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 second quarter and first six months of fiscal 2022 included the following:
Our net sales increased 7.2% and 7.8% in the second quarter and first six
months of fiscal 2022, respectively, as compared to the same periods of fiscal
? 2021 due primarily to sales growth in the Industrial Solutions and
Communications Solutions segments. On an organic basis, our net sales increased
8.4% and 8.2% during the second quarter and first six months of fiscal 2022,
respectively, as compared to the same periods of fiscal 2021.
? Our net sales by segment were as follows:
Transportation Solutions-Our net sales increased 1.2% in the second quarter of
fiscal 2022 due to sales increases in the automotive and commercial
? transportation end markets, partially offset by sales declines in the sensors
end market. In the first six months of fiscal 2022, our net sales decreased
0.9% due primarily to sales declines in the automotive end market, partially
offset by sales increases in the commercial transportation end market.
Industrial Solutions-Our net sales increased 12.9% and 16.9% in the second
? quarter and first six months of fiscal 2022, respectively, primarily as a
result of sales increases in the industrial equipment end market.
Communications Solutions-Our net sales increased 23.8% and 31.9% in the second
? quarter and first six months of fiscal 2022, respectively, due to sales
increases in both the data and devices and the appliances end markets.
? Net cash provided by operating activities was
months of fiscal 2022.
Russia-Ukraine Military Conflict
We are monitoring the military conflict betweenRussia andUkraine , escalating tensions in surrounding countries, and associated sanctions. We suspended our business operations inRussia , and our operations inUkraine have been paused 21 Table of Contents 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 theRussia -Ukraine military conflict on the global economy. These increased costs and supply chain implications have not been significant to our business, and we have been able to partially mitigate them through price increases or productivity. NeitherRussia norUkraine represents a material portion of our business, and the military conflict has not had a significant impact on our business, financial condition, or result of operations during the first six months of fiscal 2022. The full impact of the military conflict on our business operations and financial performance remains uncertain. The extent to which the conflict may impact our business in future periods will depend on future developments, including the severity and duration of the conflict, its impact on regional and global economic conditions, and supply chain disruptions. We will continue to actively monitor the conflict and assess the related sanctions and other effects and may take further actions if necessary.
COVID-19 Pandemic
The COVID-19 pandemic has affected nearly all regions around the world and resulted in business slowdowns or shutdowns and travel restrictions in affected areas. The pandemic had a negative impact on certain of our businesses in fiscal 2021 and continued to impact certain of our operations inChina in the first six months of fiscal 2022. The pandemic has not had a significant impact on our ability to staff our operations, and we do not expect that it will continue to have a significant impact on our businesses globally in fiscal 2022, with the exception of certain locations inChina where operations are shutdown. Throughout our operations, we implemented additional health and safety measures for the protection of our employees, including providing personal protective equipment, enhanced cleaning and sanitizing of our facilities, and remote working arrangements. The COVID-19 pandemic has impacted and continues to impact our business operations globally, causing disruption in our suppliers' and customers' supply chains, some of our business locations to reduce or suspend operations, and a reduction in demand for certain products from direct customers or end markets. In addition, the pandemic had far-reaching impacts on many additional aspects of our operations, both directly and indirectly, including with respect to its impacts on customer behaviors, business and manufacturing operations, inventory, our employees, and the market generally. We assessed the impact of the COVID-19 pandemic and adjusted our operations and businesses, a number of which are operating as essential businesses, and will continue to do so if necessary. The extent to which the pandemic will continue to impact our business and the markets we serve will depend on future developments which may include the further spread of the virus, variant strains of the virus, and the resumption of high levels of infections and hospitalizations as well as the success of public health advancements, including vaccine production and distribution. With the exception of shutdowns inChina , we do not expect the COVID-19 pandemic to have a significant impact on our businesses in fiscal 2022. However, it may have a negative impact on our financial condition, liquidity, and results of operations in future periods. In response to the pandemic and resulting economic environment, we have taken and continue to focus on actions to manage costs. These include restructuring and other cost reduction initiatives, such as reducing discretionary spending and travel. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, suppliers, shareholders, and the communities in which we operate.
