Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 25, 2021
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
001-33260
(Commission File Number)
TE CONNECTIVITY LTD.
(Exact name of registrant as specified in its charter)
Switzerland(Jurisdiction of Incorporation)
98-0518048(I.R.S. Employer Identification No.)
Mühlenstrasse 26, CH-8200 Schaffhausen, Switzerland
(Address of principal executive offices)
+41 (0)52 633 66 61
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
Common Shares, Par Value CHF 0.57
TEL
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of common shares outstanding as of July 23, 2021 was 327,996,918.
INDEX TO FORM 10-Q
Page
Part I.
Financial Information
Item 1.
Financial Statements
1
Condensed Consolidated Statements of Operations for the Quarters and Nine Months Ended June 25, 2021 and June 26, 2020 (unaudited)
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Quarters and Nine Months Ended June 25, 2021 and June 26, 2020 (unaudited)
2
Condensed Consolidated Balance Sheets as of June 25, 2021 and September 25, 2020 (unaudited)
3
Condensed Consolidated Statements of Equity for the Quarters and Nine Months Ended June 25, 2021 and June 26, 2020 (unaudited)
4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 25, 2021 and June 26, 2020 (unaudited)
6
Notes to Condensed Consolidated Financial Statements (unaudited)
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
22
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
38
Item 4.
Controls and Procedures
Part II.
Other Information
Legal Proceedings
39
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
40
Item 6.
Exhibits
41
Signatures
42
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the
Quarters Ended
Nine Months Ended
June 25,
June 26,
2021
2020
(in millions, except per share data)
Net sales
$
3,845
2,548
11,105
8,911
Cost of sales
2,577
1,841
7,481
6,145
Gross margin
1,268
707
3,624
2,766
Selling, general, and administrative expenses
366
321
1,128
1,040
Research, development, and engineering expenses
168
146
504
465
Acquisition and integration costs
9
8
23
27
Restructuring and other charges, net
11
98
195
144
Impairment of goodwill
—
900
Operating income
714
134
1,774
190
Interest income
14
13
Interest expense
(14)
(13)
(42)
(36)
Other income, net
5
20
Income from continuing operations before income taxes
705
127
1,751
187
Income tax expense
(124)
(185)
(290)
(674)
Income (loss) from continuing operations
581
(58)
1,461
(487)
Income (loss) from discontinued operations, net of income taxes
(1)
17
16
Net income (loss)
580
(41)
1,467
(471)
Basic earnings (loss) per share:
1.76
(0.18)
4.41
(1.46)
Income (loss) from discontinued operations
0.05
0.02
(0.12)
4.43
(1.41)
Diluted earnings (loss) per share:
1.74
4.39
Weighted-average number of shares outstanding:
Basic
330
331
333
Diluted
See Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
Other comprehensive income (loss):
Currency translation
21
172
(43)
Adjustments to unrecognized pension and postretirement benefit costs, net of income taxes
19
Gains (losses) on cash flow hedges, net of income taxes
(15)
37
15
Other comprehensive income (loss)
32
65
233
(5)
Comprehensive income (loss)
612
24
1,700
(476)
Less: comprehensive income attributable to noncontrolling interests
(2)
(3)
(4)
Comprehensive income (loss) attributable to TE Connectivity Ltd.
610
1,696
(477)
CONDENSED CONSOLIDATED BALANCE SHEETS
September 25,
(in millions, except share
data)
Assets
Current assets:
Cash and cash equivalents
1,416
945
Accounts receivable, net of allowance for doubtful accounts of $41 and $29, respectively
2,985
2,377
Inventories
2,392
1,950
Prepaid expenses and other current assets
601
512
Total current assets
7,394
5,784
Property, plant, and equipment, net
3,723
3,650
Goodwill
5,401
5,224
Intangible assets, net
1,516
1,593
Deferred income taxes
2,224
2,178
Other assets
800
813
Total assets
21,058
19,242
Liabilities, redeemable noncontrolling interests, and shareholders' equity
Current liabilities:
Short-term debt
505
694
Accounts payable
1,938
1,276
Accrued and other current liabilities
2,219
1,720
Total current liabilities
4,662
3,690
Long-term debt
3,629
3,452
Long-term pension and postretirement liabilities
1,305
1,336
149
143
Income taxes
299
252
Other liabilities
852
874
Total liabilities
10,896
9,747
Commitments and contingencies (Note 9)
Redeemable noncontrolling interests
116
112
Shareholders' equity:
Common shares, CHF 0.57 par value, 336,099,881 shares authorized and issued, and 338,953,381 shares authorized and issued, respectively
148
Accumulated earnings
10,892
10,348
Treasury shares, at cost, 7,518,936 and 8,295,878 shares, respectively
(778)
(669)
Accumulated other comprehensive loss
(216)
(445)
Total shareholders' equity
10,046
9,383
Total liabilities, redeemable noncontrolling interests, and shareholders' equity
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the Quarter Ended June 25, 2021
Accumulated
TE Connectivity
Other
Ltd.
