TE CONNECTIVITY LTD. 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
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.
Overview
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 2020 included the following:
Our net sales decreased 24.8% in the third quarter of fiscal 2020 as compared
to the third quarter of fiscal 2019 due primarily to sales declines in the
Transportation Solutions and Industrial Solutions segments. In the first nine
months of fiscal 2020, our net sales decreased 12.2% as compared to the same
? period of fiscal 2019 with sales declines across all segments. On an organic
basis, our net sales decreased 25.0% and 11.7% during the third quarter and
first nine months of fiscal 2020, respectively, as compared to the same periods
of fiscal 2019. Our net sales declines included significant unfavorable impacts
from the COVID-19 pandemic.
? Our net sales by segment were as follows:
Transportation Solutions-Our net sales decreased 36.2% and 15.9% in the third
? quarter and first nine months of fiscal 2020, respectively, due to sales
declines in all end markets.
Industrial Solutions-Our net sales decreased 13.9% and 6.3% in the third
? quarter and first nine months of fiscal 2020, respectively, primarily as a
result of sales declines in the aerospace, defense, oil, and gas and the
industrial equipment end markets.
Communications Solutions-Our net sales increased 2.9% and decreased 8.3% in the
third quarter and first nine months of fiscal 2020, respectively. The sales
? increase in the third quarter of fiscal 2020 resulted primarily from sales
increases in the data and devices end market. The sales decrease in the first
nine months of fiscal 2020 was due to sales declines in both the appliances and
the data and devices end markets.
? Net cash provided by continuing operating activities was
first nine months of fiscal 2020.
We acquired approximately 72% of the outstanding shares of First Sensor AG
? ("First Sensor"), a provider of sensing solutions based in
first nine months of fiscal 2020.
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During the first nine months of fiscal 2020, we recorded a goodwill impairment
? charge of
Transportation Solutions segment.
COVID-19 Pandemic and Economic Conditions
A novel strain of coronavirus ("COVID-19") was first identified in China in
December 2019 and subsequently declared a pandemic by the World Health
Organization . To date, COVID-19 has surfaced in nearly all regions around the
world and resulted in travel restrictions and business slowdowns or shutdowns in
affected areas. The COVID-19 pandemic negatively affected our sales and
operating results during the second and third quarters of fiscal 2020, and we
expect that COVID-19 will have a material impact on our financial condition and
results of operations in the near term and may have a material impact on our
financial condition, liquidity, and results of operations in future periods.
COVID-19 is currently impacting, and we expect that COVID-19 will continue to
impact, our business operations globally, causing disruption in our suppliers'
and customers' supply chains, some of our business locations to reduce or
suspend operations, and a reduction in demand for certain products from direct
customers or end markets. Accordingly, while a number of our businesses are
operating as essential businesses, some have had and continue to have adjusted,
reduced, or suspended operating activities at certain locations. In addition,
COVID-19 may have far-reaching impacts on many additional aspects of our
operations, directly and indirectly, including with respect to its impacts on
customer behaviors, business and manufacturing operations, inventory, our
employees, and the market generally, and the scope and nature of these impacts
continue to evolve each day. We expect to continue to assess the evolving impact
of the COVID-19 pandemic and intend to adjust our operations accordingly. For
example, throughout our operations, we have enacted additional health and safety
measures for the protection of our employees, including providing personal
protective equipment, enhanced cleaning and sanitizing of our facilities, and
remote working arrangements.
We expect that COVID-19 will negatively impact several of the markets we serve,
in particular the automotive and commercial aerospace markets. We are expecting
reduced sales volumes in these markets in the near term relative to prior year
and may experience reduced sales volumes in these markets in future periods.
However, we expect an overall increase in our net sales in the fourth quarter of
fiscal 2020 as compared to the third quarter of fiscal 2020. See "Outlook" below
for additional information.
In response to the current economic environment and our sales declines relative
to prior year, we have taken and continue to focus on actions to manage costs.
These include restructuring and other cost reduction initiatives, such as
reducing discretionary spending, cutting capital expenditures, reducing travel,
and furloughing certain employees. We will continue to actively monitor the
situation and may take further actions that alter our business operations as may
be required by federal, state, or local authorities or that we determine are in
the best interests of our employees, customers, suppliers, shareholders, and the
communities in which we operate.
On March 27, 2020 , the U.S. government enacted the Coronavirus Aid, Relief, and
Economic Security Act ("CARES Act"). The CARES Act provides certain relief to
companies, including provisions relating to payroll tax credits, deferral of
employer side social security taxes, net operating loss carryback periods,
acceleration of alternative minimum tax credit refunds, modifications to the net
interest deduction rules, and delayed minimum contributions with respect to
defined benefit plans. We do not expect the CARES Act to have a material effect
on our results of operations, financial position, or liquidity.
For a further discussion of the risks and uncertainties relating to the COVID-19
pandemic for our results of operations and business condition, see "Part II.
Item 1A. Risk Factors" below.
