UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark One) | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March | |
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 | 98-0518048 |
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 April 24, 202019, 2021 was 329,847,873.330,224,626.
TE CONNECTIVITY LTD.
INDEX TO FORM 10-Q
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| | | 6 | |
| | Notes to Condensed Consolidated Financial Statements (unaudited) | | 7 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TE CONNECTIVITY LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| | | | | | | | | | | | | |
| | For the | | For the | | ||||||||
| | Quarters Ended | | Six Months Ended | | ||||||||
| | March 27, | | March 29, | | March 27, | | March 29, | | ||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | (in millions, except per share data) | | ||||||||||
Net sales | | $ | 3,195 | | $ | 3,412 | | $ | 6,363 | | $ | 6,759 | |
Cost of sales | |
| 2,166 | |
| 2,294 | |
| 4,304 | |
| 4,527 | |
Gross margin | |
| 1,029 | |
| 1,118 | |
| 2,059 | |
| 2,232 | |
Selling, general, and administrative expenses | |
| 352 | | | 373 | |
| 719 | | | 762 | |
Research, development, and engineering expenses | |
| 158 | | | 166 | |
| 319 | | | 327 | |
Acquisition and integration costs | |
| 12 | | | 7 | |
| 19 | | | 12 | |
Restructuring and other charges, net | |
| 22 | | | 42 | |
| 46 | | | 117 | |
Impairment of goodwill | | | 900 | | | — | | | 900 | | | — | |
Operating income (loss) | | | (415) | | | 530 | | | 56 | | | 1,014 | |
Interest income | | | 5 | | | 4 | | | 11 | | | 9 | |
Interest expense | |
| (11) | | | (15) | |
| (23) | | | (42) | |
Other income, net | |
| 11 | | | 1 | |
| 16 | | | — | |
Income (loss) from continuing operations before income taxes | |
| (410) | |
| 520 | |
| 60 | |
| 981 | |
Income tax expense | |
| (42) | | | (91) | |
| (489) | | | (169) | |
Income (loss) from continuing operations | |
| (452) | |
| 429 | |
| (429) | |
| 812 | |
Income (loss) from discontinued operations, net of income taxes | |
| (4) | | | 10 | |
| (1) | | | (97) | |
Net income (loss) | | $ | (456) | | $ | 439 | | $ | (430) | | $ | 715 | |
| | | | | | | | | | | | | |
Basic earnings (loss) per share: | | | | | | | | | | | | | |
Income (loss) from continuing operations | | $ | (1.35) | | $ | 1.27 | | $ | (1.28) | | $ | 2.39 | |
Income (loss) from discontinued operations | |
| (0.01) | |
| 0.03 | |
| — | |
| (0.29) | |
Net income (loss) | |
| (1.37) | |
| 1.30 | |
| (1.29) | |
| 2.10 | |
| | | | | | | | | | | | | |
Diluted earnings (loss) per share: | | | | | | | | | | | | | |
Income (loss) from continuing operations | | $ | (1.35) | | $ | 1.26 | | $ | (1.28) | | $ | 2.37 | |
Income (loss) from discontinued operations | |
| (0.01) | |
| 0.03 | |
| — | |
| (0.28) | |
Net income (loss) | |
| (1.37) | |
| 1.29 | |
| (1.29) | |
| 2.09 | |
| | | | | | | | | | | | | |
Weighted-average number of shares outstanding: | | | | | | | | | | | | | |
Basic | |
| 334 | | | 338 | |
| 334 | | | 340 | |
Diluted | |
| 334 | | | 340 | |
| 334 | | | 342 | |
| | | | | | | | | | | | | |
| | For the | | For the | | ||||||||
| | Quarters Ended | | Six Months Ended | | ||||||||
| | March 26, | | March 27, | | March 26, | | March 27, | | ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
| | (in millions, except per share data) | | ||||||||||
Net sales | | $ | 3,738 | | $ | 3,195 | | $ | 7,260 | | $ | 6,363 | |
Cost of sales | |
| 2,528 | |
| 2,166 | |
| 4,904 | |
| 4,304 | |
Gross margin | |
| 1,210 | |
| 1,029 | |
| 2,356 | |
| 2,059 | |
Selling, general, and administrative expenses | |
| 401 | | | 352 | |
| 762 | | | 719 | |
Research, development, and engineering expenses | |
| 174 | | | 158 | |
| 336 | | | 319 | |
Acquisition and integration costs | |
| 6 | | | 12 | |
| 14 | | | 19 | |
Restructuring and other charges, net | |
| 17 | | | 22 | |
| 184 | | | 46 | |
Impairment of goodwill | | | — | | | 900 | | | — | | | 900 | |
Operating income (loss) | | | 612 | | | (415) | | | 1,060 | | | 56 | |
Interest income | | | 8 | | | 5 | | | 11 | | | 11 | |
Interest expense | |
| (13) | | | (11) | |
| (28) | | | (23) | |
Other income, net | |
| 4 | | | 11 | |
| 3 | | | 16 | |
Income (loss) from continuing operations before income taxes | |
| 611 | |
| (410) | |
| 1,046 | |
| 60 | |
Income tax expense | |
| (106) | | | (42) | |
| (166) | | | (489) | |
Income (loss) from continuing operations | |
| 505 | |
| (452) | |
| 880 | |
| (429) | |
Income (loss) from discontinued operations, net of income taxes | |
| 1 | | | (4) | |
| 7 | | | (1) | |
Net income (loss) | | $ | 506 | | $ | (456) | | $ | 887 | | $ | (430) | |
| | | | | | | | | | | | | |
Basic earnings (loss) per share: | | | | | | | | | | | | | |
Income (loss) from continuing operations | | $ | 1.53 | | $ | (1.35) | | $ | 2.66 | | $ | (1.28) | |
Income (loss) from discontinued operations | |
| — | |
| (0.01) | |
| 0.02 | |
| — | |
Net income (loss) | |
| 1.53 | |
| (1.37) | |
| 2.68 | |
| (1.29) | |
| | | | | | | | | | | | | |
Diluted earnings (loss) per share: | | | | | | | | | | | | | |
Income (loss) from continuing operations | | $ | 1.51 | | $ | (1.35) | | $ | 2.64 | | $ | (1.28) | |
Income (loss) from discontinued operations | |
| — | |
| (0.01) | |
| 0.02 | |
| — | |
Net income (loss) | |
| 1.51 | |
| (1.37) | |
| 2.66 | |
| (1.29) | |
| | | | | | | | | | | | | |
Weighted-average number of shares outstanding: | | | | | | | | | | | | | |
Basic | |
| 331 | | | 334 | |
| 331 | | | 334 | |
Diluted | |
| 334 | | | 334 | |
| 333 | | | 334 | |
See Notes to Condensed Consolidated Financial Statements.
1
TE CONNECTIVITY LTD.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the | | For the | | | For the | | For the | | ||||||||||||||||
| | Quarters Ended | | Six Months Ended | | | Quarters Ended | | Six Months Ended | | ||||||||||||||||
| | March 27, | | March 29, | | March 27, | | March 29, | | | March 26, | | March 27, | | March 26, | | March 27, | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||||||
| | (in millions) | | | (in millions) | | ||||||||||||||||||||
Net income (loss) | | $ | (456) | | $ | 439 | | $ | (430) | | $ | 715 | | | $ | 506 | | $ | (456) | | $ | 887 | | $ | (430) | |
Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | |
Currency translation | |
| (114) | | | 64 | | | (64) | | | 83 | | |
| 21 | | | (114) | | | 132 | | | (64) | |
Adjustments to unrecognized pension and postretirement benefit costs, net of income taxes | |
| 8 | | | 6 | | | 16 | | | 12 | | |
| 6 | | | 8 | | | 12 | | | 16 | |
Gains (losses) on cash flow hedges, net of income taxes | |
| (53) | | | 27 | | | (22) | | | 51 | | |
| 28 | | | (53) | | | 57 | | | (22) | |
Other comprehensive income (loss) | |
| (159) | |
| 97 | |
| (70) | |
| 146 | | |
| 55 | |
| (159) | |
| 201 | |
| (70) | |
Comprehensive income (loss) | | | (615) | | | 536 | | | (500) | | | 861 | | | | 561 | | | (615) | | | 1,088 | | | (500) | |
Less: comprehensive loss attributable to noncontrolling interests | | | 2 | | | — | | | 2 | | | — | | |||||||||||||
Less: comprehensive (income) loss attributable to noncontrolling interests | | | 4 | | | 2 | | | (2) | | | 2 | | |||||||||||||
Comprehensive income (loss) attributable to TE Connectivity Ltd. | | $ | (613) | | $ | 536 | | $ | (498) | | $ | 861 | | | $ | 565 | | $ | (613) | | $ | 1,086 | | $ | (498) | |
See Notes to Condensed Consolidated Financial Statements.
2
TE CONNECTIVITY LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| | | | | | | | | | | | | | |
| | March 27, | | September 27, | | | March 26, | | September 25, | | ||||
|
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| ||||
| | (in millions, except share | | | (in millions, except share | | ||||||||
| | data) | | | data) | | ||||||||
Assets | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 796 | | $ | 927 | | | $ | 1,748 | | $ | 945 | |
Accounts receivable, net of allowance for doubtful accounts of $32 and $25, respectively | |
| 2,461 | |
| 2,320 | | |||||||
Accounts receivable, net of allowance for doubtful accounts of $35 and $29, respectively | |
| 2,921 | |
| 2,377 | | |||||||
Inventories | |
| 2,001 | |
| 1,836 | | |
| 2,134 | |
| 1,950 | |
Prepaid expenses and other current assets | |
| 457 | |
| 471 | | |
| 619 | |
| 512 | |
Total current assets | |
| 5,715 | |
| 5,554 | | |
| 7,422 | |
| 5,784 | |
Property, plant, and equipment, net | |
| 3,558 | |
| 3,574 | | |
| 3,662 | |
| 3,650 | |
Goodwill | |
| 5,235 | |
| 5,740 | | |
| 5,342 | |
| 5,224 | |
Intangible assets, net | |
| 1,547 | |
| 1,596 | | |
| 1,548 | |
| 1,593 | |
Deferred income taxes | |
| 2,382 | |
| 2,776 | | |
| 2,204 | |
| 2,178 | |
Other assets | |
| 930 | |
| 454 | | |
| 789 | |
| 813 | |
Total assets | | $ | 19,367 | | $ | 19,694 | | | $ | 20,967 | | $ | 19,242 | |
Liabilities and equity | | | | | | | | |||||||
Liabilities, redeemable noncontrolling interests, and shareholders' equity | | | | | | | | |||||||
Current liabilities: | | | | | | | | | | | | | | |
Short-term debt | | $ | 603 | | $ | 570 | | | $ | 919 | | $ | 694 | |
Accounts payable | |
| 1,390 | |
| 1,357 | | |
| 1,793 | |
| 1,276 | |
Accrued and other current liabilities | |
| 1,966 | |
| 1,613 | | |
| 2,327 | |
| 1,720 | |
Total current liabilities | |
| 3,959 | |
| 3,540 | | |
| 5,039 | |
| 3,690 | |
Long-term debt | |
| 3,752 | |
| 3,395 | | |
| 3,602 | |
| 3,452 | |
Long-term pension and postretirement liabilities | |
| 1,359 | |
| 1,367 | | |
| 1,299 | |
| 1,336 | |
Deferred income taxes | |
| 126 | |
| 156 | | |
| 140 | |
| 143 | |
Income taxes | |
| 228 | |
| 239 | | |
| 277 | |
| 252 | |
Other liabilities | |
| 772 | |
| 427 | | |
| 827 | |
| 874 | |
Total liabilities | |
| 10,196 | |
| 9,124 | | |
| 11,184 | |
| 9,747 | |
Commitments and contingencies (Note 10) | | | | | | | | |||||||
Equity: | | | | | | | | |||||||
TE Connectivity Ltd. shareholders' equity: | | | | | | | | |||||||
Common shares, CHF 0.57 par value, 350,951,381 shares authorized and issued | |
| 154 | | | 154 | | |||||||
Commitments and contingencies (Note 9) | | | | | | | | |||||||
Redeemable noncontrolling interests | | | 114 | | | 112 | | |||||||
Shareholders' equity: | | | | | | | | |||||||
Common shares, CHF 0.57 par value, 338,953,381 shares authorized and issued | |
| 149 | | | 149 | | |||||||
Accumulated earnings | |
| 11,122 | |
| 12,256 | | |
| 10,541 | |
| 10,348 | |
Treasury shares, at cost, 19,877,795 and 15,862,337 shares, respectively | |
| (1,639) | |
| (1,337) | | |||||||
Treasury shares, at cost, 8,520,155 and 8,295,878 shares, respectively | |
| (775) | |
| (669) | | |||||||
Accumulated other comprehensive loss | |
| (571) | |
| (503) | | |
| (246) | |
| (445) | |
Total TE Connectivity Ltd. shareholders' equity | | | 9,066 | | | 10,570 | | |||||||
Noncontrolling interests | | | 105 | | | — | | |||||||
Total equity | |
| 9,171 | |
| 10,570 | | |||||||
Total liabilities and equity | | $ | 19,367 | | $ | 19,694 | | |||||||
Total shareholders' equity | |
| 9,669 | |
| 9,383 | | |||||||
Total liabilities, redeemable noncontrolling interests, and shareholders' equity | | $ | 20,967 | | $ | 19,242 | |
See Notes to Condensed Consolidated Financial Statements.
3
TE CONNECTIVITY LTD.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Quarter Ended March 27, 2020 | | | For the Quarter Ended March 26, 2021 | | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | Accumulated | | TE Connectivity | | | | | | | | | | | | | | | | | | | | | Accumulated | | TE Connectivity | | | | | | ||||||||||||
| | | | | | | | | | | | | | | | | Other | | Ltd. | | Non- | | | | | | | | | | | | | | | | | | | | Other | | Ltd. | | Non- | | | | ||||||||||
| | Common Shares | | Treasury Shares | | Contributed | | Accumulated | | Comprehensive | | Shareholders' | | controlling | | Total | | | Common Shares | | Treasury Shares | | Contributed | | Accumulated | | Comprehensive | | Shareholders' | | controlling | | Total | | ||||||||||||||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Surplus |
| Earnings |
| Loss |
| Equity |
| Interests |
| Equity |
|
| Shares |
| Amount |
| Shares |
| Amount |
| Surplus |
| Earnings |
| Loss |
| Equity |
| Interests |
| Equity |
| ||||||||||||||||
| | (in millions) | | | (in millions) | | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 27, 2019 |
| 351 | | $ | 154 |
| (17) | | $ | (1,389) | | $ | — | | $ | 12,206 | | $ | (414) | | $ | 10,557 | | $ | — | | $ | 10,557 | | |||||||||||||||||||||||||||||
Acquisition | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | 107 | | | 107 | | |||||||||||||||||||||||||||||
Net loss |
| — | |
| — |
| — | |
| — | |
| — | |
| (456) | |
| — | |
| (456) | |
| — | |
| (456) | | |||||||||||||||||||||||||||||
Other comprehensive loss |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| (157) | |
| (157) | |
| (2) | |
| (159) | | |||||||||||||||||||||||||||||
Balance at December 25, 2020 |
| 339 | | $ | 149 |
| (8) | | $ | (655) | | $ | — | | $ | 10,672 | | $ | (305) | | $ | 9,861 | | $ | — | | $ | 9,861 | | |||||||||||||||||||||||||||||
Net income |
| — | |
| — |
| — | |
| — | |
| — | |
| 506 | |
| — | |
| 506 | |
| — | |
| 506 | | |||||||||||||||||||||||||||||
Other comprehensive income |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| 59 | |
| 59 | |
| — | |
| 59 | | |||||||||||||||||||||||||||||
Share-based compensation expense |
| — | |
| — |
| — | |
| — | |
| 15 | |
| — | |
| — | |
| 15 | |
| — | |
| 15 | |
| — | |
| — |
| — | |
| — | | �� | 30 | |
| — | |
| — | |
| 30 | |
| — | |
| 30 | |
Dividends |
| — | |
| — |
| — | |
| — | |
| — | |
| (635) | |
| — | |
| (635) | |
| — | |
| (635) | |
| — | |
| — |
| — | |
| — | |
| — | |
| (661) | |
| — | |
| (661) | |
| — | |
| (661) | |
Exercise of share options |
| — | |
| — |
| — | |
| 13 | |
| — | |
| — | |
| — | |
| 13 | |
| — | |
| 13 | |
| — | |
| — |
| 1 | |
| 44 | |
| — | |
| — | |
| — | |
| 44 | |
| — | |
| 44 | |
Restricted share award vestings and other activity |
| — | |
| — |
| — | |
| 17 | |
| (15) | |
| 7 | |
| — | |
| 9 | |
| — | |
| 9 | |
| — | |
| — |
| — | |
| 18 | |
| (30) | |
| 24 | |
| — | |
| 12 | |
| — | |
| 12 | |
Repurchase of common shares |
| — | |
| — |
| (3) | |
| (280) | |
| — | |
| — | |
| — | |
| (280) | |
| — | |
| (280) | |
| — | |
| — |
| (2) | |
| (182) | |
| — | |
| — | |
| — | |
| (182) | |
| �� | |
| (182) | |
Balance at March 27, 2020 | | 351 | | $ | 154 |
| (20) | | $ | (1,639) | | $ | — | | $ | 11,122 | | $ | (571) | | $ | 9,066 | | $ | 105 | | $ | 9,171 | | |||||||||||||||||||||||||||||
Balance at March 26, 2021 | | 339 | | $ | 149 |
| (9) | | $ | (775) | | $ | — | | $ | 10,541 | | $ | (246) | | $ | 9,669 | | $ | — | | $ | 9,669 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Six Months Ended March 27, 2020 | | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | Accumulated | | TE Connectivity | | | | | | ||||||
| | | | | | | | | | | | | | | | | Other | | Ltd. | | Non- | | | | |||||
| | Common Shares | | Treasury Shares | | Contributed | | Accumulated | | Comprehensive | | Shareholders' | | controlling | | Total | | ||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Surplus |
| Earnings |
| Loss |
| Equity |
| Interests |
| Equity |
| ||||||||
| | (in millions) | | ||||||||||||||||||||||||||
Balance at September 27, 2019 |
| 351 | | $ | 154 |
| (16) | | $ | (1,337) | | $ | — | | $ | 12,256 | | $ | (503) | | $ | 10,570 | | $ | — | | $ | 10,570 | |
Acquisition | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | 107 | | | 107 | |
Net loss |
| — | |
| — |
| — | |
| — | |
| — | |
| (430) | |
| — | |
| (430) | |
| — | |
| (430) | |
Other comprehensive loss |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| (68) | |
| (68) | |
| (2) | |
| (70) | |
Share-based compensation expense |
| — | |
| — |
| — | |
| — | |
| 37 | |
| — | |
| — | |
| 37 | |
| — | |
| 37 | |
Dividends | | — | |
| — |
| — | |
| — | |
| — | | | (635) | |
| — | |
| (635) | |
| — | |
| (635) | |
Exercise of share options |
| — | |
| — |
| — | |
| 27 | |
| — | |
| — | |
| — | |
| 27 | |
| — | |
| 27 | |
Restricted share award vestings and other activity |
| — | |
| — |
| 1 | |
| 94 | |
| (37) | |
| (69) | |
| — | |
| (12) | |
| — | |
| (12) | |
Repurchase of common shares |
| — | |
| — |
| (5) | |
| (423) | |
| — | |
| — | |
| — | |
| (423) | |
| — | |
| (423) | |
Balance at March 27, 2020 | | 351 | | $ | 154 |
| (20) | | $ | (1,639) | | $ | — | | $ | 11,122 | | $ | (571) | | $ | 9,066 | | $ | 105 | | $ | 9,171 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Six Months Ended March 26, 2021 | | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | Accumulated | | TE Connectivity | | | | | | ||||||
| | | | | | | | | | | | | | | | | Other | | Ltd. | | Non- | | | | |||||
| | Common Shares | | Treasury Shares | | Contributed | | Accumulated | | Comprehensive | | Shareholders' | | controlling | | Total | | ||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Surplus |
| Earnings |
| Loss |
| Equity |
| Interests |
| Equity |
| ||||||||
| | (in millions) | | ||||||||||||||||||||||||||
Balance at September 25, 2020 |
| 339 | | $ | 149 |
| (8) | | $ | (669) | | $ | — | | $ | 10,348 | | $ | (445) | | $ | 9,383 | | $ | — | | $ | 9,383 | |
Net income |
| — | |
| — |
| — | |
| — | |
| — | |
| 887 | |
| — | |
| 887 | |
| — | |
| 887 | |
Other comprehensive income |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| 199 | |
| 199 | |
| — | |
| 199 | |
Share-based compensation expense |
| — | |
| — |
| — | |
| — | |
| 49 | |
| — | |
| — | |
| 49 | |
| — | |
| 49 | |
Dividends | | — | |
| — |
| — | |
| — | |
| — | | | (661) | |
| — | |
| (661) | |
| — | |
| (661) | |
Exercise of share options |
| — | |
| — |
| 2 | |
| 119 | |
| — | |
| — | |
| — | |
| 119 | |
| — | |
| 119 | |
Restricted share award vestings and other activity |
| — | |
| — |
| — | |
| 84 | |
| (49) | |
| (33) | |
| — | |
| 2 | |
| — | |
| 2 | |
Repurchase of common shares |
| — | |
| — |
| (3) | |
| (309) | |
| — | |
| — | |
| — | |
| (309) | |
| — | |
| (309) | |
Balance at March 26, 2021 | | 339 | | $ | 149 |
| (9) | | $ | (775) | | $ | — | | $ | 10,541 | | $ | (246) | | $ | 9,669 | | $ | — | | $ | 9,669 | |
4
TE CONNECTIVITY LTD.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED) (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Quarter Ended March 29, 2019 | | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | Accumulated | | TE Connectivity | | | | | | ||||||
| | | | | | | | | | | | | | | | | Other | | Ltd. | | Non- | | | | |||||
| | Common Shares | | Treasury Shares | | Contributed | | Accumulated | | Comprehensive | | Shareholders' | | controlling | | Total | | ||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Surplus |
| Earnings |
| Loss |
| Equity |
| Interests |
| Equity |
| ||||||||
| | (in millions) | | ||||||||||||||||||||||||||
Balance at December 28, 2018 |
| 357 | | $ | 157 |
| (18) | | $ | (1,550) | | $ | — | | $ | 11,886 | | $ | (257) | | $ | 10,236 | | $ | — | | $ | 10,236 | |
Net income | | — | | | — | | — | | | — | | | — | | | 439 | | | — | | | 439 | | | — | | | 439 | |
Other comprehensive income |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| 97 | |
| 97 | |
| — | |
| 97 | |
Share-based compensation expense |
| — | |
| — |
| — | |
| — | |
| 16 | |
| — | |
| — | |
| 16 | |
| — | |
| 16 | |
Dividends |
| — | |
| — |
| — | |
| — | |
| — | |
| (620) | |
| — | |
| (620) | |
| — | |
| (620) | |
Exercise of share options |
| — | |
| — |
| — | |
| 10 | |
| — | |
| — | |
| — | |
| 10 | |
| — | |
| 10 | |
Restricted share award vestings and other activity |
| — | |
| — |
| 1 | |
| 16 | |
| (16) | |
| 5 | |
| — | |
| 5 | |
| — | |
| 5 | |
Repurchase of common shares |
| — | |
| — |
| (3) | |
| (189) | |
| — | |
| — | |
| — | |
| (189) | |
| — | |
| (189) | |
Balance at March 29, 2019 | | 357 | | $ | 157 |
| (20) | | $ | (1,713) | | $ | — | | $ | 11,710 | | $ | (160) | | $ | 9,994 | | $ | — | | $ | 9,994 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Quarter Ended March 27, 2020 | | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | Accumulated | | TE Connectivity | | | | | | ||||||
| | | | | | | | | | | | | | | | | Other | | Ltd. | | Non- | | | | |||||
| | Common Shares | | Treasury Shares | | Contributed | | Accumulated | | Comprehensive | | Shareholders' | | controlling | | Total | | ||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Surplus |
| Earnings |
| Loss |
| Equity |
| Interests |
| Equity |
| ||||||||
| | (in millions) | | ||||||||||||||||||||||||||
Balance at December 27, 2019 |
| 351 | | $ | 154 |
| (17) | | $ | (1,389) | | $ | — | | $ | 12,206 | | $ | (414) | | $ | 10,557 | | $ | — | | $ | 10,557 | |
Acquisition |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 107 | |
| 107 | |
Net loss | | — | | | — | | — | | | — | | | — | | | (456) | | | — | | | (456) | | | — | | | (456) | |
Other comprehensive loss |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| (157) | |
| (157) | |
| (2) | |
| (159) | |
Share-based compensation expense |
| — | |
| — |
| — | |
| — | |
| 15 | |
| — | |
| — | |
| 15 | |
| — | |
| 15 | |
Dividends |
| — | |
| — |
| — | |
| — | |
| — | |
| (635) | |
| — | |
| (635) | |
| — | |
| (635) | |
Exercise of share options |
| — | |
| — |
| — | |
| 13 | |
| — | |
| — | |
| — | |
| 13 | |
| — | |
| 13 | |
Restricted share award vestings and other activity |
| — | |
| — |
| — | |
| 17 | |
| (15) | |
| 7 | |
| — | |
| 9 | |
| — | |
| 9 | |
Repurchase of common shares |
| — | |
| — |
| (3) | |
| (280) | |
| — | |
| — | |
| — | |
| (280) | |
| — | |
| (280) | |
Balance at March 27, 2020 | | 351 | | $ | 154 |
| (20) | | $ | (1,639) | | $ | — | | $ | 11,122 | | $ | (571) | | $ | 9,066 | | $ | 105 | | $ | 9,171 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Six Months Ended March 29, 2019 | | | For the Six Months Ended March 27, 2020 | | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | Accumulated | | TE Connectivity | | | | | | | | | | | | | | | | | | | | | Accumulated | | TE Connectivity | | | | | | ||||||||||||
| | | | | | | | | | | | | | | | | Other | | Ltd. | | Non- | | | | | | | | | | | | | | | | | | | | Other | | Ltd. | | Non- | | | | ||||||||||
| | Common Shares | | Treasury Shares | | Contributed | | Accumulated | | Comprehensive | | Shareholders' | | controlling | | Total | | | Common Shares | | Treasury Shares | | Contributed | | Accumulated | | Comprehensive | | Shareholders' | | controlling | | Total | | ||||||||||||||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Surplus |
| Earnings |
| Loss |
| Equity |
| Interests |
| Equity |
|
| Shares |
| Amount |
| Shares |
| Amount |
| Surplus |
| Earnings |
| Loss |
| Equity |
| Interests |
| Equity |
| ||||||||||||||||
| | (in millions) | | | (in millions) | | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 28, 2018 |
| 357 | | $ | 157 |
| (12) | | $ | (1,134) | | $ | — | | $ | 12,114 | | $ | (306) | | $ | 10,831 | | $ | — | | $ | 10,831 | | |||||||||||||||||||||||||||||
Adoption of ASU No. 2016-16 |
| — | |
| — |
| — | |
| — | |
| — | |
| (443) | |
| — | |
| (443) | |
| — | |
| (443) | | |||||||||||||||||||||||||||||
Net income | | — | | | — | | — | | | — | | | — | | | 715 | | | — | | | 715 | | | — | | | 715 | | |||||||||||||||||||||||||||||
Other comprehensive income |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| 146 | |
| 146 | |
| — | |
| 146 | | |||||||||||||||||||||||||||||
Balance at September 27, 2019 |
| 351 | | $ | 154 |
| (16) | | $ | (1,337) | | $ | — | | $ | 12,256 | | $ | (503) | | $ | 10,570 | | $ | — | | $ | 10,570 | | |||||||||||||||||||||||||||||
Acquisition |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 107 | |
| 107 | | |||||||||||||||||||||||||||||
Net loss | | — | | | — | | — | | | — | | | — | | | (430) | | | — | | | (430) | | | — | | | (430) | | |||||||||||||||||||||||||||||
Other comprehensive loss |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| (68) | |
| (68) | |
| (2) | |
| (70) | | |||||||||||||||||||||||||||||
Share-based compensation expense |
| — | |
| — |
| — | |
| — | |
| 39 | |
| — | |
| — | |
| 39 | |
| — | |
| 39 | |
| — | |
| — |
| — | |
| — | |
| 37 | |
| — | |
| — | |
| 37 | |
| — | |
| 37 | |
Dividends |
| — | |
| — |
| — | |
| — | |
| — | |
| (616) | |
| — | |
| (616) | |
| — | |
| (616) | |
| — | |
| — |
| — | |
| — | |
| — | |
| (635) | |
| — | |
| (635) | |
| — | |
| (635) | |
Exercise of share options |
| — | |
| — |
| — | |
| 17 | |
| — | |
| — | |
| — | |
| 17 | |
| — | |
| 17 | |
| — | |
| — |
| — | |
| 27 | |
| — | |
| — | |
| — | |
| 27 | |
| — | |
| 27 | |
Restricted share award vestings and other activity |
| — | |
| — |
| 1 | |
| 88 | |
| (39) | |
| (60) | |
| — | |
| (11) | |
| — | |
| (11) | |
| — | |
| — |
| 1 | |
| 94 | |
| (37) | |
| (69) | |
| — | |
| (12) | |
| — | |
| (12) | |
Repurchase of common shares |
| — | |
| — |
| (9) | |
| (684) | |
| — | |
| — | |
| — | |
| (684) | |
| — | |
| (684) | |
| — | |
| — |
| (5) | |
| (423) | |
| — | |
| — | |
| — | |
| (423) | |
| — | |
| (423) | |
Balance at March 29, 2019 | | 357 | | $ | 157 |
| (20) | | $ | (1,713) | | $ | — | | $ | 11,710 | | $ | (160) | | $ | 9,994 | | $ | — | | $ | 9,994 | | |||||||||||||||||||||||||||||
Balance at March 27, 2020 | | 351 | | $ | 154 |
| (20) | | $ | (1,639) | | $ | — | | $ | 11,122 | | $ | (571) | | $ | 9,066 | | $ | 105 | | $ | 9,171 | |
See Notes to Condensed Consolidated Financial Statements.
