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 2021 included the following:
Our net sales increased 50.9% and 24.6% in the third quarter and first nine
months of fiscal 2021, respectively, as compared to the same periods of fiscal
2020 due to sales growth in the Transportation Solutions segment and, to a
? lesser degree, the Communications Solutions and Industrial Solutions segments.
On an organic basis, our net sales increased 45.0% and 19.0% during the third
quarter and first nine months of fiscal 2021, respectively, as compared to the
same periods of fiscal 2020.
? Our net sales by segment were as follows:
Transportation Solutions-Our net sales increased 80.5% and 36.1% in the third
? quarter and first nine months of fiscal 2021, respectively, with sales
increases in all end markets.
Industrial Solutions-Our net sales increased 15.8% in the third quarter of
fiscal 2021 primarily as a result of sales increases in the industrial
? equipment end market. In the first nine months of fiscal 2021, our net sales
increased 2.7% due primarily to sales increases in the industrial equipment end
market, partially offset by declines in the aerospace, defense, oil, and gas
end market.
Communications Solutions-Our net sales increased 35.0% and 27.6% in the third
? quarter and first nine months of fiscal 2021, respectively, due to sales
increases in both the appliances and the data and devices end markets.
? Net cash provided by operating activities was
months of fiscal 2021. COVID-19 Pandemic
The COVID-19 pandemic has affected nearly all regions around the world and resulted in business slowdowns or shutdowns and travel restrictions in affected areas. The pandemic had a significant, negative impact on our sales and
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operating results during fiscal 2020 and continued to negatively affect certain of our businesses in fiscal 2021. We do not expect that it will continue to have a significant impact on our businesses in the near term. The COVID-19 pandemic impacted our business operations globally, causing disruption in our suppliers' and customers' supply chains, some of our business locations to reduce or suspend operations, and a reduction in demand for certain products from direct customers or end markets. In addition, the pandemic had far-reaching impacts on many additional aspects of our operations, both directly and indirectly, including with respect to its impacts on customer behaviors, business and manufacturing operations, inventory, our employees, and the market generally. We assessed the impact of the COVID-19 pandemic and adjusted our operations and businesses, a number of which are operating as essential businesses, and will continue to do so if necessary. Throughout our operations, we implemented additional health and safety measures for the protection of our employees, including providing personal protective equipment, enhanced cleaning and sanitizing of our facilities, and remote working arrangements. The extent to which the pandemic will continue to impact our business and the markets we serve will depend on future developments which may include the further spread of the virus, variant strains of the virus, and the resumption of high levels of infections and hospitalizations as well as the success of public health advancements, including vaccine production and distribution. Although we do not expect the COVID-19 pandemic to have a significant impact on our businesses in the near term, it may have a negative impact on our financial condition, liquidity, and results of operations in future periods. In response to the pandemic and resulting economic environment, we have taken and continue to focus on actions to manage costs. These include restructuring and other cost reduction initiatives, such as reducing discretionary spending, capital expenditures, and travel. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, suppliers, shareholders, and the communities in which we operate.
Outlook
In the fourth quarter of fiscal 2021, we expect our net sales to be approximately$3.8 billion as compared to$3.26 billion in the fourth quarter of fiscal 2020. This increase reflects sales growth in the Transportation Solutions and Communications Solutions segments and, to a lesser degree, the Industrial Solutions segment. We expect diluted earnings per share from continuing operations to be approximately$1.55 per share in the fourth quarter of fiscal 2021. This outlook reflects the positive impact of foreign currency exchange rates on net sales and earnings per share of approximately$82 million and$0.03 per share, respectively, in the fourth quarter of fiscal 2021 as compared to the fourth quarter of fiscal 2020. For fiscal 2021, we expect our net sales to be approximately$14.9 billion as compared to$12.17 billion in fiscal 2020. This increase reflects sales growth in the Transportation Solutions segment and, to a lesser degree, the Communications Solutions and Industrial Solutions segments relative to fiscal 2020. We expect diluted earnings per share from continuing operations to be approximately$5.94 per share in fiscal 2021. This outlook reflects the positive impact of foreign currency exchange rates on net sales and earnings per share of approximately$473 million and$0.18 per share, respectively, in fiscal 2021 as compared to fiscal 2020.
The above outlook is based on foreign currency exchange rates that are consistent with current levels.
We are monitoring the current macroeconomic environment, including any
developments related to the COVID-19 pandemic, and its potential effects on our
customers and the end markets we serve. We have taken actions to manage costs
and will continue to closely manage our costs in line with economic conditions.
Additionally, we are managing our capital resources and monitoring capital
availability to ensure that we have sufficient resources to fund future capital
needs. See further discussion in "Liquidity and Capital Resources."