Outlook
We expect our net sales to increase approximately 10% in the fourth quarter of fiscal 2020 as compared to$2.5 billion in the third quarter of fiscal 2020. This increase is driven primarily by expected growth of approximately 20% in the Transportation Solutions segment. We expect a slight increase in our net sales in the Industrial Solutions segment in the 26
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fourth quarter of fiscal 2020; however, we expect this growth will be offset by modest declines in the Communications Solutions segment.
Within the Transportation Solutions segment, we expect our net sales growth in the automotive end market in the fourth quarter of fiscal 2020 to be driven by an approximate 40% increase in global automotive production as compared to the third quarter of fiscal 2020.
In the fourth quarter of fiscal 2020, we expect our net sales to be negatively impacted by residual supply chain disruptions resulting from the COVID-19 pandemic.
The above outlook is based on foreign currency exchange rates that are consistent with current levels.
We are monitoring the current macroeconomic environment and its potential effects on our customers and the end markets we serve, including developments related to the COVID-19 pandemic. We have taken actions to manage costs and will continue to closely manage our costs in line with economic conditions. Additionally, we are managing our capital resources and monitoring capital availability to ensure that we have sufficient resources to fund future capital needs. See further discussion in "Liquidity and Capital Resources."
Acquisitions
We acquired approximately 72% of the outstanding shares of First Sensor for €181 million in cash (equivalent to$201 million ), net of cash acquired, during the first nine months of fiscal 2020. This business has been reported as part of our Transportation Solutions segment from the date of acquisition.
During the first nine months of fiscal 2020, we acquired three additional
businesses for a combined cash purchase price of
See Note 4 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions.
Results of Operations
The following table presents our net sales and the percentage of total net sales
by segment:
For the For the
Quarters Ended Nine Months Ended
June 26, June 28, June 26, June 28,
2020 2019 2020 2019
($ in millions)
Transportation Solutions $ 1,255 49 % $ 1,968 58 % $ 4,980 56 % $ 5,925 58 %
Industrial Solutions 865 34 1,005 30 2,754 31 2,940 29
Communications Solutions 428 17 416 12 1,177 13 1,283 13
Total $ 2,548 100 % $ 3,389 100 % $ 8,911 100 % $ 10,148 100 %
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The following table provides an analysis of the change in our net sales by
segment:
Change in Net Sales for the Quarter Ended June 26, 2020 Change in Net Sales
for the Nine Months Ended
versus Net Sales for the Quarter Ended June 28, 2019 versus Net Sales
for the Nine Months Ended
Net Sales Organic Net Sales Net Sales
Organic
Growth (Decline) Growth (Decline) Translation Acquisitions Growth (Decline) Growth (Decline) Translation Acquisitions
($ in millions)
Transportation
Solutions $ (713) (36.2) % $ (738) (37.3) % $ (19) $ 44 $ (945) (15.9) % $ (949) (16.0) % $ (91) $ 95
Industrial
Solutions (140) (13.9) (128) (12.7) (12) - (186) (6.3) (147) (5.0) (39) -
Communications
Solutions 12 2.9 16 3.8 (4) - (106) (8.3) (98) (7.6) (8) -
Total $ (841) (24.8) % $ (850) (25.0) % $ (35) $ 44 $ (1,237) (12.2) % $ (1,194) (11.7) % $ (138) $ 95
Net sales decreased$841 million , or 24.8%, in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019. The decrease in net sales resulted from organic net sales declines of 25.0% and the negative impact of foreign currency translation of 1.1% due to the weakening of certain foreign currencies, partially offset by sales contributions from acquisitions of 1.3%. In the third quarter of fiscal 2020, our net sales declines included significant unfavorable impacts from the COVID-19 pandemic. Price erosion adversely affected organic net sales by$42 million in the third quarter of fiscal 2020. In the first nine months of fiscal 2020, net sales decreased$1,237 million , or 12.2%, as compared to the first nine months of fiscal 2019 due to organic net sales declines of 11.7% and the negative impact of foreign currency translation of 1.4% due to the weakening of certain foreign currencies, partially offset by sales contributions from acquisitions of 0.9%. The significant unfavorable impacts of the COVID-19 pandemic were included in our net sales declines in the first nine months of fiscal 2020. Price erosion adversely affected organic net sales by$136 million in the first nine months of fiscal 2020.
See further discussion of net sales below under "Segment Results."
Net Sales byGeographic Region . Our business operates in three geographic regions-Europe /Middle East /Africa ("EMEA"),Asia-Pacific , and theAmericas -and our results of operations are influenced by changes in foreign currency exchange rates. Increases or decreases in the value of theU.S. dollar, compared to other currencies, will directly affect our reported results as we translate those currencies intoU.S. dollars at the end of each fiscal period.
Approximately 60% of our net sales were invoiced in currencies other than the
The following table presents our net sales and the percentage of total net sales
by geographic region(1):
For the For the
Quarters Ended Nine Months Ended
June 26, June 28, June 26, June 28,
2020 2019 2020 2019
($ in millions)
EMEA $ 777 30 % $ 1,217 36 % $ 3,062 34 % $ 3,664 36 %Asia-Pacific 1,032 41 1,101 32 3,136 35
3,344 33 Americas 739 29 1,071 32 2,713 31 3,140 31 Total$ 2,548 100 %$ 3,389 100 %$ 8,911 100 %$ 10,148 100 %
(1) Net sales to external customers are attributed to individual countries based
on the legal entity that records the sale.
