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 2021 included the following:
Our net sales increased 11.2% in the first quarter of fiscal 2021 as compared
to the first quarter of fiscal 2020 due primarily to sales growth in the
? Transportation Solutions segment. On an organic basis, our net sales increased
6.2% during the first quarter of fiscal 2021 as compared to the same period of
fiscal 2020.
? Our net sales by segment were as follows:
Transportation Solutions-Our net sales increased 19.1% in the first quarter of
? fiscal 2021 due to sales increases in the automotive end market and, to a
lesser degree, the commercial transportation and sensors end markets.
Industrial Solutions-Our net sales decreased 5.8% in the first quarter of
? fiscal 2021 primarily as a result of sales declines in the aerospace, defense,
oil, and gas and the medical end markets, partially offset by sales increases
in the industrial equipment end market.
Communications Solutions-Our net sales increased 13.9% in the first quarter of
? fiscal 2021 due to sales increases in both the appliances and the data and
devices end markets.
? Net cash provided by continuing operating activities was
first quarter of fiscal 2021.
COVID-19 Pandemic and Economic Conditions
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 negatively affected our sales and operating results during
fiscal 2020 and the first quarter of fiscal 2021, and we expect that it will
continue to have an impact on some of our businesses in the near term and may
have a material impact on our financial condition, liquidity, and results of
operations in future periods.
19
Table of Contents
The COVID-19 pandemic is currently impacting, and we expect that it will continue to impact, our business operations globally, causing further 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. While a number of our businesses are operating as essential businesses, some have had and continue to have adjusted, reduced, or suspended operating activities at certain locations. In addition, the pandemic has had and may continue to have 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, and the scope and nature of these impacts continue to evolve. We will continue to assess the evolving impact of the COVID-19 pandemic and intend to adjust our operations accordingly. Throughout our operations, we have 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 the success of, among other things, future developments and public health advancements, including the recent commencement of vaccine production and distribution. We expect that the COVID-19 pandemic will continue to impact several of the markets we serve, in particular the commercial aerospace and medical markets in our Industrial Solutions segment; however, we expect these markets to improve later in fiscal 2021. See "Outlook" below for additional information. In response to the 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 second quarter of fiscal 2021, we expect our net sales to be approximately$3.5 billion as compared to$3.2 billion in the second quarter of fiscal 2020. This increase reflects sales growth in the Transportation Solutions segment and, to a lesser degree, the Communications Solutions segment, partially offset by sales declines in the Industrial Solutions segment relative to the second quarter of fiscal 2020. We expect diluted earnings per share from continuing operations to be approximately$1.38 per share in the second quarter of fiscal 2021. This outlook reflects the positive impact of foreign currency exchange rates on net sales and earnings per share of approximately$167 million and$0.09 per share, respectively, in the second quarter of fiscal 2021 as compared to the second quarter of 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 and its potential effects on our customers and the end markets we serve, including developments related to the COVID-19 pandemic. 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 2021, we acquired one business for a cash purchase price of$106 million , net of cash acquired. The acquisition was reported as part of our Industrial Solutions segment from the date of acquisition. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions. 20 Table of Contents Results of Operations Net Sales The following table presents our net sales and the percentage of total net sales by segment: For the Quarters Ended December 25, December 27, 2020 2019 ($ in millions) Transportation Solutions$ 2,224 63 %$ 1,868 59 % Industrial Solutions 873 25 927 29 Communications Solutions 425 12 373 12 Total$ 3,522 100 %$ 3,168 100 %
The following table provides an analysis of the change in our net sales by segment:
Change in Net
Sales for the Quarter Ended
versus Net
Sales for the Quarter Ended
Net Sales Organic Net Sales
Growth (Decline) Growth (Decline) Translation Acquisitions
($ in millions)
Transportation Solutions $ 356 19.1 % $ 233 12.3 % $ 76 $ 47
Industrial Solutions (54) (5.8) (78) (8.4) 21 3
Communications Solutions 52 13.9 43 11.5 9 -
Total $ 354 11.2 % $ 198 6.2 % $ 106 $ 50
Net sales increased$354 million , or 11.2%, in the first quarter of fiscal 2021 as compared to the first quarter of fiscal 2020. The increase in net sales resulted from organic net sales growth of 6.2%, the positive impact of foreign currency translation of 3.4% due to the strengthening of certain foreign currencies, and sales contributions from acquisitions of 1.6%. In the first quarter of fiscal 2021, our net sales declines in the Industrial Solutions segment reflected significant unfavorable impacts from the COVID-19 pandemic. Price erosion adversely affected organic net sales by$26 million in the first quarter of fiscal 2021.
See further discussion of net sales below under "Segment Results."