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Acquisitions
During the first nine months of fiscal 2021, we acquired two businesses for a combined cash purchase price of$125 million , net of cash acquired. The acquisitions were reported as part of our Industrial Solutions segment from the date of acquisition. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions. Results of Operations
The following table presents our net sales and the percentage of total net sales
by segment:
For the For the
Quarters Ended Nine Months Ended
June 25, June 26, June 25, June 26,
2021 2020 2021 2020
($ in millions)
Transportation Solutions $ 2,265 59 % $ 1,255 49 % $ 6,776 61 % $ 4,980 56 %
Industrial Solutions 1,002 26 865 34 2,827 25 2,754 31
Communications Solutions 578 15 428 17 1,502 14 1,177 13
Total $ 3,845 100 % $ 2,548 100 % $ 11,105 100 % $ 8,911 100 %
The following table provides an analysis of the change in our net sales by segment:
Change in Net Sales for the Quarter Ended June 25, 2021 Change in
versus Net Sales for the Quarter Ended June 26, 2020 versus Net Sales
for the Nine Months Ended
Net Sales OrganicNet Sales AcquisitionNet Sales OrganicNet Sales Acquisitions Growth Growth Translation (Divestitures) Growth Growth (Decline) Translation (Divestitures) ($ in millions) Transportation Solutions$ 1,010 80.5 %$ 921 71.6 % $ 89 $ -$ 1,796 36.1 %$ 1,438 28.4 % $ 269 $ 89 Industrial Solutions 137 15.8 109 12.6 33 (5) 73 2.7 (8) (0.4) 84 (3) Communications Solutions 150 35.0 134 30.8 16 - 325 27.6 285 24.1 40 - Total$ 1,297 50.9 %$ 1,164 45.0 % $ 138 $ (5)$ 2,194 24.6 %$ 1,715 19.0 % $ 393 $ 86 Net sales increased$1,297 million , or 50.9%, in the third quarter of fiscal 2021 as compared to the third quarter of fiscal 2020. The increase in net sales resulted primarily from organic net sales growth of 45.0% and the positive impact of foreign currency translation of 5.4% due to the strengthening of certain foreign currencies. In the third quarter of fiscal 2020, our net sales included significant, unfavorable impacts from the COVID-19 pandemic. In the first nine months of fiscal 2021, net sales increased$2,194 million , or 24.6%, as compared to the first nine months of fiscal 2020 due to organic net sales growth of 19.0%, the positive impact of foreign currency translation of 4.5% due to the strengthening of certain foreign currencies, and net sales contributions of 1.1% from acquisitions and divestitures. The significant, unfavorable impacts of the COVID-19 pandemic were included in our net sales in the first nine months of fiscal 2020. Price erosion adversely affected organic net sales by$47 million in the first nine months of fiscal 2021.
See further discussion of net sales below under "Segment Results."
Net Sales byGeographic Region . Our business operates in three geographic regions-Asia-Pacific ,Europe /Middle East /Africa ("EMEA"), and theAmericas -and our results of operations are influenced by changes in foreign currency exchange rates. Increases or decreases in the value of theU.S. dollar, compared to other currencies, will directly affect our reported results as we translate those currencies intoU.S. dollars at the end of each fiscal period.
Approximately 60% of our net sales were invoiced in currencies other than the
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The following table presents our net sales and the percentage of total net sales
by geographic region(1):
For the For the
Quarters Ended Nine Months Ended
June 25, June 26, June 25, June 26,
2021 2020 2021 2020
($ in millions)Asia-Pacific$ 1,384 36 %$ 1,032 41 %$ 4,013 36 %
$ 3,136 35 % EMEA 1,413 37 777 30 4,119 37 3,062 34 Americas 1,048 27 739 29 2,973 27 2,713 31 Total$ 3,845 100 %$ 2,548 100 %$ 11,105 100 %$ 8,911 100 %
(1) Net sales to external customers are attributed to individual countries based
on the legal entity that records the sale.
The following table provides an analysis of the change in our net sales by
geographic region:
Change in Net Sales for the Quarter Ended June 25, 2021 Change in Net Sales for the
Nine Months Ended
versus Net Sales for the Quarter Ended June 26, 2020 versus Net Sales for the Nine
Months Ended
Net Sales Organic Net Sales Acquisition Net Sales Organic Net Sales Acquisitions
Growth Growth Translation (Divestitures) Growth Growth Translation (Divestitures)
($ in millions)
Asia-Pacific $ 352 34.1 % $ 294 27.9 % $ 61 $ (3) $ 877 28.0 % $ 705 22.3 % $ 178 $ (6)
EMEA 636 81.9 552 69.3 89 (5) 1,057 34.5 715 22.8 264 78
Americas 309 41.8 318 42.9 (12) 3 260 9.6 295 10.8 (49) 14
Total $ 1,297 50.9 % $ 1,164 45.0 % $ 138 $ (5) $ 2,194 24.6 % $ 1,715 19.0 % $ 393 $ 86
Cost of Sales and Gross Margin
The following table presents cost of sales and gross margin information:
For the For the
Quarters Ended Nine Months Ended
June 25, June 26, June 25, June 26,
2021 2020 Change 2021 2020 Change
($ in millions)
Cost of sales $ 2,577 $ 1,841 $ 736 $ 7,481 $ 6,145 $ 1,336
As a percentage of net sales 67.0 % 72.3 % 67.4 % 69.0 %
Gross margin $ 1,268 $ 707 $ 561 $ 3,624 $ 2,766 $ 858
As a percentage of net sales 33.0 % 27.7 % 32.6 % 31.0 %
Gross margin increased $561 million and $858 million in the third quarter and
first nine months of fiscal 2021, respectively, as compared to the same periods
of fiscal 2020. The increases were primarily as a result of higher volume and,
to a lesser degree, improved manufacturing productivity and the positive impact
of foreign currency translation.