Non-
Common Shares
Treasury Shares
Contributed
Comprehensive
Shareholders'
controlling
Total
Shares
Amount
Surplus
Earnings
Loss
Equity
Interests
Balance at March 26, 2021
339
(9)
(775)
10,541
(246)
9,669
Net income
Other comprehensive income
30
Share-based compensation expense
Dividends
Exercise of share options
Restricted share award vestings and other activity
(24)
29
Repurchase of common shares
(282)
Cancellation of treasury shares
262
(261)
Balance at June 25, 2021
336
(8)
For the Nine Months Ended June 25, 2021
Balance at September 25, 2020
229
73
(658)
130
90
(73)
(591)
(UNAUDITED) (Continued)
For the Quarter Ended June 26, 2020
Balance at March 27, 2020
351
154
(20)
(1,639)
11,122
(571)
9,066
105
9,171
Net loss
62
(17)
12
10
(82)
(12)
975
(970)
Balance at June 26, 2020
(729)
10,125
(509)
9,036
108
9,144
For the Nine Months Ended June 26, 2020
Balance at September 27, 2019
(16)
(1,337)
12,256
(503)
10,570
Acquisition
107
(6)
54
(633)
109
(54)
(57)
(505)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Income from discontinued operations, net of income taxes
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:
Depreciation and amortization
590
530
(62)
459
Non-cash lease cost
79
Provision for losses on accounts receivable and inventories
28
(45)
Changes in assets and liabilities, net of the effects of acquisitions and divestitures:
Accounts receivable, net
(638)
182
(482)
(342)
646
(81)
110
(204)
61
80
67
Net cash provided by operating activities
1,902
1,272
Cash flows from investing activities:
Capital expenditures
(454)
(439)
Proceeds from sale of property, plant, and equipment
85
Acquisition of businesses, net of cash acquired
(126)
(328)
Net cash used in investing activities
(497)
(748)
Cash flows from financing activities:
Net decrease in commercial paper
(219)
Proceeds from issuance of debt
661
593
Repayment of debt
(706)
(352)
Proceeds from exercise of share options
(518)
(523)
Payment of common share dividends to shareholders
(483)
(466)
(27)
(32)
Net cash used in financing activities
(943)
Effect of currency translation on cash
(7)
Net increase (decrease) in cash, cash equivalents, and restricted cash
471
(453)
Cash, cash equivalents, and restricted cash at beginning of period
927
Cash, cash equivalents, and restricted cash at end of period
474
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The unaudited Condensed Consolidated Financial Statements of TE Connectivity Ltd. (“TE Connectivity” or the “Company,” which may be referred to as “we,” “us,” or “our”) have been prepared in United States (“U.S.”) dollars, in accordance with accounting principles generally accepted in the U.S. (“GAAP”) and the instructions to Form 10-Q under the Securities Exchange Act of 1934. In management’s opinion, the unaudited Condensed Consolidated Financial Statements contain all normal recurring adjustments necessary for a fair presentation of interim results. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire fiscal year or any subsequent interim period.
The year-end balance sheet data was derived from audited financial statements, but does not include all of the information and disclosures required by GAAP. These financial statements should be read in conjunction with our audited Consolidated Financial Statements contained in our Annual Report on Form 10-K for the fiscal year ended September 25, 2020.
Unless otherwise indicated, references in the Condensed Consolidated Financial Statements to fiscal 2021 and fiscal 2020 are to our fiscal years ending September 24, 2021 and ended September 25, 2020, respectively.
2. Restructuring and Other Charges, Net
Net restructuring and other charges consisted of the following:
Restructuring charges, net
170
Impairment of held for sale businesses and loss on divestitures
Other charges, net
Net restructuring charges by segment were as follows:
Transportation Solutions
55
77
Industrial Solutions
26
56
Communications Solutions
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
Activity in our restructuring reserves was as follows:
Balance at
Changes in
Cash
Non-Cash
Currency
Charges
Estimate
Payments
Items
Translation
Fiscal 2021 Actions:
Employee severance
138
Facility and other exit costs
Property, plant, and equipment
179
(19)
Fiscal 2020 Actions:
180
(74)
111
188
18
(77)
125
Pre-Fiscal 2020 Actions:
93
(44)
97
(11)
(51)
Total Activity
285
198
(28)
(147)
(10)
305
Fiscal 2021 Actions
During fiscal 2021, we initiated a restructuring program across all segments to optimize our manufacturing footprint and improve the cost structure of the organization. During the nine months ended June 25, 2021, we recorded net restructuring charges of $162 million in connection with this program. We expect to complete all restructuring actions commenced during the nine months ended June 25, 2021 by the end of fiscal 2022 and to incur additional charges of approximately $20 million related primarily to employee severance and facility exit costs.
