(8)
$
362
$
290
$
72
Effective tax rate
16.4
%
17.6
%
17.4
%
16.6
%
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 2022 and 2021.
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 24,
June 25,
June 24,
June 25,
2022
2021
2022
2021
($ in millions)
Automotive
$
1,629
71
%
$
1,600
71
%
$
4,802
71
%
$
4,859
72
%
Commercial transportation
400
17
382
17
1,159
17
1,095
16
Sensors
271
12
283
12
811
12
822
12
Total
$
2,300
100
%
$
2,265
100
%
$
6,772
100
%
$
6,776
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 24, 2022
Change in Net Sales for the Nine Months Ended June 24, 2022
versus Net Sales for the Quarter Ended June 25, 2021
versus Net Sales for the Nine Months Ended June 25, 2021
Net Sales
Organic Net Sales
Net Sales
Organic Net Sales
Growth (Decline)
Growth
Translation
Growth (Decline)
Growth
Translation
($ in millions)
Automotive
$
29
1.8
%
$
148
9.1
%
$
(119)
$
(57)
(1.2)
%
$
137
2.7
%
$
(194)
Commercial transportation
18
4.7
38
9.8
(20)
64
5.8
95
8.6
(31)
Sensors
(12)
(4.2)
6
1.5
(18)
(11)
(1.3)
19
2.2
(30)
Total
$
35
1.5
%
$
192
8.3
%
$
(157)
$
(4)
(0.1)
%
$
251
3.7
%
$
(255)
Net sales in the Transportation Solutions segment increased $35 million, or 1.5%, in the third quarter of fiscal 2022 from the third quarter of fiscal 2021 due to organic net sales growth of 8.3%, partially offset by the negative impact of foreign currency translation of 6.8%. Our organic net sales by industry end market were as follows:
● Automotive— Our organic net sales increased 9.1% in the third quarter of fiscal 2022 with growth of 15.0% in the Americas region, 8.2% in the EMEA region, and 7.4% in the Asia–Pacific region. Overall, our organic net sales growth resulted primarily from increased content per vehicle. Global automotive production in the third quarter of fiscal 2022 was consistent with third quarter fiscal 2021 levels .
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● Commercial transportation— Our organic net sales increased 9.8% in the third quarter of fiscal 2022 due primarily to market growth in the Americas and EMEA regions as well as content and share gains.
● Sensors— Our organic net sales increased 1.5% in the third quarter of fiscal 2022 as a result of growth in industrial applications , partially offset by declines in transportation applications.
In the first nine months of fiscal 2022, net sales in the Transportation Solutions segment decreased slightly as compared to the first nine months of fiscal 2021 as the negative impact of foreign currency translation of 3.8% was offset by organic net sales growth of 3.7%. Our organic net sales by industry end market were as follows:
● Automotive— Our organic net sales increased 2.7% in the first nine months of fiscal 2022 with growth of 6.5% in the Asia–Pacific region and 5.9% in the Americas region, partially offset by declines of 2.4% in the EMEA region. Overall, our organic net sales increased due primarily to increased content per vehicle, despite declines in global automotive production.
● Commercial transportation— Our organic net sales increased 8.6% in the first nine months of fiscal 2022 primarily as a result of market growth in the Americas and EMEA regions as well as content and share gains.
● Sensors— Our organic net sales increased 2.2% in the first nine months of fiscal 2022 due to growth in industrial applications, 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
Nine Months Ended
June 24,
June 25,
June 24,
June 25,
2022
2021
Change
2022
2021
Change
($ in millions)
Operating income
$
383
$
433
$
(50)
$
1,187
$
1,139
$
48
Operating margin
16.7
%
19.1
%
17.5
%
16.8
%
Operating income in the Transportation Solutions segment decreased $50 million in the third quarter of fiscal 2022 as compared to the third quarter of fiscal 2021 and increased $48 million in the first nine months of fiscal 2022 as compared to the same period of fiscal 2021. Excluding the items below, operating income in the third quarter and first nine months of fiscal 2022 decreased primarily as a result of inflationary pressure on material and operating costs, partially offset by the positive impact of pricing actions.