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The following table provides an analysis of the change in our net sales by
geographic region:
Change in Net Sales for the Quarter Ended June 26, 2020 Change in Net Sales for the
Nine Months Ended
versus Net Sales for the Quarter Ended June 28, 2019 versus Net Sales for the Nine
Months Ended
Net Sales Organic Net Sales Net Sales Organic Net Sales
Growth (Decline) Growth (Decline) Translation Acquisitions Growth (Decline) Growth(Decline) Translation Acquisitions
($ in millions)
EMEA $ (440) (36.2) % $ (462) (37.7) % $ (12) $ 34 $ (602) (16.4) % $ (584) (15.9) % $ (75) $ 57
Asia-Pacific (69) (6.3) (53) (4.7) (16) - (208) (6.2) (167) (5.0) (41) -
Americas (332) (31.0) (335) (31.3) (7) 10 (427) (13.6) (443) (14.1) (22) 38
Total $ (841) (24.8) % $ (850) (25.0) % $ (35) $ 44 $ (1,237) (12.2) % $ (1,194) (11.7) % $ (138) $ 95
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 26, June 28, June 26, June 28,
2020 2019 Change 2020 2019 Change
($ in millions)Cost of sales$ 1,841 $ 2,279 $ (438) $ 6,145 $ 6,806 $ (661) As a percentage of net sales 72.3 % 67.2 % 69.0 % 67.1 % Gross margin$ 707 $ 1,110 $ (403) $ 2,766 $ 3,342 $ (576) As a percentage of net sales 27.7 % 32.8 % 31.0 % 32.9 % Gross margin decreased$403 million and$576 million in the third quarter and first nine months of fiscal 2020, respectively, as compared to the same periods of fiscal 2019. The decreases were primarily a result of lower volume, price erosion, and lower manufacturing productivity, partially offset by lower material costs. Gross margin as a percentage of net sales decreased to 27.7% in the third quarter of fiscal 2020 from 32.8% in the third quarter of fiscal 2019 and decreased to 31.0% in the first nine months of fiscal 2020 from 32.9% in the same period of fiscal 2019. We use a wide variety of raw materials in the manufacture of our products. Cost of sales and gross margin are subject to variability in raw material prices which continue to fluctuate for many of the raw materials we use, including copper, gold, and silver. We expect to purchase approximately 160 million pounds of copper, 110,000 troy ounces of gold, and 2.3 million troy ounces of silver in fiscal 2020. The following table presents the average prices incurred related to copper, gold, and silver: For the For the Quarters Ended Nine Months Ended June 26, June 28, June 26, June 28, Measure 2020 2019 2020 2019 Copper Lb.$ 2.78 $ 3.02 $ 2.80 $ 2.96 Gold Troy oz. 1,411 1,305 1,380 1,304 Silver Troy oz. 15.97 16.14 16.13 16.45 29 Table of Contents Operating Expenses
The following table presents operating expense information:
For the For the
Quarters Ended Nine Months Ended
June 26, June 28, June 26, June 28,
2020 2019 Change 2020 2019 Change
($ in millions)
Selling, general, and administrative
expenses $ 321 $ 356 $ (35) $ 1,040 $ 1,118 $ (78)
As a percentage of net sales 12.6 % 10.5 % 11.7 % 11.0 %
Restructuring and other charges, net
31$ 144 $ 184 $ (40) Impairment of goodwill - - - 900 - 900 Selling, General, and Administrative Expenses. Selling, general, and administrative expenses decreased$35 million in the third quarter of fiscal 2020 from the third quarter of fiscal 2019 due primarily to reduced selling expenses. In the first nine months of fiscal 2020, selling, general, and administrative expenses decreased$78 million from the same period of fiscal 2019 due primarily to reduced selling expenses, cost control measures and savings attributable to restructuring actions, and receipt of a lease termination incentive. Selling, general, and administrative expenses as a percentage of net sales increased to 12.6% in the third quarter of fiscal 2020 from 10.5% in the third quarter of fiscal 2019 and increased to 11.7% in the first nine months of fiscal 2020 from 11.0% in the same period of fiscal 2019. 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 2020, we initiated a restructuring program associated with footprint consolidation and structural improvements, due in part to COVID-19, across all segments. We incurred net restructuring charges of$144 million during the first nine months of fiscal 2020, of which$138 million related to the fiscal 2020 restructuring program. Annualized cost savings related to the fiscal 2020 actions commenced during the first nine months of fiscal 2020 are expected to be approximately$140 million and are expected to be realized by the end of fiscal 2022. Cost savings will be reflected primarily in cost of sales and selling, general, and administrative expenses. For fiscal 2020, we expect total restructuring charges to be approximately$250 million and total spending, which will be funded with cash from operations, to be approximately$265 million .
See Note 2 to the Condensed Consolidated Financial Statements for additional information regarding net restructuring and other charges.
