TE CONNECTIVITY LTD. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion may contain forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements as a result of many factors, including but not limited to those under the heading "Forward-Looking Information" and "Part II. Item 1A. Risk Factors."
Our Condensed Consolidated Financial Statements have been prepared in
The following discussion includes organic net sales growth (decline) which is a non-GAAP financial measure. See "Non-GAAP Financial Measure" for additional information regarding this measure.
Overview
TE Connectivity Ltd. ("TE Connectivity" or the "Company," which may be referred
to as "we," "us," or "our") is a global industrial technology leader creating a
safer, sustainable, productive, and connected future. Our broad range of
connectivity and sensor solutions, proven in the harshest environments, enable
advancements in transportation, industrial applications, medical technology,
energy, data communications, and the home.
The first quarter of fiscal 2022 included the following:
Our net sales increased 8.4% in the first quarter of fiscal 2022 as compared to
the same period of fiscal 2021 due to sales growth in the Industrial Solutions
? and Communications Solutions segments, partially offset by sales declines in
the Transportation Solutions segment. On an organic basis, our net sales
increased 8.0% during the first quarter of fiscal 2022 as compared to the same
period of fiscal 2021.
? Our net sales by segment were as follows:
? Transportation Solutions-Our net sales decreased 3.0% in the first quarter of
fiscal 2022 due primarily to sales declines in the automotive end market.
Industrial Solutions-Our net sales increased 21.3% in the first quarter of
? fiscal 2022 primarily as a result of sales increases in the industrial
equipment end market.
Communications Solutions-Our net sales increased 41.4% in the first quarter of
? fiscal 2022 due to sales increases in both the data and devices and the
appliances end markets.
? Net cash provided by operating activities was
of fiscal 2022.
COVID-19 Pandemic
The COVID-19 pandemic has affected nearly all regions around the world and
resulted in business slowdowns or shutdowns and travel restrictions in affected
areas. The pandemic had a negative impact on certain of our businesses in fiscal
2021. The pandemic has not had a significant impact on our ability to staff our
operations, and we do not expect that it will continue to have a significant
impact on our businesses in the near term. 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.
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The COVID-19 pandemic has impacted and continues to impact our business operations globally, causing disruption in our suppliers' and customers' supply chains, some of our business locations to reduce or suspend operations, and a reduction in demand for certain products from direct customers or end markets. In addition, the pandemic had far-reaching impacts on many additional aspects of our operations, both directly and indirectly, including with respect to its impacts on customer behaviors, business and manufacturing operations, inventory, our employees, and the market generally. We assessed the impact of the COVID-19 pandemic and adjusted our operations and businesses, a number of which are operating as essential businesses, and will continue to do so if necessary. The extent to which the pandemic will continue to impact our business and the markets we serve will depend on future developments which may include the further spread of the virus, variant strains of the virus, and the resumption of high levels of infections and hospitalizations as well as the success of public health advancements, including vaccine production and distribution. 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 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 second quarter of fiscal 2022, we expect our net sales to be approximately$3.8 billion as compared to$3.7 billion in the second quarter of fiscal 2021. This increase reflects sales growth in the Industrial Solutions and Communications Solutions segments, partially offset by sales declines in the Transportation Solutions segment driven primarily by an approximate 5% decline in global automotive production. We expect diluted earnings per share from continuing operations to be approximately$1.52 per share in the second quarter of fiscal 2022. This outlook reflects the negative impact of foreign currency exchange rates on net sales and earnings per share of approximately$111 million and$0.03 per share, respectively, in the second quarter of fiscal 2022 as compared to the second quarter of fiscal 2021. This outlook is based on foreign currency exchange rates and commodity prices that are consistent with current levels. OnDecember 27, 2021 , the canton ofSchaffhausen inSwitzerland enacted a reduction to its corporate income tax rate. We expect to recognize approximately$25 million of income tax expense related to the write-down of certain deferred tax assets to the lower tax rate in the second quarter of fiscal 2022, the period of enactment. This income tax charge is reflected in the above outlook. We are monitoring the current macroeconomic environment, including any continued impacts from the COVID-19 pandemic, and its potential effects on our customers and the end markets we serve. We have taken actions to manage costs and will continue to closely manage our costs in line with economic conditions. Additionally, we are managing our capital resources and monitoring capital availability to ensure that we have sufficient resources to fund future capital needs. See further discussion in "Liquidity and Capital Resources."
Acquisition
During the first quarter of fiscal 2022, we acquired one business for a cash purchase price of$125 million , net of cash acquired. The acquisition was reported as part of our Communications Solutions segment from the date of acquisition. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions. 20 Table of Contents Results of Operations Net Sales The following table presents our net sales and the percentage of total net sales by segment: For the Quarters Ended December 24, December 25, 2021 2020 ($ in millions) Transportation Solutions$ 2,158 56 %$ 2,224 63 % Industrial Solutions 1,059 28 873 25 Communications Solutions 601 16 425 12 Total$ 3,818 100 %$ 3,522 100 %
The following table provides an analysis of the change in our net sales by segment:
Change in
versus Net
Sales for the Quarter Ended
Net Sales Organic Net Sales Acquisitions
Growth (Decline) Growth (Decline) Translation (Divestitures)
($ in millions)
Transportation Solutions $ (66) (3.0) % $ (42) (1.8) % $ (24) $ -
Industrial Solutions 186 21.3 154 17.6 (20) 52
Communications Solutions 176 41.4 172 40.2 (1) 5
Total $ 296 8.4 % $ 284 8.0 % $ (45) $ 57
Net sales increased $296 million , or 8.4%, in the first quarter of fiscal 2022
as compared to the first quarter of fiscal 2021. The increase in net sales
resulted from organic net sales growth of 8.0% and net sales contributions of
1.7% from acquisitions and divestitures, partially offset by the negative impact
of foreign currency translation of 1.3% due to the weakening of certain foreign
currencies. Pricing actions positively affected organic net sales by $52 million
in the first quarter of fiscal 2022.