Outlook
In the third quarter of fiscal 2022, we expect our net sales to be approximately$3.9 billion as compared to$3.8 billion in the third quarter of fiscal 2021. We expect shutdowns inChina related to the COVID-19 pandemic to negatively impact our net sales by approximately 300 basis points in the third quarter of fiscal 2022 as compared to the third quarter of fiscal 2021. We expect diluted earnings per share from continuing operations to be approximately$1.71 per share in the third quarter of fiscal 2022. This outlook reflects the negative impact of foreign currency exchange rates on net sales and earnings per share of approximately$154 million and$0.02 per share, respectively, in the third quarter of fiscal 2022 as compared to the third quarter of fiscal 2021. Also, this outlook is based on foreign currency exchange rates and commodity prices that are consistent with current levels. 22
Table of Contents
We are monitoring the current macroeconomic environment, including any continued impacts from theRussia -Ukraine military conflict and the COVID-19 pandemic, and its potential effects on our customers and the end markets we serve. We have taken actions to manage costs and will continue to closely manage our costs in line with economic conditions. Additionally, we are managing our capital resources and monitoring capital availability to ensure that we have sufficient resources to fund future capital needs. See further discussion in "Liquidity and Capital Resources." Acquisition
During the first six months of fiscal 2022, we acquired one business for a cash purchase price of$127 million , net of cash acquired. The acquisition was reported as part of our Communications Solutions segment from the date of acquisition. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions. Results of Operations
The following table presents our net sales and the percentage of total net sales
by segment:
For the For the
Quarters Ended Six Months Ended
March 25, March 26, March 25, March 26,
2022 2021 2022 2021
($ in millions)
Transportation Solutions $ 2,314 58 % $ 2,287 61 % $ 4,472 57 % $ 4,511 62 %
Industrial Solutions 1,075 27 952 26 2,134 27 1,825 25
Communications Solutions 618 15 499 13 1,219 16 924 13
Total $ 4,007 100 % $ 3,738 100 % $ 7,825 100 % $ 7,260 100 %
The following table provides an analysis of the change in our net sales by segment:
Change in Net Sales for the Quarter Ended March 25, 2022 Change in Net Sales
for the Six Months Ended
versus Net Sales for the Quarter Ended March 26, 2021 versus Net Sales
for the Six Months Ended
Net Sales OrganicNet Sales AcquisitionsNet Sales OrganicNet Sales Acquisitions Growth Growth Translation (Divestitures) Growth (Decline) Growth Translation (Divestitures) ($ in millions) Transportation Solutions$ 27 1.2 %$ 101 4.5 %$ (74) $ -$ (39) (0.9) %$ 59 1.3 %$ (98) $ - Industrial Solutions 123 12.9 101 10.5 (28) 50 309 16.9 255 13.9 (48) 102 Communications Solutions 119 23.8 114 22.8 (8) 13 295 31.9 286 30.8 (9) 18 Total$ 269 7.2 %$ 316 8.4 %$ (110) $ 63$ 565 7.8 %$ 600 8.2 %$ (155) $ 120
Net sales increased$269 million , or 7.2%, in the second quarter of fiscal 2022 as compared to the second quarter of fiscal 2021. The increase in net sales resulted from organic net sales growth of 8.4% and net sales contributions of 1.7% from acquisitions and divestitures, partially offset by the negative impact of foreign currency translation of 2.9% due to the weakening of certain foreign currencies. In the second quarter of fiscal 2022, pricing actions positively affected organic net sales by$121 million . In the first six months of fiscal 2022, net sales increased$565 million , or 7.8%, as compared to the first six months of fiscal 2021. The increase in net sales resulted from organic net sales growth of 8.2% and net sales contributions of 1.7% from acquisitions and divestitures, partially offset by the negative impact of foreign currency translation of 2.1% due to the weakening of certain foreign currencies. Pricing actions positively affected organic net sales by$173 million in the first six months of fiscal 2022.
See further discussion of net sales below under "Segment Results."
23
Table of Contents
Net Sales byGeographic Region . Our business operates in three geographic regions-Europe /Middle East /Africa ("EMEA"),Asia-Pacific , and theAmericas -and our results of operations are influenced by changes in foreign currency exchange rates. Increases or decreases in the value of theU.S. dollar, compared to other currencies, will directly affect our reported results as we translate those currencies intoU.S. dollars at the end of each fiscal period.
Approximately 60% of our net sales were invoiced in currencies other than the
The following table presents our net sales and the percentage of total net sales
by geographic region(1):
For the For the
Quarters Ended Six Months Ended
March 25, March 26, March 25, March 26,
2022 2021 2022 2021
($ in millions)
EMEA $ 1,433 36 % $ 1,390 37 % $ 2,747 35 % $ 2,706 37 %
Asia-Pacific 1,411 35 1,336 36 2,881 37 2,629 36 Americas 1,163 29 1,012 27 2,197 28 1,925 27 Total$ 4,007 100 %$ 3,738 100 %$ 7,825 100 %$ 7,260 100 %
(1) Net sales to external customers are attributed to individual countries based
on the legal entity that records the sale.
