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 30, 2023
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 21, 2023 was 313,938,622.
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 30, 2023 and June 24, 2022 (unaudited)
Condensed Consolidated Statements of Comprehensive Income for the Quarters and Nine Months Ended June 30, 2023 and June 24, 2022 (unaudited)
2
Condensed Consolidated Balance Sheets as of June 30, 2023 and September 30, 2022 (unaudited)
3
Condensed Consolidated Statements of Shareholders’ Equity for the Quarters and Nine Months Ended June 30, 2023 and June 24, 2022 (unaudited)
4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2023 and June 24, 2022 (unaudited)
6
Notes to Condensed Consolidated Financial Statements (unaudited)
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
37
Item 4.
Controls and Procedures
Part II.
Other Information
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
38
Item 5.
39
Item 6.
Exhibits
Signatures
40
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the
Quarters Ended
Nine Months Ended
June 30,
June 24,
2023
2022
(in millions, except per share data)
Net sales
$
3,998
4,097
11,999
11,922
Cost of sales
2,699
2,769
8,229
8,027
Gross margin
1,299
1,328
3,770
3,895
Selling, general, and administrative expenses
431
393
1,258
1,172
Research, development, and engineering expenses
176
179
534
539
Acquisition and integration costs
9
11
26
29
Restructuring and other charges, net
53
283
59
Operating income
630
719
1,669
2,096
Interest income
18
Interest expense
(20)
(18)
(61)
(48)
Other income (expense), net
(4)
(13)
24
Income from continuing operations before income taxes
624
708
1,634
2,081
Income tax expense
(96)
(116)
(283)
(362)
Income from continuing operations
528
592
1,351
1,719
Income from discontinued operations, net of income taxes
—
Net income
594
1,358
1,720
Basic earnings per share:
1.68
1.84
4.28
5.31
Income from discontinued operations
0.01
0.02
4.30
Diluted earnings per share:
1.67
1.83
4.25
5.26
4.27
Weighted-average number of shares outstanding:
Basic
315
322
316
324
Diluted
317
318
327
See Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
Other comprehensive income (loss):
Currency translation
(25)
(225)
358
(216)
Adjustments to unrecognized pension and postretirement benefit costs, net of income taxes
12
Gains (losses) on cash flow hedges, net of income taxes
(42)
(112)
65
(65)
Other comprehensive income (loss)
(66)
(333)
427
(269)
Comprehensive income
462
261
1,785
1,451
Less: comprehensive (income) loss attributable to noncontrolling interests
(1)
(12)
Comprehensive income attributable to TE Connectivity Ltd.
461
265
1,773
1,462
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,
(in millions, except share
data)
Assets
Current assets:
Cash and cash equivalents
1,131
1,088
Accounts receivable, net of allowance for doubtful accounts of $42 and $45, respectively
2,998
2,865
Inventories
2,801
2,676
Prepaid expenses and other current assets
639
Total current assets
7,649
7,268
Property, plant, and equipment, net
3,781
3,567
Goodwill
5,528
5,258
Intangible assets, net
1,242
1,288
Deferred income taxes
2,680
2,498
Other assets
821
903
Total assets
21,701
20,782
Liabilities, redeemable noncontrolling interests, and shareholders' equity
Current liabilities:
Short-term debt
291
914
Accounts payable
1,616
1,593
Accrued and other current liabilities
2,351
2,125
Total current liabilities
4,258
4,632
Long-term debt
3,915
3,292
Long-term pension and postretirement liabilities
735
695
211
244
Income taxes
335
304
Other liabilities
791
718
Total liabilities
10,245
9,885
Commitments and contingencies (Note 9)
Redeemable noncontrolling interests
107
95
Shareholders' equity:
Common shares, CHF 0.57 par value, 322,470,281 shares authorized and issued, and 330,830,781 shares authorized and issued, respectively
142
146
Accumulated earnings
12,372
12,832
Treasury shares, at cost, 8,271,688 and 12,749,540 shares, respectively
(1,085)
(1,681)
Accumulated other comprehensive loss
(80)
(495)
Total shareholders' equity
11,349
10,802
Total liabilities, redeemable noncontrolling interests, and shareholders' equity
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the Quarter Ended June 30, 2023
Accumulated
Other
Total
Common Shares
Treasury Shares
Contributed
Comprehensive
Shareholders'
Shares
Amount
Surplus
Earnings
Loss
Equity
Balance at March 31, 2023
(7)
(933)
11,824
11,020
Other comprehensive loss
(67)
Share-based compensation expense
32
Dividends
Exercise of share options
13
Restricted share award vestings and other activity
(32)
16
8
Repurchase of common shares
(189)
Balance at June 30, 2023
(8)
For the Nine Months Ended June 30, 2023
Balance at September 30, 2022
331
Other comprehensive income
415
(740)
33
89
(95)
(5)
(621)
Cancellation of treasury shares
(9)
1,095
(1,091)
(UNAUDITED) (Continued)
For the Quarter Ended June 24, 2022
Balance at March 25, 2022
336
148
(1,769)
12,160
(97)
10,442
(329)
28
5
(28)
10
(3)
(320)
(2)
709
(707)
Balance at June 24, 2022
(10)
(1,370)
12,084
(426)
10,434
For the Nine Months Ended June 24, 2022
Balance at September 24, 2021
(1,055)
11,709
(168)
10,634
(258)
88
(717)
34
14
(88)
79
(1,072)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation and amortization
597
(121)