Impairment ofGoodwill . As a result of current and projected declines in sales and profitability, due in part to the impact of COVID-19 and projected reductions in global automotive production, of the Sensors reporting unit of the Transportation Solutions segment during the second quarter of fiscal 2020, we determined that an indicator of impairment had occurred and goodwill impairment testing of this reporting unit was required. As discussed in Note 1 to the Condensed Consolidated Financial Statements, during the second quarter of fiscal 2020, we adopted Accounting Standards Update ("ASU") No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating step 2 of the goodwill impairment test. Under the new standard, goodwill impairment is measured as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying value of goodwill. We determined the fair value of the Sensors reporting unit to be$1.0 billion as ofMarch 27, 2020 . This valuation was based on a discounted cash flows analysis incorporating our estimate of future operating performance, which we consider to be a level 3 unobservable input in the fair value hierarchy, and was corroborated using a market approach valuation. The goodwill impairment test indicated that the carrying value of the reporting unit exceeded its fair value by$900 million . As a result, we recorded a partial impairment charge of$900 million in the second quarter of fiscal 2020. The Sensors reporting unit had a remaining goodwill allocation of$626 million as ofMarch 27, 2020 . There were no triggering events identified in the third quarter of fiscal 2020 and therefore no goodwill 30
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impairment testing was required. See Note 6 to the Condensed Consolidated Financial Statements for additional information regarding the impairment of goodwill.
Operating Income
The following table presents operating income and operating margin information:
For the For the
Quarters Ended Nine Months Ended
June 26, June 28, June 26, June 28,
2020 2019 Change 2020 2019 Change
($ in millions)
Operating income $ 134 $ 520 $ (386) $ 190 $ 1,534 $ (1,344)
Operating margin 5.3 % 15.3 % 2.1 % 15.1 %
Operating income included the following:
For the For the
Quarters Ended Nine Months Ended
June 26, June 28, June 26, June 28,
2020 2019 2020 2019
(in millions)
Acquisition-related charges:
Acquisition and integration costs $ 8 $ 9 $ 27 $ 21
Charges associated with the amortization of
acquisition-related fair value adjustments - - - 3
8 9 27 24
Restructuring and other charges, net 98 67 144 184 Impairment of goodwill - - 900 - Total$ 106 $ 76 $ 1,071 $ 208
See discussion of operating income below under "Segment Results."
Non-Operating Items
The following table presents select non-operating information:
For the For the
Quarters Ended Nine Months Ended
June 26, June 28, June 26, June 28,
2020 2019 Change 2020 2019 Change
($ in millions)
Interest expense $ 13 $ 13 $ - $ 36 $ 55 $ (19)
Income tax expense (benefit) 185 (245) 430 674 (76) 750
Effective tax rate 145.7 % (47.8) % 360.4 % (5.1) %
Income (loss) from discontinued
operations, net of income taxes $ 17 $ (1) $
18
Interest Expense. Interest expense decreased$19 million in the first nine months of fiscal 2020 as compared to the same period of fiscal 2019 due primarily to the cross-currency swap program that hedges our net investment in certain foreign operations. The aggregate notional value of the contracts under this program was$1,776 million atJune 26, 2020 . Under the terms of these contracts, we receive interest inU.S. dollars at a weighted-average rate of 2.56% per annum and pay no interest. See Note 11 to the Condensed Consolidated Financial Statements for additional information regarding our cross-currency swap program. 31 Table of Contents Income Taxes. See Note 13 to the Condensed Consolidated Financial Statements for discussion of items impacting income tax expense and the effective tax rate for the third quarters and first nine months of fiscal 2020 and 2019, including an increase to the valuation allowance for certain non-U.S. deferred tax assets, the Switzerland Federal Act on Tax Reform and AHV Financing, and the termination of the Tax Sharing Agreement. Income (Loss) from Discontinued Operations, Net of Income Taxes. During the first nine months of fiscal 2019, we sold ourSubsea Communications ("SubCom") business for net cash proceeds of$297 million and incurred a pre-tax loss on sale of$86 million . The SubCom business met the held for sale and discontinued operations criteria and was reported as such in all periods presented on the Condensed Consolidated Financial Statements. Prior to reclassification to discontinued operations, the SubCom business was included in the Communications Solutions segment. The net sales of the business were$41 million in the first nine months of fiscal 2019 which represented one month of activity. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding discontinued operations. Segment Results
Transportation Solutions
For the For the
Quarters Ended Nine Months Ended
June 26, June 28, June 26, June 28,
2020 2019 2020 2019
($ in millions)
Automotive $ 797 63 % $ 1,418 72 % $ 3,567 71 % $ 4,312 73 %
Commercial transportation 233 19 317 16 785 16 938 16
Sensors 225 18 233 12 628 13 675 11
Total $ 1,255 100 % $ 1,968 100 % $ 4,980 100 % $ 5,925 100 %
Industry end market information is presented consistently with our internal (1) 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 26, 2020 Change in Net Sales
for the Nine Months Ended
versus Net Sales for the Quarter Ended June 28, 2019 versus Net Sales
for the Nine Months Ended
Net Sales Organic Net Sales Net Sales
Organic
Growth (Decline) Growth (Decline) Translation Acquisitions Growth (Decline)
Growth (Decline) Translation Acquisitions
($ in millions)
Automotive $ (621) (43.8) % $ (609) (42.8) % $ (12) $ - $ (745) (17.3) % $ (681) (15.8) % $ (64) $ -
Commercial
transportation (84) (26.5) (78) (24.1) (6) - (153) (16.3) (159) (16.9) (21) 27
Sensors (8) (3.4) (51) (22.1) (1) 44 (47) (7.0) (109) (16.2) (6) 68
Total $ (713) (36.2) % $ (738) (37.3) % $ (19) $ 44 $ (945) (15.9) % $ (949) (16.0) % $ (91) $ 95
Net sales in the Transportation Solutions segment decreased $713 million , or
36.2%, in the third quarter of fiscal 2020 from the third quarter of fiscal 2019
due to organic net sales declines of 37.3% and the negative impact of foreign
currency translation of 1.1%, partially offset by sales contributions from
acquisitions of 2.2%. In the third quarter of fiscal 2020, our net sales
declines included significant unfavorable impacts from the COVID-19 pandemic.