The following table provides an analysis of the change in our net sales by geographic region:
Change in Net Sales for the Quarter Ended March 25, 2022 Change in Net Sales for the
Six Months Ended
versus Net Sales for the Quarter Ended March 26, 2021 versus Net Sales for the Six
Months Ended
Net Sales Organic Net Sales Acquisitions Net Sales Organic Net Sales Acquisitions
Growth Growth Translation (Divestitures) Growth Growth Translation (Divestitures)
($ in millions)
EMEA $ 43 3.1 % $ 100 7.2 % (92) $ 35 $ 41 1.5 % $ 106 3.8 % $ (136) $ 71
Asia-Pacific 75 5.6 79 5.9 $ (16) 12 252 9.6 243 9.2 (16) 25
Americas 151 14.9 137 13.5 (2) 16 272 14.1 251 13.0 (3) 24
Total $ 269 7.2 % $ 316 8.4 % $ (110) $ 63 $ 565 7.8 % $ 600 8.2 % $ (155) $ 120
Cost of Sales and Gross Margin
The following table presents cost of sales and gross margin information:
For the For the
Quarters Ended Six Months Ended
March 25, March 26, March 25, March 26,
2022 2021 Change 2022 2021 Change
($ in millions)
Cost of sales $ 2,670 $ 2,528 $ 142 $ 5,258 $ 4,904 $ 354
As a percentage of net sales 66.6 % 67.6 % 67.2 % 67.5 %
Gross margin $ 1,337 $ 1,210 $ 127 $ 2,567 $ 2,356 $ 211
As a percentage of net sales 33.4 % 32.4 % 32.8 % 32.5 %
Gross margin increased $127 million and $211 million in the second quarter and
first six months of fiscal 2022, respectively, as compared to the same periods
of fiscal 2021. The increases were primarily a result of higher volume and the
positive impacts of pricing actions, partially offset by higher material costs
and, to a lesser degree, the negative impact of foreign currency translation.
We use a wide variety of raw materials in the manufacture of our products, and
cost of sales and gross margin are subject to variability in raw material
prices. In recent years, raw material prices and availability have been impacted
by worldwide events, including the COVID-19 pandemic and, more recently, the
military conflict between Russia and Ukraine . As a result, we have experienced
shortages and price increases in some of our input materials-including copper,
gold, silver,
24
Table of Contents
and palladium-however, we have been able to initiate pricing actions which have
partially offset these impacts. The following table presents the average prices
incurred related to copper, gold, silver, and palladium:
For the For the
Quarters Ended Six Months Ended
March 25, March 26, March 25, March 26,
Measure 2022 2021 2022 2021
Copper Lb. $ 4.13 $ 2.95 $ 3.97 $ 2.93
Gold Troy oz. 1,831 1,659 1,814 1,629
Silver Troy oz. 24.64 20.48 24.10 20.11
Palladium Troy oz. 2,380 2,114 2,363 2,125
We expect to purchase approximately 225 million pounds of copper, 140,000 troy
ounces of gold, 2.9 million troy ounces of silver, and 15,000 troy ounces of
palladium in fiscal 2022.
Operating Expenses
The following table presents operating expense information:
For the For the
Quarters Ended Six Months Ended
March 25, March 26, March 25, March 26,
2022 2021 Change 2022 2021 Change
($ in millions)
Selling, general, and administrative
expenses $ 416 $ 401 $ 15 $ 779 $ 762 $ 17
As a percentage of net sales 10.4 % 10.7 % 10.0 % 10.5 %
Restructuring and other charges, net
4
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased$15 million and$17 million in the second quarter and first six months of fiscal 2022, respectively, from the same periods of fiscal 2021 due primarily to increased selling expenses to support higher sales levels and incremental expenses attributable to recently acquired businesses, partially offset by lower incentive compensation costs. Restructuring and Other Charges, Net. We are committed to continuous productivity improvements, and we evaluate opportunities to simplify our global manufacturing footprint, migrate facilities to lower-cost regions, reduce fixed costs, and eliminate excess capacity. These initiatives are designed to help us maintain our competitiveness in the industry, improve our operating leverage, and position us for future growth. During fiscal 2022 and 2021, we initiated restructuring programs associated with footprint consolidation and cost structure improvements across all segments. We incurred net restructuring and related charges of$55 million during the first six months of fiscal 2022, of which$12 million was recorded in cost of sales. Annualized cost savings related to the fiscal 2022 actions commenced during the first six months of fiscal 2022 are expected to be approximately$50 million and are expected to be realized by the end of fiscal 2024. Cost savings will be reflected primarily in cost of sales and selling, general, and administrative expenses. For fiscal 2022, we expect total restructuring charges to be approximately$150 million and total spending, which will be funded with cash from operations, to be approximately$175 million .