Non-cash lease cost
106
98
Provision for losses on accounts receivable and inventories
82
Impairment of held for sale businesses
67
85
(19)
Changes in assets and liabilities, net of the effects of acquisitions and divestitures:
Accounts receivable, net
(202)
(108)
(323)
(439)
(30)
57
68
(14)
(316)
51
185
(219)
Net cash provided by operating activities
1,994
1,524
Cash flows from investing activities:
Capital expenditures
(538)
(556)
Proceeds from sale of property, plant, and equipment
Acquisition of businesses, net of cash acquired
Proceeds from divestiture of businesses, net of cash retained by businesses sold
48
22
Net cash used in investing activities
(573)
(568)
Cash flows from financing activities:
Net increase (decrease) in commercial paper
(82)
237
Proceeds from issuance of debt
499
588
Repayment of debt
(591)
(558)
Proceeds from exercise of share options
(674)
(1,086)
Payment of common share dividends to shareholders
(541)
(506)
(39)
Net cash used in financing activities
(1,386)
(1,330)
Effect of currency translation on cash
Net increase (decrease) in cash, cash equivalents, and restricted cash
43
(383)
Cash, cash equivalents, and restricted cash at beginning of period
1,203
Cash, cash equivalents, and restricted cash at end of period
820
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 30, 2022.
Unless otherwise indicated, references in the Condensed Consolidated Financial Statements to fiscal 2023 and fiscal 2022 are to our fiscal years ending September 29, 2023 and ended September 30, 2022, respectively.
2. Restructuring and Other Charges, Net
Net restructuring and other charges consisted of the following:
Restructuring charges, net
42
208
69
Impairment of held for sale businesses and loss (gain) on divestitures, net
72
Other charges, net
Restructuring Charges, Net
Net restructuring and related charges by segment were as follows:
Transportation Solutions
27
119
Industrial Solutions
Communications Solutions
36
Plus: charges included in cost of sales(1)
Restructuring and related charges, net
30
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 2023 Actions:
Employee severance
192
(35)
160
Facility and other exit costs
Property, plant, and equipment
(6)
200
162
Fiscal 2022 Actions:
108
(47)
109
15
(55)
Pre-Fiscal 2022 Actions:
112
(40)
(49)
87
Total Activity
228
219
(11)
(139)
20
Fiscal 2023 Actions
During fiscal 2023, we initiated a restructuring program associated with cost structure improvements across all segments. During the nine months ended June 30, 2023, we recorded restructuring charges of $200 million in connection with this program. We expect to complete all restructuring actions commenced during the nine months ended June 30, 2023 by the end of fiscal 2025 and to incur additional charges of approximately $18 million related primarily to employee severance and facility exit costs.
The following table summarizes expected, incurred, and remaining charges for the fiscal 2023 program by segment as of June 30, 2023:
Cumulative
Remaining
Expected
Incurred
127
63
54
218
Fiscal 2022 Actions
During fiscal 2022, we initiated a restructuring program associated with footprint consolidation and cost structure improvements across all segments. In connection with this program, during the nine months ended June 30, 2023 and June 24, 2022, we recorded net restructuring and related charges of $8 million and $84 million, respectively. We expect to complete all restructuring actions commenced during fiscal 2022 by the end of fiscal 2024 and to incur additional charges of approximately $10 million related primarily to employee severance and facility exit costs.
The following table summarizes expected, incurred, and remaining charges for the fiscal 2022 program by segment as of June 30, 2023:
96
90
52
169
Pre-Fiscal 2022 Actions
During the nine months ended June 24, 2022, we recorded net restructuring charges of $1 million related to pre-fiscal 2022 actions. We expect that any additional charges related to restructuring actions commenced prior to fiscal 2022 will be insignificant.
Total Restructuring Reserves
Restructuring reserves included on the Condensed Consolidated Balance Sheets were as follows:
276
182
46
Restructuring reserves
Divestitures
During the nine months ended June 30, 2023, we sold three businesses for net cash proceeds of $48 million. In connection with the divestitures, we recorded pre-tax impairment charges and a net pre-tax loss on sales, which totaled to a net charge of $12 million. The businesses sold were reported in our Industrial Solutions segment. Additionally, during the nine months ended June 30, 2023, we recorded a pre-tax impairment charge of $60 million in connection with a held for sale business in the Transportation Solutions segment.
During the nine months ended June 24, 2022, we sold two businesses for net cash proceeds of $16 million and recognized a net pre-tax gain of $10 million on the transactions. The businesses sold were reported in our Transportation Solutions and Industrial Solutions segments.
3. Acquisitions
During the nine months ended June 30, 2023, we acquired one business for a cash purchase price of $108 million, net of cash acquired. The acquisition was reported as part of our Industrial Solutions segment from the date of acquisition.