5
TE CONNECTIVITY LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | | | | | | | | | | | | | |
| | For the | | | For the | | ||||||||
| | Six Months Ended | | | Six Months Ended | | ||||||||
| | March 27, | | March 29, | | | March 26, | | March 27, | | ||||
|
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| ||||
| | (in millions) | | | (in millions) | | ||||||||
Cash flows from operating activities: | | | | | | | | | | | | | | |
Net income (loss) | | $ | (430) | | $ | 715 | | | $ | 887 | | $ | (430) | |
Loss from discontinued operations, net of income taxes | |
| 1 | |
| 97 | | |||||||
(Income) loss from discontinued operations, net of income taxes | |
| (7) | |
| 1 | | |||||||
Income (loss) from continuing operations | |
| (429) | |
| 812 | | |
| 880 | |
| (429) | |
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities: | | | | | | | | | | | | | | |
Impairment of goodwill | | | 900 | | | — | | | | — | | | 900 | |
Depreciation and amortization | |
| 354 | |
| 341 | | |
| 380 | |
| 354 | |
Deferred income taxes | |
| 345 | |
| (28) | | |
| (48) | |
| 345 | |
Non-cash lease cost | | | 52 | | | — | | | | 59 | | | 52 | |
Provision for losses on accounts receivable and inventories | |
| 18 | |
| 28 | | |
| 22 | |
| 18 | |
Share-based compensation expense | |
| 37 | |
| 38 | | |
| 49 | |
| 37 | |
Other | |
| 11 | |
| 32 | | |
| (20) | |
| 11 | |
Changes in assets and liabilities, net of the effects of acquisitions and divestitures: | | | | | | | | | | | | | | |
Accounts receivable, net | |
| (140) | |
| (107) | | |
| (567) | |
| (140) | |
Inventories | |
| (151) | |
| (70) | | |
| (212) | |
| (151) | |
Prepaid expenses and other current assets | |
| 25 | |
| 91 | | |
| (30) | |
| 25 | |
Accounts payable | |
| 49 | |
| (44) | | |
| 510 | |
| 49 | |
Accrued and other current liabilities | |
| (180) | |
| (206) | | |
| 125 | |
| (180) | |
Income taxes | |
| 1 | |
| 21 | | |
| 34 | |
| 1 | |
Other | |
| — | |
| (25) | | |
| 38 | |
| — | |
Net cash provided by continuing operating activities | |
| 892 | |
| 883 | | |||||||
Net cash used in discontinued operating activities | |
| — | |
| (30) | | |||||||
Net cash provided by operating activities | |
| 892 | |
| 853 | | |
| 1,220 | |
| 892 | |
Cash flows from investing activities: | | | | | | | | | | | | | | |
Capital expenditures | |
| (309) | |
| (401) | | |
| (284) | |
| (309) | |
Proceeds from sale of property, plant, and equipment | |
| 3 | |
| 13 | | |
| 58 | |
| 3 | |
Acquisition of businesses, net of cash acquired | |
| (359) | |
| 8 | | |
| (107) | |
| (359) | |
Proceeds from divestiture of discontinued operation, net of cash retained by sold operation | | | — | | | 297 | | |||||||
Other | |
| (2) | |
| — | | |
| 10 | |
| (2) | |
Net cash used in continuing investing activities | | | (667) | | | (83) | | |||||||
Net cash used in discontinued investing activities | | | — | | | (2) | | |||||||
Net cash used in investing activities | |
| (667) | |
| (85) | | |
| (323) | |
| (667) | |
Cash flows from financing activities: | | | | | | | | | | | | | | |
Net increase (decrease) in commercial paper | |
| (219) | |
| 90 | | |||||||
Net decrease in commercial paper | |
| — | |
| (219) | | |||||||
Proceeds from issuance of debt | |
| 593 | |
| 350 | | |
| 661 | |
| 593 | |
Repayment of debt | |
| — | |
| (441) | | |
| (280) | |
| — | |
Proceeds from exercise of share options | |
| 27 | |
| 17 | | |
| 119 | |
| 27 | |
Repurchase of common shares | |
| (408) | |
| (739) | | |
| (259) | |
| (408) | |
Payment of common share dividends to shareholders | |
| (307) | |
| (299) | | |
| (318) | |
| (307) | |
Transfers to discontinued operations | | | — | | | (32) | | |||||||
Other | |
| (31) | |
| (30) | | |
| (24) | |
| (31) | |
Net cash used in continuing financing activities | |
| (345) | |
| (1,084) | | |||||||
Net cash provided by discontinued financing activities | |
| — | |
| 32 | | |||||||
Net cash used in financing activities | |
| (345) | |
| (1,052) | | |
| (101) | |
| (345) | |
Effect of currency translation on cash | |
| (11) | |
| 1 | | |
| 7 | |
| (11) | |
Net decrease in cash, cash equivalents, and restricted cash | |
| (131) | |
| (283) | | |||||||
Net increase (decrease) in cash, cash equivalents, and restricted cash | |
| 803 | |
| (131) | | |||||||
Cash, cash equivalents, and restricted cash at beginning of period | |
| 927 | |
| 848 | | |
| 945 | |
| 927 | |
Cash, cash equivalents, and restricted cash at end of period | | $ | 796 | | $ | 565 | | | $ | 1,748 | | $ | 796 | |
See Notes to Condensed Consolidated Financial Statements.
6
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation and Accounting Policies
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 27, 2019.25, 2020.
Unless otherwise indicated, references in the Condensed Consolidated Financial Statements to fiscal 20202021 and fiscal 20192020 are to our fiscal years ending September 25, 202024, 2021 and ended September 27, 2019,25, 2020, respectively.
Goodwill and Other Intangible Assets
We account for goodwill and other intangible assets in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles–Goodwill and Other, as updated by Accounting Standards Update (“ASU”) No. 2017-04, Simplifying the Test for Goodwill Impairment.
Intangible assets include both indeterminable-lived residual goodwill and determinable-lived identifiable intangible assets. Intangible assets with determinable lives primarily include intellectual property, consisting of patents, trademarks, and unpatented technology, and customer relationships. Recoverability estimates range from 1 to 50 years and costs are generally amortized on a straight-line basis. Evaluations of the remaining useful lives of determinable-lived intangible assets are performed on a periodic basis and when events and circumstances warrant.
At March 27, 2020, we had 5 reporting units, all of which contained goodwill. There were 2 reporting units in both the Transportation Solutions and Industrial Solutions segments and 1 reporting unit in the Communications Solutions segment. When changes occur in the composition of one or more reporting units, goodwill is reassigned to the reporting units affected based on their relative fair values.
Goodwill impairment is evaluated by comparing the carrying value of each reporting unit to its fair value on the first day of the fourth fiscal quarter of each year or whenever we believe a triggering event requiring a more frequent assessment has occurred. In assessing the existence of a triggering event, management relies on several reporting unit-specific factors including operating results, business plans, economic projections, anticipated future cash flows, transactions, and market place data. There are inherent uncertainties related to these factors and management’s judgment in applying these factors to the impairment analysis.
When testing for goodwill impairment, we identify potential impairment by comparing the fair value of a reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, a goodwill impairment charge will be recorded for the amount of the excess, limited to the total amount of goodwill allocated to the reporting unit.
Fair value estimates used in the goodwill impairment tests are calculated using an income approach based on the present value of future cash flows of each reporting unit. The income approach has been supported by guideline analyses (a market approach). These approaches incorporate several assumptions including future growth rates, discount rates, income tax rates, and market activity in assessing fair value and are reporting unit specific. Changes in economic and operating conditions impacting these assumptions could result in goodwill impairments in future periods.
7
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Recently Adopted Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-04, an update to ASC 350, Intangibles–Goodwill and Other. The update simplifies the subsequent measurement of goodwill by eliminating step 2 of the goodwill impairment test. Under the amendments in the update, goodwill impairment should be tested by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments are to be applied on a prospective basis. We elected to early adopt this update and applied it during the quarter ended March 27, 2020. See Note 6 for additional information regarding the interim goodwill impairment test.
In February 2016, the FASB issued ASU No. 2016-02 which codified ASC 842, Leases. This guidance, as subsequently amended, requires lessees to recognize a lease liability and a right-of-use (“ROU”) asset for most leases. We adopted ASC 842, as amended, in the quarter ended December 27, 2019 using the optional transition method permitted by ASU No. 2018-11 which allows for application of the standard at the adoption date and no restatement of comparative periods. We elected to use the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows the carry forward of historical lease classification of existing and expired leases. In addition, we elected to use the hindsight practical expedient in determining the lease term for existing leases. As a result of adoption, we recorded ROU assets and related lease liabilities of approximately $520 million on the Condensed Consolidated Balance Sheet. Adoption did not have a material impact on our results of operations or cash flows. See Note 9 for additional information regarding leases.
2. Restructuring and Other Charges, Net
Net restructuring and other charges consisted of the following:
| | | | | | | | | | | | | |
| | For the | | For the | | ||||||||
| | Quarters Ended | | Six Months Ended | | ||||||||
| | March 26, | | March 27, | | March 26, | | March 27, | | ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
| | (in millions) | | ||||||||||
Restructuring charges, net | | $ | 11 | | $ | 22 | | $ | 160 | | $ | 46 | |
Impairment of held for sale businesses and loss on divestiture | | | 4 | | | — | | | 21 | | | — | |
Other charges, net | |
| 2 | |
| — | |
| 3 | |
| — | |
Restructuring and other charges, net | | $ | 17 | | $ | 22 | | $ | 184 | | $ | 46 | |
Net restructuring charges by segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the | | For the | | | For the | | For the | | ||||||||||||||||
| | Quarters Ended | | Six Months Ended | | | Quarters Ended | | Six Months Ended | | ||||||||||||||||
| | March 27, | | March 29, | | March 27, | | March 29, | | | March 26, | | March 27, | | March 26, | | March 27, | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||||||
| | (in millions) | | | (in millions) | | ||||||||||||||||||||
Transportation Solutions | | $ | 18 | | $ | 24 | | $ | 22 | | $ | 45 | | | $ | 10 | | $ | 18 | | $ | 128 | | $ | 22 | |
Industrial Solutions | |
| 1 | |
| 17 | |
| 16 | |
| 52 | | |
| — | |
| 1 | |
| 20 | |
| 16 | |
Communications Solutions | |
| 3 | |
| 1 | |
| 8 | |
| 20 | | |
| 1 | |
| 3 | |
| 12 | |
| 8 | |
Restructuring charges, net | | $ | 22 | | $ | 42 | | $ | 46 | | $ | 117 | | | $ | 11 | | $ | 22 | | $ | 160 | | $ | 46 | |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Activity in our restructuring reserves was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at | | | | | | | | | | | Currency | | Balance at |
| | Balance at | | | | | | | | | | | | | Balance at |
| ||||||||||||
| | September 27, | | | | | Changes in | | Cash | | Non-Cash | | Translation | | March 27, | | | September 25, | | | | | Changes in | | Cash | | Non-Cash | | Currency | | March 26, | | ||||||||||||
|
| 2019 |
| Charges |
| Estimate |
| Payments |
| Items |
| and Other |
| 2020 |
|
| 2020 |
| Charges |
| Estimate |
| Payments |
| Items |
| Translation |
| 2021 |
| ||||||||||||||
| | (in millions) | | | (in millions) | | ||||||||||||||||||||||||||||||||||||||
Fiscal 2020 Actions: | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||
Employee severance | | $ | — | | $ | 43 | | $ | — | | $ | (4) | | $ | — | | $ | — | | $ | 39 | | ||||||||||||||||||||||
Fiscal 2019 Actions: | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||
Fiscal 2021 Actions: | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||
Employee severance | | | 188 | | | 6 | | | (13) | | | (51) | | | (1) | | | 1 | | | 130 | | | $ | — | | $ | 161 | | $ | (14) | | $ | (5) | | $ | — | | $ | (4) | | $ | 138 | |
Facility and other exit costs | | | 1 | | | 4 | | | — | | | (7) | | | — | | | 2 | | | — | | | | — | | | 2 | | | — | | | (2) | | | — | | | — | | | 0 | |
Property, plant, and equipment | | | — | | | 5 | | | — | | | — | | | (5) | | | — | | | — | | | | — | | | 4 | | | — | | | — | | | (4) | | | — | | | 0 | |
Total | | | 189 | | | 15 | | | (13) | | | (58) | | | (6) | | | 3 | | | 130 | | | | — | | | 167 | | | (14) | | | (7) | | | (4) | | | (4) | | | 138 | |
Pre-Fiscal 2019 Actions: | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||
Fiscal 2020 Actions: | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||
Employee severance | | | 180 | | | 2 | | | — | | | (59) | | | — | | | 5 | | | 128 | | ||||||||||||||||||||||
Facility and other exit costs | | | 8 | | | 7 | | | — | | | (1) | | | — | | | 1 | | | 15 | | ||||||||||||||||||||||
Property, plant, and equipment | | | — | | | 5 | | | — | | | — | | | (5) | | | — | | | 0 | | ||||||||||||||||||||||
Total | | | 188 | | | 14 | | | — | | | (60) | | | (5) | | | 6 | | | 143 | | ||||||||||||||||||||||
Pre-Fiscal 2020 Actions: | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||
Employee severance | | | 73 | | | 1 | | | (5) | | | (34) | | | — | | | 1 | | | 36 | | | | 93 | | | — | | | (6) | | | (36) | | | — | | | 1 | | | 52 | |
Facility and other exit costs | | | 2 | | | 4 | | | — | | | (5) | | | — | | | — | | | 1 | | | | 4 | | | 1 | | | — | | | (5) | | | — | | | — | | | 0 | |
Property, plant, and equipment | | | — | | | 1 | | | — | | | — | | | (1) | | | — | | | — | | | | — | | | — | | | (2) | | | — | | | 2 | | | — | | | 0 | |
Total | | | 75 | | | 6 | | | (5) | | | (39) | | | (1) | | | 1 | | | 37 | | | | 97 | | | 1 | | | (8) | | | (41) | | | 2 | | | 1 | | | 52 | |
Total Activity | | $ | 264 | | $ | 64 | | $ | (18) | | $ | (101) | | $ | (7) | | $ | 4 | | $ | 206 | | | $ | 285 | | $ | 182 | | $ | (22) | | $ | (108) | | $ | (7) | | $ | 3 | | $ | 333 | |
Fiscal 2021 Actions
During fiscal 2021, we initiated a restructuring program across all segments to optimize our manufacturing footprint and improve the cost structure of the organization. During the six months ended March 26, 2021, we recorded net restructuring charges of $153 million in connection with this program. We expect to complete all restructuring actions commenced during the six months ended March 26, 2021 by the end of fiscal 2022 and to incur additional charges of approximately $20 million related primarily to employee severance and facility exit costs across all segments.
Fiscal 2020 Actions
During fiscal 2020, we initiated a restructuring program associated with footprint consolidation and structural improvements, due in part to the COVID-19 pandemic, across all segments. In connection with this program, during the six months ended March 26, 2021 and March 27, 2020, we recorded restructuring charges of $43 million. We expect to complete all restructuring actions commenced during the six months ended March 27, 2020 by the end of fiscal 2021 and to incur additional charges of approximately $10 million related primarily to employee severance and facility exit costs in the Transportation Solutions and Industrial Solutions segments.
Fiscal 2019 Actions
During fiscal 2019, we initiated a restructuring program associated with footprint consolidation and structural improvements impacting all segments. In connection with this program, during the six months ended March 27, 2020 and March 29, 2019, we recorded net restructuring charges of $2$14 million and $107$43 million, respectively. We expect to complete all restructuring actions commenced during fiscal 20192020 by the end of fiscal 20212023 and to incur additional charges of approximately $15$26 million related primarily to employee severance and facility exit costs incosts.
The following table summarizes expected, incurred, and remaining charges for the Transportation Solutions and Industrial Solutions segments.fiscal 2020 program by segment:
| | | | | | | | | | |
| | Total | | Cumulative | | Remaining | | |||
| | Expected | | Charges | | Expected | | |||
|
| Charges |
| Incurred |
| Charges |
| |||
| | (in millions) | | |||||||
Transportation Solutions | | $ | 140 | | $ | 127 | | $ | 13 | |
Industrial Solutions | |
| 109 | |
| 100 | |
| 9 | |
Communications Solutions | |
| 41 | |
| 37 | |
| 4 | |
Total | | $ | 290 | | $ | 264 | | $ | 26 | |
Pre-Fiscal 2019 Actions
Prior to fiscal 2019, we initiated a restructuring program associated with footprint consolidation and structural improvements primarily impacting the Industrial Solutions and Transportation Solutions segments. Also prior to fiscal 2019, we initiated a restructuring program associated with footprint consolidation related to recent acquisitions and structural improvements impacting all segments. During the six months ended March 27, 2020 and March 29, 2019, we recorded net restructuring charges of $1 million and $10 million, respectively, related to pre-fiscal 2019 actions. We expect additional charges related to pre-fiscal 2019 actions to be insignificant.
98
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Pre-Fiscal 2020 Actions
Prior to fiscal 2020, we initiated restructuring programs associated with footprint consolidation and structural improvements impacting all segments. During the six months ended March 26, 2021 and March 27, 2020, we recorded net restructuring credits of $7 million and charges of $3 million, respectively, related to pre-fiscal 2020 actions. We expect additional charges related to pre-fiscal 2020 actions to be insignificant.
TotalTotal Restructuring Reserves
Restructuring reserves included on the Condensed Consolidated Balance Sheets were as follows:
| | | | | | | | | | | | | |
| | March 27, | | September 27, | | March 26, | | September 25, | | ||||
|
| 2020 |
| 2019 |
| 2021 |
| 2020 |
| ||||
| | (in millions) | | (in millions) | | ||||||||
Accrued and other current liabilities | | $ | 170 | | $ | 245 | | $ | 270 | | $ | 229 | |
Other liabilities | |
| 36 | |
| 19 | |
| 63 | |
| 56 | |
Restructuring reserves | | $ | 206 | | $ | 264 | | $ | 333 | | $ | 285 | |
3. Discontinued OperationsAcquisitions
During the six months ended March 29, 2019,26, 2021, we sold our Subsea Communications (“SubCom”)acquired 1 business for a cash purchase price of $106 million, net of cash proceeds of $297 million and incurred a pre-tax loss on sale of $86 million, related primarily to the recognition of cumulative translation adjustment losses of $67 million and certain guarantee liabilities.acquired. The SubCom business met the held for sale and discontinued operations criteria andacquisition was reported as such in all periods presented on the Condensed Consolidated Financial Statements. Prior to reclassification to discontinued operations, the SubCom business was included in the Communicationspart of our Industrial Solutions segment.
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 ofsegment from the date of sale. These guarantees had a combined value of approximately $1.2 billion as of March 27, 2020 and are expected to expire at various dates through fiscal 2025. Also, under the terms of the definitive agreement, we are required to issue up to $300 million of new performance guarantees, subject to certain limitations, for projects entered into by the SubCom business following the sale for a period of up to three years. As of March 27, 2020, there were 0 such new performance guarantees outstanding. acquisition.
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.
The following table presents the summarized components of loss from discontinued operations, net of income taxes for the six months ended March 29, 2019:
| | | | |
| | (in millions) | | |
Net sales | | $ | 41 | |
Cost of sales | |
| (50) | |
Operating expenses | | | (11) | |
Pre-tax loss from discontinued operations | |
| (20) | |
Pre-tax loss on sale of discontinued operations | |
| (86) | |
Income tax benefit | |
| 9 | |
Loss from discontinued operations, net of income taxes | | $ | (97) | |
4. Acquisitions
First Sensor AG
In March 2020, we acquired approximately 72% of the outstanding shares of4 businesses, including First Sensor AG (“First Sensor”), for a providercombined cash purchase price of sensing solutions based in Germany, for €209$356 million, innet of cash (equivalent to $232 million). As a resultacquired, during the six months ended March 27, 2020. The acquisitions were reported as part of our Transportation Solutions and Industrial Solutions segments from the transaction, we recognized a noncontrolling interestdate of acquisition.
In connection with a fair value of €96 million (equivalent to $107 million) as of the acquisition date. The fair value of the noncontrolling interest for First Sensor, common shares that were not acquired was determined using the stated price in thewe and First Sensor entered into a Domination and Profit and Loss Transfer Agreement (“DPLTA”) which is considered
10
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
to be a level 2 observable input under the fair value hierarchy. The First Sensor business has been reported as part of our Transportation Solutions segment from the date of acquisition.
In April 2020, we and First Sensor entered into a DPLTA which will become effective following consenting resolution of the shareholders’ meeting of First Sensor and subsequent registration in the commercial register of First Sensor. We expect the DPLTA registration to occur in our fourth fiscal quarter. . Under the terms of the DPLTA, upon its effectiveness in July 2020, First Sensor minority shareholders will be offered tocan elect either (1) to remain First Sensor minority shareholders and receive recurring annual compensation of €0.56 per First Sensor share or (2) to put their First Sensor shares in exchange for compensation of €33.27 per First Sensor share. The ultimate amount and timing of any future cash payments related to the DPLTA is uncertain. TheOur First Sensor noncontrolling interest balance, which was originally recorded at a fair value of €96 million (equivalent to $107 million), is recorded as redeemable noncontrolling interest outside of equity on the Condensed Consolidated Balance Sheet as of March 26, 2021 and September 25, 2020 as the exercise of the put right by First Sensor minority shareholders is not within our control and will result in the First Sensor noncontrolling interest being presented as redeemable noncontrolling interest outside of equity on the Condensed Consolidated Balance Sheet following registration of the DPLTA.