See Note 2 to the Condensed Consolidated Financial Statements for additional information regarding net restructuring and other charges.
25
Table of Contents
Operating Income
The following table presents operating income and operating margin information:
For the For the
Quarters Ended Six Months Ended
March 25, March 26, March 25, March 26,
2022 2021 Change 2022 2021 Change
($ in millions)
Operating income $ 705 $ 612 $ 93 $ 1,377 $ 1,060 $ 317
Operating margin 17.6 % 16.4 % 17.6 % 14.6 %
Operating income included the following:
For the For the
Quarters Ended Six Months Ended
March 25, March 26, March 25, March 26,
2022 2021 2022 2021
(in millions)
Acquisition-related charges:
Acquisition and integration costs $ 10 $ 6 $ 18 $ 14
Charges associated with the amortization of
acquisition-related fair value adjustments - 2 8 3
10 8 26 17
Restructuring and other charges, net 21 17 33 184
Restructuring-related charges recorded in cost
of sales - - 12 -
Total $ 31 $ 25 $ 71 $ 201 See discussion of operating income below under "Segment Results."
Non-Operating Items
The following table presents select non-operating information:
For the For the
Quarters Ended Six Months Ended
March 25, March 26, March 25, March 26,
2022 2021 Change 2022 2021 Change
($ in millions)
Income tax expense $ 136 $ 106 $ 30 $ 246 $ 166 $ 80
Effective tax rate 19.5 % 17.3 % 17.9 % 15.9 %
Income Taxes. See Note 12 to the Condensed Consolidated Financial Statements for
discussion of items impacting income tax expense and the effective tax rate for
the second quarters and first six months of fiscal 2022 and 2021.
26
Table of Contents
Segment Results
Transportation Solutions
For the For the
Quarters Ended Six Months Ended
March 25, March 26, March 25, March 26,
2022 2021 2022 2021
($ in millions)
Automotive $ 1,653 71 % $ 1,630 71 % $ 3,173 71 % $ 3,259 72 %
Commercial transportation 394 17 382 17 759 17 713 16
Sensors 267 12 275 12 540 12 539 12
Total $ 2,314 100 % $ 2,287 100 % $ 4,472 100 % $ 4,511 100 %
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 March 25, 2022 Change in Net Sales for the Six Months Ended March 25, 2022
versus Net Sales for the Quarter Ended March 26, 2021 versus Net Sales for the Six Months Ended March 26, 2021
Net Sales Organic Net Sales Net Sales Organic Net Sales
Growth (Decline) Growth Translation Growth (Decline) Growth (Decline) Translation
($ in millions)
Automotive $ 23 1.4 % $ 80 4.9 % $ (57) $ (86) (2.6) % $ (11) (0.4) % $ (75)
Commercial
transportation 12 3.1 21 5.4 (9) 46 6.5 57 7.9 (11)
Sensors (8) (2.9) - - (8) 1 0.2 13 2.5 (12)
Total $ 27 1.2 % $ 101 4.5 % $ (74) $ (39) (0.9) % $ 59 1.3 % $ (98) Net sales in the Transportation Solutions segment increased$27 million , or 1.2%, in the second quarter of fiscal 2022 from the second quarter of fiscal 2021 due to organic net sales growth of 4.5%, partially offset by the negative impact of foreign currency translation of 3.3%. Our organic net sales by industry end market were as follows:
Automotive-Our organic net sales increased 4.9% in the second quarter of fiscal
2022 with growth of 7.9% in the
? region, and 2.1% in the EMEA region. Our overall net sales increased due
primarily to increased content per vehicle, despite declines in global
automotive production.
Commercial transportation-Our organic net sales increased 5.4% in the second
? quarter of fiscal 2022 primarily as a result of market growth in the EMEA and
Sensors-Our organic net sales were flat in the second quarter of fiscal 2022 as
? growth in industrial applications was offset by declines in transportation
applications.
In the first six months of fiscal 2022, net sales in the Transportation Solutions segment decreased$39 million , or 0.9%, as compared to the first six months of fiscal 2021 due to the negative impact of foreign currency translation of 2.2%, partially offset by organic net sales growth of 1.3%. Our organic net sales by industry end market were as follows:
Automotive-Our organic net sales were essentially flat in the first six months
of fiscal 2022 with declines of 7.6% in the EMEA region, largely offset by
? growth of 6.0% in the
impact of declines in global automotive production were offset by increased
content per vehicle.