We use a wide variety of raw materials in the manufacture of our products and
cost of sales and gross margin are subject to variability in raw material
prices. As markets recover from the COVID-19 pandemic, increases in consumer
demand have led to shortages and price increases in some of our input materials.
During the third quarter and first nine months of fiscal 2021, copper, gold,
silver, and palladium prices as well as the prices of certain other raw
materials have
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increased from prior year levels. The following table presents the average prices incurred related to copper, gold, silver, and palladium:
For the For the
Quarters Ended Nine Months Ended
June 25, June 26, June 25, June 26,
Measure 2021 2020 2021 2020
Copper Lb. $ 3.41 $ 2.78 $ 3.07 $ 2.80
Gold Troy oz. 1,735 1,411 1,664 1,380
Silver Troy oz. 22.92 15.97 21.11 16.13
Palladium Troy oz. 2,438 1,998 2,229 2,020
We expect to purchase approximately 200 million pounds of copper, 125,000 troy
ounces of gold, 2.7 million troy ounces of silver, and 15,000 troy ounces of
palladium in fiscal 2021.
Operating Expenses
The following table presents operating expense information:
For the For the
Quarters Ended Nine Months Ended
June 25, June 26, June 25, June 26,
2021 2020 Change 2021 2020 Change
($ in millions)Selling, general, and administrative expenses$ 366 $ 321 $ 45 $ 1,128 $ 1,040 $ 88 As a percentage of net sales 9.5 % 12.6 % 10.2 % 11.7 % Restructuring and other charges, net$ 11 $ 98
$ (87) $ 195 $ 144 $ 51 Impairment of goodwill - - - - 900 (900) Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased$45 million in the third quarter of fiscal 2021 from the third quarter of fiscal 2020 due primarily to increased selling expenses to support higher sales levels, higher incentive compensation costs due to improved operational performance, and the negative impact of foreign currency translation, partially offset by savings attributable to restructuring actions and gains on the sale of real estate. In the first nine months of fiscal 2021, selling, general, and administrative expenses increased$88 million from the same period of fiscal 2020 due primarily to higher incentive compensation costs, the negative impact of foreign currency translation, and increased selling expenses, partially offset by savings attributable to cost control measures and restructuring actions and gains on the sale of real estate. Restructuring and Other Charges, Net. We are committed to continuous productivity improvements, and we evaluate opportunities to simplify our global manufacturing footprint, migrate facilities to lower-cost regions, reduce fixed costs, and eliminate excess capacity. These initiatives are designed to help us maintain our competitiveness in the industry, improve our operating leverage, and position us for future growth. During fiscal 2021 and 2020, we initiated restructuring programs across all segments to optimize our manufacturing footprint and improve the cost structure of the organization. We incurred net restructuring charges of$170 million during the first nine months of fiscal 2021, of which$162 million related to the fiscal 2021 restructuring program. Annualized cost savings related to the fiscal 2021 actions commenced during the first nine months of fiscal 2021 are expected to be approximately$75 million and are expected to be realized by the end of fiscal 2023. Cost savings will be reflected primarily in cost of sales and selling, general, and administrative expenses. For fiscal 2021, we expect total restructuring charges to be approximately$200 million and total spending, which will be funded with cash from operations, to be approximately$200 million .
See Note 2 to the Condensed Consolidated Financial Statements for additional information regarding net restructuring and other charges.
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Impairment ofGoodwill . During the first nine months of fiscal 2020, we recorded a goodwill impairment charge of$900 million related to the Sensors reporting unit in our Transportation Solutions segment.
Operating Income
The following table presents operating income and operating margin information:
For the For the
Quarters Ended Nine Months Ended
June 25, June 26, June 25, June 26,
2021 2020 Change 2021 2020 Change
($ in millions)Operating income$ 714 $ 134 $ 580 $ 1,774 $ 190 $ 1,584 Operating margin 18.6 % 5.3 % 16.0 % 2.1 %
Operating income included the following:
For the For the
Quarters Ended Nine Months Ended
June 25, June 26, June 25, June 26,
2021 2020 2021 2020
(inmillions)
Acquisition-related charges: Acquisition and integration costs$ 9 $ 8 $ 23 $ 27 Charges associated with the amortization of acquisition-related fair value adjustments - - 3 - 9 8 26 27 Restructuring and other charges, net 11 98 195 144 Impairment of goodwill - - - 900 Total$ 20 $ 106 $ 221 $ 1,071
See discussion of operating income below under "Segment Results."