See further discussion of net sales below under "Segment Results."
Net Sales byGeographic Region . Our business operates in three geographic regions-Europe /Middle East /Africa ("EMEA"),Asia-Pacific , and theAmericas -and our results of operations are influenced by changes in foreign currency exchange rates. Increases or decreases in the value of theU.S. dollar, compared to other currencies, will directly affect our reported results as we translate those currencies intoU.S. dollars at the end of each fiscal period.
Approximately 60% of our net sales were invoiced in currencies other than the
The following table presents our net sales and the percentage of total net sales by geographic region(1):
For the
Quarters Ended
December 24, December 25,
2021 2020
($ in millions)
EMEA $ 1,314 34 % $ 1,316 37 %
Asia-Pacific 1,470 39 1,293 37
Americas 1,034 27 913 26
Total $ 3,818 100 % $ 3,522 100 %
(1) Net sales to external customers are attributed to individual countries based
on the legal entity that records the sale.
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The following table provides an analysis of the change in our net sales by
geographic region:
Change in Net Sales for the Quarter Ended December 24, 2021
versus Net Sales for the Quarter Ended December 25, 2020
Net Sales Organic Net Sales Acquisitions
Growth (Decline) Growth Translation (Divestitures)
($ in millions)
EMEA $ (2) (0.2) % $ 6 0.3 % $ (44) $ 36
Asia-Pacific 177 13.7 164 12.6 - 13
Americas 121 13.3 114 12.5 (1) 8
Total $ 296 8.4 % $ 284 8.0 % $ (45) $ 57
Cost of Sales and Gross Margin
The following table presents cost of sales and gross margin information:
For the
Quarters Ended
December 24, December 25,
2021 2020 Change
($ in millions)
Cost of sales $ 2,588 $ 2,376 $ 212
As a percentage of net sales 67.8 % 67.5 %
Gross margin $ 1,230 $ 1,146 $ 84
As a percentage of net sales 32.2 % 32.5 %
Gross margin increased
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 past several quarters, 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:
For the
Quarters Ended
December 24, December 25,
Measure 2021 2020
Copper Lb. $ 3.80 $ 2.88
Gold Troy oz. 1,797 1,599
Silver Troy oz. 23.56 19.70
Palladium Troy oz. 2,356 2,137
We expect to purchase approximately 220 million pounds of copper, 125,000 troy
ounces of gold, 2.9 million troy ounces of silver, and 15,000 troy ounces of
palladium in fiscal 2022.
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Operating Expenses
The following table presents operating expense information:
For the
Quarters Ended
December 24, December 25,
2021 2020 Change
($ in millions)Selling, general, and administrative expenses $ 363 $ 361$ 2 As a percentage of net sales 9.5 % 10.2 % Restructuring and other charges, net $ 12
$ 167
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased slightly in the first quarter of fiscal 2022 from the first quarter of fiscal 2021 due primarily to increased selling expenses to support higher sales levels, largely offset by a gain 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 2022 and 2021, we initiated restructuring programs associated with footprint consolidation and cost structure improvements across all segments. We incurred net restructuring and related charges of$33 million during the first quarter of fiscal 2022, of which$12 million was recorded in cost of sales. Annualized cost savings related to the fiscal 2022 actions commenced during the first quarter of fiscal 2022 are expected to be approximately$28 million and are expected to be realized by the end of fiscal 2024. Cost savings will be reflected primarily in cost of sales and selling, general, and administrative expenses. For fiscal 2022, we expect total restructuring charges to be approximately$150 million and total spending, which will be funded with cash from operations, to be approximately$190 million .
See Note 2 to the Condensed Consolidated Financial Statements for additional information regarding net restructuring and other charges.
Operating Income
The following table presents operating income and operating margin information:
For the
Quarters Ended
December 24, December 25,
2021 2020 Change
($ in millions)
Operating income $ 672 $ 448 $ 224
Operating margin 17.6 % 12.7 %
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Operating income included the following:
For the
Quarters Ended
December 24, December 25,
2021 2020
(in millions)
Acquisition-related charges:
Acquisition and integration costs $ 8 $ 8
Charges associated with the amortization of
acquisition-related fair value adjustments 8 1
16 9
Restructuring and other charges, net 12 167
Restructuring-related charges recorded in cost of sales 12 -
Total $ 40 $ 176
See discussion of operating income below under "Segment Results."
Non-Operating Items
The following table presents select non-operating information:
For the
Quarters Ended
December 24, December 25,
2021 2020 Change
($ in millions)
Income tax expense $ 110 $ 60 $ 50
Effective tax rate 16.2 % 13.8 %
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 first quarters of fiscal 2022 and 2021.
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