27
Table of Contents
Commercial transportation-Our organic net sales increased 7.9% in the first six
? months of fiscal 2022 primarily as a result of market growth in the EMEA and
Sensors-Our organic net sales increased 2.5% in the first six months of fiscal
? 2022 as growth in industrial applications was partially offset by declines in
transportation applications.
Operating Income. The following table presents the Transportation Solutions segment's operating income and operating margin information:
For the For the
Quarters Ended Six Months Ended
March 25, March 26, March 25, March 26,
2022 2021 Change 2022 2021 Change
($ in millions)
Operating income $ 409 $ 398 $ 11 $ 804 $ 706 $ 98
Operating margin 17.7 % 17.4 % 18.0 % 15.7 %
Operating income in the Transportation Solutions segment increased $11 million
and $98 million in the second quarter and first six months of fiscal 2022,
respectively, as compared to the same periods of fiscal 2021. Excluding the
items below, operating income in the second quarter of fiscal 2022 increased
slightly as the positive impacts of pricing actions were largely offset by
higher material and utilities costs. Excluding the items below, operating income
in the first six months of fiscal 2022 decreased primarily as a result of higher
material and utilities costs, partially offset by the positive impacts of
pricing actions.
For the For the
Quarters Ended Six Months Ended
March 25, March 26, March 25, March 26,
2022 2021 2022 2021
(in millions)
Acquisition-related charges:
Acquisition and integration costs $ 4 $ 3 $ 7 $ 7
Charges associated with the amortization of
acquisition-related fair value adjustments - 2 - 3
4 5 7 10
Restructuring and other charges, net 9 10 3 128 Total$ 13 $ 15$ 10 $ 138 Industrial Solutions
For the For the
Quarters Ended Six Months Ended
March 25, March 26, March 25, March 26,
2022 2021 2022 2021
($ in millions)
Industrial equipment $ 472 44 % $ 339 36 % $ 934 44 % $ 634 35 %Aerospace, defense, oil, and gas 261 24 267 28
503 24 517 28 Energy 184 17 185 19 372 17 357 20 Medical 158 15 161 17 325 15 317 17 Total$ 1,075 100 %$ 952 100 %$ 2,134 100 %$ 1,825 100 %
Industry end market information is presented consistently with our internal (1) management reporting and may be revised periodically as management deems
necessary.
28
Table of Contents
The following table provides an analysis of the change in the Industrial Solutions segment's net sales by industry end market:
Change in Net Sales for the Quarter Ended March 25, 2022 Change in Net Sales for the Six Months Ended
versus Net Sales for the Quarter Ended March 26, 2021 versus Net Sales for the Six Months Ended
Net Sales Organic Net Sales Acquisition Net Sales Organic Net Sales Acquisitions
Growth (Decline) Growth (Decline) Translation (Divestitures) Growth (Decline) Growth (Decline) Translation (Divestitures)
($ in millions)
Industrial
equipment $ 133 39.2 % $ 93 27.2 % $ (13) $ 53 $ 300 47.3 % $ 212 33.0 % $ (25) $ 113
Aerospace,
defense, oil, and
gas (6) (2.2) - - (5) (1) (14) (2.7) (6) (1.4) (8) -
Energy (1) (0.5) 9 4.8 (8) (2) 15 4.2 38 10.5 (12) (11)
Medical (3) (1.9) (1) (1.2) (2) - 8 2.5 11 3.1 (3) -
Total $ 123 12.9 % $ 101 10.5 % $ (28) $ 50 $ 309 16.9 % $ 255 13.9 % $ (48) $ 102
In the Industrial Solutions segment, net sales increased $123 million , or 12.9%,
in the second quarter of fiscal 2022 as compared to the second quarter of fiscal
2021 due to organic net sales growth of 10.5% and net sales contributions of
5.3% from an acquisition and divestitures, partially offset by the negative
impact of foreign currency translation of 2.9%. Our organic net sales by
industry end market were as follows:
Industrial equipment-Our organic net sales increased 27.2% in the second
? quarter of fiscal 2022 due to growth in all regions primarily as a result of
strength in factory automation and controls applications.
Aerospace, defense, oil, and gas-Our organic net sales were flat in the second
? quarter of fiscal 2022 as declines in the defense market were largely offset by
growth in the commercial aerospace market.
Energy-Our organic net sales increased 4.8% in the second quarter of fiscal
? 2022 with growth across all regions and continued strength in renewable energy
applications.
? Medical-Our organic net sales decreased 1.2% in the second quarter of fiscal
2022 due primarily to sales declines in interventional medical applications.