Other Acquisitions
During the six months ended March 27, 2020, we acquired 3 additional businesses for a combined cash purchase price of $124 million, net of cash acquired. The acquisitions were reported as part of our Transportation Solutions and Industrial Solutions segments from the date of acquisition.control.
5.4. Inventories
Inventories consisted of the following:
| | | | | | | | | | | | | | |
| | March 27, | | September 27, | | | March 26, | | September 25, | | ||||
|
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| ||||
| | (in millions) | | | (in millions) | | ||||||||
Raw materials | | $ | 277 | | $ | 260 | | | $ | 290 | | $ | 251 | |
Work in progress | |
| 838 | |
| 739 | | |
| 924 | |
| 851 | |
Finished goods | |
| 886 | |
| 837 | | |
| 920 | |
| 848 | |
Inventories | | $ | 2,001 | | $ | 1,836 | | | $ | 2,134 | | $ | 1,950 | |
6. Goodwill
The changes in the carrying amount of goodwill by segment were as follows:
| | | | | | | | | | | | | |
|
| Transportation |
| Industrial |
| Communications |
| | |
| |||
| | Solutions | | Solutions | | Solutions | | Total | | ||||
| | (in millions) | | ||||||||||
September 27, 2019(1) | | $ | 2,124 | | $ | 3,039 | | $ | 577 | | $ | 5,740 | |
Impairment of goodwill | | | (900) | | | — | | | — | | | (900) | |
Acquisitions | | | 403 | | | 10 | | | — | | | 413 | |
Currency translation | |
| (5) | |
| (11) | |
| (2) | |
| (18) | |
March 27, 2020(2) | | $ | 1,622 | | $ | 3,038 | | $ | 575 | | $ | 5,235 | |
In March 2020, we completed the acquisition of First Sensor and recognized goodwill in the Transportation Solutions segment. Due to the timing of the transaction, we have preliminarily allocated the purchase price of First Sensor to
119
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
goodwill. We are5. Goodwill
The changes in the process of completing the valuation of identifiable intangible assets, assets acquired, and liabilities assumed; therefore, the current allocation is subject to adjustment upon finalization of those valuations. Thecarrying amount of these potential adjustments could be significant. In addition, duringgoodwill by segment were as follows:
| | | | | | | | | | | | | |
|
| Transportation |
| Industrial |
| Communications |
| | |
| |||
| | Solutions | | Solutions | | Solutions | | Total | | ||||
| | (in millions) | | ||||||||||
September 25, 2020(1) | | $ | 1,527 | | $ | 3,110 | | $ | 587 | | $ | 5,224 | |
Acquisitions | | | — | | | 54 | | | — | | | 54 | |
Purchase price adjustments | | | 1 | | | (1) | | | — | | | — | |
Currency translation and other | |
| 20 | |
| 36 | |
| 8 | |
| 64 | |
March 26, 2021(1) | | $ | 1,548 | | $ | 3,199 | | $ | 595 | | $ | 5,342 | |
(1) | At March 26, 2021 and September 25, 2020, accumulated impairment losses for the Transportation Solutions, Industrial Solutions, and Communications Solutions segments were $3,091 million, $669 million, and $489 million, respectively. |
During the six months ended March 27, 2020,26, 2021, we recognized goodwill in the Transportation Solutions and Industrial Solutions segmentssegment in connection with othera recent acquisitions.acquisition. See Note 43 for additional information regarding acquisitions.
We test goodwill allocated to reporting units for impairment annually during the fiscal fourth quarter, or more frequently if events occur or circumstances exist that indicate that a reporting unit’s carrying value may exceed its fair value. As a result of current and projected declines in sales and profitability, due in part to the impact of the coronavirus disease COVID-19 and projected reductions in global automotive production, of the Sensors reporting unit of the Transportation Solutions segment during the quarter ended March 27, 2020, we determined that an indicator of impairment had occurred and goodwill impairment testing of this reporting unit was required.acquisition.
As discussed in Note 1, during the quarter ended March 27, 2020, we adopted ASU No. 2017-04 which simplifies the subsequent measurement of goodwill by eliminating step 2 of the goodwill impairment test. Under the new standard, goodwill impairment is measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. We determined the fair value of the Sensors reporting unit to be $1.0 billion. This valuation was based on a discounted cash flows analysis incorporating our estimate of future operating performance, which we consider to be a level 3 unobservable input in the fair value hierarchy, and was corroborated using a market approach valuation. The goodwill impairment test indicated that the carrying value of the reporting unit exceeded its fair value by $900 million. As a result, we recorded a partial impairment charge of $900 million. The Sensors reporting unit had a remaining goodwill allocation of $626 million as of March 27, 2020.
Should economic conditions deteriorate further or remain depressed for a prolonged period of time, estimates of future cash flows for each of our reporting units may be insufficient to support the carrying value and the goodwill assigned to it, requiring impairment charges, including additional impairment charges for the Sensors reporting unit. Further impairment charges, if any, may be material to our results of operations and financial position.
7.6. Intangible Assets, Net
Intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 27, 2020 | | September 27, 2019 | | | March 26, 2021 | | September 25, 2020 | | ||||||||||||||||||||||||||||
|
| Gross |
| | |
| Net |
| Gross |
| | |
| Net | |
| Gross |
| | |
| Net |
| Gross |
| | |
| Net | | ||||||||
| | Carrying | | Accumulated | | Carrying | | Carrying | | Accumulated | | Carrying | | | Carrying | | Accumulated | | Carrying | | Carrying | | Accumulated | | Carrying | | ||||||||||||
| | Amount | | Amortization | | Amount | | Amount | | Amortization | | Amount |
| | Amount | | Amortization | | Amount | | Amount | | Amortization | | Amount |
| ||||||||||||
| | (in millions) | | | (in millions) | | ||||||||||||||||||||||||||||||||
Customer relationships | | $ | 1,542 | | $ | (498) | | $ | 1,044 | | $ | 1,513 | | $ | (459) | | $ | 1,054 | | | $ | 1,699 | | $ | (610) | | $ | 1,089 | | $ | 1,648 | | $ | (554) | | $ | 1,094 | |
Intellectual property | | | 1,259 | | | (771) | | | 488 | | | 1,260 | | | (734) | | | 526 | | | | 1,233 | | | (787) | | | 446 | | | 1,225 | | | (739) | | | 486 | |
Other | |
| 32 | |
| (17) | |
| 15 | |
| 33 | |
| (17) | |
| 16 | | |
| 19 | |
| (6) | |
| 13 | |
| 19 | |
| (6) | |
| 13 | |
Total | | $ | 2,833 | | $ | (1,286) | | $ | 1,547 | | $ | 2,806 | | $ | (1,210) | | $ | 1,596 | | | $ | 2,951 | | $ | (1,403) | | $ | 1,548 | | $ | 2,892 | | $ | (1,299) | | $ | 1,593 | |
Intangible asset amortization expense was $46$48 million and $45$46 million for the quarters ended March 26, 2021 and March 27, 2020, and March 29, 2019, respectively, and $91$96 million and $90$91 million for the six months ended March 26, 2021 and March 27, 2020, andrespectively.
At March 29, 2019, respectively.26, 2021, the aggregate amortization expense on intangible assets is expected to be as follows:
| | | | |
|
| (in millions) |
| |
Remainder of fiscal 2021 | | $ | 96 | |
Fiscal 2022 | | | 192 | |
Fiscal 2023 | |
| 191 | |
Fiscal 2024 | |
| 159 | |
Fiscal 2025 | |
| 143 | |
Fiscal 2026 | |
| 137 | |
Thereafter | |
| 630 | |
Total | | $ | 1,548 | |
1210
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
At March 27, 2020, the aggregate amortization expense on intangible assets is expected to be as follows:
| | | | |
|
| (in millions) |
| |
Remainder of fiscal 2020 | | $ | 90 | |
Fiscal 2021 | | | 179 | |
Fiscal 2022 | |
| 179 | |
Fiscal 2023 | |
| 179 | |
Fiscal 2024 | |
| 148 | |
Fiscal 2025 | |
| 129 | |
Thereafter | |
| 643 | |
Total | | $ | 1,547 | |
8.7. Debt
During the quarter ended March 27, 2020,26, 2021, Tyco Electronics Group S.A. (“TEGSA”), our 100%-ownedwholly-owned subsidiary, repaid, at maturity, $250 million of 4.875% senior notes due in January 2021.
In February 2021, TEGSA issued €550 million aggregate principal amount of 0.0%0.00% senior notes due in February 2025.2029. The notes are TEGSA’s unsecured senior obligations and rank equally in right of payment with all existing and any future senior indebtedness of TEGSA and senior to any subordinated indebtedness that TEGSA may incur. The notes are fully and unconditionally guaranteed as to payment on an unsecured basis by TE Connectivity Ltd.
During the quarter ended March 27, 2020,26, 2021, we reclassified $250$500 million of 4.875%3.50% senior notes due January 2021in February 2022 from long-term debt to short-term debt on the Condensed Consolidated Balance Sheet.
As of September 27, 2019, TEGSA had $219 million of commercial paper outstanding at a weighted-average interest rate of 2.20%. TEGSA had 0 commercial paper outstanding at March 27, 2020.
The fair value of our debt, based on indicative valuations, was approximately $4,697$4,899 million and $4,278$4,550 million at March 27, 202026, 2021 and September 27, 2019,25, 2020, respectively.
9. Leases
We have facility, land, vehicle, and equipment leases that expire at various dates. We determine if a contract qualifies as a lease at inception. A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The right to control the use of an asset includes the right to obtain substantially all of the economic benefits of the identified asset and the right to direct the use of the identified asset.
Lease ROU assets and lease liabilities are recognized at the commencement date of the lease based on the present value of remaining lease payments over the lease term. Lease ROU assets represent our right to use the underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. We do not recognize ROU assets or lease liabilities that arise from short-term leases. Since our lease contracts do not contain a readily determinable implicit rate, we determine a fully-collateralized incremental borrowing rate that reflects a similar term to the lease and the economic environment of the applicable country or region in which the asset is leased.
We have elected to account for lease and non-lease components in our real estate leases as a single lease component; other leases generally do not contain non-lease components. The non-lease components in our real estate leases include logistics services, warehousing, and other operational costs. Many of these costs are variable, fluctuating based on services provided, such as pallets shipped in and out of a location or square footage of space occupied. These costs, and any other variable rental costs, are excluded from our ROU assets and lease liabilities, and instead are expensed as incurred. Some of our leases may include options to either renew or early terminate the lease. The exercise of these options is generally at our sole discretion and would only occur if there is an economic, financial, or business reason to do so. Such options are included in the lease term if we determine it is reasonably certain they will be exercised.
13
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
8. Leases
The components of lease cost were as follows:
| | | | | | | |
| | For the | | For the | | ||
| | Quarter Ended |
| Six Months Ended | | ||
| | March 27, | | March 27, | | ||
| | 2020 | | 2020 | | ||
|
| (in millions) |
| ||||
Operating lease cost | | $ | 25 | | $ | 52 | |
Variable lease cost | | | 15 | | | 26 | |
Total lease cost | | $ | 40 | | $ | 78 | |
Amounts recognized on the Condensed Consolidated Balance Sheet were as follows:
| | | | |
| | March 27, | | |
| | 2020 | | |
|
| ($ in millions) | | |
Operating lease ROU assets: | | | | |
Other assets | | $ | 454 | |
Operating lease liabilities: | | | | |
Accrued and other current liabilities | | $ | 115 | |
Other liabilities | | | 351 | |
Total operating lease liabilities | | $ | 466 | |
| | | | |
Weighted-average remaining lease term (in years) | | | 5.9 | |
Weighted-average discount rate | | | 1.3 | % |
| | | | | | | | | | | | | |
| | For the | | For the | | ||||||||
| | Quarters Ended |
| Six Months Ended | | ||||||||
| | March 26, | | March 27, | | March 26, | | March 27, | | ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
|
| (in millions) |
| ||||||||||
Operating lease cost | | $ | 29 | | $ | 25 | | $ | 59 | | $ | 52 | |
Variable lease cost | | | 13 | | | 15 | | | 24 | | | 26 | |
Total lease cost | | $ | 42 | | $ | 40 | | $ | 83 | | $ | 78 | |
Cash flow information, including significant non-cash transactions, related to leases was as follows:
| | | | | | | | | | | |
| | For the | | | For the | | |||||
| | Six Months Ended | | | Six Months Ended | | |||||
| | March 27, | | | March 26, | | March 27, | | |||
| | 2020 | |
| 2021 |
| 2020 |
| |||
|
| (in millions) |
|
| (in millions) |
| |||||
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | | | |
Payments for operating leases(1) | | $ | 51 | | | $ | 59 | | $ | 51 | |
| | | | | | | | | | | |
ROU assets obtained in exchange for new operating lease liabilities | | | 12 | | |||||||
Right-of-use assets obtained in exchange for new operating lease liabilities | | | 38 | | | 12 | |
(1) | These payments are included in cash flows from continuing operating activities, primarily in changes in other liabilities. |
14
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
At March 27, 2020, the maturities of operating lease liabilities were as follows:
| | | | |
|
| (in millions) |
| |
Remainder of fiscal 2020 | | $ | 60 | |
Fiscal 2021 | |
| 105 | |
Fiscal 2022 | | | 83 | |
Fiscal 2023 | | | 67 | |
Fiscal 2024 | | | 53 | |
Thereafter | | | 115 | |
Total lease payments | | | 483 | |
Less: interest | | | (17) | |
Present value of lease liabilities | | $ | 466 | |
The following table, which was included in our Annual Report on Form 10-K for the fiscal year ended September 27, 2019 and presented in accordance with the previous lease accounting standard, presents the future minimum lease payments under non-cancelable operating lease obligations as of September 27, 2019:
| | | | |
|
| (in millions) |
| |
Fiscal 2020 | | $ | 117 | |
Fiscal 2021 | |
| 102 | |
Fiscal 2022 | |
| 81 | |
Fiscal 2023 | |
| 67 | |
Fiscal 2024 | |
| 55 | |
Thereafter | |
| 118 | |
Total | | $ | 540 | |
10.9. Commitments and Contingencies
LegalLegal Proceedings
In the normal course of business, we are subject to various legal proceedings and claims, including patent infringement claims, product liability matters, employment disputes, disputes on agreements, other commercial disputes,
11
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
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.
TradeComplianceMatters
We are investigating our past compliance with relevant U.S. trade controls and have made voluntary disclosures of apparent trade controls violations to the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) and the U.S. State Department’s Directorate of Defense Trade Controls (“DDTC”). We are cooperating with the BIS and DDTC on these matters, and both our internal assessment and the resulting investigations by the agencies remain ongoing. We are unable to predict the timing and final outcome of the agencies’ investigations. An unfavorable outcome may include fines or penalties imposed in response to our disclosures, but we are not yet able to reasonably estimate the extent of any such fines or penalties. While we have reserved for potential fines and penalties relating to these matters based on our current understanding of the facts, the investigations into these matters have yet to be completed and the final outcome of such investigations and related fines and penalties may differ from amounts currently reserved.
Environmental Matters
We are involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites. The ultimate cost of site cleanup is difficult to predict given the uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations, and alternative cleanup methods. As of March 27, 2020,26, 2021, we concluded that we would incur investigation and remediation costs at these sites in the reasonably possible range of $14$17 million to $45$47 million, and we accrued $17$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
15
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
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 March 27, 2020,26, 2021, we had outstanding letters of credit, letters of guarantee, and surety bonds of $271 million.$157 million, excluding those related to our Subsea Communications (“SubCom”) business which are discussed below.
WeDuring fiscal 2019, we sold our SubCom business during fiscal 2019.business. In connection with the sale, we contractually agreed to continue to honor certain performance guarantees and letters of credit related to the SubCom business. See Note 3 for additional information regarding thesebusiness’ projects that existed as of the date of sale. These performance guarantees and letters of credit had a combined value of approximately $130 million as of March 26, 2021 and are expected to expire at various dates through fiscal 2025. During the divestiture ofquarter ended March 26, 2021, we amended our agreement with SubCom and removed the requirement to issue new performance guarantees. We have contractual recourse against the SubCom business.business if we are required to perform on any SubCom guarantees; however, based on historical experience, we do not anticipate having to perform.
12
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
11.10. Financial Instruments
ForeignForeign Currency Exchange Rate Risk
During fiscal 2015, we entered intoWe utilize cross-currency swap contracts to reduce our exposure to foreign currency exchange rate risk associated with certain intercompany loans. The aggregate notional value of these contracts was €700 million and €1,000 million at March 27, 202026, 2021 and September 27, 2019, respectively. Certain contracts were terminated during the quarter ended March 27, 2020; the remaining contracts mature in fiscal 2022.25, 2020. Under the terms of these contracts, which have been designated as cash flow hedges, we make interest payments in euros at 3.50% per annum and receive interest in U.S. dollars at a weighted-average rate of 5.34% per annum. Upon maturity in fiscal 2022, we will pay the notional value of the contracts in euros and receive U.S. dollars from our counterparties. In connection with the cross-currency swap contracts, both counterparties to each contract are required to provide cash collateral.
These cross-currency swap contracts were recorded on the Condensed Consolidated Balance Sheets as follows:
| | | | | | | | | | | | | | |
| | March 27, | | September 27, | | | March 26, | | September 25, | | ||||
|
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| ||||
| | (in millions) | | | (in millions) | | ||||||||
Other assets | | $ | 39 | | $ | 19 | | | $ | — | | $ | 1 | |
Other liabilities | |
| 24 | |
| 9 | |
At March 27, 202026, 2021 and September 27, 2019,25, 2020, collateral received from or paid to our counterparties approximated the net derivative position. Collateral is recorded in accrued and other current liabilities when the contracts are in a net asset position, or prepaid expenses and other current assets when the contracts are in a net liability position on the Condensed Consolidated Balance Sheets. The impacts of these cross-currency swap contracts were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the | | For the | | | For the | | For the | | ||||||||||||||||
| | Quarters Ended | | Six Months Ended | | | Quarters Ended | | Six Months Ended | | ||||||||||||||||
| | March 27, | | March 29, | | March 27, | | March 29, | | | March 26, | | March 27, | | March 26, | | March 27, | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||||||
| | (in millions) | | | (in millions) | | ||||||||||||||||||||
Gains recorded in other comprehensive income (loss) | | $ | 28 | | $ | 13 | | $ | 32 |
| $ | 32 | | |||||||||||||
Gains (losses) recorded in other comprehensive income (loss) | | $ | — | | $ | 28 | | $ | (4) |
| $ | 32 | | |||||||||||||
Gains (losses) excluded from the hedging relationship(1) | |
| 17 | |
| 21 | |
| (5) | |
| 38 | | |
| 28 | |
| 17 | |
| (12) | |
| (5) | |
(1) | Gains and losses excluded from the hedging relationship are recognized prospectively in selling, general, and administrative expenses and are offset by losses and gains generated as a result of re-measuring certain intercompany loans to the U.S. dollar. |
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 $3,429$4,154 million and $3,374$3,511 million at March 27, 202026, 2021 and September 27, 2019,25, 2020, respectively.
We also use a cross-currency swap program to hedge our net investment in certain foreign operations. The aggregate notional value of the contracts under this program was $1,380 million and $1,664 million at March 26, 2021 and September 25, 2020, respectively. Under the terms of these contracts, we receive interest in U.S. dollars at a weighted-average rate of 2.29% per annum and pay 0 interest. Upon the maturity of these contracts at various dates through fiscal 2025, we will pay the notional value of the contracts in the designated foreign currency and receive U.S. dollars from our counterparties. We are not required to provide collateral for these contracts.
1613
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
We also use a cross-currency swap program to hedge our net investment in certain foreign operations. The aggregate notional value of the contracts under this program was $1,889 million and $1,844 million at March 27, 2020 and September 27, 2019, respectively. Under the terms of these contracts, we receive interest in U.S. dollars at a weighted-average rate of 2.62% per annum and pay 0 interest. Upon the maturity of these contracts at various dates through fiscal 2024, 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:
| | | | | | | | | | | | | | |
| | March 27, | | September 27, | | | March 26, | | September 25, | | ||||
|
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| ||||
| | (in millions) | | | (in millions) | | ||||||||
Prepaid expenses and other current assets | | $ | 23 | | $ | 27 | | | $ | 1 | | $ | 1 | |
Other assets | |
| 50 | |
| 46 | | |
| 11 | |
| 3 | |
Accrued and other current liabilities | | | 2 | | | 2 | | | | 11 | | | 6 | |
Other liabilities | | | — | | | 1 | | | | 27 | | | 16 | |
The impacts of our hedge of net investment programs were as follows:
| | | | | | | | | | | | | |
| | | For the | | For the | | |||||||
| | | Quarters Ended | | Six Months Ended | | |||||||
| | March 27, | | March 29, | | March 27, | | March 29, | | ||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | (in millions) | | ||||||||||
Foreign currency exchange gains (losses) on intercompany loans and external borrowings(1) | | $ | 57 | | $ | 36 | | $ | (8) | | $ | 112 | |
Gains on cross-currency swap contracts designated as hedges of net investment(2) | |
| 55 | |
| 42 | |
| 22 | |
| 37 | |
| | | | | | | | | | | | | |
| | | For the | | For the | | |||||||
| | | Quarters Ended | | Six Months Ended | | |||||||
| | March 26, | | March 27, | | March 26, | | March 27, | | ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
| | (in millions) | | ||||||||||
Foreign currency exchange gains (losses) on intercompany loans and external borrowings(1) | | $ | 133 | | $ | 57 | | $ | (35) | | $ | (8) | |
Gains (losses) on cross-currency swap contracts designated as hedges of net investment(1) | |
| 58 | |
| 55 | |
| (27) | |
| 22 | |
(1) |
Interest Rate Risk Management
We utilize forward starting interest rate swap contracts to manage interest rate exposure in periods prior to the anticipated issuance of fixed rate debt. These contracts had an aggregate notional value of $450 million at March 26, 2021 and September 25, 2020 and were designated as cash flow hedges. These forward starting interest rate swap contracts were recorded on the Condensed Consolidated Balance Sheets as follows:
| | | | | | | |
| | March 26, | | September 25, | | ||
|
| 2021 |
| 2020 |
| ||
| | (in millions) | | ||||
Prepaid expenses and other current assets | | $ | 10 | | $ | — | |
Accrued and other current liabilities | | | 27 | | | — | |
Other liabilities | | | — | | | 64 | |
The impacts of these forward starting interest rate swap contracts were as follows:
| | | | | | | | | | | | | |
| | For the | | For the | | ||||||||
| | Quarters Ended | | Six Months Ended | | ||||||||
| | March 26, | | March 27, | | March 26, | | March 27, | | ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
| | (in millions) | | ||||||||||
Gains (losses) recorded in other comprehensive income (loss) | | $ | 34 | | $ | (42) | | $ | 47 |
| $ | (32) | |
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 $410 million and $312 million at March
14
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
26, 2021 and September 25, 2020, respectively, and were designated as cash flow hedges. These commodity swap contracts were recorded on the Condensed Consolidated Balance Sheets as follows:
| | | | | | | |
| | March 26, | | September 25, | | ||
|
| 2021 |
| 2020 |
| ||
| | (in millions) | | ||||
Prepaid expenses and other current assets | | $ | 53 | | $ | 41 | |
Other assets | |
| 2 | |
| 3 | |
Accrued and other current liabilities | | | 6 | | | 2 | |
Other liabilities | | | 3 | | | 1 | |
The impacts of these commodity swap contracts were as follows:
| | | | | | | | | | | | | |
| | For the | | For the | | ||||||||
| | Quarters Ended | | Six Months Ended | | ||||||||
| | March 26, | | March 27, | | March 26, | | March 27, | | ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
| | (in millions) | | ||||||||||
Gains (losses) recorded in other comprehensive income (loss) | | $ | 17 | | $ | (37) | | $ | 54 |
| $ | (18) | |
Gains reclassified from accumulated other comprehensive income (loss) into cost of sales | | | 24 | | | 4 | | | 39 | | | 3 | |
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.