Non-Operating Items
The following table presents select non-operating information:
For the For the
Quarters Ended Nine Months Ended
June 25, June 26, June 25, June 26,
2021 2020 Change 2021 2020 Change
($ in millions)
Income tax expense $ 124 $ 185 $ (61) $ 290 $ 674 $ (384)
Effective tax rate 17.6 % 145.7 % 16.6 % 360.4 %
Income Taxes. See Note 12 to the Condensed Consolidated Financial Statements for
discussion of items impacting income tax expense and the effective tax rate for
the third quarters and first nine months of fiscal 2021 and 2020, including the
Switzerland Federal Act on Tax Reform and AHV Financing and an increase to the
valuation allowance for certain non-U.S. deferred tax assets in fiscal 2020.
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Segment Results
Transportation Solutions
For the For the
Quarters Ended Nine Months Ended
June 25, June 26, June 25, June 26,
2021 2020 2021 2020
($ in millions)
Automotive $ 1,600 71 % $ 797 63 % $ 4,859 72 % $ 3,567 71 %
Commercial transportation 382 17 233 19 1,095 16 785 16
Sensors 283 12 225 18 822 12 628 13
Total $ 2,265 100 % $ 1,255 100 % $ 6,776 100 % $ 4,980 100 %
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 25, 2021 Change in Net Sales
for the Nine Months Ended
versus Net Sales for the Quarter Ended June 26, 2020 versus Net Sales for the
Nine Months Ended
Net Sales Organic Net Sales Net Sales Organic Net Sales
Growth Growth Translation Growth Growth Translation Acquisition
($ in millions)
Automotive $ 803 100.8 % $ 738 90.2 % $ 65 $ 1,292 36.2 % $ 1,083 29.9 % $ 209 $ -Commercial transportation 149 63.9 136
56.3 13 310 39.5 274 34.3 36 -
Sensors 58 25.8 47 20.3 11 194 30.9 81 12.5 24 89
Total $ 1,010 80.5 % $ 921 71.6 % $ 89 $ 1,796 36.1 % $ 1,438 28.4 % $ 269 $ 89
Net sales in the Transportation Solutions segment increased$1,010 million , or 80.5%, in the third quarter of fiscal 2021 from the third quarter of fiscal 2020 due primarily to organic net sales growth of 71.6%. In the third quarter of fiscal 2020, our net sales included significant, unfavorable impacts from the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
Automotive-Our organic net sales increased 90.2% in the third quarter of fiscal
2021 with increases of 194.4% in the
? region, and 41.7% in the
resulted primarily from increases in global automotive production and content
gains.
Commercial transportation-Our organic net sales increased 56.3% in the third
? quarter of fiscal 2021 with growth across all regions as a result of market
growth and content gains.
? Sensors-Our organic net sales increased 20.3% in the third quarter of fiscal
2021 due primarily to strength in transportation applications.
In the first nine months of fiscal 2021, net sales in the Transportation Solutions segment increased$1,796 million , or 36.1%, as compared to the first nine months of fiscal 2020 primarily as a result of organic net sales growth of 28.4%. Net sales in the first nine months of fiscal 2020 included the significant, unfavorable impacts of the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
Automotive-Our organic net sales increased 29.9% in the first nine months of
? fiscal 2021 with increases of 35.8% in the
region, and 25.4% in theAsia-Pacific region . Our overall 28 Table of Contents
organic net sales growth was attributable primarily to increases in global
automotive production and content gains.
Commercial transportation-Our organic net sales increased 34.3% in the first
? nine months of fiscal 2021 due to growth across all regions resulting from
market growth and content gains.
? Sensors-Our organic net sales increased 12.5% in the first nine months of
fiscal 2021 as a result of strength across all markets.
Operating Income (Loss). The following table presents the Transportation
Solutions segment's operating income (loss) and operating margin information:
For the For the
Quarters Ended Nine Months Ended
June 25, June 26, June 25, June 26,
2021 2020 Change 2021 2020 Change
($ in millions)
Operating income (loss) $ 433 $ (1) $ 434 $ 1,139 $ (291) $ 1,430
Operating margin 19.1 % (0.1) % 16.8 % (5.8) %
Operating income (loss) in the Transportation Solutions segment increased $434
million and $1,430 million in the third quarter and first nine months of fiscal
2021, respectively, as compared to the same periods of fiscal 2020. Excluding
the items below, operating income (loss) increased primarily as a result of
higher volume and, to a lesser degree, improved manufacturing productivity.