We acquired two businesses for a combined cash purchase price of $141 million, net of cash acquired, during the nine months ended June 24, 2022. The acquisitions were reported as part of our Communications Solutions segment from the date of acquisition. Also during the nine months ended June 24, 2022, we finalized the purchase price allocation of certain fiscal 2021 acquisitions, which included the recognition of $25 million of cash acquired.
4. Inventories
Inventories consisted of the following:
Raw materials
404
390
Work in progress
1,300
1,066
Finished goods
1,097
1,220
5. Goodwill
The changes in the carrying amount of goodwill by segment were as follows:
Transportation
Industrial
Communications
Solutions
September 30, 2022(1)
1,439
3,118
701
Acquisition
Currency translation and other
111
198
June 30, 2023(1)
1,496
3,301
731
During the nine months ended June 30, 2023, we recognized goodwill in the Industrial Solutions segment in connection with a recent acquisition. See Note 3 for additional information regarding acquisitions.
6. Intangible Assets, Net
Intangible assets consisted of the following:
June 30, 2023
September 30, 2022
Gross
Net
Carrying
Amortization
Customer relationships
1,754
(797)
957
1,642
(687)
955
Intellectual property
(931)
272
1,174
(852)
19
2,976
(1,734)
2,832
(1,544)
Intangible asset amortization expense was $46 million and $48 million for the quarters ended June 30, 2023 and June 24, 2022, respectively, and $141 million and $145 million for the nine months ended June 30, 2023 and June 24, 2022, respectively.
At June 30, 2023, the aggregate amortization expense on intangible assets is expected to be as follows:
Remainder of fiscal 2023
Fiscal 2024
166
Fiscal 2025
149
Fiscal 2026
145
Fiscal 2027
126
Fiscal 2028
94
Thereafter
514
7. Debt
During the nine months ended June 30, 2023, Tyco Electronics Group S.A. (“TEGSA”), our wholly-owned subsidiary, issued $500 million aggregate principal amount of 4.50% senior notes due in February 2026. 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.
During the nine months ended June 30, 2023, TEGSA repaid, at maturity, €550 million of 1.10% senior notes due in March 2023.
As of June 30, 2023, TEGSA had $288 million of commercial paper outstanding at a weighted-average interest rate of 5.3%. TEGSA had $370 million of commercial paper outstanding at a weighted-average interest rate of 3.45% at September 30, 2022.
The fair value of our debt, based on indicative valuations, was approximately $4,017 million and $3,990 million at June 30, 2023 and September 30, 2022, respectively.
8. Leases
The components of lease cost were as follows:
Operating lease cost
Variable lease cost
Total lease cost
49
138
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)
92
Right-of-use assets, including modifications of existing leases, obtained in exchange for operating lease liabilities
102
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 have been 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 the resulting investigations are ongoing. We have also been contacted by the U.S. Department of Justice concerning aspects of these matters. 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. Although 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 30, 2023, we concluded that we would incur investigation and remediation costs at these sites in the reasonably possible range of $16 million to $44 million, and we accrued $20 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 30, 2023, we had outstanding letters of credit, letters of guarantee, and surety bonds of $174 million, excluding those related to our former 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 $58 million as of June 30, 2023 and are expected to expire at various dates through fiscal 2027. We have contractual recourse against the SubCom business if we are required to perform on any SubCom guarantees; however, based on historical experience, we do not anticipate having to perform.
10. Financial Instruments
Foreign Currency Exchange Rate Risk
We may utilize cross-currency swap contracts to reduce our exposure to foreign currency exchange rate risk associated with certain intercompany loans. As of fiscal year end 2022, all such cross-currency swap contracts had been terminated or matured and were settled; additionally, all related collateral positions were settled.
The impacts of these cross-currency swap contracts were as follows:
Quarter Ended
Losses recorded in other comprehensive income (loss)
Gains excluded from the hedging relationship(1)
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 $2,108 million and $1,658 million at June 30, 2023 and September 30, 2022, 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 $3,815 million and $1,873 million at June 30, 2023 and September 30, 2022, respectively. Under the terms of these contracts, we receive interest in U.S. dollars at a weighted-average rate of 1.60% per annum and pay no interest. Upon the maturity of these contracts at various dates through fiscal 2027, 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.
These cross-currency swap contracts were recorded on the Condensed Consolidated Balance Sheets as follows:
74
55
172
The impacts of our hedge of net investment programs were as follows:
Foreign currency exchange gains (losses) on intercompany loans and external borrowings(1)
156
(208)
344
Gains (losses) on cross-currency swap contracts designated as hedges of net investment(1)
78
(110)
Interest Rate Risk Management
We may utilize forward starting interest rate swap contracts to manage interest rate exposure in periods prior to the anticipated issuance of fixed rate debt. During fiscal 2022, we terminated forward starting interest rate swap contracts as a result of the issuance of our 2.50% senior notes due in 2032.