12.11. 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 | | | Non-U.S. Plans | | U.S. Plans | | ||||||||||||||||
| | For the | | For the | | | For the | | For the | | ||||||||||||||||
| | Quarters Ended | | Quarters Ended | | | Quarters Ended | | Quarters Ended | | ||||||||||||||||
| | March 27, | | March 29, | | March 27, | | March 29, | | | March 26, | | March 27, | | March 26, | | March 27, | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||||||
| | (in millions) | | | (in millions) | | ||||||||||||||||||||
Operating expense: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Service cost | | $ | 12 | | $ | 12 | | $ | 2 | | $ | 3 | | | $ | 12 | | $ | 12 | | $ | 3 | | $ | 2 | |
Other (income) expense: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest cost | |
| 6 | |
| 10 | |
| 9 | |
| 11 | | |
| 7 | |
| 6 | |
| 8 | |
| 9 | |
Expected return on plan assets | |
| (15) | |
| (16) | |
| (14) | |
| (15) | | |
| (13) | |
| (15) | |
| (13) | |
| (14) | |
Amortization of net actuarial loss | |
| 10 | |
| 6 | |
| 2 | |
| 5 | | |
| 7 | |
| 10 | |
| 2 | |
| 2 | |
Amortization of prior service credit | |
| (1) | |
| (2) | |
| — | |
| — | | |
| (2) | |
| (1) | |
| — | |
| — | |
Net periodic pension benefit cost (credit) | | $ | 12 | | $ | 10 | | $ | (1) | | $ | 4 | | | $ | 11 | | $ | 12 | | $ | — | | $ | (1) | |
1715
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
| | | | | | | | | | | | | |
| | Non-U.S. Plans | | U.S. Plans | | ||||||||
| | For the | | For the | | ||||||||
| | Six Months Ended | | Six Months Ended | | ||||||||
| | March 27, | | March 29, | | March 27, | | March 29, | | ||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | (in millions) | | ||||||||||
Operating expense: | | | | | | | | | | | | | |
Service cost | | $ | 25 | | $ | 24 | | $ | 5 | | $ | 6 | |
Other (income) expense: | | | | | | | | | | | | | |
Interest cost | |
| 12 | |
| 21 | |
| 18 | |
| 23 | |
Expected return on plan assets | |
| (30) | |
| (32) | |
| (29) | |
| (29) | |
Amortization of net actuarial loss | |
| 20 | |
| 12 | |
| 4 | |
| 9 | |
Amortization of prior service credit | |
| (3) | |
| (4) | |
| — | |
| — | |
Net periodic pension benefit cost (credit) | | $ | 24 | | $ | 21 | | $ | (2) | | $ | 9 | |
| | | | | | | | | | | | | |
| | Non-U.S. Plans | | U.S. Plans | | ||||||||
| | For the | | For the | | ||||||||
| | Six Months Ended | | Six Months Ended | | ||||||||
| | March 26, | | March 27, | | March 26, | | March 27, | | ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
| | (in millions) | | ||||||||||
Operating expense: | | | | | | | | | | | | | |
Service cost | | $ | 24 | | $ | 25 | | $ | 6 | | $ | 5 | |
Other (income) expense: | | | | | | | | | | | | | |
Interest cost | |
| 14 | |
| 12 | |
| 16 | |
| 18 | |
Expected return on plan assets | |
| (27) | |
| (30) | |
| (26) | |
| (29) | |
Amortization of net actuarial loss | |
| 15 | |
| 20 | |
| 4 | |
| 4 | |
Amortization of prior service credit | |
| (3) | |
| (3) | |
| — | |
| — | |
Net periodic pension benefit cost (credit) | | $ | 23 | | $ | 24 | | $ | — | | $ | (2) | |
During the six months ended March 27, 2020,26, 2021, we contributed $19$20 million and $18 million to our non-U.S. and U.S. pension plans.plans, respectively.
13.12. Income Taxes
We recorded income tax expense of $42$106 million and $91$42 million for the quarters ended March 27, 202026, 2021 and March 29, 2019,27, 2020, respectively. The income tax expense for the quarter ended March 27, 2020 included an income tax benefit of $31 million related to pre-separation tax matters and the termination of the Tax Sharing Agreement. See the “Tax Sharing Agreement” section below for additional information.Agreement with Tyco International plc (now part of Johnson Controls International plc) and Covidien plc (now part of Medtronic plc). The pre-tax goodwill impairment charge of $900 million recorded during the quarter ended March 27, 2020 resulted in a tax benefit of $4 million as the associated goodwill was primarily not deductible for income tax purposes. See Note 6 for additional information regarding the impairment of goodwill. The income tax expense for the quarter ended March 29, 2019 included $15 million of income tax expense associated with the tax impacts of certain legal entity restructurings and intercompany transactions, partially offset by a $12 million income tax benefit resulting from lapses of statutes of limitations in certain non-U.S. jurisdictions.
We recorded income tax expense of $489$166 million and $169$489 million for the six months ended March 26, 2021 and March 27, 2020, andrespectively. The income tax expense for the six months ended March 29, 2019, respectively.26, 2021 included a $29 million income tax benefit related to an Internal Revenue Service approved change in the tax method of depreciating or amortizing certain assets. The income tax expense for the six months ended March 27, 2020 included $355 million of income tax expense related to the tax impacts of certain measures of the Switzerland Federal Act on Tax Reform and AHV Financing (“Swiss Tax Reform”), and an income tax benefit of $31 million related to pre-separation tax matters and the termination of the Tax Sharing Agreement. See the “Swiss Tax Reform” and “Tax Sharing Agreement” sections below for additional information. The income tax expense for the six months ended March 29, 2019 included $15 million of income tax expense associated with the tax impacts of certain legal entity restructurings and intercompany transactions.
Although it is difficult to predict the timing or results of our worldwide examinations, we estimate that approximately $100$110 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 March 27, 2020.26, 2021.
Swiss Tax Reform
The Federal Act on Tax Reform and AHV Financing eliminateseliminated certain preferential tax items and implementsimplemented new tax rates at both the federal and cantonal levels. During fiscal 2019, Switzerland enacted the federal provisions of Swiss Tax Reform and the federal tax authority issued guidance abolishing certain interest deductions. The impacts of these measures were reflected in our fiscal 2019 Consolidated Financial Statements.
18
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
In October 2019, the canton of Schaffhausen enacted Swiss Tax Reform into law, including reductions in tax rates. During the six months ended March 27, 2020, we recognized $355 million of income tax expense related primarily to cantonal implementation and the resulting write-down of certain deferred tax assets to the lower tax rates.
16
Tax Sharing AgreementTable of Contents
Upon our separation from Tyco International plc in fiscal 2007, we entered into a Tax Sharing Agreement with Tyco International plc (now part of Johnson Controls International plc) and Covidien plc (now part of Medtronic plc) under which we shared certain income tax liabilities for periods prior to and including June 29, 2007. Pursuant to the Tax Sharing Agreement, we entered into certain guarantee commitments and indemnifications.TE CONNECTIVITY LTD.
In March 2020, we, Johnson Controls International plc, and Medtronic plc entered into an agreement to terminate the Tax Sharing Agreement. We believe that substantially all income tax matters that may be subject to the Tax Sharing Agreement have been settled with tax authorities and we do not expect any remaining tax matters to have a material effect on our results of operations, financial position, or cash flows. Accordingly, during the quarter ended March 27, 2020, we recognized an income tax benefit of $31 million and net other income of $8 million representing settlement of the remaining shared pre-separation income tax matters and indemnification balances.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
14.13. Earnings (Loss) Per Share
The weighted-average number of shares outstanding used in the computations of basic and diluted earnings (loss) per share were as follows:
| | | | | | | | | | | | | | | | | | |
| | For the | | For the | | | For the | | For the | | ||||||||
| | Quarters Ended | | Six Months Ended | | | Quarters Ended | | Six Months Ended | | ||||||||
| | March 27, | | March 29, | | March 27, | | March 29, | | | March 26, | | March 27, | | March 26, | | March 27, | |
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
| | (in millions) | | | (in millions) | | ||||||||||||
Basic |
| 334 | | 338 | | 334 | | 340 | |
| 331 | | 334 | | 331 | | 334 | |
Dilutive impact of share-based compensation arrangements |
| — | | 2 | | — | | 2 | |
| 3 | | — | | 2 | | — | |
Diluted |
| 334 |
| 340 | | 334 |
| 342 | |
| 334 |
| 334 | | 333 |
| 334 | |
For the quarter and six months ended March 27, 2020, there were nonvested share awards and options outstanding with underlying exercise prices less than the average market prices of our common shares; however, these were excluded from the calculation of diluted loss per share as inclusion would be antidilutive as a result of our loss during the period. Such shares not included in the computation of diluted loss per share were 1 million and 2 million in the quarter and six months ended March 27, 2020, respectively.
The following share options were not included in the computation of diluted earnings (loss) per share because the instruments’ underlying exercise prices were greater than the average market prices of our common shares and inclusion would be antidilutive:
| | | | | | | | | | | | | | | | | | |
| | For the | | For the | | | For the | | For the | | ||||||||
| | Quarters Ended | | Six Months Ended | | | Quarters Ended | | Six Months Ended | | ||||||||
| | March 27, | | March 29, | | March 27, | | March 29, | | | March 26, | | March 27, | | March 26, | | March 27, | |
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
| | (in millions) | | | (in millions) | | ||||||||||||
Antidilutive share options |
| 3 | | 1 | | 3 | | 1 | |
| — | | 3 | | — | | 3 | |
14. Shareholders’ Equity
Common Shares Held in Treasury
In March 2021, our shareholders approved the cancellation of approximately 3 million shares purchased under our share repurchase program during the period beginning September 28, 2019 and ending September 25, 2020. The capital reduction by cancellation of these shares is subject to a notice period and filing with the commercial register in Switzerland and is not yet reflected on the Condensed Consolidated Balance Sheet.
Dividends
We paid cash dividends to shareholders as follows:
| | | | | | | | | | | | | |
| | For the | | For the |
| ||||||||
| | Quarters Ended | | Six Months Ended |
| ||||||||
|
| March 26, |
| March 27, |
| March 26, |
| March 27, |
| ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
Dividends paid per common share | | $ | 0.48 | | $ | 0.46 | | $ | 0.96 | | $ | 0.92 | |
In March 2021, our shareholders approved a dividend payment to shareholders of $2.00 per share, payable in 4 equal quarterly installments of $0.50 per share beginning in the third quarter of 2021 and ending in the second quarter of fiscal 2022.
1917
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
15. Equity
Common Shares
In March 2020, our shareholders reapproved and extended through March 11, 2022, our board of directors’ authorization to issue additional new shares, subject to certain conditions specified in our articles of association, in aggregate not exceeding 50% of the amount of our authorized shares.
Common Shares Held in Treasury
In March 2020, our shareholders approved the cancellation of approximately 12 million shares purchased under our share repurchase program during the period beginning September 29, 2018 and ending September 27, 2019. The capital reduction by cancellation of these shares is subject to a notice period and filing with the commercial register in Switzerland and is not yet reflected on the Condensed Consolidated Balance Sheet.
Dividends
We paid cash dividends to shareholders as follows:
| | | | | | | | | | | | | |
| | For the | | For the |
| ||||||||
| | Quarters Ended | | Six Months Ended |
| ||||||||
|
| March 27, |
| March 29, |
| March 27, |
| March 29, |
| ||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
Dividends paid per common share | | $ | 0.46 | | $ | 0.44 | | $ | 0.92 | | $ | 0.88 | |
In March 2020, our shareholders approved a dividend payment to shareholders of $1.92 per share, payable in 4 equal quarterly installments of $0.48 per share beginning in the third quarter of fiscal 2020 and ending in the second quarter of fiscal 2021.
Upon shareholders’ approval of a dividend payment, we record a liability with a corresponding charge to shareholders’ equity. At March 27, 202026, 2021 and September 27, 2019,25, 2020, the unpaid portion of the dividends recorded in accrued and other current liabilities on the Condensed Consolidated Balance Sheets totaled $636$661 million and $308$317 million, respectively.
Share Repurchase Program
Common shares repurchased under the share repurchase program were as follows:
| | | | | | | | | | | | | | |
| | For the | | | For the | | ||||||||
| | Six Months Ended | | | Six Months Ended | | ||||||||
| | March 27, | | March 29, | | | March 26, | | March 27, | | ||||
|
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| ||||
| | (in millions) | | | (in millions) | | ||||||||
Number of common shares repurchased |
| | 5 |
| | 9 | |
| | 3 |
| | 5 | |
Repurchase value |
| $ | 423 |
| $ | 684 | |
| $ | 309 |
| $ | 423 | |
At March 27, 2020,26, 2021, we had $1.1 billion$686 million of availability remaining under our share repurchase authorization.
15. Share Plans
Share-based compensation expense, which was included primarily in selling, general, and administrative expenses on the Condensed Consolidated Statements of Operations, was as follows:
| | | | | | | | | | | | | |
| | For the | | For the | | ||||||||
| | Quarters Ended | | Six Months Ended | | ||||||||
| | March 26, | | March 27, | | March 26, | | March 27, | | ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
| | (in millions) | | ||||||||||
Share-based compensation expense |
| $ | 30 |
| $ | 15 | | $ | 49 |
| $ | 37 | |
As of March 26, 2021, there was $151 million of unrecognized compensation expense related to share-based awards, which is expected to be recognized over a weighted-average period of 2.0 years.
During the quarter ended December 25, 2020, we granted the following share-based awards as part of our annual incentive plan grant:
| | | | | | |
| | | | Grant-Date | | |
|
| Shares |
| Fair Value |
| |
| | (in millions) | | | | |
Share options | | 1.3 | | $ | 22.03 | |
Restricted share awards | | 0.4 | |
| 105.86 | |
Performance share awards | | 0.2 | | | 105.86 | |
As of March 26, 2021, we had 13 million shares available for issuance under the TE Connectivity Ltd. 2007 Stock and Incentive Plan, amended and restated as of September 17, 2020.
2018
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
16. Share Plans
Share-based compensation expense, which was included primarily in selling, general, and administrative expenses on the Condensed Consolidated Statements of Operations, was as follows:
| | | | | | | | | | | | | |
| | For the | | For the | | ||||||||
| | Quarters Ended | | Six Months Ended | | ||||||||
| | March 27, | | March 29, | | March 27, | | March 29, | | ||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | (in millions) | | ||||||||||
Share-based compensation expense |
| $ | 15 |
| $ | 15 | | $ | 37 |
| $ | 38 | |
As of March 27, 2020, there was $150 million of unrecognized compensation expense related to share-based awards, which is expected to be recognized over a weighted-average period of 2.1 years.
During the quarter ended December 27, 2019, we granted the following share-based awards as part of our annual incentive plan grant:
| | | | | | |
| | | | Grant-Date | | |
|
| Shares |
| Fair Value |
| |
| | (in millions) | | | | |
Share options | | 1.5 | | $ | 15.52 | |
Restricted share awards | | 0.5 | |
| 93.63 | |
Performance share awards | | 0.2 | | | 93.63 | |
As of March 27, 2020, we had 15 million shares available for issuance under our stock and incentive plans, of which the TE Connectivity Ltd. 2007 Stock and Incentive Plan, amended and restated as of March 8, 2017, was the primary plan.
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 | |
| 21 | % | |
|
| 28 | % |
|
Risk-free interest rate | |
| 1.8 | % | | |
| 0.5 | % | |
Expected annual dividend per share | | $ | 1.84 | | | | $ | 1.92 | | |
Expected life of options (in years) | |
| 5.1 | | | |
| 5.4 | | |
21
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
17.16. Segment and Geographic Data
Net sales by segment(1) and industry end market(2) were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the | | For the | | | For the | | For the | | ||||||||||||||||
| | Quarters Ended | | Six Months Ended | | | Quarters Ended | | Six Months Ended | | ||||||||||||||||
| | March 27, | | March 29, | | March 27, | | March 29, | | | March 26, | | March 27, | | March 26, | | March 27, | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||||||
| | (in millions) | | | (in millions) | | ||||||||||||||||||||
Transportation Solutions: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Automotive | | $ | 1,365 | | $ | 1,425 | | $ | 2,770 | | $ | 2,894 | | | $ | 1,630 | | $ | 1,365 | | $ | 3,259 | | $ | 2,770 | |
Commercial transportation | |
| 294 | |
| 324 | |
| 552 | |
| 621 | | |
| 382 | |
| 294 | |
| 713 | |
| 552 | |
Sensors | |
| 198 | |
| 222 | |
| 403 | |
| 442 | | |
| 275 | |
| 198 | |
| 539 | |
| 403 | |
Total Transportation Solutions | | | 1,857 | | | 1,971 | | | 3,725 | | | 3,957 | | | | 2,287 | | | 1,857 | | | 4,511 | | | 3,725 | |
Industrial Solutions: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Aerospace, defense, oil, and gas | |
| 318 | |
| 331 | |
| 627 | |
| 616 | | |
| 267 | |
| 318 | |
| 517 | |
| 627 | |
Industrial equipment | | | 280 | | | 326 | | | 543 | | | 641 | | | | 339 | | | 280 | | | 634 | | | 543 | |
Medical(3) | | | 186 | | | 176 | | | 365 | | | 344 | | |||||||||||||
Medical | | | 161 | | | 186 | | | 317 | | | 365 | | |||||||||||||
Energy | |
| 178 | |
| 174 | |
| 354 | |
| 334 | | |
| 185 | |
| 178 | |
| 357 | |
| 354 | |
Total Industrial Solutions | | | 962 | | | 1,007 | | | 1,889 | | | 1,935 | | | | 952 | | | 962 | | | 1,825 | | | 1,889 | |
Communications Solutions: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Data and devices | | | 218 | | | 251 | | | 437 | | | 508 | | | | 278 | | | 218 | | | 512 | | | 437 | |
Appliances | |
| 158 | |
| 183 | |
| 312 | |
| 359 | | |
| 221 | |
| 158 | |
| 412 | |
| 312 | |
Total Communications Solutions | | | 376 | | | 434 | | | 749 | | | 867 | | | | 499 | | | 376 | | | 924 | | | 749 | |
Total | | $ | 3,195 | | $ | 3,412 | | $ | 6,363 | | $ | 6,759 | | | $ | 3,738 | | $ | 3,195 | | $ | 7,260 | | $ | 6,363 | |
(1) | Intersegment sales were not |
(2) | Industry end market information is presented consistently with our internal management reporting and may be revised periodically as management deems necessary. |
22
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Net sales by geographic region(1) and segment were as follows:
| | | | | | | | | | | | | |
| | For the | | For the | | ||||||||
| | Quarters Ended | | Six Months Ended | | ||||||||
| | March 27, | | March 29, | | March 27, | | March 29, | | ||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | (in millions) | | ||||||||||
Europe/Middle East/Africa (“EMEA”): | | | | | | | | | | | | | |
Transportation Solutions | | $ | 766 | | $ | 824 | | $ | 1,468 | | $ | 1,580 | |
Industrial Solutions | |
| 361 | |
| 382 | |
| 701 | |
| 732 | |
Communications Solutions | |
| 61 | |
| 70 | |
| 116 | |
| 135 | |
Total EMEA | |
| 1,188 | |
| 1,276 | |
| 2,285 | |
| 2,447 | |
Asia–Pacific: | | | | | | | | | | | | | |
Transportation Solutions | |
| 631 | |
| 674 | |
| 1,373 | |
| 1,438 | |
Industrial Solutions | |
| 138 | |
| 155 | |
| 283 | |
| 310 | |
Communications Solutions | | | 222 | | | 241 | | | 448 | | | 495 | |
Total Asia–Pacific | |
| 991 | |
| 1,070 | |
| 2,104 | |
| 2,243 | |
Americas: | | | | | | | | | | | | | |
Transportation Solutions | | | 460 | | | 473 | | | 884 | | | 939 | |
Industrial Solutions | |
| 463 | |
| 470 | |
| 905 | |
| 893 | |
Communications Solutions | | | 93 | | | 123 | | | 185 | | | 237 | |
Total Americas | |
| 1,016 | |
| 1,066 | |
| 1,974 | |
| 2,069 | |
Total | | $ | 3,195 | | $ | 3,412 | | $ | 6,363 | | $ | 6,759 | |
Operating income (loss) by segment was as follows:
| | | | | | | | | | | | | |
| | For the | | For the | | ||||||||
| | Quarters Ended | | Six Months Ended | | ||||||||
| | March 27, | | March 29, | | March 27, | | March 29, | | ||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | (in millions) | | ||||||||||
Transportation Solutions | | $ | (606) | (1) | $ | 316 | | $ | (290) | (1) | $ | 648 | |
Industrial Solutions | | | 142 | | | 137 | | | 257 | | | 237 | |
Communications Solutions | | | 49 | | | 77 | | | 89 | | | 129 | |
Total | | $ | (415) | | $ | 530 | | $ | 56 | | $ | 1,014 | |
2319
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
18. Tyco Electronics Group S.A.Net sales by geographic region(1) and segment were as follows:
Tyco Electronics Group S.A. (“TEGSA”), a Luxembourg company and our 100%-owned subsidiary, is a holding company that owns, directly or indirectly, all of our operating subsidiaries. TEGSA is the obligor under our senior notes, commercial paper, and five-year unsecured senior revolving credit facility, which are fully and unconditionally guaranteed by its parent, TE Connectivity Ltd. The following tables present condensed consolidating financial information for TE Connectivity Ltd., TEGSA, and all other subsidiaries that are not providing a guarantee of debt but which represent assets of TEGSA, using the equity method of accounting.