Our organic net sales by industry end market were as follows:
Automotive-Our organic net sales decreased 42.8% in the third quarter of fiscal
? 2020 with declines of 64.2% in the
and 18.3% in the
due to declines in global automotive production.
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Commercial transportation-Our organic net sales decreased 24.1% in the third
? quarter of fiscal 2020 as a result of market weakness in the
regions, partially offset by growth in the
? Sensors-Our organic net sales decreased 22.1% in the third quarter of fiscal
2020 due to weakness across all markets.
In the first nine months of fiscal 2020, net sales in the Transportation Solutions segment decreased$945 million , or 15.9%, as compared to the first nine months of fiscal 2019 as a result of organic net sales declines of 16.0% and the negative impact of foreign currency translation of 1.5%, partially offset by sales from acquisitions of 1.6%. Net sales declines in the first nine months of fiscal 2020 included the significant unfavorable impacts of the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
Automotive-Our organic net sales decreased 15.8% in the first nine months of
fiscal 2020 with declines of 21.7% in the
? region, and 8.3% in the
decreased as a result of declines in global automotive production; however, our
sales decreased at a lesser rate than global automotive production due to
content gains and customer inventory builds.
Commercial transportation-Our organic net sales decreased 16.9% in the first
? nine months of fiscal 2020 due to market weakness in the
regions, partially offset by growth in the
? Sensors-Our organic net sales decreased 16.2% in the first nine months of
fiscal 2020 as a result of weakness across all markets.
Operating Income (Loss). The following table presents the Transportation
Solutions segment's operating income (loss) and operating margin information:
For the For the
Quarters Ended Nine Months Ended
June 26, June 28, June 26, June 28,
2020 2019 Change 2020 2019 Change
($ in millions)
Operating income (loss) $ (1) $ 308 $ (309) $ (291) $ 956 $ (1,247)
Operating margin (0.1) % 15.7 % (5.8) % 16.1 %
Operating income (loss) in the Transportation Solutions segment decreased
$309 million and $1,247 million in the third quarter and first nine months of
fiscal 2020, respectively, as compared to the same periods of fiscal 2019. The
Transportation Solutions segment's operating income (loss) included the
following:
For the For the
Quarters Ended Nine Months Ended
June 26, June 28, June 26, June 28,
2020 2019 2020 2019
(in millions)
Acquisition and integration costs $ 6 $ 6 $ 21 $ 13
Restructuring and other charges, net 55 53 77 98 Impairment of goodwill - - 900 - Total$ 61 $ 59 $ 998 $ 111
Excluding these items, operating income decreased in the third quarter and first nine months of fiscal 2020 as compared to the same periods of fiscal 2019 primarily as a result of lower volume and, to a lesser degree, price erosion and lower manufacturing productivity, partially offset by lower material costs.
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Industrial Solutions
For the For the
Quarters Ended Nine Months Ended
June 26, June 28, June 26, June 28,
2020 2019 2020 2019
($ in millions)
Aerospace, defense, oil, and gas
892 32 %$ 958 33 % Industrial equipment 265 31 309 31 808 30 950 32 Medical 161 19 176 17 526 19 520 18 Energy 174 19 178 18 528 19 512 17 Total$ 865 100 %$ 1,005 100 %$ 2,754 100 %$ 2,940 100 %
Industry end market information is presented consistently with our internal (1) 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 26, 2020 Change in Net Sales for
the Nine Months Ended
versus Net Sales for the Quarter Ended June 28, 2019 versus Net Sales for
the Nine Months Ended
Net Sales Organic Net Sales Net Sales Organic Net Sales
Growth (Decline) Growth (Decline) Translation Growth (Decline) Growth (Decline) Translation
($ in millions)
Aerospace, defense, oil, and gas
(57) (6.0) % $ (9)
Industrial equipment (44) (14.2) (40) (12.7) (4) (142) (14.9) (127) (13.4) (15)
Medical (15) (8.5) (15) (8.5) - 6 1.2 7 1.3 (1)
Energy (4) (2.2) 1 0.5 (5) 16 3.1 30 5.8 (14)
Total $ (140) (13.9) % $
(128) (12.7) %
(147) (5.0) %
In the Industrial Solutions segment, net sales decreased$140 million , or 13.9%, in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019 due to organic net sales declines of 12.7% and the negative impact of foreign currency translation of 1.2%. Net sales declines in the third quarter of fiscal 2020 included significant unfavorable impacts from the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
Aerospace, defense, oil, and gas-Our organic net sales decreased 21.9% in the
? third quarter of fiscal 2020 due primarily to weakness in the commercial
aerospace and the defense markets.