Net sales in the Industrial Solutions segment increased$309 million , or 16.9%, in the first six months of fiscal 2022 as compared to the first six months of fiscal 2021 due to organic net sales growth of 13.9% and net sales contributions of 5.6% from acquisitions and divestitures, partially offset by the negative impact of foreign currency translation of 2.6%. Our organic net sales by industry end market were as follows:
Industrial equipment-Our organic net sales increased 33.0% in the first six
? months of fiscal 2022 as a result of growth in all regions due primarily to
strength in factory automation and controls applications.
Aerospace, defense, oil, and gas-Our organic net sales decreased 1.4% in the
? first six months of fiscal 2022 with declines in the defense and the oil and
gas markets partially offset by growth in the commercial aerospace market.
Energy-Our organic net sales increased 10.5% in the first six months of fiscal
? 2022 due to growth across all regions and continued strength in renewable
energy applications.
Medical-Our organic net sales increased 3.1% in the first six months of fiscal
? 2022 primarily as a result of market growth in interventional medical
applications.
29
Table of Contents
Operating Income. The following table presents the Industrial Solutions segment's operating income and operating margin information:
For the For the
Quarters Ended Six Months Ended
March 25, March 26, March 25, March 26,
2022 2021 Change 2022 2021 Change
($ in millions)
Operating income $ 148 $ 111 $ 37 $ 271 $ 187 $ 84
Operating margin 13.8 % 11.7 % 12.7 % 10.2 %
Operating income in the Industrial Solutions segment increased$37 million and$84 million in the second quarter and first six months of fiscal 2022, respectively, as compared to the same periods of fiscal 2021. Excluding the items below, operating income increased primarily as a result of higher volume and the positive impacts of pricing actions. For the For the Quarters Ended Six Months Ended March 25, March 26, March 25, March 26, 2022 2021 2022 2021 (in millions) Acquisition-related charges: Acquisition and integration costs $ 6 $ 3$ 10 $ 7 Charges associated with the amortization of acquisition-related fair value adjustments - - 8 - 6 3 18 7 Restructuring and other charges, net 10 5 20 43 Restructuring-related charges recorded in cost of sales - - 12 - Total $ 16 $ 8$ 50 $ 50 Communications Solutions
For the For the
Quarters Ended Six Months Ended
March 25, March 26, March 25, March 26,
2022 2021 2022 2021
($ in millions)
Data and devices $ 385 62 % $ 278 56 % $ 734 60 % $ 512 55 %
Appliances 233 38 221 44 485 40 412 45
Total $ 618 100 % $ 499 100 % $ 1,219 100 % $ 924 100 %
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 Communications Solutions segment's net sales by industry end market:
Change in Net Sales for the Quarter Ended March 25, 2022 Change in
versus Net Sales for the Quarter Ended March 26, 2021 versus Net Sales
for the Six Months Ended
Net Sales Organic Net Sales Net Sales Organic Net Sales
Growth Growth Translation Acquisition Growth Growth Translation Acquisition
($ in millions)
Data and devices $ 107 38.5 % $ 98 35.0 % $ (4) $ 13 $ 222 43.4 % $ 209 40.7 % $ (5) $ 18
Appliances 12 5.4 16 7.3 (4) - 73 17.7 77 18.4 (4) -
Total $ 119 23.8 % $ 114 22.8 % $ (8) $ 13 $ 295 31.9 % $ 286 30.8 % $ (9) $ 18
30
Table of Contents
Net sales in the Communications Solutions segment increased $119 million , or
23.8%, in the second quarter of fiscal 2022 as compared to the second quarter of
fiscal 2021 due primarily to organic net sales growth of 22.8%. Our organic net
sales by industry end market were as follows:
Data and devices-Our organic net sales increased 35.0% in the second quarter of
? fiscal 2022 primarily as a result of market strength and growth in high-speed
cloud applications.
Appliances-Our organic net sales increased 7.3% in the second quarter of fiscal
? 2022 due to sales growth in the
primarily to share gains.
In the first six months of fiscal 2022, net sales in the Communications Solutions segment increased$295 million , or 31.9%, as compared to the first six months of fiscal 2021 due primarily to organic net sales growth of 30.8%. Our organic net sales by industry end market were as follows:
Data and devices-Our organic net sales increased 40.7% in the first six months
? of fiscal 2022 due primarily to market strength and growth in high-speed cloud
applications.
Appliances-Our organic net sales increased 18.4% in the first six months of
? fiscal 2022 as a result of sales growth in the
attributable primarily to share gains.