Condensed Consolidating Statement of Operations (unaudited)
For the Quarter Ended March 27, 2020
| | | | | | | | | | | | | | | | |
| | TE | | | | | | | | | | | | |
| |
| | Connectivity | | | | | Other | | Consolidating | | | |
| |||
|
| Ltd. |
| TEGSA |
| Subsidiaries |
| Adjustments |
| Total |
| |||||
| | (in millions) |
| |||||||||||||
Net sales | | $ | — | | $ | — | | $ | 3,195 | | $ | — | | $ | 3,195 | |
Cost of sales | |
| — | |
| — | |
| 2,166 | |
| — | |
| 2,166 | |
Gross margin | |
| — | |
| — | |
| 1,029 | |
| — | |
| 1,029 | |
Selling, general, and administrative expenses, net(1) | |
| 23 | |
| (122) | |
| 451 | |
| — | |
| 352 | |
Research, development, and engineering expenses | |
| — | |
| — | |
| 158 | |
| — | |
| 158 | |
Acquisition and integration costs | |
| — | |
| — | |
| 12 | |
| — | |
| 12 | |
Restructuring and other charges, net | |
| — | |
| — | |
| 22 | |
| — | |
| 22 | |
Impairment of goodwill | | | — | | | — | | | 900 | | | — | | | 900 | |
Operating income (loss) | |
| (23) | |
| 122 | |
| (514) | |
| — | |
| (415) | |
Interest income | |
| — | |
| — | |
| 5 | |
| — | |
| 5 | |
Interest expense | |
| — | |
| (10) | |
| (1) | |
| — | |
| (11) | |
Other income, net | |
| — | |
| — | |
| 11 | |
| — | |
| 11 | |
Equity in net loss of subsidiaries | |
| (403) | |
| (493) | |
| — | |
| 896 | |
| — | |
Equity in net loss of subsidiaries of discontinued operations | |
| (4) | |
| (4) | |
| — | |
| 8 | |
| — | |
Intercompany interest income (expense), net | |
| (26) | |
| (22) | |
| 48 | |
| — | |
| — | |
Loss from continuing operations before income taxes | |
| (456) | |
| (407) | |
| (451) | |
| 904 | |
| (410) | |
Income tax expense | |
| — | |
| — | |
| (42) | |
| — | |
| (42) | |
Loss from continuing operations | |
| (456) | |
| (407) | |
| (493) | |
| 904 | |
| (452) | |
Loss from discontinued operations, net of income taxes | |
| — | |
| — | |
| (4) | |
| — | |
| (4) | |
Net loss | |
| (456) | |
| (407) | |
| (497) | |
| 904 | |
| (456) | |
Other comprehensive loss | |
| (159) | |
| (159) | |
| (198) | |
| 357 | |
| (159) | |
Less: other comprehensive loss attributable to noncontrolling interests | | | 2 | | | 2 | | | 2 | | | (4) | | | 2 | |
Comprehensive loss attributable to TE Connectivity Ltd., TEGSA, or Other Subsidiaries | | $ | (613) | | $ | (564) | | $ | (693) | | $ | 1,257 | | $ | (613) | |
| | | | | | | | | | | | | |
| | For the | | For the | | ||||||||
| | Quarters Ended | | Six Months Ended | | ||||||||
| | March 26, | | March 27, | | March 26, | | March 27, | | ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
| | (in millions) | | ||||||||||
Asia–Pacific: | | | | | | | | | | | | | |
Transportation Solutions | | $ | 875 | | $ | 631 | | $ | 1,751 | | $ | 1,373 | |
Industrial Solutions | |
| 171 | |
| 138 | |
| 334 | |
| 283 | |
Communications Solutions | | | 290 | | | 222 | | | 544 | | | 448 | |
Total Asia–Pacific | |
| 1,336 | |
| 991 | |
| 2,629 | |
| 2,104 | |
Europe/Middle East/Africa (“EMEA”): | | | | | | | | | | | | | |
Transportation Solutions | | | 922 | | | 766 | | | 1,816 | | | 1,468 | |
Industrial Solutions | |
| 393 | |
| 361 | |
| 751 | |
| 701 | |
Communications Solutions | |
| 75 | |
| 61 | |
| 139 | |
| 116 | |
Total EMEA | |
| 1,390 | |
| 1,188 | |
| 2,706 | |
| 2,285 | |
Americas: | | | | | | | | | | | | | |
Transportation Solutions | | | 490 | | | 460 | | | 944 | | | 884 | |
Industrial Solutions | |
| 388 | |
| 463 | |
| 740 | |
| 905 | |
Communications Solutions | | | 134 | | | 93 | | | 241 | | | 185 | |
Total Americas | |
| 1,012 | |
| 1,016 | |
| 1,925 | |
| 1,974 | |
Total | | $ | 3,738 | | $ | 3,195 | | $ | 7,260 | | $ | 6,363 | |
| (1) |
Operating income (loss) by segment was as follows:
24
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Condensed Consolidating Statement of Operations (unaudited)
For the Quarter Ended March 29, 2019
| | | | | | | | | | | | | | | | |
| | TE | | | | | | | | | | | | |
| |
| | Connectivity | | | | | Other | | Consolidating | | | |
| |||
|
| Ltd. |
| TEGSA |
| Subsidiaries |
| Adjustments |
| Total |
| |||||
| | (in millions) |
| |||||||||||||
Net sales | | $ | — | | $ | — | | $ | 3,412 | | $ | — | | $ | 3,412 | |
Cost of sales | |
| — | |
| — | |
| 2,294 | |
| — | |
| 2,294 | |
Gross margin | |
| — | |
| — | |
| 1,118 | |
| — | |
| 1,118 | |
Selling, general, and administrative expenses, net | |
| 28 | |
| 9 | |
| 336 | |
| — | |
| 373 | |
Research, development, and engineering expenses | |
| — | |
| — | |
| 166 | |
| — | |
| 166 | |
Acquisition and integration costs | |
| — | |
| — | |
| 7 | |
| — | |
| 7 | |
Restructuring and other charges, net | |
| — | |
| — | |
| 42 | |
| — | |
| 42 | |
Operating income (loss) | |
| (28) | |
| (9) | |
| 567 | |
| — | |
| 530 | |
Interest income | |
| — | |
| 1 | |
| 3 | |
| — | |
| 4 | |
Interest expense | |
| — | |
| (14) | |
| (1) | |
| — | |
| (15) | |
Other income, net | |
| — | |
| 1 | |
| — | |
| — | |
| 1 | |
Equity in net income of subsidiaries | |
| 489 | | | 560 | | | — | | | (1,049) | | | — | |
Equity in net income of subsidiaries of discontinued operations | |
| 10 | |
| 3 | |
| — | |
| (13) | |
| — | |
Intercompany interest income (expense), net | |
| (32) | | | (50) | | | 82 | | | — | | | — | |
Income from continuing operations before income taxes | |
| 439 | |
| 492 | |
| 651 | |
| (1,062) | |
| 520 | |
Income tax expense | |
| — | |
| — | |
| (91) | |
| — | |
| (91) | |
Income from continuing operations | |
| 439 | |
| 492 | |
| 560 | |
| (1,062) | |
| 429 | |
Income from discontinued operations, net of income taxes | |
| — | |
| 7 | |
| 3 | |
| — | |
| 10 | |
Net income | |
| 439 | |
| 499 | |
| 563 | |
| (1,062) | |
| 439 | |
Other comprehensive income | |
| 97 | |
| 97 | |
| 47 | |
| (144) | |
| 97 | |
Comprehensive income | | $ | 536 | | $ | 596 | | $ | 610 | | $ | (1,206) | | $ | 536 | |
25
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Condensed Consolidating Statement of Operations (unaudited)
For the Six Months Ended March 27, 2020
| | | | | | | | | | | | | | | | |
| | TE | | | | | | | | | | | | | | |
| | Connectivity | | | | | Other | | Consolidating | | | | | |||
|
| Ltd. |
| TEGSA |
| Subsidiaries |
| Adjustments |
| Total |
| |||||
| | (in millions) | | |||||||||||||
Net sales | | $ | — | | $ | — | | $ | 6,363 | | $ | — | | $ | 6,363 | |
Cost of sales | |
| — | |
| — | |
| 4,304 | |
| — | |
| 4,304 | |
Gross margin | |
| — | |
| — | |
| 2,059 | |
| — | |
| 2,059 | |
Selling, general, and administrative expenses, net(1) | |
| 49 | |
| (106) | |
| 776 | |
| — | |
| 719 | |
Research, development, and engineering expenses | |
| — | |
| — | |
| 319 | |
| — | |
| 319 | |
Acquisition and integration costs | |
| 1 | |
| — | |
| 18 | |
| — | |
| 19 | |
Restructuring and other charges, net | |
| — | |
| — | |
| 46 | |
| — | |
| 46 | |
Impairment of goodwill | | | — | | | — | | | 900 | | | — | | | 900 | |
Operating income (loss) | |
| (50) | |
| 106 | |
| — | |
| — | |
| 56 | |
Interest income | |
| — | |
| — | |
| 11 | |
| — | |
| 11 | |
Interest expense | |
| — | |
| (20) | |
| (3) | |
| — | |
| (23) | |
Other income, net | |
| — | |
| — | |
| 16 | |
| — | |
| 16 | |
Equity in net loss of subsidiaries | |
| (329) | |
| (392) | |
| — | |
| 721 | |
| — | |
Equity in net loss of subsidiaries of discontinued operations | | | (1) | | | (4) | | | — | | | 5 | | | — | |
Intercompany interest income (expense), net | |
| (50) | |
| (23) | |
| 73 | |
| — | |
| — | |
Income (loss) from continuing operations before income taxes | |
| (430) | |
| (333) | |
| 97 | |
| 726 | |
| 60 | |
Income tax expense | |
| — | |
| — | |
| (489) | |
| — | |
| (489) | |
Loss from continuing operations | |
| (430) | |
| (333) | |
| (392) | |
| 726 | |
| (429) | |
Income (loss) from discontinued operations, net of income taxes | |
| — | |
| 3 | |
| (4) | |
| — | |
| (1) | |
Net loss | |
| (430) | |
| (330) | |
| (396) | |
| 726 | |
| (430) | |
Other comprehensive loss | |
| (70) | |
| (70) | |
| (90) | |
| 160 | |
| (70) | |
Less: other comprehensive loss attributable to noncontrolling interests | | | 2 | | | 2 | | | 2 | | | (4) | | | 2 | |
Comprehensive loss attributable to TE Connectivity Ltd., TEGSA, or Other Subsidiaries | | $ | (498) | | $ | (398) | | $ | (484) | | $ | 882 | | $ | (498) | |
| | | | | | | | | | | | | |
| | For the | | For the | | ||||||||
| | Quarters Ended | | Six Months Ended | | ||||||||
| | March 26, | | March 27, | | March 26, | | March 27, | | ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
| | (in millions) | | ||||||||||
Transportation Solutions | | $ | 398 | | $ | (606) | (1) | $ | 706 | | $ | (290) | (1) |
Industrial Solutions | | | 111 | | | 142 | | | 187 | | | 257 | |
Communications Solutions | | | 103 | | | 49 | | | 167 | | | 89 | |
Total | | $ | 612 | | $ | (415) | | $ | 1,060 | | $ | 56 | |
| (1) |
26
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Condensed Consolidating Statement of Operations (unaudited)
For the Six Months Ended March 29, 2019
| | | | | | | | | | | | | | | | |
| | TE | | | | | | | | | | | | | | |
| | Connectivity | | | | | Other | | Consolidating | | | | | |||
|
| Ltd. |
| TEGSA |
| Subsidiaries |
| Adjustments |
| Total |
| |||||
| | (in millions) | | |||||||||||||
Net sales | | $ | — | | $ | — | | $ | 6,759 | | $ | — | | $ | 6,759 | |
Cost of sales | |
| — | |
| — | |
| 4,527 | |
| — | |
| 4,527 | |
Gross margin | |
| — | |
| — | |
| 2,232 | |
| — | |
| 2,232 | |
Selling, general, and administrative expenses, net(1) | |
| 63 | |
| (98) | |
| 797 | |
| — | |
| 762 | |
Research, development, and engineering expenses | |
| — | |
| — | |
| 327 | |
| — | |
| 327 | |
Acquisition and integration costs | |
| — | |
| — | |
| 12 | |
| — | |
| 12 | |
Restructuring and other charges, net | |
| — | |
| — | |
| 117 | |
| — | |
| 117 | |
Operating income (loss) | |
| (63) | |
| 98 | |
| 979 | |
| — | |
| 1,014 | |
Interest income | |
| — | |
| 1 | |
| 8 | |
| — | |
| 9 | |
Interest expense | |
| — | |
| (41) | |
| (1) | |
| — | |
| (42) | |
Other income (expense), net | |
| — | |
| 1 | |
| (1) | |
| — | |
| — | |
Equity in net income of subsidiaries | | | 930 | | | 949 | | | — | | | (1,879) | | | — | |
Equity in net loss of subsidiaries of discontinued operations | |
| (97) | |
| (46) | |
| — | |
| 143 | |
| — | |
Intercompany interest income (expense), net | | | (55) | | | (78) | | | 133 | | | — | | | — | |
Income from continuing operations before income taxes | |
| 715 | |
| 884 | |
| 1,118 | |
| (1,736) | |
| 981 | |
Income tax expense | |
| — | |
| — | |
| (169) | |
| — | |
| (169) | |
Income from continuing operations | |
| 715 | |
| 884 | |
| 949 | |
| (1,736) | |
| 812 | |
Loss from discontinued operations, net of income taxes | |
| — | |
| (51) | |
| (46) | |
| — | |
| (97) | |
Net income | |
| 715 | |
| 833 | |
| 903 | |
| (1,736) | |
| 715 | |
Other comprehensive income | |
| 146 | |
| 146 | |
| 82 | |
| (228) | |
| 146 | |
Comprehensive income | | $ | 861 | | $ | 979 | | $ | 985 | | $ | (1,964) | | $ | 861 | |
|
|
27
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Condensed Consolidating Balance Sheet (unaudited)
As of March 27, 2020
| | | | | | | | | | | | | | | | |
| | TE | | | | | | | | | | | | | | |
| | Connectivity | | | | | Other | | Consolidating | | | | | |||
|
| Ltd. |
| TEGSA |
| Subsidiaries |
| Adjustments |
| Total |
| |||||
| | (in millions) | | |||||||||||||
Assets | | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | — | | $ | — | | $ | 796 | | $ | — | | $ | 796 | |
Accounts receivable, net | |
| — | |
| — | |
| 2,461 | |
| — | |
| 2,461 | |
Inventories | |
| — | |
| — | |
| 2,001 | |
| — | |
| 2,001 | |
Intercompany receivables | |
| 46 | |
| 3,590 | |
| 59 | |
| (3,695) | |
| — | |
Prepaid expenses and other current assets | |
| 6 | |
| 32 | |
| 419 | |
| — | |
| 457 | |
Total current assets | |
| 52 | |
| 3,622 | |
| 5,736 | |
| (3,695) | |
| 5,715 | |
Property, plant, and equipment, net | |
| — | |
| — | |
| 3,558 | |
| — | |
| 3,558 | |
Goodwill | |
| — | |
| — | |
| 5,235 | |
| — | |
| 5,235 | |
Intangible assets, net | |
| — | |
| — | |
| 1,547 | |
| — | |
| 1,547 | |
Deferred income taxes | |
| — | |
| — | |
| 2,382 | |
| — | |
| 2,382 | |
Investment in subsidiaries | |
| 13,418 | |
| 27,701 | |
| — | |
| (41,119) | |
| — | |
Intercompany loans receivable | |
| — | |
| 2,568 | |
| 16,040 | |
| (18,608) | |
| — | |
Other assets | |
| — | |
| 100 | |
| 830 | |
| — | |
| 930 | |
Total assets | | $ | 13,470 | | $ | 33,991 | | $ | 35,328 | | $ | (63,422) | | $ | 19,367 | |
Liabilities and equity | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | |
Short-term debt | | $ | — | | $ | 602 | | $ | 1 | | $ | — | | $ | 603 | |
Accounts payable | |
| 1 | |
| — | |
| 1,389 | |
| — | |
| 1,390 | |
Accrued and other current liabilities | |
| 655 | |
| 102 | |
| 1,209 | |
| — | |
| 1,966 | |
Intercompany payables | | | 3,643 | | | — | | | 52 | | | (3,695) | | | — | |
Total current liabilities | |
| 4,299 | |
| 704 | |
| 2,651 | |
| (3,695) | |
| 3,959 | |
Long-term debt | |
| — | |
| 3,752 | |
| — | |
| — | |
| 3,752 | |
Intercompany loans payable | |
| — | |
| 16,040 | |
| 2,568 | |
| (18,608) | |
| — | |
Long-term pension and postretirement liabilities | |
| — | |
| — | |
| 1,359 | |
| — | |
| 1,359 | |
Deferred income taxes | |
| — | |
| — | |
| 126 | |
| — | |
| 126 | |
Income taxes | |
| — | |
| — | |
| 228 | |
| — | |
| 228 | |
Other liabilities | |
| — | |
| 77 | |
| 695 | |
| — | |
| 772 | |
Total liabilities | |
| 4,299 | |
| 20,573 | |
| 7,627 | |
| (22,303) | |
| 10,196 | |
Total equity | |
| 9,171 | |
| 13,418 | |
| 27,701 | |
| (41,119) | |
| 9,171 | |
Total liabilities and equity | | $ | 13,470 | | $ | 33,991 | | $ | 35,328 | | $ | (63,422) | | $ | 19,367 | |
28
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Condensed Consolidating Balance Sheet (unaudited)
As of September 27, 2019
| | | | | | | | | | | | | | | | |
| | TE | | | | | | | | | | | | | | |
| | Connectivity | | | | | Other | | Consolidating | | | | | |||
|
| Ltd. |
| TEGSA |
| Subsidiaries |
| Adjustments |
| Total |
| |||||
| | (in millions) | | |||||||||||||
Assets | | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | — | | $ | — | | $ | 927 | | $ | — | | $ | 927 | |
Accounts receivable, net | |
| — | |
| — | |
| 2,320 | |
| — | |
| 2,320 | |
Inventories | |
| — | |
| — | |
| 1,836 | |
| — | |
| 1,836 | |
Intercompany receivables | |
| 49 | |
| 2,959 | |
| 60 | |
| (3,068) | |
| — | |
Prepaid expenses and other current assets | |
| 4 | |
| 36 | |
| 431 | |
| — | |
| 471 | |
Total current assets | |
| 53 | |
| 2,995 | |
| 5,574 | |
| (3,068) | |
| 5,554 | |
Property, plant, and equipment, net | |
| — | |
| — | |
| 3,574 | |
| — | |
| 3,574 | |
Goodwill | |
| — | |
| — | |
| 5,740 | |
| — | |
| 5,740 | |
Intangible assets, net | |
| — | |
| — | |
| 1,596 | |
| — | |
| 1,596 | |
Deferred income taxes | |
| — | |
| — | |
| 2,776 | |
| — | |
| 2,776 | |
Investment in subsidiaries | |
| 13,865 | |
| 28,336 | |
| — | |
| (42,201) | |
| — | |
Intercompany loans receivable | | | — | |
| 2,562 | |
| 16,033 | |
| (18,595) | |
| — | |
Other assets | |
| — | |
| 72 | |
| 382 | |
| — | |
| 454 | |
Total assets | | $ | 13,918 | | $ | 33,965 | | $ | 35,675 | | $ | (63,864) | | $ | 19,694 | |
Liabilities and equity | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | |
Short-term debt | | $ | — | | $ | 568 | | $ | 2 | | $ | — | | $ | 570 | |
Accounts payable | |
| 1 | |
| — | |
| 1,356 | |
| — | |
| 1,357 | |
Accrued and other current liabilities | |
| 328 | |
| 57 | |
| 1,228 | |
| — | |
| 1,613 | |
Intercompany payables | |
| 3,019 | |
| — | |
| 49 | |
| (3,068) | |
| — | |
Total current liabilities | |
| 3,348 | |
| 625 | |
| 2,635 | |
| (3,068) | |
| 3,540 | |
Long-term debt | |
| — | |
| 3,395 | |
| — | |
| — | |
| 3,395 | |
Intercompany loans payable | |
| — | |
| 16,033 | |
| 2,562 | |
| (18,595) | |
| — | |
Long-term pension and postretirement liabilities | |
| — | |
| — | |
| 1,367 | |
| — | |
| 1,367 | |
Deferred income taxes | |
| — | |
| — | |
| 156 | |
| — | |
| 156 | |
Income taxes | |
| — | |
| — | |
| 239 | |
| — | |
| 239 | |
Other liabilities | |
| — | |
| 47 | |
| 380 | |
| — | |
| 427 | |
Total liabilities | |
| 3,348 | |
| 20,100 | |
| 7,339 | |
| (21,663) | |
| 9,124 | |
Total equity | |
| 10,570 | | | 13,865 | | | 28,336 | | | (42,201) | | | 10,570 | |
Total liabilities and equity | | $ | 13,918 | | $ | 33,965 | | $ | 35,675 | | $ | (63,864) | | $ | 19,694 | |
29
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Condensed Consolidating Statement of Cash Flows (unaudited)
For the Six Months Ended March 27, 2020
| | | | | | | | | | | | | | | | |
| | TE | | | | | | | | | | | | | | |
| | Connectivity | | | | | Other | | Consolidating | | | | | |||
|
| Ltd. |
| TEGSA |
| Subsidiaries |
| Adjustments |
| Total |
| |||||
| | (in millions) | | |||||||||||||
Cash flows from operating activities: | | | | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities(1) | | $ | (114) | | $ | 493 | | $ | 971 | | $ | (458) | | $ | 892 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | |
Capital expenditures | |
| — | |
| — | |
| (309) | |
| — | |
| (309) | |
Proceeds from sale of property, plant, and equipment | |
| — | |
| — | |
| 3 | |
| — | |
| 3 | |
Acquisition of businesses, net of cash acquired | | | — | | | — | | | (359) | | | — | | | (359) | |
Change in intercompany loans | |
| — | |
| (625) | |
| — | |
| 625 | |
| — | |
Other | |
| — | |
| — | |
| (2) | |
| — | |
| (2) | |
Net cash used in investing activities | | | — | | | (625) | | | (667) | | | 625 | | | (667) | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | |
Changes in parent company equity(2) | |
| 59 | |
| (105) | |
| 46 | |
| — | |
| — | |
Net decrease in commercial paper | |
| — | |
| (219) | |
| — | |
| — | |
| (219) | |
Proceeds from issuance of debt | | | — | | | 593 | | | — | | | — | | | 593 | |
Proceeds from exercise of share options | |
| — | |
| 13 | |
| 14 | |
| — | |
| 27 | |
Repurchase of common shares | |
| (262) | |
| (146) | |
| — | |
| — | |
| (408) | |
Payment of common share dividends to shareholders | |
| (307) | |
| — | |
| — | |
| — | |
| (307) | |
Intercompany distributions(1) | |
| — | |
| — | |
| (458) | |
| 458 | |
| — | |
Loan activity with parent | |
| 624 | |
| — | |
| 1 | |
| (625) | |
| — | |
Other | |
| — | |
| (4) | |
| (27) | |
| — | |
| (31) | |
Net cash provided by (used in) financing activities | | | 114 | | | 132 | | | (424) | | | (167) | | | (345) | |
Effect of currency translation on cash | |
| — | |
| — | |
| (11) | |
| — | |
| (11) | |
Net decrease in cash, cash equivalents, and restricted cash | |
| — | |
| — | |
| (131) | |
| — | |
| (131) | |
Cash, cash equivalents, and restricted cash at beginning of period | |
| — | |
| — | |
| 927 | |
| — | |
| 927 | |
Cash, cash equivalents, and restricted cash at end of period | | $ | — | | $ | — | | $ | 796 | | $ | — | | $ | 796 | |
30
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Condensed Consolidating Statement of Cash Flows (unaudited)
For the Six Months Ended March 29, 2019
| | | | | | | | | | | | | | | | |
| | TE | | | | | | | | | | | | | | |
| | Connectivity | | | | | Other | | Consolidating | | | | | |||
|
| Ltd. |
| TEGSA |
| Subsidiaries |
| Adjustments |
| Total |
| |||||
| | (in millions) | | |||||||||||||
Cash flows from operating activities: | | | | | | | | | | | | | | | | |
Net cash provided by (used in) continuing operating activities | | $ | (121) | | $ | (79) | | $ | 1,083 | | $ | — | | $ | 883 | |
Net cash used in discontinued operating activities | |
| — | |
| — | |
| (30) | |
| — | |
| (30) | |
Net cash provided by (used in) operating activities | |
| (121) | |
| (79) | |
| 1,053 | |
| — | |
| 853 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | |
Capital expenditures | |
| — | |
| — | |
| (401) | |
| — | |
| (401) | |
Proceeds from sale of property, plant, and equipment | |
| — | |
| — | |
| 13 | |
| — | |
| 13 | |
Acquisition of businesses, net of cash acquired | |
| — | |
| — | |
| 8 | |
| — | |
| 8 | |
Proceeds from divestiture of discontinued operation, net of cash retained by sold operation | | | — | | | 312 | | | (15) | | | — | | | 297 | |
Change in intercompany loans | |
| — | |
| 5,475 | |
| — | |
| (5,475) | |
| — | |
Net cash provided by (used in) continuing investing activities | | | — | | | 5,787 | | | (395) | | | (5,475) | | | (83) | |
Net cash used in discontinued investing activities | | | — | | | — | | | (2) | | | — | | | (2) | |
Net cash provided by (used in) investing activities | | | — | | | 5,787 | | | (397) | | | (5,475) | | | (85) | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | |
Changes in parent company equity(1) | |
| 38 | |
| (5,704) | |
| 5,666 | |
| — | |
| — | |
Net increase in commercial paper | |
| — | |
| 90 | |
| — | |
| — | |
| 90 | |
Proceeds from issuance of debt | | | — | | | 350 | | | — | | | — | | | 350 | |
Repayment of debt | | | — | | | (441) | | | — | | | — | | | (441) | |
Proceeds from exercise of share options | |
| — | |
| — | |
| 17 | |
| — | |
| 17 | |
Repurchase of common shares | |
| (739) | |
| — | |
| — | |
| — | |
| (739) | |
Payment of common share dividends to shareholders | |
| (299) | |
| — | |
| — | |
| — | |
| (299) | |
Loan activity with parent | |
| 1,121 | |
| — | |
| (6,596) | |
| 5,475 | |
| — | |
Transfers to discontinued operations | | | — | | | — | | | (32) | | | — | | | (32) | |
Other | |
| — | |
| (3) | |
| (27) | |
| — | |
| (30) | |
Net cash provided by (used in) continuing financing activities | |
| 121 | |
| (5,708) | |
| (972) | |
| 5,475 | |
| (1,084) | |
Net cash provided by discontinued financing activities | |
| — | |
| — | |
| 32 | |
| — | |
| 32 | |
Net cash provided by (used in) financing activities | |
| 121 | |
| (5,708) | |
| (940) | |
| 5,475 | |
| (1,052) | |
Effect of currency translation on cash | |
| — | |
| — | |
| 1 | |
| — | |
| 1 | |
Net decrease in cash, cash equivalents, and restricted cash | |
| — | |
| — | |
| (283) | |
| — | |
| (283) | |
Cash, cash equivalents, and restricted cash at beginning of period | |
| — | |
| — | |
| 848 | |
| — | |
| 848 | |
Cash, cash equivalents, and restricted cash at end of period | | $ | — | | $ | — | | $ | 565 | | $ | — | | $ | 565 | |
3120
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion may contain forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements as a result of many factors, including but not limited to those under the heading “Forward-Looking Information” and “Part II. Item 1A. Risk Factors.”
Our Condensed Consolidated Financial Statements have been prepared in United States (“U.S.”) dollars, in accordance with accounting principles generally accepted in the U.S. (“GAAP”).
The following discussion includes organic net sales growth (decline) which is a non-GAAP financial measure. See “Non-GAAP Financial Measure” for additional information regarding this measure.
Overview
TE Connectivity Ltd. (“TE Connectivity” or the “Company,” which may be referred to as “we,” “us,” or “our”) is a global industrial technology leader creating a safer, sustainable, productive, and connected future. Our broad range of connectivity and sensor solutions, proven in the harshest environments, enable advancements in transportation, industrial applications, medical technology, energy, data communications, and the home.
The second quarter and first six months of fiscal 20202021 included the following:
● | Our net sales |
● | Our net sales by segment were as follows: |
● | Transportation Solutions—Our net sales |
● | Industrial Solutions—Our net sales decreased |
● | Communications Solutions—Our net sales |
● | Net cash provided by |
32
COVID-19 Pandemic and Economic Conditions
A novel strain of coronavirus (“COVID-19”) was first identified in China in December 2019 and subsequently declared aThe COVID-19 pandemic by the World Health Organization. To date, COVID-19 has surfaced inaffected nearly all regions around the world and resulted in travel restrictions and business slowdowns or shutdowns and travel restrictions in affected areas. The COVID-19 pandemic negatively affected our sales and operating results during the second quarter of fiscal 2020 and wecontinued to negatively affect certain of our businesses in the first six months of fiscal 2021. We expect that COVID-19
21
it will continue to have a materialan impact on some of our financial condition and results of operationsbusinesses in the near term and may have a material impact on our financial condition, liquidity, and results of operations in future periods.
The COVID-19 pandemic is currently impacting, and we expect that COVID-19it 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. Accordingly, while a number of our businesses are operating as essential businesses, some of our business locations have adjusted, reduced, or suspended operating activities at certain of their locations. In addition, COVID-19the 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 each day.evolve. We expect towill continue to assess the evolving impact of the COVID-19 pandemic and intend to adjust our operations and businesses, a number of which are operating as essential businesses, accordingly. For example, throughoutThroughout our operations, we have enactedimplemented 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 vaccine production and distribution. We expect that the COVID-19 pandemic will negativelycontinue to impact several of the markets we serve, in particular the automotive and commercial aerospace markets. We are expecting reduced salesmarket in these marketsour Industrial Solutions segment; however, we expect this market to stabilize in the near term and may experience reduced sales in these markets in future periods. As a result,second half of fiscal 2021. See “Outlook” below for additional information regarding our expectations.
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 shareholders.the communities in which we operate.
As a result of current and projected declines in sales and profitability, due in part toOutlook
In the impact of COVID-19 and projected reductions in global automotive production, of the Sensors reporting unit of the Transportation Solutions segment during the secondthird quarter of fiscal 2020,2021, we determined that an indicator of impairment had occurred and goodwill impairment testing of this reporting unit was required.
As discussed in Note 1 to the Condensed Consolidated Financial Statements, during the second quarter of fiscal 2020, we adopted Accounting Standards Update (“ASU”) No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating step 2 of the goodwill impairment test. Under the new standard, goodwill impairment is measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. We determined the fair value of the Sensors reporting unit to be $1.0 billion. This valuation was based on a discounted cash flows analysis incorporating our estimate of future operating performance, which we consider to be a level 3 unobservable input in the fair value hierarchy, and was corroborated using a market approach valuation. The goodwill impairment test indicated that the carrying value of the reporting unit exceeded its fair value by $900 million. As a result, we recorded a partial impairment charge of $900 million. The Sensors reporting unit had a remaining goodwill allocation of $626 million as of March 27, 2020.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act provides certain relief to companies, including provisions relating to payroll tax credits, deferral of employer side social security taxes, net operating loss carryback periods, acceleration of alternative minimum tax credit refunds, modifications to the net interest deduction rules, and delayed minimum contributions with respect to defined benefit plans. We do not expect the CARES Act to have a material effect on our results of operations, financial position, or liquidity.
For a further discussion of the risks and uncertainties relating to the COVID-19 pandemic for our results of operations and business condition, see “Part II. Item 1A. Risk Factors” below.