The following table summarizes expected, incurred, and remaining charges for the fiscal 2021 program by segment:
Cumulative
Remaining
Expected
Incurred
131
120
34
162
Fiscal 2020 Actions
During fiscal 2020, we initiated a restructuring program associated with footprint consolidation and structural improvements, due in part to the COVID-19 pandemic, across all segments. In connection with this program, during the nine months ended June 25, 2021 and June 26, 2020, we recorded restructuring charges of $18 million and $138 million, respectively. We expect to complete all restructuring actions commenced during fiscal 2020 by the end of fiscal 2023 and to incur additional charges of approximately $22 million related primarily to employee severance and facility exit costs.
The following table summarizes expected, incurred, and remaining charges for the fiscal 2020 program by segment:
139
129
102
290
268
Pre-Fiscal 2020 Actions
Prior to fiscal 2020, we initiated restructuring programs associated with footprint consolidation and structural improvements impacting all segments. During the nine months ended June 25, 2021 and June 26, 2020, we recorded net restructuring credits of $10 million and charges of $6 million, respectively, related to pre-fiscal 2020 actions. We expect additional charges related to pre-fiscal 2020 actions to be insignificant.
Total Restructuring Reserves
Restructuring reserves included on the Condensed Consolidated Balance Sheets were as follows:
236
69
Restructuring reserves
3. Acquisitions
During the nine months ended June 25, 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.
We acquired four businesses, including First Sensor AG (“First Sensor”), for a combined cash purchase price of $325 million, net of cash acquired, during the nine months ended June 26, 2020. The acquisitions were reported as part of our Transportation Solutions and Industrial Solutions segments from the date of acquisition.
In connection with the acquisition of First Sensor, we and First Sensor entered into a Domination and Profit and Loss Transfer Agreement (“DPLTA”). Under the terms of the DPLTA, upon its effectiveness in July 2020, First Sensor minority shareholders can elect either (1) to remain First Sensor minority shareholders and receive recurring annual compensation of €0.56 per First Sensor share or (2) to put their First Sensor shares in exchange for compensation of €33.27 per First Sensor share. The ultimate amount and timing of any future cash payments related to the DPLTA is uncertain. Our First Sensor noncontrolling interest balance, which was originally recorded at a fair value of €96 million (equivalent to $107 million), is recorded as redeemable noncontrolling interest outside of equity on the Condensed Consolidated Balance Sheets as of June 25, 2021 and September 25, 2020 as the exercise of the put right by First Sensor minority shareholders is not within our control.
4. Inventories
Inventories consisted of the following:
Raw materials
315
251
Work in progress
1,000
851
Finished goods
1,077
848
5. Goodwill
The changes in the carrying amount of goodwill by segment were as follows:
Transportation
Industrial
Communications
Solutions
September 25, 2020(1)
1,527
3,110
587
Acquisitions
Purchase price adjustments
Currency translation and other
95
June 25, 2021(1)
1,566
3,236
599
During the nine months ended June 25, 2021, we recognized goodwill in the Industrial Solutions segment in connection with recent acquisitions. See Note 3 for additional information regarding acquisitions.
6. Intangible Assets, Net
Intangible assets consisted of the following:
June 25, 2021
September 25, 2020
Gross
Net
Carrying
Amortization
Customer relationships
1,714
(637)
1,648
(554)
1,094
Intellectual property
1,237
(812)
425
1,225
(739)
486
2,971
(1,455)
2,892
(1,299)
Intangible asset amortization expense was $48 million and $46 million for the quarters ended June 25, 2021 and June 26, 2020, respectively, and $144 million and $137 million for the nine months ended June 25, 2021 and June 26, 2020, respectively.
At June 25, 2021, the aggregate amortization expense on intangible assets is expected to be as follows:
Remainder of fiscal 2021
48
Fiscal 2022
194
Fiscal 2023
192
Fiscal 2024
160
Fiscal 2025
145
Fiscal 2026
Thereafter
639
7. Debt
During the nine months ended June 25, 2021, Tyco Electronics Group S.A. (“TEGSA”), our wholly-owned subsidiary, repaid, at maturity, $250 million of 4.875% senior notes due in January 2021 and €350 million of fixed-to-floating rate senior notes due in June 2021.
During the nine months ended June 25, 2021, TEGSA issued €550 million aggregate principal amount of 0.00% senior notes due in February 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. The notes are fully and unconditionally guaranteed as to payment on an unsecured basis by TE Connectivity Ltd.
TEGSA has a five-year unsecured senior revolving credit facility (“Credit Facility”) with total commitments of $1.5 billion. The Credit Facility was amended in June 2021 primarily to extend the maturity date from November 2023 to June 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 at June 25, 2021 or September 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.
During the nine months ended June 25, 2021, we reclassified $500 million of 3.50% senior notes due in February 2022 from long-term debt to short-term debt on the Condensed Consolidated Balance Sheet.
The fair value of our debt, based on indicative valuations, was approximately $4,510 million and $4,550 million at June 25, 2021 and September 25, 2020, respectively.