For the
For the
Quarters Ended
Nine Months Ended
June 24,
June 25,
June 24,
June 25,
2022
2021
2022
2021
(in millions)
Acquisition-related charges:
Acquisition and integration costs
$
5
$
5
$
12
$
12
Charges associated with the amortization of acquisition-related fair value adjustments
—
—
—
3
5
5
12
15
Restructuring and other charges, net
9
2
12
130
Total
$
14
$
7
$
24
$
145
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Industrial Solutions
Net Sales. The following table presents the Industrial Solutions segment’s net sales and the percentage of total net sales by industry end market (1) :
For the
For the
Quarters Ended
Nine Months Ended
June 24,
June 25,
June 24,
June 25,
2022
2021
2022
2021
($ in millions)
Industrial equipment
$
479
42
%
$
377
37
%
$
1,413
43
%
$
1,011
36
%
Aerospace, defense, oil, and gas
271
24
260
26
774
24
777
27
Energy
207
18
187
19
579
18
544
19
Medical
177
16
178
18
502
15
495
18
Total
$
1,134
100
%
$
1,002
100
%
$
3,268
100
%
$
2,827
100
%
(1) Industry end market information is presented consistently with our internal management reporting and may be revised periodically as management deems necessary.
The following table provides an analysis of the change in the Industrial Solutions segment’s net sales by industry end market:
Change in Net Sales for the Quarter Ended June 24, 2022
Change in Net Sales for the Nine Months Ended June 24, 2022
versus Net Sales for the Quarter Ended June 25, 2021
versus Net Sales for the Nine Months Ended June 25, 2021
Net Sales
Organic Net Sales
Acquisition
Net Sales
Organic Net Sales
Acquisitions
Growth (Decline)
Growth
Translation
(Divestiture)
Growth (Decline)
Growth
Translation
(Divestitures)
($ in millions)
Industrial equipment
$
102
27.1
%
$
71
19.1
%
$
(30)
$
61
$
402
39.8
%
$
283
27.9
%
$
(55)
$
174
Aerospace, defense, oil, and gas
11
4.2
22
8.7
(10)
(1)
(3)
(0.4)
16
2.0
(18)
(1)
Energy
20
10.7
31
16.7
(11)
—
35
6.4
69
12.7
(23)
(11)
Medical
(1)
(0.6)
1
0.6
(2)
—
7
1.4
12
2.2
(5)
—
Total
$
132
13.2
%
$
125
12.7
%
$
(53)
$
60
$
441
15.6
%
$
380
13.5
%
$
(101)
$
162
In the Industrial Solutions segment, net sales increased $132 million, or 13.2%, in the third quarter of fiscal 2022 as compared to the third quarter of fiscal 2021 due to organic net sales growth of 12.7% and net sales contributions of 5.9% from an acquisition and a divestiture, partially offset by the negative impact of foreign currency translation of 5.4%. Our organic net sales by industry end market were as follows:
● Industrial equipment— Our organic net sales increased 19.1% in the third quarter of fiscal 2022 due to growth in all regions and continued strength in factory automation and controls applications.
● Aerospace, defense, oil, and gas— Our organic net sales increased 8.7% in the third quarter of fiscal 2022 primarily as a result of growth in the commercial aerospace and the defense markets.
● Energy— Our organic net sales increased 16.7% in the third quarter of fiscal 2022 with growth across all regions and continued strength in renewable energy applications.
● Medical— Our organic net sales increased 0.6% in the third quarter of fiscal 2022 due to market growth in surgical and imaging as well as interventional medical applications .
Net sales in the Industrial Solutions segment increased $441 million, or 15.6%, in the first nine months of fiscal 2022 as compared to the first nine months of fiscal 2021 due to organic net sales growth of 13.5% and net sales contributions
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of 5.7% from acquisitions and divestitures, partially offset by the negative impact of foreign currency translation of 3.6%. Our organic net sales by industry end market were as follows:
● Industrial equipment— Our organic net sales increased 27.9% in the first nine months of fiscal 2022 as a result of growth in all regions and continued strength in factory automation and controls applications.