33
Outlook
We expect our net sales to declinebe approximately 25%$3.7 billion as compared to $2.5 billion in the third quarter of fiscal 2020 as compared to $3.2 billion2020. This increase reflects sales growth in the second quarter of fiscal 2020. This decline is driven primarily by weakness inTransportation Solutions segment and, to a lesser degree, the automotiveCommunications Solutions and commercial aerospace markets as well as supply chain adjustments. Partially offsetting the decline, we expect our net sales to benefit from strength in the defense and the data and devices markets.Industrial Solutions segments.
We expect our net salesdiluted earnings per share from continuing operations to decrease in the automotive end marketbe approximately $1.51 per share in the third quarter of fiscal 2020 due primarily to an approximate 33% decline in global automotive production as compared to2021. This outlook reflects the second quarterpositive impact of fiscal 2020. Additionally,foreign currency exchange rates on net sales and earnings per share of approximately $108 million and $0.01 per share, respectively, in the third quarter of fiscal 2020, we expect our net sales in the automotive end market to reflect a negative impact of approximately $200 million from reduced demand due to customer inventory builds in the second quarter of fiscal 2020 in response to an uncertain manufacturing environment.
We expect our net sales in the commercial aerospace market to be negatively impacted by reduced production in the second half of fiscal 20202021 as compared to the first half of fiscal 2020. We expect an approximate 33% decline in production in the commercial aerospace market in the third quarter of fiscal 2020 as compared to the second quarter of fiscal 2020 due primarily to the impacts of COVID-19.2020.
We expect our net sales to be negatively impacted by approximately $100 million in the third quarter of fiscal 2020 due to supply chain disruptions resulting from the COVID-19 pandemic.
For fiscal 2020, weThe above outlook is based on foreign currency exchange rates that are withdrawing our full year guidance due to limited visibility of the impact of the COVID-19 pandemic on future demand.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.”
AcquisitionsAcquisition
In March 2020, we acquired approximately 72% of the outstanding shares of First Sensor for €209 million in cash (equivalent to $232 million). This business has been reported as part of our Transportation Solutions segment from the date of acquisition.
During the first six months of fiscal 2020,2021, we acquired three additional businessesone business for a combined cash purchase price of $124$106 million, net of cash acquired. The acquisitions wereacquisition was reported as part of our Transportation Solutions and Industrial Solutions segmentssegment from the date of acquisition.
See Note 43 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions.
3422
Results of Operations
Net Sales
The following table presents our net sales and the percentage of total net sales by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the | | | For the | | | | For the | | | For the | | | ||||||||||||||||||||||||||||||||||||
| | Quarters Ended | | | Six Months Ended | | | | Quarters Ended | | | Six Months Ended | | | ||||||||||||||||||||||||||||||||||||
| | March 27, | | | March 29, | | | March 27, | | | March 29, | | | | March 26, | | | March 27, | | | March 26, | | | March 27, | | | ||||||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| ||||||||||||||||||||||||
|
| ($ in millions) | |
|
| ($ in millions) | |
| ||||||||||||||||||||||||||||||||||||||||||
Transportation Solutions | | $ | 1,857 | | 58 | % | | $ | 1,971 | | 58 | % | | $ | 3,725 | | 58 | % | | $ | 3,957 | | 58 | % | | | $ | 2,287 | | 61 | % | | $ | 1,857 | | 58 | % | | $ | 4,511 | | 62 | % | | $ | 3,725 | | 58 | % | |
Industrial Solutions | |
| 962 |
| 30 | | |
| 1,007 |
| 29 | | |
| 1,889 |
| 30 | | |
| 1,935 |
| 29 | | | |
| 952 |
| 26 | | |
| 962 |
| 30 | | |
| 1,825 |
| 25 | | |
| 1,889 |
| 30 | | |
Communications Solutions | |
| 376 |
| 12 | | |
| 434 |
| 13 | | |
| 749 |
| 12 | | |
| 867 |
| 13 | | | |
| 499 |
| 13 | | |
| 376 |
| 12 | | |
| 924 |
| 13 | | |
| 749 |
| 12 | | |
Total | | $ | 3,195 |
| 100 | % | | $ | 3,412 |
| 100 | % | | $ | 6,363 |
| 100 | % | | $ | 6,759 |
| 100 | % | | | $ | 3,738 |
| 100 | % | | $ | 3,195 |
| 100 | % | | $ | 7,260 |
| 100 | % | | $ | 6,363 |
| 100 | % | |
The following table provides an analysis of the change in our net sales by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Change in Net Sales for the Quarter Ended March 27, 2020 | | Change in Net Sales for the Six Months Ended March 27, 2020 | | ||||||||||||||||||||||||||||
| | versus Net Sales for the Quarter Ended March 29, 2019 | | versus Net Sales for the Six Months Ended March 29, 2019 | | ||||||||||||||||||||||||||||
| | Net Sales | | Organic Net Sales | | | | | | | | Net Sales | | Organic Net Sales | | | | | | | | ||||||||||||
|
| Growth (Decline) | | Growth (Decline) | | Translation | | Acquisitions |
| Growth (Decline) | | Growth (Decline) |
| Translation |
| Acquisitions |
| ||||||||||||||||
| | ($ in millions) |
| ||||||||||||||||||||||||||||||
Transportation Solutions | | $ | (114) |
| (5.8) | % | $ | (98) |
| (5.0) | % | $ | (42) | | $ | 26 | | $ | (232) |
| (5.9) | % | $ | (211) |
| (5.3) | % | $ | (72) | | $ | 51 | |
Industrial Solutions | |
| (45) |
| (4.5) | |
| (30) |
| (3.0) | |
| (15) | |
| — | |
| (46) |
| (2.4) | |
| (19) |
| (1.0) | |
| (27) | |
| — | |
Communications Solutions | |
| (58) |
| (13.4) | |
| (55) |
| (12.6) | |
| (3) | |
| — | |
| (118) |
| (13.6) | |
| (114) |
| (13.1) | |
| (4) | |
| — | |
Total | | $ | (217) |
| (6.4) | % | $ | (183) |
| (5.4) | % | $ | (60) | | $ | 26 | | $ | (396) |
| (5.9) | % | $ | (344) |
| (5.1) | % | $ | (103) | | $ | 51 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Change in Net Sales for the Quarter Ended March 26, 2021 | | Change in Net Sales for the Six Months Ended March 26, 2021 | | ||||||||||||||||||||||||||||
| | versus Net Sales for the Quarter Ended March 27, 2020 | | versus Net Sales for the Six Months Ended March 27, 2020 | | ||||||||||||||||||||||||||||
| | Net Sales | | Organic Net Sales | | | | | Acquisitions | | Net Sales | | Organic Net Sales | | | | | Acquisitions | | ||||||||||||||
|
| Growth (Decline) | | Growth (Decline) | | Translation | | (Divestiture) |
| Growth (Decline) | | Growth (Decline) |
| Translation |
| (Divestiture) |
| ||||||||||||||||
| | ($ in millions) |
| ||||||||||||||||||||||||||||||
Transportation Solutions | | $ | 430 |
| 23.2 | % | $ | 284 |
| 15.3 | % | $ | 104 | | $ | 42 | | $ | 786 |
| 21.1 | % | $ | 517 |
| 13.8 | % | $ | 180 | | $ | 89 | |
Industrial Solutions | |
| (10) |
| (1.0) | |
| (40) |
| (4.2) | |
| 31 | |
| (1) | |
| (64) |
| (3.4) | |
| (118) |
| (6.3) | |
| 52 | |
| 2 | |
Communications Solutions | |
| 123 |
| 32.7 | |
| 108 |
| 28.7 | |
| 15 | |
| — | |
| 175 |
| 23.4 | |
| 151 |
| 20.2 | |
| 24 | |
| — | |
Total | | $ | 543 |
| 17.0 | % | $ | 352 |
| 11.0 | % | $ | 150 | | $ | 41 | | $ | 897 |
| 14.1 | % | $ | 550 |
| 8.6 | % | $ | 256 | | $ | 91 | |
Net sales decreased $217increased $543 million, or 6.4%17.0%, in the second quarter of fiscal 20202021 as compared to the second quarter of fiscal 2019.2020. The decreaseincrease in net sales resulted from organic net sales declinesgrowth of 5.4% and11.0%, the negativepositive impact of foreign currency translation of 1.8%4.7% due to the weakeningstrengthening of certain foreign currencies, partially offset byand net sales contributions of 1.3% from acquisitions of 0.8%.and a divestiture. In the second quarter of fiscal 2020,2021, our net sales declines includedin the Industrial Solutions segment reflected significant unfavorable impacts from the COVID-19 pandemic. Price erosion adversely affected organic net sales by $53$20 million in the second quarter of fiscal 2020.2021.
In the first six months of fiscal 2020,2021, net sales decreased $396increased $897 million, or 5.9%14.1%, as compared to the first six months of fiscal 20192020 due to organic net sales declinesgrowth of 5.1% and8.6%, the negativepositive impact of foreign currency translation of 1.5%4.0% due to the weakeningstrengthening of certain foreign currencies, partially offset byand net sales contributions of 1.5% from acquisitions and a divestiture. In the first six months of 0.7%. The unfavorable impacts of the COVID-19 pandemic were included infiscal 2021, our net sales declines in the first six months of fiscal 2020.Industrial Solutions segment reflected significant unfavorable impacts from the COVID-19 pandemic. Price erosion adversely affected organic net sales by $94$46 million in the first six months of fiscal 2020.2021.
See further discussion of net sales below under “Segment Results.”
Net Sales by Geographic Region. Our business operates in three geographic regions—EMEA, Asia–Pacific, Europe/Middle East/Africa (“EMEA”), and the Americas—and our results of operations are influenced by changes in foreign currency exchange rates. Increases or decreases in the value of the U.S. dollar, compared to other currencies, will directly affect our reported results as we translate those currencies into U.S. dollars at the end of each fiscal period.
Approximately 60% of our net sales were invoiced in currencies other than the U.S. dollar in the first six months of fiscal 2020.2021.
3523
The following table presents our net sales and the percentage of total net sales by geographic region(1):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the | | | For the | | | | For the | | | For the | | | ||||||||||||||||||||||||||||||||||||
| | Quarters Ended | | | Six Months Ended | | | | Quarters Ended | | | Six Months Ended | | | ||||||||||||||||||||||||||||||||||||
| | March 27, | | | March 29, | | | March 27, | | | March 29, | | | | March 26, | | | March 27, | | | March 26, | | | March 27, | | | ||||||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| ||||||||||||||||||||||||
| | ($ in millions) | | | | ($ in millions) | | | ||||||||||||||||||||||||||||||||||||||||||
Asia–Pacific | | $ | 1,336 |
| 36 | % | | $ | 991 |
| 31 | % | | $ | 2,629 |
| 36 | % | | $ | 2,104 |
| 33 | % | | |||||||||||||||||||||||||
EMEA | | $ | 1,188 | | 37 | % | | $ | 1,276 | | 38 | % | | $ | 2,285 | | 36 | % | | $ | 2,447 | | 36 | % | | | | 1,390 | | 37 | | | | 1,188 | | 37 | | | | 2,706 | | 37 | | | | 2,285 | | 36 | | |
Asia–Pacific | |
| 991 |
| 31 | | |
| 1,070 |
| 31 | | |
| 2,104 |
| 33 | | |
| 2,243 |
| 33 | | | |||||||||||||||||||||||||
Americas | |
| 1,016 |
| 32 | | |
| 1,066 |
| 31 | | |
| 1,974 |
| 31 | | |
| 2,069 |
| 31 | | | |
| 1,012 |
| 27 | | |
| 1,016 |
| 32 | | |
| 1,925 |
| 27 | | |
| 1,974 |
| 31 | | |
Total | | $ | 3,195 |
| 100 | % | | $ | 3,412 |
| 100 | % | | $ | 6,363 |
| 100 | % | | $ | 6,759 |
| 100 | % | | | $ | 3,738 |
| 100 | % | | $ | 3,195 |
| 100 | % | | $ | 7,260 |
| 100 | % | | $ | 6,363 |
| 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 March 27, 2020 | | Change in Net Sales for the Six Months Ended March 27, 2020 | | | Change in Net Sales for the Quarter Ended March 26, 2021 | | Change in Net Sales for the Six Months Ended March 26, 2021 | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | versus Net Sales for the Quarter Ended March 29, 2019 | | versus Net Sales for the Six Months Ended March 29, 2019 | | | versus Net Sales for the Quarter Ended March 27, 2020 | | versus Net Sales for the Six Months Ended March 27, 2020 | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | Net Sales | | Organic Net Sales | | | | | | | | Net Sales | | Organic Net Sales | | | | | | | | | Net Sales | | Organic Net Sales | | | | | Acquisitions | | Net Sales | | Organic Net Sales | | | | | Acquisitions | | ||||||||||||||||||||||||||
|
| Growth (Decline) |
| Growth (Decline) |
| Translation |
| Acquisitions |
| Growth (Decline) |
| Growth (Decline) | | Translation | | Acquisitions |
|
| Growth (Decline) |
| Growth (Decline) |
| Translation |
| (Divestiture) |
| Growth (Decline) |
| Growth (Decline) | | Translation | | (Divestiture) |
| ||||||||||||||||||||||||||||||||
| | ($ in millions) |
| | ($ in millions) |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Asia–Pacific | | $ | 345 | | 34.8 | % | $ | 283 | | 28.7 | % | $ | 65 | | $ | (3) | | $ | 525 |
| 25.0 | % | $ | 411 | | 19.6 | % | $ | 117 | | $ | (3) | | |||||||||||||||||||||||||||||||||
EMEA | | $ | (88) | | (6.9) | % | $ | (68) | | (5.3) | % | $ | (32) | | $ | 12 | | $ | (162) |
| (6.6) | % | $ | (122) |
| (4.9) | % | $ | (63) |
| $ | 23 | | |
| 202 |
| 17.0 | |
| 62 |
| 5.3 | |
| 102 | |
| 38 | |
| 421 |
| 18.4 | |
| 163 |
| 7.0 | |
| 175 | |
| 83 | |
Asia–Pacific | |
| (79) |
| (7.4) | |
| (61) |
| (5.7) | |
| (18) | |
| — | |
| (139) |
| (6.2) | |
| (114) |
| (5.1) | |
| (25) | |
| — | | |||||||||||||||||||||||||||||||||
Americas | |
| (50) |
| (4.7) | |
| (54) |
| (5.1) | |
| (10) | |
| 14 | |
| (95) |
| (4.6) | |
| (108) |
| (5.2) | |
| (15) | |
| 28 | | |
| (4) |
| (0.4) | |
| 7 |
| 0.7 | |
| (17) | |
| 6 | |
| (49) |
| (2.5) | |
| (24) |
| (1.2) | |
| (36) | |
| 11 | |
Total | | $ | (217) |
| (6.4) | % | $ | (183) |
| (5.4) | % | $ | (60) | | $ | 26 | | $ | (396) |
| (5.9) | % | $ | (344) |
| (5.1) | % | $ | (103) | | $ | 51 | | | $ | 543 |
| 17.0 | % | $ | 352 |
| 11.0 | % | $ | 150 | | $ | 41 | | $ | 897 |
| 14.1 | % | $ | 550 |
| 8.6 | % | $ | 256 | | $ | 91 | |
Cost of Sales and Gross Margin
The following table presents cost of sales and gross margin information:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the | | For the | | | For the | | | | | For the | | | | | ||||||||||||||||||||||||
| | Quarters Ended | | Six Months Ended | | | Quarters Ended | | | | | Six Months Ended | | | | | ||||||||||||||||||||||||
| | March 27, | | March 29, | | | | March 27, | | | March 29, | | | | | | March 26, | | March 27, | | | | March 26, | | March 27, | | | | ||||||||||||
|
| 2020 |
| 2019 |
| Change |
| 2020 |
|
| 2019 |
|
| Change |
|
| 2021 |
| 2020 |
| Change |
| 2021 |
| 2020 |
| Change |
| ||||||||||||
| | ($ in millions) | | | ($ in millions) | | ||||||||||||||||||||||||||||||||||
Cost of sales | | $ | 2,166 | | $ | 2,294 | | $ | (128) | | $ | 4,304 | | | $ | 4,527 | | | $ | (223) | | | $ | 2,528 | | $ | 2,166 | | $ | 362 | | $ | 4,904 | | $ | 4,304 | | $ | 600 | |
As a percentage of net sales | |
| 67.8 | % |
| 67.2 | % |
|
| |
| 67.6 | % | |
| 67.0 | % | |
|
| | |
| 67.6 | % |
| 67.8 | % |
|
| |
| 67.5 | % |
| 67.6 | % |
|
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross margin | | $ | 1,029 | | $ | 1,118 | | $ | (89) | | $ | 2,059 | | | $ | 2,232 | | | $ | (173) | | | $ | 1,210 | | $ | 1,029 | | $ | 181 | | $ | 2,356 | | $ | 2,059 | | $ | 297 | |
As a percentage of net sales | |
| 32.2 | % |
| 32.8 | % |
|
| |
| 32.4 | % | |
| 33.0 | % | |
|
| | |
| 32.4 | % |
| 32.2 | % |
|
| |
| 32.5 | % |
| 32.4 | % |
|
| |
Gross margin decreased $89increased $181 million and $173$297 million in the second quarter and first six months of fiscal 2020,2021, respectively, as compared to the same periods of fiscal 2019.2020. The decreasesincreases were primarily as a result of lowerhigher volume and, price erosion,to a lesser degree, positive foreign currency translation, lower material costs, and improved manufacturing productivity, partially offset by lower material costs. Gross margin as a percentage of net sales decreased to 32.2% in the second quarter of fiscal 2020 from 32.8% in the second quarter of fiscal 2019 and decreased to 32.4% in the first six months of fiscal 2020 from 33.0% in the same period of fiscal 2019.price erosion.
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 silver.palladium. We expect to purchase approximately 175200 million pounds of copper, 120,000 troy ounces
24
of gold, and 2.42.6 million troy ounces of silver, and 15,000 troy ounces of palladium in fiscal 2020.2021. The following table presents the average prices incurred related to copper, gold, silver, and silver:palladium:
| | | | | | | | | | | | | | | |
| | | | For the | | For the | | ||||||||
| | | | Quarters Ended | | Six Months Ended | | ||||||||
| | | | March 27, | | March 29, | | March 27, | | March 29, | | ||||
|
| Measure |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
Copper |
| Lb. | | $ | 2.78 | | $ | 3.01 |
| $ | 2.81 | | $ | 2.92 |
|
Gold |
| Troy oz. | |
| 1,376 | |
| 1,312 |
|
| 1,365 | |
| 1,303 |
|
Silver |
| Troy oz. | |
| 16.17 | |
| 16.60 |
|
| 16.21 | |
| 16.60 |
|
36
| | | | | | | | | | | | | | | |
| | | | For the | | For the | | ||||||||
| | | | Quarters Ended | | Six Months Ended | | ||||||||
| | | | March 26, | | March 27, | | March 26, | | March 27, | | ||||
|
| Measure |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
Copper |
| Lb. | | $ | 2.95 | | $ | 2.78 |
| $ | 2.93 | | $ | 2.81 |
|
Gold |
| Troy oz. | |
| 1,659 | |
| 1,376 |
|
| 1,629 | |
| 1,365 |
|
Silver | | Troy oz. | | | 20.48 | | | 16.17 | | | 20.11 | | | 16.21 | |
Palladium |
| Troy oz. | |
| 2,114 | |
| 2,270 |
|
| 2,125 | |
| 2,032 |
|
Operating Expenses
The following table presents operating expense information:
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the | | For the | | ||||||||||||||||||
| | Quarters Ended | | Six Months Ended | | ||||||||||||||||||
| | March 27, | | | March 29, | | | | | March 27, | | | March 29, | | | | | ||||||
|
| 2020 |
|
| 2019 |
|
| Change |
| 2020 |
|
| 2019 |
|
| Change |
| ||||||
| | ($ in millions) | | ||||||||||||||||||||
Selling, general, and administrative expenses | | $ | 352 | | | $ | 373 | | | $ | (21) | | $ | 719 | | | $ | 762 | | | $ | (43) | |
As a percentage of net sales | |
| 11.0 | % | |
| 10.9 | % | |
|
| |
| 11.3 | % | |
| 11.3 | % | |
|
| |
| | | | | | | | | | | | | | | | | | | | | | | |
Restructuring and other charges, net | | $ | 22 | | | $ | 42 | | | $ | (20) | | $ | 46 | | | $ | 117 | | | $ | (71) | |
Impairment of goodwill | | | 900 | | | | — | | | | 900 | | | 900 | | | | — | | | | 900 | |
| | | | | | | | | | | | | | | | | | | |
| | For the | | | | | For the | | | | | ||||||||
| | Quarters Ended | | | | | Six Months Ended | | | | | ||||||||
| | March 26, | | March 27, | | | | March 26, | | March 27, | | | | ||||||
|
| 2021 |
| 2020 |
| Change |
| 2021 |
| 2020 |
| Change |
| ||||||
| | ($ in millions) | | ||||||||||||||||
Selling, general, and administrative expenses | | $ | 401 | | $ | 352 | | $ | 49 | | $ | 762 | | $ | 719 | | $ | 43 | |
As a percentage of net sales | |
| 10.7 | % |
| 11.0 | % |
|
| |
| 10.5 | % |
| 11.3 | % |
|
| |
| | | | | | | | | | | | | | | | | | | |
Restructuring and other charges, net | | $ | 17 | | $ | 22 | | $ | (5) | | $ | 184 | | $ | 46 | | $ | 138 | |
Impairment of goodwill | | | — | | | 900 | | | (900) | | | — | | | 900 | | | (900) | |
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses decreased $21increased $49 million and $43 million in the second quarter of fiscal 2020 from the second quarter of fiscal 2019 due primarily to receipt of a lease termination incentive. In theand first six months of fiscal 2020, selling, general, and administrative expenses decreased $43 million2021, respectively, from the same period of fiscal 2019 due primarily to receipt of a lease termination incentive, reduced selling expenses, and cost control measures and savings attributable to restructuring actions. Selling, general, and administrative expenses as a percentage of net sales were 11.0% and 10.9% in the second quartersperiods of fiscal 2020 and 2019, respectively, and 11.3% in both the first six monthsprimarily as a result of fiscal 2020 and 2019.higher incentive compensation costs due to improved operational performance.
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 20202021 and 2019,2020, we initiated restructuring programs associated with footprint consolidation and structural improvements across all segments. In connection with these initiatives, wesegments to optimize our manufacturing footprint and improve the cost structure of the organization. We incurred net restructuring charges of $46$160 million during the first six months of fiscal 2020,2021, of which $43$153 million related to the fiscal 20202021 restructuring program. Annualized cost savings related to the fiscal 20202021 actions commenced during the first six months of fiscal 20202021 are expected to be approximately $45$60 million and are expected to be realized by the end of fiscal 2022.2023. Cost savings will be reflected primarily in cost of sales and selling, general, and administrative expenses. For fiscal 2020,2021, we expect total restructuring charges to be approximately $200 million to $250 million and total spending, which will be funded with cash from operations, to be approximately $220$230 million.
See Note 2 to the Condensed Consolidated Financial Statements for additional information regarding net restructuring and other charges.
Impairment of Goodwill.During the second quarter of fiscal 2020, we recorded a goodwill impairment charge of $900 million related to the Sensors reporting unit in our Transportation Solutions segment. See Note 6 to the Condensed Consolidated Financial Statements for additional information regarding the impairment
25
Operating Income (Loss)
The following table presents operating income (loss) and operating margin information:
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the | | For the | | ||||||||||||||||||
| | Quarters Ended | | Six Months Ended | | ||||||||||||||||||
| | March 27, | | | March 29, | | | | | March 27, | | | March 29, | | | | | ||||||
|
| 2020 |
|
| 2019 |
|
| Change |
| 2020 |
|
| 2019 |
|
| Change |
| ||||||
| | ($ in millions) | | ||||||||||||||||||||
Operating income (loss) | | $ | (415) | | | $ | 530 | | | $ | (945) | | $ | 56 | | | $ | 1,014 | | | $ | (958) | |
Operating margin | |
| (13.0) | % | |
| 15.5 | % | |
|
| |
| 0.9 | % | |
| 15.0 | % | |
|
| |
37
| | | | | | | | | | | | | | | | | | | |
| | For the | | | | | For the | | | | | ||||||||
| | Quarters Ended | | | | | Six Months Ended | | | | | ||||||||
| | March 26, | | March 27, | | | | March 26, | | March 27, | | | | ||||||
|
| 2021 |
| 2020 |
| Change |
| 2021 |
| 2020 |
| Change |
| ||||||
| | ($ in millions) | | ||||||||||||||||
Operating income (loss) | | $ | 612 | | $ | (415) | | $ | 1,027 | | $ | 1,060 | | $ | 56 | | $ | 1,004 | |
Operating margin | |
| 16.4 | % |
| (13.0) | % |
|
| |
| 14.6 | % |
| 0.9 | % |
|
| |
Operating income (loss) included the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the | | For the | | | For the | | For the | | ||||||||||||||||
| | Quarters Ended | | Six Months Ended | | | Quarters Ended | | Six Months Ended | | ||||||||||||||||
| | March 27, | | March 29, | | March 27, | | March 29, | | | March 26, | | March 27, | | March 26, | | March 27, | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||||||
| | (in millions) | | | (in millions) | | ||||||||||||||||||||
Acquisition-related charges: |
| |
|
| |
|
| |
|
| |
| |
| |
|
| |
|
| |
|
| |
| |
Acquisition and integration costs | | $ | 12 | | $ | 7 | | $ | 19 | | $ | 12 | | | $ | 6 | | $ | 12 | | $ | 14 | | $ | 19 | |
Charges associated with the amortization of acquisition-related fair value adjustments | |
| — | |
| 2 | |
| — | |
| 3 | | |
| 2 | |
| — | |
| 3 | |
| — | |
| |
| 12 | |
| 9 | |
| 19 | |
| 15 | | |
| 8 | |
| 12 | |
| 17 | |
| 19 | |
Restructuring and other charges, net | |
| 22 | |
| 42 | |
| 46 | |
| 117 | | |
| 17 | |
| 22 | |
| 184 | |
| 46 | |
Impairment of goodwill | | | 900 | | | — | | | 900 | | | — | | | | — | | | 900 | | | — | | | 900 | |
Total | | $ | 934 | | $ | 51 | | $ | 965 | | $ | 132 | | | $ | 25 | | $ | 934 | | $ | 201 | | $ | 965 | |
See discussion of operating income (loss) below under “Segment Results.”