8. Leases
The components of lease cost were as follows:
Operating lease cost
31
Variable lease cost
Total lease cost
44
117
Cash flow information, including significant non-cash transactions, related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Payments for operating leases(1)
78
Right-of-use assets obtained in exchange for new operating lease liabilities
9. Commitments and Contingencies
In the normal course of business, we are subject to various legal proceedings and claims, including patent infringement claims, product liability matters, employment disputes, disputes on agreements, other commercial disputes, environmental matters, antitrust claims, and tax matters, including non-income tax matters such as value added tax, sales and use tax, real estate tax, and transfer tax. Although it is not feasible to predict the outcome of these proceedings, based upon our experience, current information, and applicable law, we do not expect that the outcome of these proceedings, either individually or in the aggregate, will have a material effect on our results of operations, financial position, or cash flows.
Trade Compliance Matters
We are investigating our past compliance with relevant U.S. trade controls and have made voluntary disclosures of apparent trade controls violations to the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) and the U.S. State Department’s Directorate of Defense Trade Controls (“DDTC”). We are cooperating with the BIS and DDTC on these matters, and both our internal assessment and the resulting investigations by the agencies remain ongoing. We are unable to predict the timing and final outcome of the agencies’ investigations. An unfavorable outcome may include fines or penalties imposed in response to our disclosures, but we are not yet able to reasonably estimate the extent of any such fines or penalties. While we have reserved for potential fines and penalties relating to these matters based on our current understanding of the facts, the investigations into these matters have yet to be completed and the final outcome of such investigations and related fines and penalties may differ from amounts currently reserved.
Environmental Matters
We are involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites. The ultimate cost of site cleanup is difficult to predict given the uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations, and alternative cleanup methods. As of June 25, 2021, we concluded that we would incur investigation and remediation costs at these sites in the reasonably possible range of $18 million to $47 million, and we accrued $21 million as the probable loss, which was the best estimate within this range. We believe that any potential payment of such estimated amounts will not have a material adverse effect on our results of operations, financial position, or cash flows.
Guarantees
In disposing of assets or businesses, we often provide representations, warranties, and/or indemnities to cover various risks including unknown damage to assets, environmental risks involved in the sale of real estate, liability for investigation and remediation of environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not expect that these uncertainties will have a material adverse effect on our results of operations, financial position, or cash flows.
At June 25, 2021, we had outstanding letters of credit, letters of guarantee, and surety bonds of $135 million, excluding those related to our Subsea Communications (“SubCom”) business which are discussed below.
During fiscal 2019, we sold our SubCom business. In connection with the sale, we contractually agreed to continue to honor performance guarantees and letters of credit related to the SubCom business’ projects that existed as of the date of sale. These performance guarantees and letters of credit had a combined value of approximately $129 million as of June 25, 2021 and are expected to expire at various dates through fiscal 2025. During the nine months ended June 25, 2021, we amended our agreement with SubCom and removed the requirement to issue new performance guarantees. 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.
10. Financial Instruments
Foreign Currency Exchange Rate Risk
We utilize cross-currency swap contracts to reduce our exposure to foreign currency exchange rate risk associated with certain intercompany loans. The aggregate notional value of these contracts was €700 million at June 25, 2021 and September 25, 2020. Under the terms of these contracts, which have been designated as cash flow hedges, we make interest payments in euros at 3.50% per annum and receive interest in U.S. dollars at a weighted-average rate of 5.34% per annum. Upon maturity in fiscal 2022, we will pay the notional value of the contracts in euros and receive U.S. dollars from our counterparties. In connection with the cross-currency swap contracts, both counterparties to each contract are required to provide cash collateral.
These cross-currency swap contracts were recorded on the Condensed Consolidated Balance Sheets as follows:
36
At June 25, 2021 and September 25, 2020, collateral received from or paid to our counterparties approximated the net derivative position. Collateral is recorded in accrued and other current liabilities when the contracts are in a net asset
position, or prepaid expenses and other current assets when the contracts are in a net liability position on the Condensed Consolidated Balance Sheets. The impacts of these cross-currency swap contracts were as follows:
Gains (losses) recorded in other comprehensive income (loss)
Losses excluded from the hedging relationship(1)
(23)
Hedge of Net Investment
We hedge our net investment in certain foreign operations using intercompany loans and external borrowings denominated in the same currencies. The aggregate notional value of these hedges was $4,216 million and $3,511 million at June 25, 2021 and September 25, 2020, respectively.
We also use a cross-currency swap program to hedge our net investment in certain foreign operations. The aggregate notional value of the contracts under this program was $1,509 million and $1,664 million at June 25, 2021 and September 25, 2020, respectively. Under the terms of these contracts, we receive interest in U.S. dollars at a weighted-average rate of 1.98% per annum and pay no interest. Upon the maturity of these contracts at various dates through fiscal 2025, we will pay the notional value of the contracts in the designated foreign currency and receive U.S. dollars from our counterparties. We are not required to provide collateral for these contracts.