For the For the
Quarters Ended Nine Months Ended
June 25, June 26, June 25, June 26,
2021 2020 2021 2020
(in millions)
Acquisition-related charges:
Acquisition and integration costs $ 5 $ 6 $ 12 $ 21
Charges associated with the amortization of
acquisition-related fair value adjustments - - 3 -
5 6 15 21
Restructuring and other charges, net 2 55 130 77 Impairment of goodwill - - - 900 Total $ 7$ 61 $ 145 $ 998 Industrial Solutions
For the For the
Quarters Ended Nine Months Ended
June 25, June 26, June 25, June 26,
2021 2020 2021 2020
($ in millions)
Aerospace, defense, oil, and gas
777 27 %$ 892 32 % Industrial equipment 377 37 265 31 1,011 36 808 30 Medical 178 18 161 19 495 18 526 19 Energy 187 19 174 19 544 19 528 19 Total$ 1,002 100 %$ 865 100 %$ 2,827 100 %$ 2,754 100 %
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 Industrial Solutions segment's net sales by industry end market:
Change in Net Sales for the Quarter Ended June 25, 2021 Change in Net
Sales for the Nine Months Ended
versus Net Sales for the Quarter Ended June 26, 2020 versus Net
Sales for the Nine Months Ended
Net Sales OrganicNet Sales AcquisitionNet Sales OrganicNet Sales Acquisition Growth (Decline) Growth (Decline) Translation (Divestitures) Growth (Decline)
Growth (Decline) Translation (Divestitures)
($ in millions)
Aerospace,
defense, oil, and
gas $ (5) (1.9) % $ (18) (6.9) % $ 8 $ 5 $ (115) (12.9) % $ (152) (17.1) % $ 21 $ 16
Industrial
equipment 112 42.3 96 35.5 16 - 203 25.1 162 19.6 41 -
Medical 17 10.6 16 9.9 1 - (31) (5.9) (33) (6.3) 2 -
Energy 13 7.5 15 8.7 8 (10) 16 3.0 15 2.9 20 (19)
Total $ 137 15.8 % $ 109 12.6 % $ 33 $ (5) $ 73 2.7 % $ (8) (0.4) % $ 84 $ (3)
In the Industrial Solutions segment, net sales increased $137 million , or 15.8%,
in the third quarter of fiscal 2021 as compared to the third quarter of fiscal
2020 due primarily to organic net sales growth of 12.6% and the positive impact
of foreign currency translation of 3.8%. Net sales in the third quarter of
fiscal 2020 included significant, unfavorable impacts from the COVID-19
pandemic. Our organic net sales by industry end market were as follows:
Aerospace, defense, oil, and gas-Our organic net sales decreased 6.9% in the
? third quarter of fiscal 2021 due primarily to declines in the commercial
aerospace market, partially offset by strength in the defense market.
Industrial equipment-Our organic net sales increased 35.5% in the third quarter
? of fiscal 2021 due to growth in all regions primarily as a result of strength
in factory automation and controls applications.
Medical-Our organic net sales increased 9.9% in the third quarter of fiscal
? 2021 primarily as a result of market growth attributable to increases in
interventional medical procedures.
Energy-Our organic net sales increased 8.7% in the third quarter of fiscal 2021
? due primarily to growth in the
applications.
In the first nine months of fiscal 2021, net sales in the Industrial Solutions segment increased$73 million , or 2.7%, as compared to the first nine months of fiscal 2020 primarily as a result of the positive impact of foreign currency translation of 3.1%. In the first nine months of fiscal 2020, our net sales included significant, unfavorable impacts of the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
Aerospace, defense, oil, and gas-Our organic net sales decreased 17.1% in the
? first nine months of fiscal 2021 primarily as a result of declines in the
commercial aerospace market, partially offset by strength in the defense market.
Industrial equipment-Our organic net sales increased 19.6% in the first nine
? months of fiscal 2021 with growth in all regions due primarily to strength in
factory automation and controls applications.
Medical-Our organic net sales decreased 6.3% in the first nine months of fiscal
? 2021 due primarily to delays in elective procedures during the first six months
of fiscal 2021.
Energy-Our organic net sales increased 2.9% in the first nine months of fiscal
? 2021 primarily as a result of growth in the
strength in solar applications.