Non-Operating Items
The following table presents select non-operating information:
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the | | For the | | ||||||||||||||||||
| | Quarters Ended | | Six Months Ended | | ||||||||||||||||||
| | March 27, | | | March 29, | | | | | March 27, | | | March 29, | | | | | ||||||
|
| 2020 |
|
| 2019 |
|
| Change |
| 2020 |
|
| 2019 |
|
| Change |
| ||||||
| | ($ in millions) | | ||||||||||||||||||||
Interest expense | | $ | 11 | | | $ | 15 | | | $ | (4) | | $ | 23 | | | $ | 42 | | | $ | (19) | |
| | | | | | | | | | | | | | | | | | | | | | | |
Income tax expense | | | 42 | | | | 91 | | | | (49) | | | 489 | | | | 169 | | | | 320 | |
Effective tax rate | |
| (10.2) | % | |
| 17.5 | % | |
|
| |
| 815.0 | % | |
| 17.2 | % | |
|
| |
| | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from discontinued operations, net of income taxes | | $ | (4) | | | $ | 10 | | | $ | (14) | | $ | (1) | | | $ | (97) | | | $ | 96 | |
Interest Expense. Interest expense decreased $19 million in the first six months of fiscal 2020 as compared to the same period of fiscal 2019 due primarily to the cross-currency swap program that hedges our net investment in certain foreign operations. Under the terms of these contracts, we receive interest in U.S. dollars at a weighted-average rate of 2.62% per annum and pay no interest. See Note 11 to the Condensed Consolidated Financial Statements for additional information regarding our cross-currency swap program.
| | | | | | | | | | | | | | | | | | | |
| | For the | | | | | For the | | | | | ||||||||
| | Quarters Ended | | | | | Six Months Ended | | | | | ||||||||
| | March 26, | | March 27, | | | | March 26, | | March 27, | | | | ||||||
|
| 2021 |
| 2020 |
| Change |
| 2021 |
| 2020 |
| Change |
| ||||||
| | ($ in millions) | | ||||||||||||||||
Income tax expense | | $ | 106 | | $ | 42 | | $ | 64 | | $ | 166 | | $ | 489 | | $ | (323) | |
Effective tax rate | |
| 17.3 | % |
| (10.2) | % |
|
| |
| 15.9 | % |
| 815.0 | % |
|
| |
Income Taxes. See Note 1312 to the Condensed Consolidated Financial Statements for discussion of items impacting income tax expense and the effective tax rate for the second quarters and first six months of fiscal 2021 and 2020, and 2019, including termination of the Tax Sharing Agreement and the Switzerland Federal Act on Tax Reform and AHV Financing.
Income (Loss) from Discontinued Operations, Net of Income Taxes. DuringFinancing and the first six months of fiscal 2019, we sold our Subsea Communications (“SubCom”) business for net cash proceeds of $297 million and incurred a pre-tax loss on sale of $86 million. The SubCom business met the held for sale and discontinued operations criteria and was reported as such in all periods presented on the Condensed Consolidated Financial Statements. Prior to reclassification to discontinued operations, the SubCom business was included in the Communications Solutions segment. The net salestermination of the business were $41 millionTax Sharing Agreement in the first six months of fiscal 2019 which represented one month of activity. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding discontinued operations.2020.
3826
Segment Results
Transportation Solutions
Net Sales. The following table presents the Transportation Solutions segment’s net sales and the percentage of total net sales by industry end market(1):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the | | | For the | | | | For the | | | For the | | | | ||||||||||||||||||||||||||||||||||||
| | Quarters Ended | | | Six Months Ended | | | | Quarters Ended | | | Six Months Ended | | | | ||||||||||||||||||||||||||||||||||||
| | March 27, | | | March 29, | | | March 27, | | | March 29, | | | | March 26, | | | March 27, | | | March 26, | | | March 27, | | | | ||||||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
|
| ||||||||||||||||||||||||
| | ($ in millions) | | | | ($ in millions) | | | | ||||||||||||||||||||||||||||||||||||||||||
Automotive | | $ | 1,365 | | 73 | % | | $ | 1,425 | | 72 | % | | $ | 2,770 | | 74 | % | | $ | 2,894 | | 73 | % | | | $ | 1,630 |
| 71 | % | | $ | 1,365 |
| 73 | % | | $ | 3,259 | | 72 | % | | $ | 2,770 | | 74 | % | | |
Commercial transportation | |
| 294 |
| 16 | | |
| 324 |
| 17 | | |
| 552 |
| 15 | | |
| 621 |
| 16 | | | |
| 382 |
| 17 | | |
| 294 |
| 16 | | |
| 713 |
| 16 | | |
| 552 |
| 15 | | | |
Sensors | |
| 198 |
| 11 | | |
| 222 |
| 11 | | |
| 403 |
| 11 | | |
| 442 |
| 11 | | | |
| 275 |
| 12 | | |
| 198 |
| 11 | | |
| 539 |
| 12 | | |
| 403 |
| 11 | | | |
Total | | $ | 1,857 |
| 100 | % | | $ | 1,971 |
| 100 | % | | $ | 3,725 |
| 100 | % | | $ | 3,957 |
| 100 | % | | | $ | 2,287 |
| 100 | % | | $ | 1,857 |
| 100 | % | | $ | 4,511 |
| 100 | % | | $ | 3,725 |
| 100 | % | |
(1) | Industry end market information is presented consistently with our internal management reporting and may be revised periodically as management deems necessary. |
The following table provides an analysis of the change in the Transportation Solutions segment’s net sales by industry end market:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Change in Net Sales for the Quarter Ended March 27, 2020 | | Change in Net Sales for the Six Months Ended March 27, 2020 | | ||||||||||||||||||||||||||||
| | versus Net Sales for the Quarter Ended March 29, 2019 | | versus Net Sales for the Six Months Ended March 29, 2019 | | ||||||||||||||||||||||||||||
|
| Net Sales |
| Organic Net Sales |
| | |
| | |
| Net Sales |
| Organic Net Sales |
| | |
| | |
| ||||||||||||
| | Growth (Decline) | | Growth (Decline) | | Translation | | Acquisitions | | Growth (Decline) | | Growth (Decline) | | Translation | | Acquisitions |
| ||||||||||||||||
| | ($ in millions) |
| ||||||||||||||||||||||||||||||
Automotive | | $ | (60) | | (4.2) | % | $ | (29) | | (2.1) | % | $ | (31) |
| $ | — | | $ | (124) |
| (4.3) | % | $ | (72) |
| (2.5) | % | $ | (52) | | $ | — | |
Commercial transportation | |
| (30) |
| (9.3) | |
| (36) |
| (11.1) | |
| (8) | |
| 14 | |
| (69) |
| (11.1) | |
| (81) |
| (13.2) | |
| (15) | |
| 27 | |
Sensors | |
| (24) |
| (10.8) | |
| (33) |
| (14.9) | |
| (3) | |
| 12 | |
| (39) |
| (8.8) | |
| (58) |
| (13.1) | |
| (5) | |
| 24 | |
Total | | $ | (114) |
| (5.8) | % | $ | (98) |
| (5.0) | % | $ | (42) | | $ | 26 | | $ | (232) |
| (5.9) | % | $ | (211) |
| (5.3) | % | $ | (72) | | $ | 51 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Change in Net Sales for the Quarter Ended March 26, 2021 | | Change in Net Sales for the Six Months Ended March 26, 2021 | | ||||||||||||||||||||||||||||
| | versus Net Sales for the Quarter Ended March 27, 2020 | | versus Net Sales for the Six Months Ended March 27, 2020 | | ||||||||||||||||||||||||||||
|
| Net Sales |
| Organic Net Sales |
| | |
| | |
| Net Sales |
| Organic Net Sales |
| | |
| | |
| ||||||||||||
| | Growth | | Growth | | Translation | | Acquisition | | Growth | | Growth | | Translation | | Acquisition |
| ||||||||||||||||
| | ($ in millions) |
| ||||||||||||||||||||||||||||||
Automotive | | $ | 265 | | 19.4 | % | $ | 184 | | 13.5 | % | $ | 81 |
| $ | — | | $ | 489 | | 17.7 | % | $ | 345 | | 12.4 | % | $ | 144 |
| $ | — | |
Commercial transportation | |
| 88 |
| 29.9 | |
| 73 |
| 24.8 | |
| 15 | |
| — | |
| 161 |
| 29.2 | |
| 138 |
| 24.9 | |
| 23 | |
| — | |
Sensors | |
| 77 |
| 38.9 | |
| 27 |
| 13.4 | |
| 8 | |
| 42 | |
| 136 |
| 33.7 | |
| 34 |
| 8.2 | |
| 13 | |
| 89 | |
Total | | $ | 430 |
| 23.2 | % | $ | 284 |
| 15.3 | % | $ | 104 | | $ | 42 | | $ | 786 |
| 21.1 | % | $ | 517 |
| 13.8 | % | $ | 180 | | $ | 89 | |
Net sales in the Transportation Solutions segment decreased $114increased $430 million, or 5.8%23.2%, in the second quarter of fiscal 20202021 from the second quarter of fiscal 20192020 due to organic net sales declinesgrowth of 5.0% and15.3%, the negativepositive impact of foreign currency translation of 2.1%5.6%, partially offset byand sales contributions from acquisitionsan acquisition of 1.3%2.3%. In the second quarter of fiscal 2020, our net sales declines included significant unfavorable impacts from the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
● | Automotive—Our organic net sales |
● | Commercial transportation—Our organic net sales |
● | Sensors—Our organic net sales |
In the first six months of fiscal 2020,2021, net sales in the Transportation Solutions segment decreased $232increased $786 million, or 5.9%21.1%, as compared to the first six months of fiscal 20192020 as a result of organic net sales declinesgrowth of 5.3% and13.8%, the negativepositive impact of foreign currency translation of 1.9%4.9%, partially offset byand sales contributions from acquisitionsan acquisition of 1.3%2.4%. Net sales declines in the
39
first six months of fiscal 2020 included the unfavorable impacts of the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
● | Automotive—Our organic net sales |
27
the Asia–Pacific and EMEA regions |
● | Commercial transportation—Our organic net sales |
● | Sensors—Our organic net sales |
Operating Income (Loss). The following table presents the Transportation Solutions segment’s operating income (loss) and operating margin information:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the | | For the | | | For the | | | | | For the | | | | | ||||||||||||||||||||||||||
| | Quarters Ended | | Six Months Ended | | | Quarters Ended | | | | | Six Months Ended | | | | | ||||||||||||||||||||||||||
| | March 27, | | | March 29, | | | | | | March 27, | | | March 29, | | | | | | | March 26, | | March 27, | | | | | March 26, | | March 27, | | | | | ||||||||
|
| 2020 |
|
| 2019 |
|
| Change |
| 2020 |
|
| 2019 |
|
| Change |
|
| 2021 |
| 2020 |
| Change |
| 2021 |
| 2020 |
| Change |
| ||||||||||||
| | ($ in millions) | | | ($ in millions) | | ||||||||||||||||||||||||||||||||||||
Operating income (loss) | | $ | (606) | | | $ | 316 | | | $ | (922) | | $ | (290) | | | $ | 648 | | | $ | (938) | | | $ | 398 | | $ | (606) | | $ | 1,004 | | $ | 706 | | $ | (290) | | $ | 996 | |
Operating margin | |
| (32.6) | % | |
| 16.0 | % | |
| | |
| (7.8) | % | |
| 16.4 | % | |
| | | |
| 17.4 | % |
| (32.6) | % |
| | |
| 15.7 | % |
| (7.8) | % |
| | |
Operating income (loss) in the Transportation Solutions segment decreased $922increased $1,004 million and $938$996 million in the second quarter and first six months of fiscal 2020,2021, respectively, as compared to the same periods of fiscal 2019. The Transportation Solutions segment’s2020. Excluding the items below, operating income (loss) included the following:
| | | | | | | | | | | | | |
| | For the | | For the | | ||||||||
| | Quarters Ended | | Six Months Ended | | ||||||||
| | March 27, | | March 29, | | March 27, | | March 29, | | ||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | (in millions) | | ||||||||||
Acquisition and integration costs | | $ | 10 | | $ | 4 | | $ | 15 | | $ | 7 | |
Restructuring and other charges, net | | | 18 | | | 24 | |
| 22 | |
| 45 | |
Impairment of goodwill | | | 900 | | | — | | | 900 | | | — | |
Total | | $ | 928 | | $ | 28 | | $ | 937 | | $ | 52 | |
Excluding these items, operating income decreased in the second quarter and first six months of fiscal 2020 as compared to the same periods of fiscal 2019increased primarily as a result of lower volume and price erosion, partially offset by lower material costs and improved manufacturing productivity.higher volume.
| | | | | | | | | | | | | |
| | For the | | For the | | ||||||||
| | Quarters Ended | | Six Months Ended | | ||||||||
| | March 26, | | March 27, | | March 26, | | March 27, | | ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
| | (in millions) | | ||||||||||
Acquisition-related charges: |
| |
|
| |
|
| |
|
| |
| |
Acquisition and integration costs | | $ | 3 | | $ | 10 | | $ | 7 | | $ | 15 | |
Charges associated with the amortization of acquisition-related fair value adjustments | |
| 2 | |
| — | |
| 3 | |
| — | |
| |
| 5 | |
| 10 | |
| 10 | |
| 15 | |
Restructuring and other charges, net | | | 10 | | | 18 | |
| 128 | |
| 22 | |
Impairment of goodwill | | | — | | | 900 | | | — | | | 900 | |
Total | | $ | 15 | | $ | 928 | | $ | 138 | | $ | 937 | |
40
Industrial Solutions
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):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the | | | For the | | | | For the | | | For the | | | ||||||||||||||||||||||||||||||||||||
| | Quarters Ended | | | Six Months Ended | | | | Quarters Ended | | | Six Months Ended | | | ||||||||||||||||||||||||||||||||||||
| | March 27, | | | March 29, | | | March 27, | | | March 29, | | | | March 26, | | | March 27, | | | March 26, | | | March 27, | | | ||||||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| ||||||||||||||||||||||||
| | ($ in millions) | | | | ($ in millions) | | | ||||||||||||||||||||||||||||||||||||||||||
Aerospace, defense, oil, and gas | | $ | 318 | | 33 | % | | $ | 331 | | 33 | % | | $ | 627 | | 33 | % | | $ | 616 | | 32 | % | | | $ | 267 | | 28 | % | | $ | 318 | | 33 | % | | $ | 517 | | 28 | % | | $ | 627 | | 33 | % | |
Industrial equipment | |
| 280 |
| 29 | | |
| 326 |
| 32 | | |
| 543 |
| 29 | | |
| 641 |
| 33 | | | |
| 339 |
| 36 | | |
| 280 |
| 29 | | |
| 634 |
| 35 | | |
| 543 |
| 29 | | |
Medical | | | 186 |
| 19 | | | | 176 | | 18 | | | | 365 | | 19 | | | | 344 | | 18 | | | | | 161 |
| 17 | | | | 186 | | 19 | | | | 317 | | 17 | | | | 365 | | 19 | | |
Energy | |
| 178 |
| 19 | | |
| 174 |
| 17 | | |
| 354 |
| 19 | | |
| 334 |
| 17 | | | |
| 185 |
| 19 | | |
| 178 |
| 19 | | |
| 357 |
| 20 | | |
| 354 |
| 19 | | |
Total | | $ | 962 |
| 100 | % | | $ | 1,007 |
| 100 | % | | $ | 1,889 |
| 100 | % | | $ | 1,935 |
| 100 | % | | | $ | 952 |
| 100 | % | | $ | 962 |
| 100 | % | | $ | 1,825 |
| 100 | % | | $ | 1,889 |
| 100 | % | |
(1) | Industry end market information is presented consistently with our internal management reporting and may be revised periodically as management deems necessary. |
28
The following table provides an analysis of the change in the Industrial Solutions segment’s net sales by industry end market:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Change in Net Sales for the Quarter Ended March 27, 2020 | | Change in Net Sales for the Six Months Ended March 27, 2020 | | ||||||||||||||||||||||
| | versus Net Sales for the Quarter Ended March 29, 2019 | | versus Net Sales for the Six Months Ended March 29, 2019 | | ||||||||||||||||||||||
| | Net Sales | | Organic Net Sales | | | | | Net Sales | | Organic Net Sales | | | | | ||||||||||||
|
| Growth (Decline) |
| Growth (Decline) |
| Translation |
| Growth (Decline) |
| Growth (Decline) |
| Translation |
| ||||||||||||||
| | ($ in millions) |
| ||||||||||||||||||||||||
Aerospace, defense, oil, and gas | | $ | (13) | | (3.9) | % | $ | (10) | | (2.9) | % | $ | (3) | | $ | 11 |
| 1.8 | % | $ | 17 |
| 2.8 | % | $ | (6) | |
Industrial equipment | |
| (46) |
| (14.1) | |
| (40) |
| (12.5) | |
| (6) | |
| (98) |
| (15.3) | |
| (87) |
| (13.7) | |
| (11) | |
Medical | | | 10 |
| 5.7 | |
| 10 |
| 5.7 | |
| — | | | 21 |
| 6.1 | |
| 22 |
| 6.3 | |
| (1) | |
Energy | |
| 4 |
| 2.3 | |
| 10 |
| 5.6 | |
| (6) | |
| 20 |
| 6.0 | |
| 29 |
| 8.7 | |
| (9) | |
Total | | $ | (45) |
| (4.5) | % | $ | (30) |
| (3.0) | % | $ | (15) | | $ | (46) |
| (2.4) | % | $ | (19) |
| (1.0) | % | $ | (27) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Change in Net Sales for the Quarter Ended March 26, 2021 | | Change in Net Sales for the Six Months Ended March 26, 2021 | | ||||||||||||||||||||||||||||
| | versus Net Sales for the Quarter Ended March 27, 2020 | | versus Net Sales for the Six Months Ended March 27, 2020 | | ||||||||||||||||||||||||||||
| | Net Sales | | Organic Net Sales | | | | | Acquisition | | Net Sales | | Organic Net Sales | | | | | Acquisition | | ||||||||||||||
|
| Growth (Decline) |
| Growth (Decline) |
| Translation |
| (Divestiture) |
| Growth (Decline) |
| Growth (Decline) |
| Translation |
| (Divestiture) |
| ||||||||||||||||
| | ($ in millions) |
| ||||||||||||||||||||||||||||||
Aerospace, defense, oil, and gas | | $ | (51) | | (16.0) | % | $ | (66) | | (20.8) | % | $ | 7 | | $ | 8 | | $ | (110) | | (17.5) | % | $ | (134) | | (21.4) | % | $ | 13 | | $ | 11 | |
Industrial equipment | |
| 59 |
| 21.1 | |
| 44 |
| 15.7 | |
| 15 | |
| — | |
| 91 |
| 16.8 | |
| 65 |
| 11.8 | |
| 26 | |
| — | |
Medical | | | (25) |
| (13.4) | |
| (25) |
| (13.4) | |
| — | |
| — | | | (48) |
| (13.2) | |
| (49) |
| (13.5) | |
| 1 | |
| — | |
Energy | |
| 7 |
| 3.9 | |
| 7 |
| 4.0 | |
| 9 | |
| (9) | |
| 3 |
| 0.8 | |
| — |
| 0.1 | |
| 12 | |
| (9) | |
Total | | $ | (10) |
| (1.0) | % | $ | (40) |
| (4.2) | % | $ | 31 | | $ | (1) | | $ | (64) |
| (3.4) | % | $ | (118) |
| (6.3) | % | $ | 52 | | $ | 2 | |
In the Industrial Solutions segment, net sales decreased $45$10 million, or 4.5%1.0%, in the second quarter of fiscal 20202021 as compared to the second quarter of fiscal 20192020 due primarily to organic net sales declines of 3.0% and4.2%, partially offset by the negativepositive impact of foreign currency translation of 1.5%3.2%. Net sales declines in the second quarter of fiscal 20202021 included significant unfavorable impacts from the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
● | Aerospace, defense, oil, and gas—Our organic net sales decreased |
● | Industrial equipment—Our organic net sales |
● | Medical—Our organic net sales |
● | Energy—Our organic net sales increased |
41
In the first six months of fiscal 2020,2021, net sales in the Industrial Solutions segment decreased $46$64 million, or 2.4%3.4%, as compared to the same periodfirst six months of fiscal 20192020 primarily as a result of organic net sales declines of 6.3%, partially offset by the negativepositive impact of foreign currency translation of 1.4% and organic2.8%. Our net sales declines of 1.0%. Thereflected significant unfavorable impacts of the COVID-19 pandemic were included in net sales declines in the first six months of fiscal 2020.2021. Our organic net sales by industry end market were as follows:
● | Aerospace, defense, oil, and gas—Our organic net sales |
● | Industrial equipment—Our organic net sales |
● | Medical—Our organic net sales |
● | Energy—Our organic net sales |
29
Operating Income. The following table presents the Industrial Solutions segment’s operating income and operating margin information:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the | | For the | | | For the | | | | | For the | | | | | ||||||||||||||||||||||||||
| | Quarters Ended | | Six Months Ended | | | Quarters Ended | | | | | Six Months Ended | | | | | ||||||||||||||||||||||||||
| | March 27, | | | March 29, | | | | | | March 27, | | | March 29, | | | | | | | March 26, | | March 27, | | | | | March 26, | | March 27, | | | | | ||||||||
|
| 2020 |
|
| 2019 |
|
| Change |
| 2020 |
|
| 2019 |
|
| Change |
|
| 2021 |
| 2020 |
| Change |
| 2021 |
| 2020 |
| Change |
| ||||||||||||
| | ($ in millions) | | | ($ in millions) | | ||||||||||||||||||||||||||||||||||||
Operating income | | $ | 142 | | | $ | 137 | | | $ | 5 | | $ | 257 | | | $ | 237 | | | $ | 20 | | | $ | 111 | | $ | 142 | | $ | (31) | | $ | 187 | | $ | 257 | | $ | (70) | |
Operating margin | |
| 14.8 | % | |
| 13.6 | % | |
|
| |
| 13.6 | % | |
| 12.2 | % | |
|
| | |
| 11.7 | % |
| 14.8 | % |
|
| |
| 10.2 | % |
| 13.6 | % |
|
| |
Operating income in the Industrial Solutions segment increased $5decreased $31 million and $20$70 million in the second quarter and first six months of fiscal 2020,2021, respectively, as compared to the same periods of fiscal 2019. The Industrial Solutions segment’s operating income included2020. Excluding the following:
| | | | | | | | | | | | | |
| | For the | | For the | | ||||||||
| | Quarters Ended | | Six Months Ended | | ||||||||
| | March 27, | | March 29, | | March 27, | | March 29, | | ||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | (in millions) | | ||||||||||
Acquisition-related charges: |
| |
|
| |
|
| |
|
| |
|
|
Acquisition and integration costs | | $ | 2 | | $ | 3 | | $ | 4 | | $ | 5 | |
Charges associated with the amortization of acquisition-related fair value adjustments | |
| — | |
| 2 | |
| — | |
| 3 | |
| |
| 2 | |
| 5 | |
| 4 | |
| 8 | |
Restructuring and other charges, net | |
| 1 | |
| 17 | |
| 16 | |
| 52 | |
Total | | $ | 3 | | $ | 22 | | $ | 20 | | $ | 60 | |
Excluding these items below, operating income decreased in the second quarter and first six months of fiscal 2020 as compareddue primarily to the same periods of fiscal 2019 primarily as a result of lower volume and price erosion, partially offset by lower material costs.volume.