Industrial equipment-Our organic net sales decreased 12.7% in the third quarter
? of fiscal 2020 as a result of market weakness in the
partially offset by growth in the
? Medical-Our organic net sales decreased 8.5% in the third quarter of fiscal
2020 due primarily to delays in elective procedures.
Energy-Our organic net sales increased 0.5% in the third quarter of fiscal 2020
? primarily as a result of growth in the EMEA region, partially offset by
declines in the
In the first nine months of fiscal 2020, net sales in the Industrial Solutions segment decreased$186 million , or 6.3%, as compared to the same period of fiscal 2019 as a result of organic net sales declines of 5.0% and the negative impact of foreign currency translation of 1.3%. The significant unfavorable impacts of the COVID-19 pandemic were included in our net sales declines in the first nine months of fiscal 2020. Our organic net sales by industry end market were as follows:
Aerospace, defense, oil, and gas-Our organic net sales decreased 6.0% in the
? first nine months of fiscal 2020 due primarily to weakness in the commercial
aerospace and the defense markets.
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Industrial equipment-Our organic net sales decreased 13.4% in the first nine
? months of fiscal 2020 due to market weakness in industrial applications across
all regions.
Medical-Our organic net sales increased 1.3% in the first nine months of fiscal
? 2020 primarily as a result of strength in interventional medical applications,
partially offset by delays in elective procedures.
? Energy-Our organic net sales increased 5.8% in the first nine months of fiscal
2020 due to growth across all regions.
Operating Income. The following table presents the Industrial Solutions segment's operating income and operating margin information:
For the For the
Quarters Ended Nine Months Ended
June 26, June 28, June 26, June 28,
2020 2019 Change 2020 2019 Change
($ in millions)
Operating income $ 70 $ 156 $ (86) $ 327 $ 393 $ (66)
Operating margin 8.1 % 15.5 % 11.9 % 13.4 %
Operating income in the Industrial Solutions segment decreased$86 million and$66 million in the third quarter and first nine months of fiscal 2020, respectively, as compared to the same periods of fiscal 2019. The Industrial Solutions segment's operating income included the following: For the For the Quarters Ended Nine Months Ended June 26, June 28, June 26, June 28, 2020 2019 2020 2019 (in millions) Acquisition-related charges: Acquisition and integration costs$ 2 $ 3$ 6 $ 8 Charges associated with the amortization of acquisition-related fair value adjustments - - - 3 2 3 6 11 Restructuring and other charges, net 40
8 56 60 Total$ 42 $ 11 $ 62 $ 71
Excluding these items, operating income decreased in the third quarter and first nine months of fiscal 2020 as compared to the same periods of fiscal 2019 primarily as a result of lower volume and price erosion, partially offset by lower material costs. Communications Solutions
For the For the
Quarters Ended Nine Months Ended
June 26, June 28, June 26, June 28,
2020 2019 2020 2019
($ in millions)
Data and devices $ 276 64 % $ 245 59 % $ 713 61 % $ 753 59 %
Appliances 152 36 171 41 464 39 530 41
Total $ 428 100 % $ 416 100 % $ 1,177 100 % $ 1,283 100 %
Industry end market information is presented consistently with our internal (1) 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 Communications Solutions segment's net sales by industry end market:
Change in Net Sales for the Quarter Ended June 26, 2020 Change in Net Sales for
the Nine Months Ended
versus Net Sales for the Quarter Ended June 28, 2019 versus Net Sales for
the Nine Months Ended
Net Sales Organic Net Sales Net Sales Organic Net Sales
Growth (Decline) Growth (Decline) Translation Growth (Decline) Growth (Decline) Translation
($ in millions)
Data and devices $ 31 12.7 % $ 31 12.7 % $ - $ (40) (5.3) % $ (40) (5.3) % $ -
Appliances (19) (11.1) (15) (8.9) (4) (66) (12.5) (58) (10.8) (8)
Total $ 12 2.9 % $ 16 3.8 % $ (4) $ (106) (8.3) % $ (98) (7.6) % $ (8)
Net sales in the Communications Solutions segment increased$12 million , or 2.9%, in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019 due primarily to organic net sales growth of 3.8%. In the third quarter of fiscal 2020, the unfavorable impacts of the COVID-19 pandemic partially offset our net sales growth. Our organic net sales by industry end market were as follows:
Data and devices-Our organic net sales increased 12.7% in the third quarter of
? fiscal 2020 primarily a result of increased sales to cloud infrastructure
customers.
? Appliances-Our organic net sales decreased 8.9% in the third quarter of fiscal
2020 due to market weakness across all regions.