The impacts of these forward starting interest rate swap contracts were as follows:
Gains recorded in other comprehensive income (loss)
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 $485 million and $566 million at
June 30, 2023 and September 30, 2022, respectively, and were designated as cash flow hedges. These commodity swap contracts were recorded on the Condensed Consolidated Balance Sheets as follows:
23
77
The impacts of these commodity swap contracts were as follows:
Gains (losses) recorded in other comprehensive income (loss)
(106)
(45)
Gains (losses) reclassified from accumulated other comprehensive income (loss) into cost of sales
35
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 returns on plan assets
(15)
Amortization of net actuarial loss
Amortization of prior service credit
Net periodic pension benefit cost (credit)
31
25
(34)
(44)
(29)
During the nine months ended June 30, 2023, we contributed $58 million to our non-U.S. pension plans.
12. Income Taxes
We recorded income tax expense of $96 million and $116 million for the quarters ended June 30, 2023 and June 24, 2022, respectively. The income tax expense for the quarter ended June 30, 2023 included a $19 million net income tax benefit related to a recent divestiture. The income tax expense for the quarter ended June 24, 2022 included a $21 million income tax benefit related to the tax impacts of an intercompany transaction.
We recorded income tax expense of $283 million and $362 million for the nine months ended June 30, 2023 and June 24, 2022, respectively. The income tax expense for the nine months ended June 30, 2023 included a $19 million net income tax benefit related to a recent divestiture. The income tax expense for the nine months ended June 24, 2022 included a $57 million income tax benefit related to the tax impacts of the intercompany transaction discussed above and $27 million of income tax expense related to the write-down of certain deferred tax assets to the lower corporate tax rate enacted in the canton of Schaffhausen. In addition, the income tax expense for the nine months ended June 24, 2022 included $12 million of income tax expense related to an income tax audit of an acquired entity. As we are entitled to indemnification of pre-acquisition period tax obligations under the terms of the purchase agreement, we recorded an associated indemnification receivable and other income of $11 million during the nine months ended June 24, 2022.
During the nine months ended June 30, 2023, we completed tax returns for certain non-U.S. entities which resulted in the recognition of additional deferred tax assets for tax loss carryforwards of $313 million. As we do not expect these subsidiaries to generate sufficient future taxable income to realize the deferred tax assets, we recognized a corresponding increase to the valuation allowance. Accordingly, there was no impact to the Condensed Consolidated Statement of Operations for the nine months ended June 30, 2023 or Condensed Consolidated Balance Sheet as of June 30, 2023.
Although it is difficult to predict the timing or results of our worldwide examinations, we estimate that, as of June 30, 2023, approximately $20 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 30, 2023.
13. Earnings Per Share
The weighted-average number of shares outstanding used in the computations of basic and diluted earnings per share were as follows:
Dilutive impact of share-based compensation arrangements
The following share options were not included in the computation of diluted earnings 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
In March 2023, our shareholders approved, for a period of one year ending March 15, 2024, our board of directors’ authorization to issue additional new shares to a maximum of 120% and/or reduce shares to a minimum of 80% of the existing share capital, subject to certain conditions specified in our articles of association.
Common Shares Held in Treasury
In March 2023, our shareholders approved the cancellation of approximately eight and a half million shares purchased under our share repurchase program during the period beginning September 25, 2021 and ending September 30, 2022. The capital reduction by cancellation of these shares, which was subject to filing with the commercial register in Switzerland, approval by our board of directors, and other requirements, became effective in March 2023.
We paid cash dividends to shareholders as follows:
Dividends paid per common share
0.59
0.56
1.71
1.56
In March 2023, our shareholders approved a dividend payment to shareholders of $2.36 per share, payable in four equal quarterly installments of $0.59 per share beginning in the third quarter of fiscal 2023 and ending in the second quarter of fiscal 2024.
17
Upon shareholders’ approval of a dividend payment, we record a liability with a corresponding charge to shareholders’ equity. At June 30, 2023 and September 30, 2022, the unpaid portion of the dividends recorded in accrued and other current liabilities on the Condensed Consolidated Balance Sheets totaled $555 million and $356 million, respectively.
Share Repurchase Program
Common shares repurchased under the share repurchase program were as follows:
Number of common shares repurchased
Repurchase value
621
1,072
At June 30, 2023, we had $1.1 billion of availability remaining under our share repurchase authorization.
15. Share Plans
Share-based compensation expense, which was included in selling, general, and administrative expenses on the Condensed Consolidated Statements of Operations, was as follows:
As of June 30, 2023, there was $162 million of unrecognized compensation expense related to share-based awards, which is expected to be recognized over a weighted-average period of 1.6 years.
During the quarter ended December 30, 2022, we granted the following share-based awards as part of our annual incentive plan grant:
Grant-Date
Fair Value
Share options
0.9
35.79
Restricted share awards
0.4
124.52
Performance share awards
0.2
As of June 30, 2023, we had eight 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
4.0
Expected annual dividend per share
2.24
Expected life of options (in years)
5.1
16. Segment and Geographic Data
Effective for fiscal 2023, we realigned certain product lines from the Industrial Solutions segment to the Communications Solutions segment. We continue to operate through three reporting segments: Transportation Solutions, Industrial Solutions, and Communications Solutions. The following segment information reflects our current segment reporting structure. Prior period segment results have been restated to conform to the current segment reporting structure. As a result of the realignment, $22 million of net sales and $10 million of operating income for the first nine months of fiscal 2022 were reflected in the Communications Solutions segment.