Operating Income. The following table presents the Communications Solutions segment's operating income and operating margin information:
For the For the
Quarters Ended Six Months Ended
March 25, March 26, March 25, March 26,
2022 2021 Change 2022 2021 Change
($ in millions)
Operating income $ 148 $ 103 $ 45 $ 302 $ 167 $ 135
Operating margin 23.9 % 20.6 % 24.8 % 18.1 %
Operating income in the Communications Solutions segment increased
For the For the
Quarters Ended Six Months Ended
March 25, March 26, March 25, March 26,
2022 2021 2022 2021
(in millions)
Acquisition and integration costs $ - $ - $ 1 $ -
Restructuring and other charges, net 2 2 10 13 Total $ 2 $ 2$ 11 $ 13 Liquidity and Capital Resources Our ability to fund our future capital needs will be affected by our ongoing ability to generate cash from operations and may be affected by our access to capital markets, money markets, or other sources of funding, as well as the capacity and terms of our financing arrangements. We believe that cash generated from operations and, to the extent necessary, these other sources of potential funding will be sufficient to meet our anticipated capital needs for the foreseeable future, including the payment of €550 million of 1.10% senior notes due inMarch 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. 31
Table of Contents
Cash Flows from Operating Activities
In the first six months of fiscal 2022, net cash provided by operating activities decreased$275 million to$945 million from$1,220 million in the first six months of fiscal 2021. The decrease resulted primarily from the impact of higher incentive compensation payments and increased working capital levels, partially offset by higher pre-tax income. The amount of income taxes paid, net of refunds, during the first six months of fiscal 2022 and 2021 was$177 million and$181 million , respectively.
Cash Flows from Investing Activities
Capital expenditures were$351 million and$284 million in the first six months of fiscal 2022 and 2021, respectively. We expect fiscal 2022 capital spending levels to be approximately 5% of net sales. We believe our capital funding levels are adequate to support new programs, and we continue to invest in our manufacturing infrastructure to further enhance productivity and manufacturing capabilities. During the first six months of fiscal 2022, we acquired one business for a cash purchase price of$127 million , net of cash acquired. We acquired one business for a cash purchase price of$106 million , net of cash acquired, during the first six months of fiscal 2021. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions.
Cash Flows from Financing Activities and Capitalization
Total debt at
During the second quarter of fiscal 2022,Tyco Electronics Group S.A. ("TEGSA"), our wholly-owned subsidiary, issued$600 million aggregate principal amount of 2.50% senior notes due inFebruary 2032 . The notes are TEGSA's unsecured senior obligations and rank equally in right of payment with all existing and any future senior indebtedness of TEGSA and senior to any subordinated indebtedness that TEGSA may incur. During the first six months of fiscal 2022, TEGSA completed an early redemption of$500 million aggregate principal amount of 3.50% senior notes due inFebruary 2022 .
TEGSA has a five-year unsecured senior revolving credit facility ("Credit
Facility") with a maturity date of
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 ofMarch 25, 2022 , we were in compliance with all of our debt covenants and believe that we will continue to be in compliance with our existing covenants for the foreseeable future. In addition to the Credit Facility, TEGSA is the borrower under our senior notes and commercial paper. TEGSA's payment obligations under its senior notes, commercial paper, and Credit Facility are fully and unconditionally guaranteed on an unsecured basis by its parent,TE Connectivity Ltd.
Payments of common share dividends to shareholders were
InMarch 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. 32 Table of Contents We repurchased approximately five million of our common shares for$752 million and approximately three million of our common shares for$309 million under the share repurchase program during the first six months of fiscal 2022 and 2021, respectively. AtMarch 25, 2022 , we had$839 million of availability remaining under our share repurchase authorization.
Summarized Guarantor Financial Information
As discussed above, our senior notes, commercial paper, and Credit Facility are issued by TEGSA and are fully and unconditionally guaranteed on an unsecured basis by TEGSA's parent,TE Connectivity Ltd. In addition to being the issuer of our debt securities, TEGSA owns, directly or indirectly, all of our operating subsidiaries. The following tables present summarized financial information, excluding investments in and equity in earnings of our non-guarantor subsidiaries, forTE Connectivity Ltd. and TEGSA on a combined basis. March 25, September 24, 2022 2021 (in millions) Balance Sheet Data: Total current assets$ 252 $ 452 Total noncurrent assets(1) 2,674 1,829 Total current liabilities 1,553 1,144 Total noncurrent liabilities(2) 16,159 12,443
Includes
(1)
non-guarantor subsidiaries.
Includes
(2)
non-guarantor subsidiaries.