● Aerospace, defense, oil, and gas— Our organic net sales increased 2.0% in the first nine months of fiscal 2022 due to growth in the commercial aerospace market, partially offset by declines in the oil and gas and the defense markets.
● Energy— Our organic net sales increased 12.7% in the first nine months of fiscal 2022 due to growth across all regions and continued strength in renewable energy applications.
● Medical— Our organic net sales increased 2.2% in the first nine months of fiscal 2022 as a result of market growth in surgical and imaging as well as interventional medical applications.
Operating Income. The following table presents the Industrial Solutions segment’s operating income and operating margin information:
For the
For the
Quarters Ended
Nine Months Ended
June 24,
June 25,
June 24,
June 25,
2022
2021
Change
2022
2021
Change
($ in millions)
Operating income
$
169
$
148
$
21
$
440
$
335
$
105
Operating margin
14.9
%
14.8
%
13.5
%
11.9
%
Operating income in the Industrial Solutions segment increased $21 million and $105 million in the third quarter and first nine 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 impact of pricing actions, partially offset by inflationary pressure on material and operating costs.
For the
For the
Quarters Ended
Nine Months Ended
June 24,
June 25,
June 24,
June 25,
2022
2021
2022
2021
(in millions)
Acquisition-related charges:
Acquisition and integration costs
$
5
$
4
$
15
$
11
Charges associated with the amortization of acquisition-related fair value adjustments
1
—
9
—
6
4
24
11
Restructuring and other charges, net
11
6
31
49
Restructuring-related charges recorded in cost of sales
4
—
16
—
Total
$
21
$
10
$
71
$
60
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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 24,
June 25,
June 24,
June 25,
2022
2021
2022
2021
($ in millions)
Data and devices
$
417
63
%
$
329
57
%
$
1,151
61
%
$
841
56
%
Appliances
246
37
249
43
731
39
661
44
Total
$
663
100
%
$
578
100
%
$
1,882
100
%
$
1,502
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 24, 2022
Change in Net Sales for the Nine Months Ended June 24, 2022
versus Net Sales for the Quarter Ended June 25, 2021
versus Net Sales for the Nine Months Ended June 25, 2021
Net Sales
Organic Net Sales
Net Sales
Organic Net Sales
Growth (Decline)
Growth
Translation
Acquisition
Growth
Growth
Translation
Acquisition
($ in millions)
Data and devices
$
88
26.7
%
$
86
26.2
%
$
(11)
$
13
$
310
36.9
%
$
295
35.0
%
$
(16)
$
31
Appliances
(3)
(1.2)
6
2.2
(9)
—
70
10.6
83
12.4
(13)
—
Total
$
85
14.7
%
$
92
15.9
%
$
(20)
$
13
$
380
25.3
%
$
378
25.1
%
$
(29)
$
31
Net sales in the Communications Solutions segment increased $85 million, or 14.7%, in the third quarter of fiscal 2022 as compared to the third quarter of fiscal 2021 due primarily to organic net sales growth of 15.9%. Our organic net sales by industry end market were as follows:
● Data and devices —Our organic net sales increased 26.2% in the third quarter of fiscal 2022 as a result of market strength in all regions and growth across all product lines.
● Appliances —Our organic net sales increased 2.2% in the third quarter of fiscal 2022 due to sales growth in the Americas and EMEA regions attributable primarily to share gains, partially offset by declines in the Asia–Pacific region.
In the first nine months of fiscal 2022, net sales in the Communications Solutions segment increased $380 million, or 25.3%, as compared to the first nine months of fiscal 2021 due primarily to organic net sales growth of 25.1%. Our organic net sales by industry end market were as follows:
● Data and devices —Our organic net sales increased 35.0% in the first nine months of fiscal 2022 due to market strength in all regions and growth across all product lines.