Net sales by segment(1) and industry end market(2) were as follows:
Transportation Solutions:
Automotive
1,747
1,629
5,191
4,802
Commercial transportation
403
400
1,156
1,159
Sensors
271
828
811
Total Transportation Solutions
2,433
2,300
7,175
6,772
Industrial Solutions:
Industrial equipment
423
471
1,318
1,391
Aerospace, defense, and marine
293
855
774
Energy
230
207
652
579
Medical
195
177
567
502
Total Industrial Solutions
1,141
1,126
3,392
3,246
Communications Solutions:
Data and devices
252
425
869
1,173
Appliances
246
563
Total Communications Solutions
424
671
1,432
1,904
Net sales by geographic region(1) and segment were as follows:
Asia–Pacific:
813
825
2,598
2,636
599
220
377
756
1,048
Total Asia–Pacific
1,215
1,402
3,921
4,283
Europe/Middle East/Africa (“EMEA”):
1,011
894
2,869
2,564
529
469
1,500
1,362
70
234
269
Total EMEA
1,610
1,448
4,603
4,195
Americas:
609
581
1,708
1,572
430
457
1,325
1,285
134
209
442
587
Total Americas
1,247
3,475
3,444
Operating income by segment was as follows:
383
1,040
1,187
150
165
440
171
189
479
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.
Summary of Performance
Economic Conditions
Our business and operating results have been and will continue to be affected by worldwide economic conditions. The global economy has been impacted in recent years by supply chain disruptions and inflationary cost pressures as well as the military conflict between Russia and Ukraine and the COVID-19 pandemic. We are monitoring the current environment and its potential effects on our customers and the end markets we serve.
We have experienced inflationary cost pressures including increased costs for transportation, energy, and raw materials. However, we have been able to mitigate increased costs and supply chain disruptions through price increases or productivity. We have implemented select price increases for certain products. Also, we have taken and continue to focus on actions to manage costs, including restructuring and other cost reduction initiatives such as reducing discretionary spending and travel. Additionally, we are managing our capital resources and monitoring capital availability to ensure that we have sufficient resources to fund our future capital needs. See further discussion in “Liquidity and Capital Resources.”
We continue to monitor the military conflict between Russia and Ukraine, escalating tensions in surrounding countries, and associated sanctions. We sold our business operations in Russia, and our operations in Ukraine have been reduced. Neither Russia nor Ukraine represents a material portion of our business, and the military conflict did not have a significant impact on our business, financial condition, or results of operations during the first nine months of fiscal 2023. The extent to which the conflict may impact our business in future periods will depend on future developments, including the severity and duration of the conflict, its impact on regional and global economic conditions, and supply chain disruptions. We will continue to actively monitor the conflict and assess the related sanctions and other effects and may take further actions if necessary.
The COVID-19 pandemic has had a global impact and has resulted in business slowdowns or shutdowns. While the pandemic has impacted certain aspects of our business, 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 resurgence of the spread of the virus and variant strains of the virus as well as the success of public health advancements. While certain of our operations in China were impacted in the first nine months of fiscal 2023 and were shut down for a period of time in fiscal 2022, we do not expect the COVID-19 pandemic to have a significant impact on our businesses globally in fiscal 2023. However, it may have a negative impact on our financial condition and results of operations in future periods. We will continue to actively monitor the COVID-19 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 2023, we expect our net sales to be approximately $4.0 billion as compared to $4.4 billion in the fourth quarter of fiscal 2022. The fourth quarter of fiscal 2022 included an additional week which contributed $306 million in net sales. We expect diluted earnings per share from continuing operations to be approximately $1.63 per share in the fourth quarter of fiscal 2023. This outlook reflects the positive impact of foreign currency exchange rates on net sales of approximately $68 million in the fourth quarter of fiscal 2023 as compared to the same period of fiscal 2022. Also, this outlook is based on foreign currency exchange rates and commodity prices that are consistent with current levels.
During the first nine months of fiscal 2023, we acquired one business for a cash purchase price of $108 million, net of cash acquired. The acquisition was 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.
During the first nine months of fiscal 2023, we sold three businesses for net cash proceeds of $48 million. In connection with the divestitures, we recorded pre-tax impairment charges and a net pre-tax loss on sales, which totaled to a net charge of $12 million. The businesses sold were reported in our Industrial Solutions segment. Additionally, during the first nine months of fiscal 2023, we recorded a pre-tax impairment charge of $60 million in connection with a held for sale business in the Transportation Solutions segment. See Note 2 to the Condensed Consolidated Financial Statements for additional information regarding divestitures.