In the first nine months of fiscal 2020, net sales in the Communications Solutions segment decreased$106 million , or 8.3%, as compared to the first nine months of fiscal 2019 primarily as a result of organic net sales declines of 7.6%. Net sales declines in the first nine months of fiscal 2020 included the unfavorable impacts of the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
Data and devices-Our organic net sales decreased 5.3% in the first nine months
? of fiscal 2020 due primarily to market weakness in the
regions, partially offset by increased sales to cloud infrastructure customers.
? Appliances-Our organic net sales decreased 10.8% in the first nine months of
fiscal 2020 primarily as a result of market weakness in all regions.
Operating Income. The following table presents the Communications Solutions segment's operating income and operating margin information:
For the For the
Quarters Ended Nine Months Ended
June 26, June 28, June 26, June 28,
2020 2019 Change 2020 2019 Change
($ in millions)
Operating income $ 65 $ 56 $ 9 $ 154 $ 185 $ (31)
Operating margin 15.2 % 13.5 % 13.1 % 14.4 %
Operating income in the Communications Solutions segment increased $9 million
and decreased $31 million in the third quarter and first nine months of fiscal
2020, respectively, as compared to the same periods of fiscal 2019. The
Communications Solutions segment's operating income included the following:
For the For the
Quarters Ended Nine Months Ended
June 26, June 28, June 26, June 28,
2020 2019 2020 2019
(in millions)
Restructuring and other charges, net $ 3 $ 6$ 11 $ 26 36 Table of Contents Excluding these items, operating income increased slightly in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019. Excluding these items, operating income decreased in the first nine months of fiscal 2020 primarily as a result of price erosion and lower volume, partially offset by lower material costs. Liquidity and Capital Resources Our ability to fund our future capital needs will be affected by our ability to continue to generate cash from operations and may be affected by our ability to access the capital markets, money markets, or other sources of funding, as well as the capacity and terms of our financing arrangements. We believe that cash generated from operations and, to the extent necessary, these other sources of potential funding will be sufficient to meet our anticipated capital needs for the foreseeable future, including the payments of$250 million of 4.875% senior notes due inJanuary 2021 and €350 million of fixed-to-floating rate senior notes due inJune 2021 , and compensation payments to First Sensor minority shareholders. 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, including future developments related to the COVID-19 pandemic. There is uncertainty surrounding the duration and scope of the COVID-19 pandemic and it may have a material impact on our liquidity and financial conditions. We believe that we have sufficient financial resources and liquidity which, along with managing expenses and capital structure flexibility, will enable us to meet our ongoing working capital and other cash flow needs during the COVID-19 pandemic and resulting period of economic uncertainty which will include reduced sales and net income levels for us relative to fiscal 2019. For further information regarding the impact of COVID-19 on our liquidity and capital resources, see "Part II. Item 1A. Risk Factors" in this report.
Cash Flows from Operating Activities
In the first nine months of fiscal 2020, net cash provided by continuing operating activities decreased$303 million to$1,272 million from$1,575 million in the first nine months of fiscal 2019. The decrease resulted primarily from lower pre-tax income and increased inventory levels, partially offset by the favorable effects of changes in accounts receivable levels and a reduction in income tax payments. The amount of income taxes paid, net of refunds, during the first nine months of fiscal 2020 and 2019 was$195 million and$277 million , respectively.
Cash Flows from Investing Activities
Capital expenditures were$439 million and$570 million in the first nine months of fiscal 2020 and 2019, respectively. We expect fiscal 2020 capital spending to be approximately$575 million . We believe our capital funding levels are adequate to support new programs, and we continue to invest in our manufacturing infrastructure to further enhance productivity and manufacturing capabilities. During the first nine months of fiscal 2020, we acquired four businesses, including First Sensor, for a combined cash purchase price of$325 million , net of cash acquired. During the first nine months of fiscal 2019, we acquired three businesses for a combined cash purchase price of$296 million , net of cash acquired. See Note 4 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions.
During the first nine months of fiscal 2019, we received net cash proceeds of
Cash Flows from Financing Activities and Capitalization
Total debt at
During the third quarter of fiscal 2020,Tyco Electronics Group S.A. ("TEGSA"), our wholly-owned subsidiary, repaid, at maturity,$350 million of floating rate senior notes due inJune 2020 . 37
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During the first nine months of fiscal 2020, TEGSA issued €550 million aggregate principal amount of 0.0% senior notes due inFebruary 2025 . The notes are TEGSA's unsecured senior obligations and rank equally in right of payment with all existing and any future senior indebtedness of TEGSA and senior to any subordinated indebtedness that TEGSA may incur. TEGSA has a five-year unsecured senior revolving credit facility ("Credit Facility") with a maturity date ofNovember 2023 and total commitments of$1.5 billion . TEGSA had no borrowings under the Credit Facility atJune 26, 2020 orSeptember 27, 2019 . 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 ofJune 26, 2020 , we were in compliance with all of our debt covenants and believe that we will continue to be in compliance with our existing covenants for the foreseeable future. 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
InMarch 2020 , our shareholders approved a dividend payment to shareholders of$1.92 per share, payable in four equal quarterly installments of$0.48 per share beginning in the third quarter of fiscal 2020 and ending in the second quarter of fiscal 2021. We repurchased approximately 6 million of our common shares for$505 million and approximately 10 million of our common shares for$836 million under the share repurchase program during the first nine months of fiscal 2020 and 2019, respectively. AtJune 26, 2020 , we had$1.0 billion of availability remaining under our share repurchase authorization.