Net Sales byGeographic Region . Our business operates in three geographic regions-Asia-Pacific ,Europe /Middle East /Africa ("EMEA"), and theAmericas -and our results of operations are influenced by changes in foreign currency exchange rates. Increases or decreases in the value of theU.S. dollar, compared to other currencies, will directly affect our reported results as we translate those currencies intoU.S. dollars at the end of each fiscal period.
Approximately 60% of our net sales were invoiced in currencies other than the
21
Table of Contents
The following table presents our net sales and the percentage of total net sales by geographic region(1):
For the
Quarters Ended
December 25, December 27,
2020 2019
($ in millions)
Asia-Pacific $ 1,293 37 % $ 1,113 35 %
EMEA 1,316 37 1,097 35
Americas 913 26 958 30
Total $ 3,522 100 % $ 3,168 100 %
(1) Net sales to external customers are attributed to individual countries based
on the legal entity that records the sale.
The following table provides an analysis of the change in our net sales by
geographic region:
Change in Net Sales for the Quarter Ended December 25, 2020
versus Net Sales for the Quarter Ended December 27, 2019
Net Sales Organic Net Sales
Growth (Decline) Growth (Decline) Translation Acquisitions
($ in millions)
Asia-Pacific $ 180 16.2 % $ 128 11.5 % $ 52 $ -
EMEA 219 20.0 101 9.0 73 45
Americas (45) (4.7) (31) (3.2) (19) 5
Total $ 354 11.2 % $ 198 6.2 % $ 106 $ 50
Cost of Sales and Gross Margin
The following table presents cost of sales and gross margin information:
For the
Quarters Ended
December 25, December 27,
2020 2019 Change
($ in millions)
Cost of sales $ 2,376 $ 2,138 $ 238
As a percentage of net sales 67.5 % 67.5 %
Gross margin $ 1,146 $ 1,030 $ 116
As a percentage of net sales 32.5 % 32.5 %
Gross margin increased
We use a wide variety of raw materials in the manufacture of our products. Cost of sales and gross margin are subject to variability in raw material prices which continue to fluctuate for many of the raw materials we use, including copper, gold, silver, and palladium. We expect to purchase approximately 180 million pounds of copper, 115,000 troy ounces
22
Table of Contents
of gold, 2.5 million troy ounces of silver, and 15,000 troy ounces of palladium
in fiscal 2021. The following table presents the average prices incurred related
to copper, gold, silver, and palladium:
For the
Quarters Ended
December 25, December 27,
Measure 2020 2019
Copper Lb. $ 2.88 $ 2.84
Gold Troy oz. 1,599 1,354
Silver Troy oz. 19.70 16.26
Palladium Troy oz. 2,137 1,793
Operating Expenses
The following table presents operating expense information:
For the
Quarters Ended
December 25, December 27,
2020 2019 Change
($ in millions)Selling, general, and administrative expenses $ 361 $
367 $ (6)
As a percentage of net sales 10.2 % 11.6 %
Restructuring and other charges, net $ 167 $
24
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses decreased slightly in the first quarter of fiscal 2021 from the first quarter of fiscal 2020 due primarily to cost control measures and savings attributable to restructuring actions, partially offset by higher incentive compensation costs. Restructuring and Other Charges, Net. We are committed to continuous productivity improvements, and we evaluate opportunities to simplify our global manufacturing footprint, migrate facilities to lower-cost regions, reduce fixed costs, and eliminate excess capacity. These initiatives are designed to help us maintain our competitiveness in the industry, improve our operating leverage, and position us for future growth. During fiscal 2021 and 2020, we initiated restructuring programs associated with footprint consolidation and structural improvements, due in part to the COVID-19 pandemic, across all segments. We incurred net restructuring charges of$149 million during the first quarter of fiscal 2021, of which$142 million related to the fiscal 2021 restructuring program. Annualized cost savings related to the fiscal 2021 actions commenced during the first quarter of fiscal 2021 are expected to be approximately$60 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$250 million .
See Note 2 to the Condensed Consolidated Financial Statements for additional information regarding net restructuring and other charges.
Operating Income
The following table presents operating income and operating margin information:
For the
Quarters Ended
December 25, December 27,
2020 2019 Change
($ in millions)
Operating income $ 448 $ 471 $ (23)
Operating margin 12.7 % 14.9 %
23
Table of Contents
Operating income included the following:
For the
Quarters Ended
December 25, December 27,
2020 2019
(in millions)
Acquisition-related charges:
Acquisition and integration costs $ 8 $ 7
Charges associated with the amortization of
acquisition-related fair value adjustments 1 -
9 7
Restructuring and other charges, net 167 24
Total $ 176 $ 31
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 25, December 27,
2020 2019 Change
($ in millions)
Income tax expense $ 60 $ 447 $ (387)
Effective tax rate 13.8 % 95.1 %
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 2021 and 2020, including the Switzerland Federal
Act on Tax Reform and AHV Financing in fiscal 2020.
© Edgar Online, source