Results of Operations
Net Sales
The following table presents our net sales and the percentage of total net sales by segment:
($ in millions)
61
56
60
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 30, 2023
Change in Net Sales for the Nine Months Ended June 30, 2023
versus Net Sales for the Quarter Ended June 24, 2022
versus Net Sales for the Nine Months Ended June 24, 2022
Organic Net Sales
Acquisitions
Growth (Decline)
(Divestiture)
133
5.8
163
7.1
6.0
734
10.8
(331)
1.3
2.2
4.5
251
7.7
(100)
(247)
(36.8)
(245)
(36.7)
(472)
(24.8)
(23.1)
(51)
(99)
(2.4)
(58)
(1.4)
0.6
546
4.6
(482)
Net sales decreased $99 million, or 2.4%, in the third quarter of fiscal 2023 as compared to the third quarter of fiscal 2022. The decrease in net sales resulted primarily from organic net sales declines of 1.4% and the negative impact of foreign currency translation of 1.0% due to the weakening of certain foreign currencies. In the third quarter of fiscal 2023, pricing actions positively affected organic net sales by $173 million.
In the first nine months of fiscal 2023, net sales increased $77 million, or 0.6%, as compared to the first nine months of fiscal 2022. The increase in net sales resulted primarily from organic net sales growth of 4.6%, partially offset by the negative impact of foreign currency translation of 4.0% due to the weakening of certain foreign currencies. Pricing actions positively affected organic net sales by $468 million in the first nine months of fiscal 2023.
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 2023.
The following table presents our net sales and the percentage of total net sales by geographic region(1):
Asia–Pacific
EMEA
41
Americas
The following table provides an analysis of the change in our net sales by geographic region:
(187)
(13.3)
(131)
(9.4)
(56)
(8.5)
(73)
(1.7)
(289)
11.2
9.3
408
9.7
578
13.8
(185)
(74)
(5.9)
(60)
(4.9)
1.2
Cost of Sales and Gross Margin
The following table presents cost of sales and gross margin information:
Change
(70)
202
As a percentage of net sales
67.5
67.6
68.6
67.3
(125)
32.5
32.4
31.4
32.7
Gross margin decreased $29 million in the third quarter of fiscal 2023 as compared to the third quarter of fiscal 2022 primarily as a result of lower volume, partially offset by the positive impacts of pricing actions. In the first nine months of fiscal 2023, gross margin decreased $125 million from the first nine months of fiscal 2022 due primarily to higher material and operating costs, the negative impact of foreign currency translation, and lower volume, partially offset by the positive impact of pricing actions.
We use a wide variety of raw materials in the manufacture of our products, and cost of sales and gross margin are subject to variability in raw material prices. In recent years, raw material prices and availability have been impacted by worldwide economic conditions, including supply chain disruptions, inflationary cost pressures, and the COVID-19 pandemic. As a result, we have experienced shortages and price increases in some of our input materials; however, we have
been able to initiate pricing actions to offset these impacts. The following table presents the average prices incurred related to copper, gold, silver, and palladium:
Measure
Copper
Lb.
4.04
4.12
4.02
Gold
Troy oz.
1,876
1,850
1,853
1,826
Silver
22.83
24.72
23.45
24.31
Palladium
2,219
2,383
2,211
2,370
We expect to purchase approximately 185 million pounds of copper, 115,000 troy ounces of gold, 2.4 million troy ounces of silver, and 7,000 troy ounces of palladium in fiscal 2023.
Operating Expenses
The following table presents operating expense information:
86
9.6
10.5
9.8
224
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased $38 million in the third quarter of fiscal 2023 as compared to the third quarter of fiscal 2022 due primarily to a gain on the sale of real estate in the third quarter of fiscal 2022. In the first nine months of fiscal 2023, selling, general, and administrative expenses increased $86 million as compared to the first nine months of fiscal 2022 due primarily to gains on the sale of real estate in the first nine months of fiscal 2022 and the impact of cost inflation, partially offset by the positive impact of foreign currency translation.
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 2023, we initiated a restructuring program associated with cost structure improvements across all segments. We incurred net restructuring charges of $208 million during the first nine months of fiscal 2023. Annualized cost savings related to the fiscal 2023 actions commenced during the first nine months of fiscal 2023 are expected to be approximately $150 million and are expected to be realized by the end of fiscal 2025. Cost savings will be reflected primarily in cost of sales and selling, general, and administrative expenses. For fiscal 2023, we expect total restructuring charges to be approximately $250 million and total spending, which will be funded with cash from operations, to be approximately $200 million.
During the first nine months of fiscal 2023, we recorded a pre-tax impairment charge of $60 million in connection with a held for sale business in the Transportation Solutions segment.
See Note 2 to the Condensed Consolidated Financial Statements for additional information regarding net restructuring and other charges.
Operating Income
The following table presents operating income and operating margin information:
(89)
(427)
Operating margin
15.8
17.5
13.9
17.6
Operating income included the following:
Acquisition-related charges:
Charges associated with the amortization of acquisition-related fair value adjustments
Restructuring-related charges recorded in cost of sales
62
309
113
See discussion of operating income below under “Segment Results.”
Non-Operating Items
The following table presents select non-operating information:
116
362
(79)
Effective tax rate
15.4
16.4
17.3
17.4
Income Taxes. See Note 12 to the Condensed Consolidated Financial Statements for discussion of income taxes.