Summarized Guarantor Financial Information
InMarch 2020 , theSecurities and Exchange Commission adopted amendments to the financial disclosure requirements of Regulation S-X for subsidiary issuers and guarantors of registered debt securities and for affiliates whose securities are pledged as collateral for registered securities. The amended disclosure requirements permit alternative disclosures of summarized financial information for subsidiary issuers and guarantors and allow for these disclosures to be made outside the Condensed Consolidated Financial Statements and accompanying notes. We elected to early adopt these amendments in the third quarter of fiscal 2020. As discussed above, our senior notes, commercial paper, and Credit Facility are issued by TEGSA and are fully and unconditionally guaranteed on an unsecured basis by TEGSA's parent,TE Connectivity Ltd. In addition to being the issuer of our debt securities, TEGSA owns, directly or indirectly, all of our operating subsidiaries. The following tables present 38
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summarized financial information, excluding investments in and equity in earnings of our non-guarantor subsidiaries, forTE Connectivity Ltd. and TEGSA on a combined basis. June 26, September 27, 2020 2019 (in millions) Balance Sheet Data: Total current assets $ 91 $ 89 Total noncurrent assets(1) 2,683 2,634 Total current liabilities 1,256 1,014 Total noncurrent liabilities(2) 19,863 19,475
Includes
(1) 27, 2019, respectively, of intercompany loans receivable from non-guarantor
subsidiaries.
Includes
(2)
non-guarantor subsidiaries.
For the For the
Nine Months Ended Fiscal Year Ended
June 26, September 27,
2020 2019
(in millions)
Statement of Operations Data:
Loss from continuing operations $ (92) $ (341)
Net loss (89) (391)
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.
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 2020 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
As discussed above, in the first nine months of fiscal 2019, we sold our SubCom
business. In connection with the sale, we contractually agreed to continue to
honor performance guarantees and letters of credit related to the SubCom
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business' projects that existed as of the date of sale. These guarantees had a combined value of approximately$1.2 billion as ofJune 26, 2020 and are expected to expire at various dates through fiscal 2025. Also, under the terms of the definitive agreement, we are required to issue up to$300 million of new performance guarantees, subject to certain limitations, for projects entered into by the SubCom business following the sale for a period of up to three years. As ofJune 26, 2020 , there were no such new performance guarantees outstanding. We have contractual recourse against the SubCom business if we are required to perform on any SubCom guarantees; however, based on historical experience, we do not anticipate having to perform. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding the divestiture of the SubCom business. Critical Accounting Policies and Estimates The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses. Our accounting policies for revenue recognition, goodwill and other intangible assets, income taxes, and pension are based on, among other things, judgments and assumptions made by management. For additional information regarding these policies and the underlying accounting assumptions and estimates used in these policies, refer to the Consolidated Financial Statements and accompanying notes contained in our Annual Report on Form 10-K for the fiscal year endedSeptember 27, 2019 . Except as set forth below, there were no significant changes to this information during the first nine months of fiscal 2020.
We adopted ASU No. 2017-04, an update to Accounting Standards Codification 350,
Intangibles-Goodwill and Other, in the second quarter of fiscal 2020. See Note 1
to the Condensed Consolidated Financial Statements for information regarding our
goodwill and other intangible assets policy and the adoption of ASU No. 2017-04.
Accounting Pronouncements
See Note 1 to the Condensed Consolidated Financial Statements for information regarding recently adopted accounting pronouncements.
Non-GAAP Financial Measure
Organic Net Sales Growth (Decline)
We present organic net sales growth (decline) as we believe it is appropriate for investors to consider this adjusted financial measure in addition to results in accordance with GAAP. Organic net sales growth (decline) represents net sales growth (decline) (the most comparable GAAP financial measure) excluding the impact of foreign currency exchange rates, and acquisitions and divestitures that occurred in the preceding twelve months, if any. Organic net sales growth (decline) is a useful measure of our performance because it excludes items that are not completely under management's control, such as the impact of changes in foreign currency exchange rates, and items that do not reflect the underlying growth of the company, such as acquisition and divestiture activity. Organic net sales growth (decline) provides useful information about our results and the trends of our business. Management uses this measure to monitor and evaluate performance. Also, management uses this measure together with GAAP financial measures in its decision-making processes related to the operations of our reportable segments and our overall company. It is also a significant component in our incentive compensation plans. We believe that investors benefit from having access to the same financial measures that management uses in evaluating operations. The tables presented in "Results of Operations" and "Segment Results" provide reconciliations of organic net sales growth (decline) to net sales growth (decline) calculated in accordance with GAAP.
Organic net sales growth (decline) is a non-GAAP financial measure and should not be considered a replacement for results in accordance with GAAP. This non-GAAP financial measure may not be comparable to similarly-titled measures
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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.
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