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Operating Income. The following table presents the Industrial Solutions segment's operating income and operating margin information:
For the For the
Quarters Ended Nine Months Ended
June 25, June 26, June 25, June 26,
2021 2020 Change 2021 2020 Change
($ in millions)
Operating income $ 148 $ 70 $ 78 $ 335 $ 327 $ 8
Operating margin 14.8 % 8.1 % 11.9 % 11.9 %
Operating income in the Industrial Solutions segment increased$78 million and$8 million in the third quarter and first nine months of fiscal 2021, respectively, as compared to the same periods of fiscal 2020. Excluding the items below, operating income increased in the third quarter of fiscal 2021 primarily as a result of higher volume. Excluding the items below, operating income increased slightly in the first nine months of fiscal 2021 as compared to the first nine months of fiscal 2020. For the For the Quarters Ended Nine Months Ended June 25, June 26, June 25, June 26, 2021 2020 2021 2020 (in millions) Acquisition and integration costs$ 4 $ 2$ 11 $ 6 Restructuring and other charges, net 6
40 49 56 Total$ 10 $ 42 $ 60 $ 62 Communications Solutions
For the For the
Quarters Ended Nine Months Ended
June 25, June 26, June 25, June 26,
2021 2020 2021 2020
($ in millions)
Data and devices $ 329 57 % $ 276 64 % $ 841 56 % $ 713 61 %
Appliances 249 43 152 36 661 44 464 39
Total $ 578 100 % $ 428 100 % $ 1,502 100 % $ 1,177 100 %
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 June 25, 2021 Change in Net Sales for the Nine Months Ended
versus Net Sales for the Quarter Ended June 26, 2020 versus Net Sales for the Nine Months Ended
Net Sales Organic Net Sales Net Sales
Organic
Growth Growth Translation Growth Growth Translation
($ in millions)
Data and devices $ 53 19.2 % $ 46 16.1 % $ 7 $ 128 18.0 % $ 108 15.0 % $ 20
Appliances 97 63.8 88 56.9 9 197 42.5 177 37.7 20
Total $ 150 35.0 % $ 134 30.8 % $ 16 $ 325 27.6 % $ 285 24.1 % $ 40
Net sales in the Communications Solutions segment increased $150 million , or
35.0%, in the third quarter of fiscal 2021 as compared to the third quarter of
fiscal 2020 due primarily to organic net sales growth of 30.8%. In the third
quarter
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of fiscal 2020, our net sales included the unfavorable impacts of the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
Data and devices-Our organic net sales increased 16.1% in the third quarter of
? fiscal 2021 primarily as a result of market strength in all regions as well as
content growth and market share gains in high-speed cloud applications.
Appliances-Our organic net sales increased 56.9% in the third quarter of fiscal
? 2021 due to sales growth in all regions attributable primarily to market
improvements and market share gains.
In the first nine months of fiscal 2021, net sales in the Communications Solutions segment increased$325 million , or 27.6%, as compared to the first nine months of fiscal 2020 primarily as a result of organic net sales growth of 24.1%. Net sales in the first nine months of fiscal 2020 included the unfavorable impacts of the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
Data and devices-Our organic net sales increased 15.0% in the first nine months
? of fiscal 2021 due primarily to market strength in all regions as well as
content growth and market share gains in high-speed cloud applications.
Appliances-Our organic net sales increased 37.7% in the first nine months of
? fiscal 2021 as a result of sales growth in all regions due primarily to market
improvements and market share gains.
Operating Income. The following table presents the Communications Solutions segment's operating income and operating margin information:
For the For the
Quarters Ended Nine Months Ended
June 25, June 26, June 25, June 26,
2021 2020 Change 2021 2020 Change
($ in millions)Operating income$ 133 $ 65 $ 68 $ 300 $ 154 $ 146 Operating margin 23.0 % 15.2 % 20.0 %
13.1 %
Operating income in the Communications Solutions segment increased$68 million and$146 million in the third quarter and first nine months of fiscal 2021, respectively, as compared to the same periods of fiscal 2020. Excluding the item below, operating income increased due primarily to higher volume and, to a lesser degree, improved manufacturing productivity. For the For the Quarters Ended Nine Months Ended June 25, June 26, June 25, June 26, 2021 2020 2021 2020 (in millions) Restructuring and other charges, net $ 3 $
3$ 16 $ 11 Liquidity and Capital Resources Our ability to fund our future capital needs will be affected by our ongoing ability to generate cash from operations and may be affected by our access to capital markets, money markets, or other sources of funding, as well as the capacity and terms of our financing arrangements. We believe that cash generated from operations and, to the extent necessary, these other sources of potential funding will be sufficient to meet our anticipated capital needs for the foreseeable future, including the payment of$500 million of 3.50% senior notes due inFebruary 2022 . We may use excess cash to purchase a portion of our common shares pursuant to our authorized share repurchase program, to acquire strategic businesses or product lines, to pay dividends on our common shares, or to reduce our outstanding debt. The cost or availability of future funding may be impacted by financial market conditions. We will continue to monitor financial markets and respond as necessary to changing 32
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conditions, including any developments related to the COVID-19 pandemic. We believe that we have sufficient financial resources and liquidity which will enable us to meet our ongoing working capital and other cash flow needs.
Cash Flows from Operating Activities
In the first nine months of fiscal 2021, net cash provided by operating activities increased$630 million to$1,902 million from$1,272 million in the first nine months of fiscal 2020. The increase resulted primarily from higher pre-tax income and increased accounts payable levels driven by higher production volumes, partially offset by the impact of increased sales on accounts receivable levels. The amount of income taxes paid, net of refunds, during the first nine months of fiscal 2021 and 2020 was$291 million and$195 million , respectively.