42
| | | | | | | | | | | | | |
| | For the | | For the | | ||||||||
| | Quarters Ended | | Six Months Ended | | ||||||||
| | March 26, | | March 27, | | March 26, | | March 27, | | ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
| | (in millions) | | ||||||||||
Acquisition and integration costs | | $ | 3 | | $ | 2 | | $ | 7 | | $ | 4 | |
Restructuring and other charges, net | |
| 5 | |
| 1 | |
| 43 | |
| 16 | |
Total | | $ | 8 | | $ | 3 | | $ | 50 | | $ | 20 | |
Communications Solutions
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):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the | | | For the | | | | For the | | | For the | | | ||||||||||||||||||||||||||||||||||||
| | Quarters Ended | | | Six Months Ended | | | | Quarters Ended | | | Six Months Ended | | | ||||||||||||||||||||||||||||||||||||
| | March 27, | | | March 29, | | | March 27, | | | March 29, | | | | March 26, | | | March 27, | | | March 26, | | | March 27, | | | ||||||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| ||||||||||||||||||||||||
| | ($ in millions) | | | | ($ in millions) | | | ||||||||||||||||||||||||||||||||||||||||||
Data and devices | | $ | 218 | | 58 | % | | $ | 251 | | 58 | % | | $ | 437 | | 58 | % | | $ | 508 | | 59 | % | | | $ | 278 | | 56 | % | | $ | 218 | | 58 | % | | $ | 512 | | 55 | % | | $ | 437 | | 58 | % | |
Appliances | |
| 158 |
| 42 | | |
| 183 |
| 42 | | |
| 312 |
| 42 | | |
| 359 |
| 41 | | | |
| 221 |
| 44 | | |
| 158 |
| 42 | | |
| 412 |
| 45 | | |
| 312 |
| 42 | | |
Total | | $ | 376 |
| 100 | % | | $ | 434 |
| 100 | % | | $ | 749 |
| 100 | % | | $ | 867 |
| 100 | % | | | $ | 499 |
| 100 | % | | $ | 376 |
| 100 | % | | $ | 924 |
| 100 | % | | $ | 749 |
| 100 | % | |
(1) | Industry end market information is presented consistently with our internal management reporting and may be revised periodically as management deems necessary. |
The following table provides an analysis of the change in the Communications Solutions segment’s net sales by industry end market:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Change in Net Sales for the Quarter Ended March 27, 2020 | | Change in Net Sales for the Six Months Ended March 27, 2020 | | ||||||||||||||||||||||
| | versus Net Sales for the Quarter Ended March 29, 2019 | | versus Net Sales for the Six Months Ended March 29, 2019 | | ||||||||||||||||||||||
|
| Net Sales |
| Organic Net Sales |
| | |
| Net Sales |
| Organic Net Sales |
| | |
| ||||||||||||
| | Growth (Decline) | | Growth (Decline) | | Translation | | Growth (Decline) | | Growth (Decline) | | Translation | | ||||||||||||||
| | ($ in millions) | | ||||||||||||||||||||||||
Data and devices | | $ | (33) | | (13.1) | % | $ | (33) | | (13.1) | % | $ | — | | $ | (71) |
| (14.0) | % | $ | (71) |
| (14.0) | % | $ | — | |
Appliances | |
| (25) |
| (13.7) | |
| (22) |
| (11.9) | |
| (3) | |
| (47) |
| (13.1) | |
| (43) |
| (11.7) | |
| (4) | |
Total | | $ | (58) |
| (13.4) | % | $ | (55) |
| (12.6) | % | $ | (3) | | $ | (118) |
| (13.6) | % | $ | (114) |
| (13.1) | % | $ | (4) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Change in Net Sales for the Quarter Ended March 26, 2021 | | Change in Net Sales for the Six Months Ended March 26, 2021 | | ||||||||||||||||||||||
| | versus Net Sales for the Quarter Ended March 27, 2020 | | versus Net Sales for the Six Months Ended March 27, 2020 | | ||||||||||||||||||||||
|
| Net Sales |
| Organic Net Sales |
| | |
| Net Sales |
| Organic Net Sales |
| | |
| ||||||||||||
| | Growth | | Growth | | Translation | | Growth | | Growth | | Translation | | ||||||||||||||
| | ($ in millions) | | ||||||||||||||||||||||||
Data and devices | | $ | 60 | | 27.5 | % | $ | 52 | | 24.0 | % | $ | 8 | | $ | 75 | | 17.2 | % | $ | 62 | | 14.4 | % | $ | 13 | |
Appliances | |
| 63 |
| 39.9 | |
| 56 |
| 35.3 | |
| 7 | |
| 100 |
| 32.1 | |
| 89 |
| 28.3 | |
| 11 | |
Total | | $ | 123 |
| 32.7 | % | $ | 108 |
| 28.7 | % | $ | 15 | | $ | 175 |
| 23.4 | % | $ | 151 |
| 20.2 | % | $ | 24 | |
30
Net sales in the Communications Solutions segment decreased $58increased $123 million, or 13.4%32.7%, in the second quarter of fiscal 20202021 as compared to the second quarter of fiscal 20192020 due primarily to organic net sales declinesgrowth of 12.6%28.7%. In the second quarter of fiscal 2020, the unfavorable impacts of the COVID-19 pandemic were included in our net sales declines. Our organic net sales by industry end market were as follows:
● | Data and devices—Our organic net sales |
● | Appliances—Our organic net sales |
In the first six months of fiscal 2020,2021, net sales in the Communications Solutions segment decreased $118increased $175 million, or 13.6%23.4%, as compared to the first six months of fiscal 20192020 primarily as a result of organic net sales declinesgrowth of 13.1%20.2%. Net sales declines in the first six months of fiscal 2020 included the unfavorable impacts of the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
● | Data and devices—Our organic net sales |
● | Appliances—Our organic net sales |
43
Operating Income. The following table presents the Communications Solutions segment’s operating income and operating margin information:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the | | For the | | | For the | | | | | For the | | | | | ||||||||||||||||||||||||||
| | Quarters Ended | | Six Months Ended | | | Quarters Ended | | | | | Six Months Ended | | | | | ||||||||||||||||||||||||||
| | March 27, | | | March 29, | | | | | | March 27, | | | March 29, | | | | | | | March 26, | | March 27, | | | | | March 26, | | March 27, | | | | | ||||||||
|
| 2020 |
|
| 2019 |
|
| Change |
| 2020 |
|
| 2019 |
|
| Change |
|
| 2021 |
| 2020 |
| Change |
| 2021 |
| 2020 |
| Change |
| ||||||||||||
| | ($ in millions) | | | ($ in millions) | | ||||||||||||||||||||||||||||||||||||
Operating income | | $ | 49 | | | $ | 77 | | | $ | (28) | | $ | 89 | | | $ | 129 | | | $ | (40) | | | $ | 103 | | $ | 49 | | $ | 54 | | $ | 167 | | $ | 89 | | $ | 78 | |
Operating margin | |
| 13.0 | % | |
| 17.7 | % | |
| | |
| 11.9 | % | |
| 14.9 | % | |
|
| | |
| 20.6 | % |
| 13.0 | % |
| | |
| 18.1 | % |
| 11.9 | % |
|
| |
Operating income in the Communications Solutions segment decreased $28increased $54 million and $40$78 million in the second quarter and first six months of fiscal 2020,2021, respectively, as compared to the same periods of fiscal 2019. The Communications Solutions segment’s2020. Excluding the item below, operating income included the following:
| | | | | | | | | | | | | |
| | For the | | For the | | ||||||||
| | Quarters Ended | | Six Months Ended | | ||||||||
| | March 27, | | March 29, | | March 27, | | March 29, |
| ||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | | ||||
| | (in millions) | | ||||||||||
Restructuring and other charges, net | | $ | 3 | | $ | 1 | | $ | 8 | | $ | 20 | |
Excluding these items, operating income decreased in the second quarter and first six months of fiscal 2020increased due primarily to lowerhigher volume and price erosion.improved manufacturing productivity.
| | | | | | | | | | | | | |
| | For the | | For the | | ||||||||
| | Quarters Ended | | Six Months Ended | | ||||||||
| | March 26, | | March 27, | | March 26, | | March 27, |
| ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | | ||||
| | (in millions) | | ||||||||||
Restructuring and other charges, net | | $ | 2 | | $ | 3 | | $ | 13 | | $ | 8 | |
Liquidity and Capital Resources
Our ability to fund our future capital needs will be affected by our ongoing ability to continue to generate cash from operations and may be affected by our abilityaccess to access the capital markets, money markets, or other sources of funding, as well as the capacity and terms of our financing arrangements. We believe that cash generated from operations and, to the extent necessary, these other sources of potential funding will be sufficient to meet our anticipated capital needs for the foreseeable future, including the paymentspayment of $350€350 million of floatingfixed-to-floating rate senior notes due in fiscal 2020June 2021 and $250$500 million of 4.875%3.50% senior notes due in fiscal 2021, and anticipated compensation payments to First Sensor minority shareholders.February 2022. We may use excess cash to purchase a portion of our common shares pursuant to our authorized share repurchase program, to acquire strategic businesses or product lines, to pay dividends on our common shares, or to reduce our outstanding debt. The cost or availability of future funding may be impacted by financial market conditions. We will continue to monitor financial markets and respond as necessary to changing conditions, including future developments related to the COVID-19 pandemic. There is continued uncertainty surrounding the duration and scope of the COVID-19 pandemic and it may have a material impact on our liquidity and financial conditions. We believe that we have sufficient financial resources and liquidity
31
which, along with managing expenses and capital structure flexibility, will enable us to meet our ongoing working capital and other cash flow needs during the COVID-19 pandemic and resulting period of economic uncertainty which will include reduced sales and net income levels for us. For further information regarding the impact of COVID-19 on our liquidity and capital resources, please see “Part II. Item 1A. Risk Factors” in this report.uncertainty.
Cash Flows from Operating Activities
In the first six months of fiscal 2020,2021, net cash provided by continuing operating activities increased slightly$328 million to $892$1,220 million from $883$892 million in the first six months of fiscal 2019.2020. The increase resulted primarily from higher pre-tax income levels and improved working capital. The amount of income taxes paid, net of refunds, during the first six months of fiscal 2021 and 2020 and 2019 was $144$181 million and $177$144 million, respectively.
Cash Flows from Investing Activities
Capital expenditures were $309$284 million and $401$309 million in the first six months of fiscal 20202021 and 2019,2020, respectively. We expect fiscal 20202021 capital spending levels to be approximately $575 million.4-5% of net sales. We believe our capital funding levels are adequate to support new programs, and we continue to invest in our manufacturing infrastructure to further enhance productivity and manufacturing capabilities.
44
During the first six months of fiscal 2020,2021, we acquired one business for a cash purchase price of $106 million, net of cash acquired. We acquired four businesses, including First Sensor AG, for a combined cash purchase price of $356 million, net of cash acquired.acquired, during the first six months of 2020. See Note 43 to the Condensed Consolidated Financial Statements for additional information.
During the first six months of fiscal 2019, we received net cash proceeds of $297 million related to the sale of our SubCom business. See additional information in Note 3 to the Condensed Consolidated Financial Statements.regarding acquisitions.
Cash Flows from Financing Activities and Capitalization
Total debt at March 27, 202026, 2021 and September 27, 201925, 2020 was $4,355$4,521 million and $3,965$4,146 million, respectively. See Note 87 to the Condensed Consolidated Financial Statements for additional information regarding debt.
In the second quarter of fiscal 2020,2021, Tyco Electronics Group S.A. (“TEGSA”), our 100%-ownedwholly-owned subsidiary, issued €550 million aggregate principal amount of 0.0%0.00% senior notes due in February 2025.2029. The notes are TEGSA’s unsecured senior obligations and rank equally in right of payment with all existing and any future senior indebtedness of TEGSA and senior to any subordinated indebtedness that TEGSA may incur.
TEGSA has a five-year unsecured senior revolving credit facility (“Credit Facility”) with a maturity date of November 2023 and total commitments of $1.5 billion. TEGSA had no borrowings under the Credit Facility at March 27, 202026, 2021 or September 27, 2019.25, 2020.
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 March 27, 2020,26, 2021, we were in compliance with all of our debt covenants and believe that we will continue to be in compliance with our existing covenants for the foreseeable future.
In addition to the Credit Facility, TEGSA is the borrower under our senior notes and commercial paper. TEGSA’s payment obligations under its senior notes, commercial paper, and Credit Facility are fully and unconditionally guaranteed on an unsecured basis by its parent, TE Connectivity Ltd.
Payments of common share dividends to shareholders were $307$318 million and $299$307 million in the first six months of fiscal 20202021 and 2019,2020, respectively.
We repurchased approximately 3 million of our common shares for $309 million and approximately 5 million of our common shares for $423 million and approximately 9 million of our common shares for $684 million under the share repurchase program during the first six months of fiscal 20202021 and 2019,2020, respectively. At March 27, 2020,26, 2021, we had $1.1 billion$686 million of availability remaining under our share repurchase authorization.
32
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.
| | | | | | | |
| | March 26, | | September 25, | | ||
|
| 2021 |
| 2020 |
| ||
| | (in millions) | | ||||
Balance Sheet Data: | | | | | | | |
Total current assets | | $ | 120 | | $ | 134 | |
Total noncurrent assets(1) | |
| 3,130 | |
| 3,282 | |
| | | | | | | |
Total current liabilities | |
| 1,761 | |
| 1,237 | |
Total noncurrent liabilities(2) | | | 23,685 | | | 23,549 | |
(1) | Includes $3,118 million and $3,275 million as of March 26, 2021 and September 25, 2020, respectively, of intercompany loans receivable from non-guarantor subsidiaries. |
(2) | Includes $20,050 million and $20,016 million as of March 26, 2021 and September 25, 2020, respectively, of intercompany loans payable to non-guarantor subsidiaries. |
| | | | | | | |
| | For the | | For the | | ||
| | Six Months Ended | | Fiscal Year Ended | | ||
| | March 26, | | September 25, | | ||
|
| 2021 |
| 2020 |
| ||
| | (in millions) | | ||||
Statement of Operations Data: | | | | | | | |
Loss from continuing operations | | $ | (141) | | $ | (206) | |
Net loss | |
| (134) | |
| (202) | |
Commitments and Contingencies
Legal Proceedings
In the normal course of business, we are subject to various legal proceedings and claims, including patent infringement claims, product liability matters, employment disputes, disputes on agreements, other commercial disputes, environmental matters, antitrust claims, and tax matters, including non-income tax matters such as value added tax, sales and use tax, real estate tax, and transfer tax. Although it is not feasible to predict the outcome of these proceedings, based upon our experience, current information, and applicable law, we do not expect that the outcome of these proceedings, either individually or in the aggregate, will have a material effect on our results of operations, financial position, or cash flows.
Trade Compliance Matters
We are investigating our past compliance with relevant U.S. trade controls and have made voluntary disclosures of apparent trade controls violations to the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) and the U.S. State Department’s Directorate of Defense Trade Controls (“DDTC”). We are cooperating with the BIS and DDTC on these matters, and both our internal assessment and the resulting investigations by the agencies remain ongoing. We are unable to predict the timing and final outcome of the agencies’ investigations. An unfavorable outcome may include fines or penalties imposed in response to our disclosures, but we are not yet able to reasonably estimate the extent of any such fines or penalties. While we have reserved for potential fines and penalties relating to these matters based on our current understanding of the facts, the investigations into these matters have yet to be completed and the final outcome of such investigations and related fines and penalties may differ from amounts currently reserved.
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Guarantees
In certain instances, we have guaranteed the performance of third parties and provided financial guarantees for uncompleted work and financial commitments. The terms of these guarantees vary with end dates ranging from fiscal 20202021 through the completion of such transactions. The guarantees would be triggered in the event of nonperformance, and the
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potential exposure for nonperformance under the guarantees would not have a material effect on our results of operations, financial position, or cash flows.
In disposing of assets or businesses, we often provide representations, warranties, and/or indemnities to cover various risks including unknown damage to assets, environmental risks involved in the sale of real estate, liability for investigation and remediation of environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not expect that these uncertainties will have a material adverse effect on our results of operations, financial position, or cash flows.
At March 27, 2020,26, 2021, we had outstanding letters of credit, letters of guarantee, and surety bonds of $271 million.$157 million, excluding those related to our Subsea Communications (“SubCom”) business which are discussed below.
As discussed above, in the first six months ofDuring 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 $1.2 billion$130 million as of March 27, 202026, 2021 and are expected to expire at various dates through fiscal 2025. Also, underDuring the termssecond quarter of fiscal 2021, we amended our agreement with SubCom and removed the definitive agreement, we are requiredrequirement to issue up to $300 million of new performance guarantees, subject to certain limitations, for projects entered into by the SubCom business following the sale for a period of up to three years. As of March 27, 2020, there were no such new performance guarantees outstanding.guarantees. We have contractual recourse against the SubCom business if we are required to perform on any SubCom guarantees; however, based on historical experience, we do not anticipate having to perform. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding the divestiture of the SubCom business.
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 are based on, among other things, judgments and assumptions made by management. For additional information regarding these policies and the underlying accounting assumptions and estimates used in these policies, refer to the Consolidated Financial Statements and accompanying notes contained in our Annual Report on Form 10-K for the fiscal year ended September 27, 2019. Except as set forth below, there25, 2020. There were no significant changes to this information during the first six months of fiscal 2020.
Goodwill and Other Intangible Assets
We adopted ASU No. 2017-04, an update to Accounting Standards Codification 350, Intangibles–Goodwill and Other, in the second quarter of fiscal 2020. See Note 1 to the Condensed Consolidated Financial Statements for information regarding our goodwill and other intangible assets policy and the adoption of ASU No. 2017-04.2021.
Accounting Pronouncements
See Note 1 to the Condensed Consolidated Financial Statements for information regarding recently adopted accounting pronouncements.
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
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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
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“Results of Operations” and “Segment Results” provide reconciliations of organic net sales growth (decline) to net sales growth (decline) calculated in accordance with GAAP.
Organic net sales growth (decline) is a non-GAAP financial measure and should not be considered a replacement for results in accordance with GAAP. This non-GAAP financial measure may not be comparable to similarly-titled measures reported by other companies. The primary limitation of this measure is that it excludes the financial impact of items that would otherwise either increase or decrease our reported results. This limitation is best addressed by using organic net sales growth (decline) in combination with net sales growth (decline) to better understand the amounts, character, and impact of any increase or decrease in reported amounts.
Forward-Looking Information
Certain statements in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These statements are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include, among others, the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities, potential operating performance improvements, acquisitions, divestitures, the effects of competition, and the effects of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believe,” “expect,” “plan,” “intend,” “anticipate,” “estimate,” “predict,” “potential,” “continue,” “may,” and “should,” or the negative of these terms or similar expressions.
Forward-looking statements involve risks, uncertainties, and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. Investors should not place undue reliance on any forward-looking statements. We do not have any intention or obligation to update forward-looking statements after we file this report except as required by law.
The following and other risks, which are described in greater detail in “Part I. Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended September 27, 2019,25, 2020, and in this report, could cause our results to differ materially from those expressed in forward-looking statements:
● | conditions in the global or regional economies and global capital markets, and cyclical industry conditions; |
● | conditions affecting demand for products in the industries we serve, particularly the automotive industry; |
● | risk of future goodwill impairment; |
● | competition and pricing pressure; |
● | market acceptance of our new product introductions and product innovations and product life cycles; |
● | raw material availability, quality, and cost; |
● | fluctuations in foreign currency exchange rates and impacts of offsetting hedges; |
● | financial condition and consolidation of customers and vendors; |
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● | reliance on third-party suppliers; |
● | risks associated with current and future acquisitions and divestitures; |
● | global risks of business interruptions due to natural disasters or other disasters such as the COVID-19 pandemic, which have and could continue to negatively impact our results of operations as well as customer |
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behaviors, business, and manufacturing operations as well as our facilities and the facilities of our suppliers, and other aspects of our business; |
● | global risks of political, economic, and military instability, including volatile and uncertain economic conditions in China; |
● | risks associated with security breaches and other disruptions to our information technology infrastructure; |
● | risks related to compliance with current and future environmental and other laws and regulations; |
● | risks associated with compliance with applicable antitrust or competition laws or applicable trade regulations; |
● | our ability to protect our intellectual property rights; |
● | risks of litigation; |
● | our ability to operate within the limitations imposed by our debt instruments; |
● | the possible effects on us of various non-U.S. and U.S. legislative proposals and other initiatives that, if adopted, could materially increase our worldwide corporate effective tax rate and negatively impact our U.S. government contracts business; |
● | various risks associated with being a Swiss corporation; |
● | the impact of fluctuations in the market price of our shares; and |
● | the impact of certain provisions of our articles of association on unsolicited takeover proposals. |
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 six months of fiscal 2020.2021. For further discussion of our exposures to market risk, refer to “Part II. Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended September 27, 2019.25, 2020.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934), as of March 27, 2020.26, 2021. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 27, 2020.26, 2021.
Changes in Internal Control Over Financial Reporting
During the quarter ended March 27, 2020,26, 2021, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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 27, 2019.25, 2020. Refer to “Part I. Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended September 27, 201925, 2020 for additional information regarding legal proceedings.
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from those disclosed in “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 27, 201925, 2020 except as described below. The risk factors described in our Annual Report on Form 10-K, in addition to other information set forth below and in this report, could materially affect our business operations, financial condition, or liquidity. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial may also impair our business operations, financial condition, and liquidity.
We have suffered and could continueIf any of our operations are found not to suffer significantcomply with applicable antitrust or competition laws or applicable trade regulations, our business interruptions, including as a result of COVID-19.may suffer.
Our operations are subject to applicable antitrust and thosecompetition laws in the jurisdictions in which we conduct our business, in particular the U.S. and the European Union. These laws prohibit, among other things, anticompetitive agreements and practices. If any of our supplierscommercial agreements and customers, andpractices with respect to the supply chains that support their operations,electronic components or other markets are found to violate or infringe such laws, we may be vulnerablesubject to interruption by natural disasters such as earthquakes, tsunamis, typhoons,civil and other penalties. We may also be subject to third-party claims for damages. Further, agreements that infringe these antitrust and competition laws may be void and unenforceable, in whole or floods;in part, or other disasters such as fires, explosions, acts of terrorism or war, disease or other adverse health developments, including as a result of COVID-19, or failures of management information or other systems duerequire modification to internal or external causes. These effects could include disruptions or restrictions on our employees’ ability to travel, as well as temporary closures of our facilities or the facilities of our customers, suppliers, or other vendors in our supply chain. In addition, such interruptions could result in a widespread crisis that could adversely affect the economiesbe lawful and financial markets of many countries, resulting in an economic downturn that could affect demand for our end customers’ products.enforceable. If a business interruption occurs and we are unsuccessfulunable to enforce our commercial agreements, whether at all or in material part, our continuing efforts to minimize the impact of these events, our business, results of operations, financial position, and cash flows could be materially adversely affected. COVID-19 is currently impacting countries, communities, workforces, supply chains,
We also must comply with applicable trade regulations in the jurisdictions where we operate. A small portion of our products, including defense-related products, may require governmental import and markets around the world,export licenses, whose issuance may be influenced by geopolitical and as a result we have experienced disruptions and restrictions onother events. Any failure to maintain compliance with trade regulations could limit our employees’ ability to travel, as well as temporary closures ofimport and export raw materials and finished goods into or from the relevant jurisdiction, which could negatively impact our facilities and the facilities of our customers, suppliers, and other vendors in our supply chain. We expect that COVID-19 will have a material impact on our financial condition and results of operations, infinancial position, and cash flows. In this regard, we are investigating our past compliance with relevant U.S. trade controls and have made voluntary disclosures of apparent trade controls violations to the near termU.S. Department of Commerce’s Bureau of Industry and may have a material impactSecurity (“BIS”) and the U.S. State Department’s Directorate of Defense Trade Controls (“DDTC”). We are cooperating with the BIS and DDTC on these matters, and both our financial condition, liquidity,internal assessment and resultsthe resulting investigations by the agencies remain ongoing. We are unable to predict the timing and final outcome of operations in future periods. The extent to which COVID-19 will further impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted. Such developmentsthe agencies’ investigations. An unfavorable outcome may include the geographic spread of the virus, the severity of the virus, the duration of the pandemic, the impact on our suppliers’ and customers’ supply chains and financial positions, including their ability to pay us, the actions that may be taken by various governmental authoritiesfines or penalties imposed in response to our disclosures, but we are not yet able to reasonably estimate the outbreak in jurisdictions in whichextent of any such fines or penalties. While we operate,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 possible impact on the global economyfinal outcome of such investigations and local economies in which we operate.
related fines and penalties may differ from amounts currently reserved.
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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 March 27, 2020:26, 2021:
| | | | | | | | | | | |
| | | | | | | | Maximum |
| ||
| | | | | | | Total Number of | | Approximate |
| |
| | | | | | | Shares Purchased | | Dollar Value |
| |
| | | | | | | as Part of | | of Shares that May |
| |
| | Total Number | | Average Price | | Publicly Announced | | Yet Be Purchased |
| ||
| | of Shares | | Paid Per | | Plans or | | Under the Plans |
| ||
Period |
| Purchased(1) |
| Share(1) |
| Programs(2) |
| or Programs(2) |
| ||
December 28, 2019–January 24, 2020 | | 447,879 | | $ | 97.85 | | 447,600 | | $ | 1,314,299,381 | |
January 25–February 28, 2020 |
| 941,185 | |
| 91.45 |
| 937,100 | |
| 1,228,626,234 | |
February 29–March 27, 2020 |
| 2,297,143 | |
| 65.58 |
| 2,296,000 | |
| 1,078,053,521 | |
Total |
| 3,686,207 | | $ | 76.11 |
| 3,680,700 | |
|
| |
| | | | | | | | | | | |
| | | | | | | | 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) |
| ||
December 26, 2020–January 22, 2021 | | 308,559 | | $ | 126.17 | | 308,500 | | $ | 829,012,757 | |
January 23–February 26, 2021 |
| 570,123 | |
| 127.53 |
| 567,400 | |
| 756,643,559 | |
February 27–March 26, 2021 |
| 549,137 | |
| 129.09 |
| 548,700 | |
| 685,801,112 | |
Total |
| 1,427,819 | | $ | 127.84 |
| 1,424,600 | |
|
| |
(1) | These columns include the following transactions which occurred during the quarter ended March |
(i) | the acquisition of 3,219 common shares from individuals in order to satisfy tax withholding requirements in connection with the vesting of restricted share awards issued under equity compensation plans; and |
(ii) | open market purchases totaling 1,424,600 common shares, summarized on a trade-date basis, in conjunction with the share repurchase program announced in September 2007. |
(2) | Our share repurchase program authorizes us to purchase a portion of our outstanding common shares from time to time through open market or private transactions, depending on business and market conditions. The share repurchase program does not have an expiration date. |
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ITEM 6. EXHIBITS
| | |
Exhibit Number | | Exhibit |
|
| |
4.1 | | |
10.1 | ‡ | |
22.1 | * | |
31.1 | * | |
31.2 | * | |
32.1 | ** | |
101.INS | | Inline XBRL Instance Document(1)(2) |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document(2) |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document(2) |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document(2) |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document(2) |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document(2) |
104 | | Cover Page Interactive Data File(3) |
‡Management contract or compensatory plan or arrangement |
|
*Filed herewith
** | Furnished herewith |
(2) | The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
(3) | Formatted in Inline XBRL and contained in exhibit 101 |
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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.
| | |
| TE CONNECTIVITY LTD. | |
| | |
| By: | /s/ Heath A. Mitts Heath A. Mitts |
Date: May 4, 2020April 23, 2021
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