The impacts of our hedge of net investment programs were as follows:
Foreign currency exchange losses on intercompany loans and external borrowings(1)
(46)
(52)
(60)
Losses on cross-currency swap contracts designated as hedges of net investment(1)
(25)
Interest Rate Risk Management
We utilize forward starting interest rate swap contracts to manage interest rate exposure in periods prior to the anticipated issuance of fixed rate debt. These contracts had an aggregate notional value of $450 million at June 25, 2021 and September 25, 2020 and were designated as cash flow hedges. These forward starting interest rate swap contracts were recorded on the Condensed Consolidated Balance Sheets as follows:
64
The impacts of these forward starting interest rate swap contracts were as follows:
Commodity Hedges
As part of managing the exposure to certain commodity price fluctuations, we utilize commodity swap contracts. The objective of these contracts is to minimize impacts to cash flows and profitability due to changes in prices of commodities used in production. These contracts had an aggregate notional value of $478 million and $312 million at June 25, 2021 and September 25, 2020, respectively, and were designated as cash flow hedges. These commodity swap contracts were recorded on the Condensed Consolidated Balance Sheets as follows:
49
The impacts of these commodity swap contracts were as follows:
Gains recorded in other comprehensive income (loss)
Gains reclassified from accumulated other comprehensive income (loss) into cost of sales
66
We expect that significantly all of the balance in accumulated other comprehensive income (loss) associated with commodity hedges will be reclassified into the Condensed Consolidated Statement of Operations within the next twelve months.
11. Retirement Plans
The net periodic pension benefit cost (credit) for all non-U.S. and U.S. defined benefit pension plans was as follows:
Non-U.S. Plans
U.S. Plans
Operating expense:
Service cost
Other (income) expense:
Interest cost
Expected return on plan assets
Amortization of net actuarial loss
Amortization of prior service credit and other
Net periodic pension benefit cost (credit)
(40)
(39)
During the nine months ended June 25, 2021, we contributed $31 million and $18 million to our non-U.S. and U.S. pension plans, respectively.
12. Income Taxes
We recorded income tax expense of $124 million and $185 million for the quarters ended June 25, 2021 and June 26, 2020, respectively. The income tax expense for the quarter ended June 26, 2020 included $170 million of income tax expense related to an increase to the valuation allowance for certain non-U.S. deferred tax assets. Due to the COVID-19 pandemic and its negative impact on our current and expected future operating profit and taxable income, we believed it was more likely than not that a portion of our deferred tax assets would not be realized. Depending on business conditions, additional adjustments to our valuation allowance may be required in future periods as we continue to assess the realizability of our deferred tax assets.
We recorded income tax expense of $290 million and $674 million for the nine months ended June 25, 2021 and June 26, 2020, respectively. The income tax expense for the nine months ended June 25, 2021 included a $29 million income tax benefit related to an Internal Revenue Service approved change in the tax method of depreciating or amortizing certain assets. The income tax expense for the nine months ended June 26, 2020 included $355 million of income tax expense related to the tax impacts of certain measures of the Switzerland Federal Act on Tax Reform and AHV Financing (“Swiss Tax Reform”). See “Swiss Tax Reform” below for additional information. In addition, the income tax expense included $170
million of income tax expense related to an increase to the valuation allowance for certain non-U.S. deferred tax assets, partially offset by an income tax benefit of $31 million related to pre-separation tax matters and the termination of the Tax Sharing Agreement with Tyco International plc (now part of Johnson Controls International plc) and Covidien plc (now part of Medtronic plc). The pre-tax goodwill impairment charge of $900 million recorded during the nine months ended June 26, 2020 resulted in a tax benefit of $4 million as the associated goodwill was primarily not deductible for income tax purposes.
Although it is difficult to predict the timing or results of our worldwide examinations, we estimate that approximately $90 million of unrecognized income tax benefits, excluding the impact relating to accrued interest and penalties, could be resolved within the next twelve months.
We are not aware of any other matters that would result in significant changes to the amount of unrecognized income tax benefits reflected on the Condensed Consolidated Balance Sheet as of June 25, 2021.
Swiss Tax Reform
The Federal Act on Tax Reform and AHV Financing eliminated certain preferential tax items and implemented new tax rates at both the federal and cantonal levels. During fiscal 2019, Switzerland enacted the federal provisions of Swiss Tax Reform and the federal tax authority issued guidance abolishing certain interest deductions. The impacts of these measures were reflected in our fiscal 2019 Consolidated Financial Statements.
In October 2019, the canton of Schaffhausen enacted Swiss Tax Reform into law, including reductions in tax rates. During the nine months ended June 26, 2020, we recognized $355 million of income tax expense related primarily to cantonal implementation and the resulting write-down of certain deferred tax assets to the lower tax rates.
13. Earnings (Loss) Per Share
The weighted-average number of shares outstanding used in the computations of basic and diluted earnings (loss) per share were as follows:
Dilutive impact of share-based compensation arrangements
For both the quarter and nine months ended June 26, 2020, there were one million nonvested share awards and options outstanding with underlying exercise prices less than the average market prices of our common shares; however, these were excluded from the calculation of diluted loss per share as inclusion would be antidilutive as a result of our loss during the period.