For the For the
Six Months Ended Fiscal Year Ended
March 25, September 24,
2022 2021
(in millions)
Statement of Operations Data:
Loss from continuing operations $ (3) $ (486)Net loss (3) (479) Guarantees In certain instances, we have guaranteed the performance of third parties and provided financial guarantees for uncompleted work and financial commitments. The terms of these guarantees vary with end dates ranging from fiscal 2022 through the completion of such transactions. The guarantees would be triggered in the event of nonperformance, and the potential exposure for nonperformance under the guarantees would not have a material effect on our results of operations, financial position, or cash flows. In disposing of assets or businesses, we often provide representations, warranties, and/or indemnities to cover various risks including unknown damage to assets, environmental risks involved in the sale of real estate, liability for investigation and remediation of environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not expect that these uncertainties will have a material adverse effect on our results of operations, financial position, or cash flows.
At
During fiscal 2019, we sold ourSubCom business. In connection with the sale, we contractually agreed to continue to honor performance guarantees and letters of credit related to theSubCom business' projects that existed as of the date
of
33
Table of Contents
sale. These performance guarantees and letters of credit had a combined value of
approximately $117 million as of March 25, 2022 and are expected to expire at
various dates through fiscal 2027. We have contractual recourse against the
SubCom business if we are required to perform on any SubCom guarantees; however,
based on historical experience, we do not anticipate having to perform.
Commitments and Contingencies
Legal Proceedings
In the normal course of business, we are subject to various legal proceedings and claims, including patent infringement claims, product liability matters, employment disputes, disputes on agreements, other commercial disputes, environmental matters, antitrust claims, and tax matters, including non-income tax matters such as value added tax, sales and use tax, real estate tax, and transfer tax. Although it is not feasible to predict the outcome of these proceedings, based upon our experience, current information, and applicable law, we do not expect that the outcome of these proceedings, either individually or in the aggregate, will have a material effect on our results of operations, financial position, or cash flows.
Trade Compliance Matters
We are investigating our past compliance with relevantU.S. trade controls and have made voluntary disclosures of apparent trade controls violations to theU.S. Department of Commerce's Bureau of Industry and Security ("BIS") and theU.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 endedSeptember 24, 2021 . There were no significant changes to this information during the first six months of fiscal 2022. Non-GAAP Financial Measure
Organic Net Sales Growth (Decline)
We present organic net sales growth (decline) as we believe it is appropriate
for investors to consider this adjusted financial measure in addition to results
in accordance with GAAP. Organic net sales growth (decline) represents net sales
growth (decline) (the most comparable GAAP financial measure) excluding the
impact of foreign currency exchange rates, and acquisitions and divestitures
that occurred in the preceding twelve months, if any. Organic net sales growth
(decline) is a useful measure of our performance because it excludes items that
are not completely under management's control, such as the impact of changes in
foreign currency exchange rates, and items that do not reflect the underlying
growth of the company, such as acquisition and divestiture activity.
34
Table of Contents
Organic net sales growth (decline) provides useful information about our results
and the trends of our business. Management uses this measure to monitor and
evaluate performance. Also, management uses this measure together with GAAP
financial measures in its decision-making processes related to the operations of
our reportable segments and our overall company. It is also a significant
component in our incentive compensation plans. We believe that investors benefit
from having access to the same financial measures that management uses in
evaluating operations. The tables presented in "Results of Operations" and
"Segment Results" provide reconciliations of organic net sales growth (decline)
to net sales growth (decline) calculated in accordance with GAAP.
Organic net sales growth (decline) is a non-GAAP financial measure and should
not be considered a replacement for results in accordance with GAAP. This
non-GAAP financial measure may not be comparable to similarly-titled measures
reported by other companies. The primary limitation of this measure is that it
excludes the financial impact of items that would otherwise either increase or
decrease our reported results. This limitation is best addressed by using
organic net sales growth (decline) in combination with net sales growth
(decline) to better understand the amounts, character, and impact of any
increase or decrease in reported amounts.
Forward-Looking Information
Certain statements in this Quarterly Report on Form 10-Q are "forward-looking
statements" within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. These statements are based on our management's beliefs and
assumptions and on information currently available to our management.
Forward-looking statements include, among others, the information concerning our
possible or assumed future results of operations, business strategies, financing
plans, competitive position, potential growth opportunities, potential operating
performance improvements, acquisitions, divestitures, the effects of
competition, and the effects of future legislation or regulations.
Forward-looking statements include all statements that are not historical facts
and can be identified by the use of forward-looking terminology such as the
words "believe," "expect," "plan," "intend," "anticipate," "estimate,"
"predict," "potential," "continue," "may," and "should," or the negative of
these terms or similar expressions.
Forward-looking statements involve risks, uncertainties, and assumptions. Actual
results may differ materially from those expressed in these forward-looking
statements. Investors should not place undue reliance on any forward-looking
statements. We do not have any intention or obligation to update forward-looking
statements after we file this report except as required by law.
The following and other risks, which are described in greater detail in "Part I.
© Edgar Online, source