The Organisation for Economic Co-operation and Development (“OECD”) and participating countries continue to work towards the enactment of a 15% global minimum tax. Member states have begun to enact the rules. The Swiss Parliament recently approved a constitutional amendment to implement the global minimum tax rules, and the amendment was approved by public vote in June 2023. We anticipate that the Swiss global minimum tax will be effective as of January 1, 2024. The global minimum tax is a significant structural change to the international taxation framework, which will affect us beginning in fiscal 2025. Although global enactment has begun, the OECD and participating countries continue to work on defining the underlying rules and administrative procedures. We are currently monitoring these developments and evaluating the potential impact on our results of operations, cash taxes, and worldwide corporate effective tax rate.
Segment Results
Effective for fiscal 2023, we realigned certain product lines from the Industrial Solutions segment to the Communications Solutions segment. Prior period segment results have been restated to conform to the current segment
reporting structure. See Note 16 to the Condensed Consolidated Financial Statements for additional information regarding our segments.
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
The following table provides an analysis of the change in the Transportation Solutions segment’s net sales by industry end market:
Growth
118
7.2
143
8.8
389
8.1
651
13.5
(262)
0.8
2.1
(0.3)
3.6
4.4
4.1
(24)
Net sales in the Transportation Solutions segment increased $133 million, or 5.8%, in the third quarter of fiscal 2023 from the third quarter of fiscal 2022 due to organic net sales growth of 7.1%, partially offset by the negative impact of foreign currency translation of 1.3%. In the third quarter of fiscal 2023, pricing actions positively affected organic net sales by $105 million. Our organic net sales by industry end market were as follows:
In the first nine months of fiscal 2023, net sales in the Transportation Solutions segment increased $403 million, or 6.0%, as compared to the first nine months of fiscal 2022 due to organic net sales growth of 10.8%, partially offset by the negative impact of foreign currency translation of 4.8%. In the first nine months of fiscal 2023, pricing actions positively affected organic net sales by $303 million. Our organic net sales by industry end market were as follows:
Operating Income. The following table presents the Transportation Solutions segment’s operating income and operating margin information:
(147)
16.7
14.5
Operating income in the Transportation Solutions segment increased $42 million in the third quarter of fiscal 2023 and decreased $147 million in the first nine months of fiscal 2023, as compared to the same periods of fiscal 2022. Excluding the items below, operating income increased in the third quarter and first nine months of fiscal 2023 primarily as a result of the positive impact of pricing actions, partially offset by higher material and operating costs and the negative impact of foreign currency translation.
181
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:
(10.2)
(46)
(9.8)
(5.2)
(17)
(1.2)
13.2
81
15.2
11.1
8.0
73
12.6
14.2
10.2
12.9
13.6
In the Industrial Solutions segment, net sales increased $15 million, or 1.3%, in the third quarter of fiscal 2023 as compared to the third quarter of fiscal 2022 due primarily to organic net sales growth of 2.2%. In the third quarter of fiscal 2023, pricing actions positively affected organic net sales by $72 million. Our organic net sales by industry end market were as follows:
Net sales in the Industrial Solutions segment increased $146 million, or 4.5%, in the first nine months of fiscal 2023 as compared to the first nine months of fiscal 2022 due primarily to organic net sales growth of 7.7%, partially offset by the negative impact of foreign currency translation of 3.1%. In the first nine months of fiscal 2023, pricing actions positively affected organic net sales by $164 million. 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:
13.1
14.7
13.0
Operating income in the Industrial Solutions segment decreased $15 million in the third quarter of fiscal 2023 and increased $10 million in the first nine months of fiscal 2023, as compared to the same periods of fiscal 2022. Excluding the items below, operating income during the third quarter of fiscal 2023 was consistent with third quarter fiscal 2022 levels as lower volume and higher material and operating costs were largely offset by the positive impact of pricing actions. Excluding the items below, operating income increased during the first nine months of fiscal 2023 primarily as a result of the positive impact of pricing actions, partially offset by higher material and operating costs and the negative impact of foreign currency translation.
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):
The following table provides an analysis of the change in the Communications Solutions segment’s net sales by industry end market:
Decline
(173)
(40.7)
(174)
(41.2)
(304)
(25.9)
(294)
(25.1)
(30.1)
(71)
(28.9)
(23.0)
(145)
(19.8)
(23)
Net sales in the Communications Solutions segment decreased $247 million, or 36.8%, in the third quarter of fiscal 2023 as compared to the third quarter of fiscal 2022 due primarily to organic net sales declines of 36.7%. Our organic net sales by industry end market were as follows:
In the first nine months of fiscal 2023, net sales in the Communications Solutions segment decreased $472 million, or 24.8%, as compared to the first nine months of fiscal 2022 due primarily to organic net sales declines of 23.1% and the negative impact of foreign currency translation of 2.7%. 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:
(290)
25.5
25.2
Operating income in the Communications Solutions segment decreased $116 million and $290 million in the third quarter and first nine months of fiscal 2023, respectively, as compared to the same periods of fiscal 2022. Excluding the items below, operating income decreased due primarily to lower volume.