The following share options were not included in the computation of diluted earnings (loss) per share because the instruments’ underlying exercise prices were greater than the average market prices of our common shares and inclusion would be antidilutive:
Antidilutive share options
14. Shareholders’ Equity
Common Shares Held in Treasury
In March 2021, our shareholders approved the cancellation of approximately 3 million shares purchased under our share repurchase program during the period beginning September 28, 2019 and ending September 25, 2020. The capital reduction by cancellation of these shares was subject to a notice period and filing with the commercial register in Switzerland and became effective in May 2021.
We paid cash dividends to shareholders as follows:
Dividends paid per common share
0.50
0.48
1.46
1.40
In March 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.
Upon shareholders’ approval of a dividend payment, we record a liability with a corresponding charge to shareholders’ equity. At June 25, 2021 and September 25, 2020, the unpaid portion of the dividends recorded in accrued and other current liabilities on the Condensed Consolidated Balance Sheets totaled $493 million and $317 million, respectively.
Share Repurchase Program
During the quarter ended June 25, 2021, our board of directors authorized an increase of $1.5 billion in the share repurchase program. Common shares repurchased under the share repurchase program were as follows:
Number of common shares repurchased
Repurchase value
591
At June 25, 2021, we had $1.9 billion of availability remaining under our share repurchase authorization.
15. Share Plans
Share-based compensation expense, which was included primarily in selling, general, and administrative expenses on the Condensed Consolidated Statements of Operations, was as follows:
As of June 25, 2021, there was $140 million of unrecognized compensation expense related to share-based awards, which is expected to be recognized over a weighted-average period of 1.8 years.
During the quarter ended December 25, 2020, we granted the following share-based awards as part of our annual incentive plan grant:
Grant-Date
Fair Value
Share options
1.3
22.03
Restricted share awards
0.4
105.86
Performance share awards
0.2
As of June 25, 2021, we had 13 million shares available for issuance under the TE Connectivity Ltd. 2007 Stock and Incentive Plan, amended and restated as of September 17, 2020.
Share-Based Compensation Assumptions
The assumptions we used in the Black-Scholes-Merton option pricing model for the options granted as part of our annual incentive plan grant were as follows:
Expected share price volatility
%
Risk-free interest rate
0.5
Expected annual dividend per share
1.92
Expected life of options (in years)
5.4
16. Segment and Geographic Data
Net sales by segment(1) and industry end market(2) were as follows:
Transportation Solutions:
Automotive
1,600
797
4,859
3,567
Commercial transportation
382
1,095
785
Sensors
283
225
822
628
Total Transportation Solutions
2,265
1,255
6,776
4,980
Industrial Solutions:
Aerospace, defense, oil, and gas
260
265
777
892
Industrial equipment
377
1,011
808
Medical
178
161
495
526
Energy
174
544
528
Total Industrial Solutions
1,002
865
2,827
2,754
Communications Solutions:
Data and devices
329
276
841
713
Appliances
249
152
464
Total Communications Solutions
578
428
1,502
1,177
Net sales by geographic region(1) and segment were as follows:
Asia–Pacific:
868
606
2,619
1,979
183
153
517
436
273
877
721
Total Asia–Pacific
1,384
1,032
4,013
3,136
Europe/Middle East/Africa (“EMEA”):
913
410
2,729
1,878
417
313
1,168
1,014
83
222
Total EMEA
1,413
4,119
3,062
Americas:
484
239
1,428
1,123
402
399
1,142
1,304
101
403
286
Total Americas
1,048
739
2,973
2,713
Operating income (loss) by segment was as follows:
433
1,139
(291)
70
335
327
133
300
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion may contain forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements as a result of many factors, including but not limited to those under the heading “Forward-Looking Information” and “Part II. Item 1A. Risk Factors.”
Our Condensed Consolidated Financial Statements have been prepared in United States (“U.S.”) dollars, in accordance with accounting principles generally accepted in the U.S. (“GAAP”).
The following discussion includes organic net sales growth (decline) which is a non-GAAP financial measure. See “Non-GAAP Financial Measure” for additional information regarding this measure.
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:
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
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.”
During the first nine months of fiscal 2021, we acquired two businesses for a combined cash purchase price of $125 million, net of cash acquired. The acquisitions were reported as part of our Industrial Solutions segment from the date of acquisition. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions.
Results of Operations
Net Sales
The following table presents our net sales and the percentage of total net sales by segment:
($ in millions)
59
25
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 Net Sales for the Nine Months Ended June 25, 2021
versus Net Sales for the Quarter Ended June 26, 2020
versus Net Sales for the Nine Months Ended June 26, 2020
Organic Net Sales
Growth
(Divestitures)
Growth (Decline)
1,010
80.5
921
71.6
89
1,796
36.1
1,438
28.4
269
137
15.8
12.6
33
2.7
(0.4)
84
150
35.0
30.8
325
27.6
24.1
1,297
50.9
1,164
45.0
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 by Geographic Region. Our business operates in three geographic regions—Asia–Pacific, Europe/Middle East/Africa (“EMEA”), and the Americas—and our results of operations are influenced by changes in foreign currency exchange rates. Increases or decreases in the value of the U.S. dollar, compared to other currencies, will directly affect our reported results as we translate those currencies into U.S. dollars at the end of each fiscal period.