● Appliances —Our organic net sales increased 12.4% in the first nine months of fiscal 2022 due to sales growth in the Americas and EMEA regions resulting primarily from share gains, partially offset by declines in the Asia–Pacific region.
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Operating Income. The following table presents the Communications Solutions segment’s operating income and operating margin information:
For the
For the
Quarters Ended
Nine Months Ended
June 24,
June 25,
June 24,
June 25,
2022
2021
Change
2022
2021
Change
($ in millions)
Operating income
$
167
$
133
$
34
$
469
$
300
$
169
Operating margin
25.2
%
23.0
%
24.9
%
20.0
%
Operating income in the Communications Solutions segment increased $34 million and $169 million in the third quarter and first nine 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
Nine Months Ended
June 24,
June 25,
June 24,
June 25,
2022
2021
2022
2021
(in millions)
Acquisition and integration costs
$
1
$
—
$
2
$
—
Restructuring and other charges, net
6
3
16
16
Total
$
7
$
3
$
18
$
16
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.
Cash Flows from Operating Activities
In the first nine months of fiscal 2022, net cash provided by operating activities decreased $378 million to $1,524 million from $1,902 million in the first nine months of fiscal 2021. The decrease resulted primarily from the impact of increased working capital levels including changes in accrued and other current liabilities resulting from higher incentive compensation payments, partially offset by higher pre-tax income. The amount of income taxes paid, net of refunds, during the first nine months of fiscal 2022 and 2021 was $326 million and $291 million, respectively.
Cash Flows from Investing Activities
Capital expenditures were $556 million and $454 million in the first nine 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 nine months of fiscal 2022, we acquired two businesses for a combined cash purchase price of $141 million, net of cash acquired. We acquired two businesses for a combined cash purchase price of $125 million, net of cash
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acquired, during the first nine 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 June 24, 2022 and September 24, 2021 was $4,202 million and $4,092 million, respectively. See Note 7 to the Condensed Consolidated Financial Statements for additional information regarding debt.
During the first nine months 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 nine months of fiscal 2022, TEGSA completed an early redemption of $500 million aggregate principal amount of 3.50% senior notes due in February 2022.
As of June 24, 2022, TEGSA had $237 million of commercial paper outstanding at a weighted-average interest rate of 1.92%. TEGSA had no commercial paper outstanding at September 24, 2021.
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 June 24, 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 June 24, 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 $506 million and $483 million in the first nine 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.
During the third quarter of fiscal 2022, our board of directors authorized an increase of $1.5 billion in our share repurchase program. We repurchased approximately eight million of our common shares for $1,072 million and approximately five million of our common shares for $591 million under the share repurchase program during the first nine months of fiscal 2022 and 2021, respectively. At June 24, 2022, we had $2.0 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
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summarized financial information, excluding investments in and equity in earnings of our non-guarantor subsidiaries, for TE Connectivity Ltd. and TEGSA on a combined basis.
June 24,
September 24,
2022
2021
(in millions)
Balance Sheet Data:
Total current assets
$
736
$
452
Total noncurrent assets (1)
4,265
1,829
Total current liabilities
1,567
1,144
Total noncurrent liabilities (2)
17,824
12,443
(1) Includes $4,167 million and $1,810 million as of June 24, 2022 and September 24, 2021, respectively, of intercompany loans receivable from non-guarantor subsidiaries.
(2) Includes $14,445 million and $8,832 million as of June 24, 2022 and September 24, 2021, respectively, of intercompany loans payable to non-guarantor subsidiaries.
For the
For the
Nine Months Ended
Fiscal Year Ended
June 24,
September 24,
2022
2021
(in millions)
Statement of Operations Data:
Loss from continuing operations
$
(13)
$
(486)
Net loss
(13)
(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 June 24, 2022, we had outstanding letters of credit, letters of guarantee, and surety bonds of $134 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 $116 million as of June 24, 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.
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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.
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 nine 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.
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
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“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, including recession, inflation, and higher interest rates;
● 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
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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.