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. We may use excess cash to purchase a portion of our common shares pursuant to our authorized share repurchase program, to acquire strategic businesses or product lines, to pay dividends on our common shares, or to reduce our outstanding debt. The cost or availability of future funding may be impacted by financial market conditions. We will continue to monitor financial markets and respond as necessary to changing conditions. We believe that we have sufficient financial resources and liquidity which will enable us to meet our ongoing working capital and other cash flow needs.
Cash Flows from Operating Activities
In the first nine months of fiscal 2023, net cash provided by operating activities increased $470 million to $1,994 million from $1,524 million in the first nine months of fiscal 2022. The increase resulted primarily from the impact of changes in working capital levels, partially offset by lower pre-tax income. The amount of income taxes paid, net of refunds, during the first nine months of fiscal 2023 and 2022 was $354 million and $326 million, respectively.
Cash Flows from Investing Activities
Capital expenditures were $538 million and $556 million in the first nine months of fiscal 2023 and 2022, respectively. We expect fiscal 2023 capital spending levels to be approximately 5% of net sales. We believe our capital funding levels are adequate to support new programs, and we continue to invest in our manufacturing infrastructure to further enhance productivity and manufacturing capabilities.
During the first nine months of fiscal 2023, we received net cash proceeds of $48 million related to the sale of three businesses. We received net cash proceeds of $16 million related to the sale of two businesses during the first nine months of fiscal 2022. See Note 2 to the Condensed Consolidated Financial Statements for additional information.
During the first nine months of fiscal 2023, we acquired one business for a cash purchase price of $108 million, net of cash acquired. We acquired two businesses for a combined cash purchase price of $141 million, net of cash acquired, during the first nine months of fiscal 2022. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions.
Cash Flows from Financing Activities and Capitalization
Total debt at both June 30, 2023 and September 30, 2022 was $4,206 million. See Note 7 to the Condensed Consolidated Financial Statements for additional information regarding debt.
During the first nine months of fiscal 2023, Tyco Electronics Group S.A. (“TEGSA”), our wholly-owned subsidiary, issued $500 million aggregate principal amount of 4.50% senior notes due in February 2026. The notes are TEGSA’s unsecured senior obligations and rank equally in right of payment with all existing and any future senior indebtedness of TEGSA and senior to any subordinated indebtedness that TEGSA may incur.
During the first nine months of fiscal 2023, TEGSA repaid, at maturity, €550 million of 1.10% senior notes due in March 2023.
TEGSA has a five-year unsecured senior revolving credit facility (“Credit Facility”) with a maturity date of June 2026 and total commitments of $1.5 billion. TEGSA had no borrowings under the Credit Facility at June 30, 2023 or September 30, 2022.
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 30, 2023, 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 $541 million and $506 million in the first nine months of fiscal 2023 and 2022, respectively.
We repurchased approximately five million of our common shares for $621 million and approximately eight million of our common shares for $1,072 million under the share repurchase program during the first nine months of fiscal 2023 and 2022, respectively. At June 30, 2023, we had $1.1 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:
1,400
Total noncurrent assets(1)
3,062
993
1,937
Total noncurrent liabilities(2)
7,458
15,871
Fiscal Year Ended
Statement of Operations Data:
Loss from continuing operations
(616)
Net loss
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 2023 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.
Commitments and Contingencies
Critical Accounting Policies and Estimates
The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses.
Our accounting policies for revenue recognition, goodwill and other intangible assets, income taxes, and pension plans are based on, among other things, judgments and assumptions made by management. For additional information regarding these policies and the underlying accounting assumptions and estimates used in these policies, refer to “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” and the Consolidated Financial Statements and accompanying notes contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. There were no significant changes to this information during the first nine months of fiscal 2023.
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, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. 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 30, 2022, 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 2023. 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 30, 2022.
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 30, 2023. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2023.
Changes in Internal Control Over Financial Reporting
During the quarter ended June 30, 2023, 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 30, 2022. Refer to “Part I. Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 for additional information regarding legal proceedings.
Environmental Matter
For the environmental matter reported in accordance with Item 103 of Regulation S-K, refer to “Part II. Item 1. Legal Proceedings” in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2023.
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 30, 2022. The risk factors described in our Annual Report on Form 10-K, in addition to other information 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.
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 30, 2023:
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)
April 1–April 28, 2023
499,090
126.03
498,500
1,186,347,538
April 29–June 2, 2023
820,376
122.02
806,091
1,087,977,170
June 3–June 30, 2023
212,605
131.92
212,300
1,059,969,667
1,532,071
124.70
1,516,891
ITEM 5. OTHER INFORMATION
Rule 10b5-1 Trading Arrangements
In the quarter ended June 30, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted or terminated a plan for the purchase or sale of our securities intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or a non-Rule 10b5-1 trading arrangement for the purchase or sale of our securities, within the meaning of Item 408 of Regulation S-K.
ITEM 6. EXHIBITS
Exhibit Number
Exhibit
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)
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File(2)
*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 28, 2023