Approximately 60% of our net sales were invoiced in currencies other than the U.S. dollar in the first nine months of fiscal 2021.
The following table presents our net sales and the percentage of total net sales by geographic region(1):
Asia–Pacific
35
EMEA
Americas
The following table provides an analysis of the change in our net sales by geographic region:
352
34.1
294
27.9
28.0
22.3
636
81.9
552
69.3
1,057
34.5
715
22.8
264
309
41.8
318
42.9
9.6
295
10.8
(49)
Cost of Sales and Gross Margin
The following table presents cost of sales and gross margin information:
Change
736
As a percentage of net sales
67.0
72.3
67.4
69.0
561
858
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
increased from prior year levels. The following table presents the average prices incurred related to copper, gold, silver, and palladium:
Measure
Copper
Lb.
3.41
2.78
3.07
2.80
Gold
Troy oz.
1,735
1,411
1,664
1,380
Silver
22.92
15.97
21.11
16.13
Palladium
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:
45
88
9.5
10.2
11.7
(87)
51
(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.
Impairment of Goodwill. 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:
1,584
Operating margin
18.6
5.3
16.0
2.1
Operating income included the following:
Acquisition-related charges:
Charges associated with the amortization of acquisition-related fair value adjustments
106
221
1,071
See discussion of operating income below under “Segment Results.”
Non-Operating Items
The following table presents select non-operating information:
124
185
(61)
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.
Segment Results
Net Sales. The following table presents the Transportation Solutions segment’s net sales and the percentage of total net sales by industry end market(1):
71
63
72
The following table provides an analysis of the change in the Transportation Solutions segment’s net sales by industry end market:
803
100.8
738
90.2
1,292
36.2
1,083
29.9
209
63.9
136
56.3
310
39.5
274
34.3
58
25.8
47
20.3
30.9
81
12.5
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:
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:
Operating Income (Loss). The following table presents the Transportation Solutions segment’s operating income (loss) and operating margin information:
Operating income (loss)
434
1,430
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.
998
Net Sales. The following table presents the Industrial Solutions segment’s net sales and the percentage of total net sales by industry end market(1):
The following table provides an analysis of the change in the Industrial Solutions segment’s net sales by industry end market:
(1.9)
(18)
(6.9)
(115)
(12.9)
(152)
(17.1)
42.3
96
35.5
203
25.1
19.6
10.6
9.9
(31)
(5.9)
(33)
(6.3)
7.5
8.7
3.0
2.9
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:
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:
Operating Income. The following table presents the Industrial Solutions segment’s operating income and operating margin information:
14.8
8.1
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.
60
Net Sales. The following table presents the Communications Solutions segment’s net sales and the percentage of total net sales by industry end market(1):
57
43
The following table provides an analysis of the change in the Communications Solutions segment’s net sales by industry end market:
53
19.2
46
16.1
128
18.0
15.0
63.8
56.9
197
42.5
177
37.7
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
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:
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:
Operating Income. The following table presents the Communications Solutions segment’s operating income and operating margin information:
68
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.
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 in February 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
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 June 25, 2021 and September 25, 2020 was $4,134 million and $4,146 million, respectively. See Note 7 to the Condensed Consolidated Financial Statements for additional information regarding debt.
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 in January 2021 and €350 million of fixed-to-floating rate senior notes due in June 2021.
During the first nine months of fiscal 2021, TEGSA issued €550 million aggregate principal amount of 0.00% senior notes due in February 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.
The Credit Facility contains a financial ratio covenant providing that if, as of the last day of each fiscal quarter, our ratio of Consolidated Total Debt to Consolidated EBITDA (as defined in the Credit Facility) for the then most recently concluded period of four consecutive fiscal quarters exceeds 3.75 to 1.0, an Event of Default (as defined in the Credit
Facility) is triggered. The Credit Facility and our other debt agreements contain other customary covenants. None of our covenants are presently considered restrictive to our operations. As of June 25, 2021, 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 $483 million and $466 million in the first nine months of fiscal 2021 and 2020, respectively.
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. At June 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, for TE Connectivity Ltd. and TEGSA on a combined basis.
Balance Sheet Data:
Total noncurrent assets(1)
2,533
3,282
Total noncurrent liabilities(2)
24,024
23,549
Fiscal Year Ended
Statement of Operations Data:
Loss from continuing operations
(295)
(206)
(288)
(202)
Commitments and Contingencies
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.
During fiscal 2019, we sold our SubCom business. In connection with the sale, we contractually agreed to continue to honor performance guarantees and letters of credit related to the SubCom business’ projects that existed as of the date of sale. These performance guarantees and letters of credit had a combined value of approximately $129 million as of June 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 with SubCom and removed the requirement to issue new performance guarantees. 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.