Cash Flows from Investing Activities
Capital expenditures were$454 million and$439 million in the first nine months of fiscal 2021 and 2020, respectively. We expect fiscal 2021 capital spending levels to be approximately 4-5% of net sales. We believe our capital funding levels are adequate to support new programs, and we continue to invest in our manufacturing infrastructure to further enhance productivity and manufacturing capabilities. During the first nine months of fiscal 2021, we acquired two businesses for a combined cash purchase price of$125 million , net of cash acquired. We acquired four businesses, including First Sensor AG, for a combined cash purchase price of$325 million , net of cash acquired, during the first nine months of fiscal 2020. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions.
Cash Flows from Financing Activities and Capitalization
Total debt at
During the first nine months of fiscal 2021,Tyco Electronics Group S.A. ("TEGSA"), our wholly-owned subsidiary, repaid, at maturity,$250 million of 4.875% senior notes due inJanuary 2021 and €350 million of fixed-to-floating rate senior notes due inJune 2021 . During the first nine months of fiscal 2021, TEGSA issued €550 million aggregate principal amount of 0.00% senior notes due inFebruary 2029 . The notes are TEGSA's unsecured senior obligations and rank equally in right of payment with all existing and any future senior indebtedness of TEGSA and senior to any subordinated indebtedness that TEGSA may incur. TEGSA has a five-year unsecured senior revolving credit facility ("Credit Facility") with total commitments of$1.5 billion . The Credit Facility was amended inJune 2021 primarily to extend the maturity date fromNovember 2023 toJune 2026 . The amended Credit Facility contains customary provisions for the replacement of London Interbank Offered Rate ("LIBOR") with successor rates and amends certain representations, warranties, and covenants applicable to us and TEGSA as obligors under the credit agreement. TEGSA had no borrowings under the Credit Facility atJune 25, 2021 orSeptember 25, 2020 . Borrowings under the Credit Facility bear interest at a rate per annum equal to, at the option of TEGSA, (1) LIBOR or, upon a phase-out of LIBOR, an alternative benchmark rate, (2) an alternate base rate equal to the highest of (i)Bank of America, N.A.'s base rate, (ii) the federal funds effective rate plus 1/2 of 1%, and (iii) one-month LIBOR, or an alternative benchmark rate, plus 1%, (3) an alternative currency daily rate, or (4) an alternative currency term rate, plus, in each case, an applicable margin based upon the senior, unsecured, long-term debt rating of TEGSA. TEGSA is required to pay an annual facility fee. Based on the applicable credit ratings of TEGSA, this fee ranges from 5.0 to 12.5 basis points of the lenders' commitments under the Credit Facility. The Credit Facility contains a financial ratio covenant providing that if, as of the last day of each fiscal quarter, our ratio of Consolidated Total Debt to Consolidated EBITDA (as defined in the Credit Facility) for the then most recently concluded period of four consecutive fiscal quarters exceeds 3.75 to 1.0, an Event of Default (as defined in the Credit 33
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Facility) is triggered. The Credit Facility and our other debt agreements
contain other customary covenants. None of our covenants are presently
considered restrictive to our operations. As of
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. InMarch 2021 , our shareholders approved a dividend payment to shareholders of$2.00 per share, payable in four equal quarterly installments of$0.50 per share beginning in the third quarter of fiscal 2021 and ending in the second quarter of fiscal 2022.
Payments of common share dividends to shareholders were
During the third quarter of fiscal 2021, our board of directors authorized an increase of$1.5 billion in the share repurchase program. We repurchased approximately 5 million of our common shares for$591 million and approximately 6 million of our common shares for$505 million under the share repurchase program during the first nine months of fiscal 2021 and 2020, respectively. AtJune 25, 2021 , we had$1.9 billion of availability remaining under our share repurchase authorization.
Summarized Guarantor Financial Information
As discussed above, our senior notes, commercial paper, and Credit Facility are issued by TEGSA and are fully and unconditionally guaranteed on an unsecured basis by TEGSA's parent,TE Connectivity Ltd. In addition to being the issuer of our debt securities, TEGSA owns, directly or indirectly, all of our operating subsidiaries. The following tables present summarized financial information, excluding investments in and equity in earnings of our non-guarantor subsidiaries, forTE Connectivity Ltd. and TEGSA on a combined basis. June 25, September 25, 2021 2020 (in millions) Balance Sheet Data: Total current assets$ 107 $ 134 Total noncurrent assets(1) 2,533 3,282 Total current liabilities 1,225 1,237 Total noncurrent liabilities(2) 24,024 23,549
Includes
(1) 25, 2020, 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 25, September 25,
2021 2020
(in millions)
Statement of Operations Data:
Loss from continuing operations $ (295) $ (206)
Net loss (288) (202)
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Commitments and Contingencies
Legal Proceedings
In the normal course of business, we are subject to various legal proceedings
and claims, including patent infringement claims, product liability matters,
employment disputes, disputes on agreements, other commercial disputes,
environmental matters, antitrust claims, and tax matters, including non-income
tax matters such as value added tax, sales and use tax, real estate tax, and
transfer tax. Although it is not feasible to predict the outcome of these
proceedings, based upon our experience, current information, and applicable law,
we do not expect that the outcome of these proceedings, either individually or
in the aggregate, will have a material effect on our results of operations,
financial position, or cash flows.