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 the Consolidated Financial Statements and accompanying notes contained in our Annual Report on Form 10-K for the fiscal year ended September 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. Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended September 25, 2020, and in this report, could cause our results to differ materially from those expressed in forward-looking statements:
There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in our exposures to market risk during the first nine months of fiscal 2021. For further discussion of our exposures to market risk, refer to “Part II. Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended September 25, 2020.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934), as of June 25, 2021. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 25, 2021.
Changes in Internal Control Over Financial Reporting
During the quarter ended June 25, 2021, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in our legal proceedings since we filed our Annual Report on Form 10-K for the fiscal year ended September 25, 2020. Refer to “Part I. Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended September 25, 2020 for additional information regarding legal proceedings.
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from those disclosed in “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 25, 2020 except as set forth in “Part II. Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended March 26, 2021 and as described below. The risk factors described in our Annual Report on Form 10-K and subsequent Quarterly Report on Form 10-Q, in addition to other information set forth below and in this report, could materially affect our business operations, financial condition, or liquidity. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial may also impair our business operations, financial condition, and liquidity.
We have suffered and could continue to suffer significant business interruptions, including impacts resulting from the COVID-19 pandemic.
Our operations and those of our suppliers and customers, and the supply chains that support their operations, may be vulnerable to interruption by natural disasters such as earthquakes, tsunamis, typhoons, tornados, or floods; other disasters such as fires, explosions, acts of terrorism or war, or disease or other adverse health developments, including impacts resulting from the COVID-19 pandemic; or failures of management information or other systems due to internal or external causes. In addition, such interruptions could result in a widespread crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our end customers’ products. If a business interruption occurs and we are unsuccessful in our continuing efforts to minimize the impact of these events, our business, results of operations, financial position, and cash flows could be materially adversely affected. The COVID-19 pandemic impacted and continues to impact countries, communities, workforces, supply chains, and markets around the world, and as a result, we have experienced disruptions and restrictions on our employees’ ability to travel, as well as temporary closures of our facilities and the facilities of our customers, suppliers, and other vendors in our supply chain. As a result of the COVID-19 pandemic, some of our employees have transitioned to working from home on a full-time or part-time basis, which may increase our vulnerability to cyber and other information technology risks. The COVID-19 pandemic had a significant, negative impact on our sales and operating results during fiscal 2020 and continued to negatively affect certain of our businesses in fiscal 2021. The COVID-19 pandemic may have a negative impact on our financial condition and results of operations in future periods. The extent to which the COVID-19 pandemic will further impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted. Such developments may include the further spread of the virus to additional persons and geographic regions; the severity of the virus; variant strains of the virus; the duration of the pandemic; resumption of high levels of infections and hospitalizations; the resulting impact on our suppliers’ and customers’ supply chains and financial positions, including their ability to pay us; the actions that may be taken by various governmental authorities in response to the outbreak in jurisdictions in which we operate; and the possible impact on the global economy and local economies in which we operate. Further, to the extent the COVID-19 pandemic adversely affects our business, results of operations, or financial condition, it may also have the effect of heightening many of the other risks described in “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 25, 2020 and subsequent quarterly reports on Form 10-Q.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table presents information about our purchases of our common shares during the quarter ended June 25, 2021:
Maximum
Total Number of
Approximate
Shares Purchased
Dollar Value
as Part of
of Shares that May
Total Number
Average Price
Publicly Announced
Yet Be Purchased
of Shares
Paid Per
Plans or
Under the Plans
Period
Purchased(1)
Share(1)
Programs(2)
or Programs(2)
March 27–April 23, 2021
322,038
131.06
321,800
643,625,276
April 24–May 28, 2021
836,053
133.90
832,500
532,161,897
May 29–June 25, 2021
946,537
135.25
946,400
1,904,159,643
2,104,628
134.07
2,100,700
ITEM 6. EXHIBITS
Exhibit Number
Exhibit
3.1
Articles of Association of TE Connectivity Ltd., as amended and restated (incorporated by reference to Exhibit 3.1 to TE Connectivity’s Current Report on Form 8-K, filed May 20, 2021)
10.1
First Amendment to Amended and Restated Credit Agreement, dated as of June 1, 2021, by and among Tyco Electronics Group S.A., as borrower, TE Connectivity Ltd., as parent guarantor, the lenders party thereto and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to TE Connectivity’s Current Report on Form 8-K, filed June 1, 2021)
‡*
TE Connectivity Ltd. Employee Stock Purchase Plan (amended and restated as of June 18, 2021)
22.1
*
Guaranteed Securities
31.1
Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
**
Certification by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
Inline XBRL Instance Document(1)(2)
101.SCH
Inline XBRL Taxonomy Extension Schema Document(2)
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document(2)
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document(2)
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document(2)
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document(2)
104
Cover Page Interactive Data File(3)
‡Management contract or compensatory plan or arrangement
*Filed herewith
Furnished herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
By:
/s/ Heath A. Mitts
Heath A. MittsExecutive Vice President and Chief FinancialOfficer (Principal Financial Officer)
Date: July 29, 2021