Trade Compliance Matters
We are investigating our past compliance with 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.
Guarantees
In certain instances, we have guaranteed the performance of third parties and provided financial guarantees for uncompleted work and financial commitments. The terms of these guarantees vary with end dates ranging from fiscal 2021 through the completion of such transactions. The guarantees would be triggered in the event of nonperformance, and the potential exposure for nonperformance under the guarantees would not have a material effect on our results of operations, financial position, or cash flows. In disposing of assets or businesses, we often provide representations, warranties, and/or indemnities to cover various risks including unknown damage to assets, environmental risks involved in the sale of real estate, liability for investigation and remediation of environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not expect that these uncertainties will have a material adverse effect on our results of operations, financial position, or cash flows.
At
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 sale. These performance guarantees and letters of credit had a combined value of approximately$129 million as ofJune 25, 2021 and are expected to expire at various dates through fiscal 2025. During the first nine months of fiscal 2021, we amended our agreement withSubCom and removed the requirement to issue new performance guarantees. We have contractual recourse against theSubCom business if we are required to perform on anySubCom guarantees; however, based on historical experience, we do not anticipate having to perform. Critical Accounting Policies and Estimates The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses. 35
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Our accounting policies for revenue recognition, goodwill and other intangible assets, income taxes, and pension plans are based on, among other things, judgments and assumptions made by management. For additional information regarding these policies and the underlying accounting assumptions and estimates used in these policies, refer to the Consolidated Financial Statements and accompanying notes contained in our Annual Report on Form 10-K for the fiscal year endedSeptember 25, 2020 . There were no significant changes to this information during the first nine months of fiscal 2021. Non-GAAP Financial Measure
Organic Net Sales Growth (Decline)
We present organic net sales growth (decline) as we believe it is appropriate
for investors to consider this adjusted financial measure in addition to results
in accordance with GAAP. Organic net sales growth (decline) represents net sales
growth (decline) (the most comparable GAAP financial measure) excluding the
impact of foreign currency exchange rates, and acquisitions and divestitures
that occurred in the preceding twelve months, if any. Organic net sales growth
(decline) is a useful measure of our performance because it excludes items that
are not completely under management's control, such as the impact of changes in
foreign currency exchange rates, and items that do not reflect the underlying
growth of the company, such as acquisition and divestiture activity.
Organic net sales growth (decline) provides useful information about our results
and the trends of our business. Management uses this measure to monitor and
evaluate performance. Also, management uses this measure together with GAAP
financial measures in its decision-making processes related to the operations of
our reportable segments and our overall company. It is also a significant
component in our incentive compensation plans. We believe that investors benefit
from having access to the same financial measures that management uses in
evaluating operations. The tables presented in "Results of Operations" and
"Segment Results" provide reconciliations of organic net sales growth (decline)
to net sales growth (decline) calculated in accordance with GAAP.
Organic net sales growth (decline) is a non-GAAP financial measure and should
not be considered a replacement for results in accordance with GAAP. This
non-GAAP financial measure may not be comparable to similarly-titled measures
reported by other companies. The primary limitation of this measure is that it
excludes the financial impact of items that would otherwise either increase or
decrease our reported results. This limitation is best addressed by using
organic net sales growth (decline) in combination with net sales growth
(decline) to better understand the amounts, character, and impact of any
increase or decrease in reported amounts.
Forward-Looking Information
Certain statements in this Quarterly Report on Form 10-Q are "forward-looking
statements" within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. These statements are based on our management's beliefs and
assumptions and on information currently available to our management.
Forward-looking statements include, among others, the information concerning our
possible or assumed future results of operations, business strategies, financing
plans, competitive position, potential growth opportunities, potential operating
performance improvements, acquisitions, divestitures, the effects of
competition, and the effects of future legislation or regulations.
Forward-looking statements include all statements that are not historical facts
and can be identified by the use of forward-looking terminology such as the
words "believe," "expect," "plan," "intend," "anticipate," "estimate,"
"predict," "potential," "continue," "may," and "should," or the negative of
these terms or similar expressions.
Forward-looking statements involve risks, uncertainties, and assumptions. Actual
results may differ materially from those expressed in these forward-looking
statements. Investors should not place undue reliance on any forward-looking
statements. We do not have any intention or obligation to update forward-looking
statements after we file this report except as required by law.
The following and other risks, which are described in greater detail in "Part I.
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