The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion may contain forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements as a result of many factors, including but not limited to those under the heading "Forward-Looking Information" and "Part II. Item 1A. Risk Factors."
Our Condensed Consolidated Financial Statements have been prepared in
The following discussion includes organic net sales growth (decline) which is a non-GAAP financial measure. See "Non-GAAP Financial Measure" for additional information regarding this measure.
OverviewTE 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 2021 included the following:
Our net sales increased 17.0% and 14.1% in the second quarter and first six
months of fiscal 2021, respectively, as compared to the same periods of fiscal
2020 due to sales growth in the Transportation Solutions and the Communications
? Solutions segments, partially offset by sales declines in the Industrial
Solutions segment. On an organic basis, our net sales increased 11.0% and 8.6%
during the second quarter and first six months of fiscal 2021, respectively, as
compared to the same periods of fiscal 2020.
? Our net sales by segment were as follows:
Transportation Solutions-Our net sales increased 23.2% and 21.1% in the second
? quarter and first six months of fiscal 2021, respectively, with sales increases
in all end markets. Industrial Solutions-Our net sales decreased 1.0% and 3.4% in the second
quarter and first six months of fiscal 2021, respectively, as a result of sales
? declines in the aerospace, defense, oil, and gas and the medical end markets,
partially offset by sales increases in the industrial equipment and the energy
end markets.
Communications Solutions-Our net sales increased 32.7% and 23.4% in the second
? quarter and first six months of fiscal 2021, respectively, due to sales
increases in both the appliances and the data and devices end markets.
? Net cash provided by operating activities was
months of fiscal 2021.
COVID-19 Pandemic and Economic Conditions
The COVID-19 pandemic has affected nearly all regions around the world and resulted in business slowdowns or shutdowns and travel restrictions in affected areas. The pandemic negatively affected our sales and operating results during fiscal 2020 and continued to negatively affect certain of our businesses in the first six months of fiscal 2021. We expect that 21
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it will continue to have an impact on some of our businesses in the near term and may have a material impact on our financial condition, liquidity, and results of operations in future periods.
The COVID-19 pandemic is currently impacting, and we expect that it will continue to impact, our business operations globally, causing further disruption in our suppliers' and customers' supply chains, some of our business locations to reduce or suspend operations, and a reduction in demand for certain products from direct customers or end markets. In addition, the pandemic has had and may continue to have far-reaching impacts on many additional aspects of our operations, both directly and indirectly, including with respect to its impacts on customer behaviors, business and manufacturing operations, inventory, our employees, and the market generally, and the scope and nature of these impacts continue to evolve. We will continue to assess the evolving impact of the COVID-19 pandemic and intend to adjust our operations and businesses, a number of which are operating as essential businesses, accordingly. Throughout our operations, we have implemented additional health and safety measures for the protection of our employees, including providing personal protective equipment, enhanced cleaning and sanitizing of our facilities, and remote working arrangements. The extent to which the pandemic will continue to impact our business and the markets we serve will depend on the success of, among other things, future developments and public health advancements, including vaccine production and distribution. We expect that the COVID-19 pandemic will continue to impact several of the markets we serve, in particular the commercial aerospace market in our Industrial Solutions segment; however, we expect this market to stabilize in the 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 the communities in which
we operate. Outlook In the third quarter of fiscal 2021, we expect our net sales to be approximately$3.7 billion as compared to$2.5 billion in the third quarter of fiscal 2020. This increase reflects sales growth in the Transportation Solutions segment and, to a lesser degree, the Communications Solutions and Industrial Solutions segments. We expect diluted earnings per share from continuing operations to be approximately$1.51 per share in the third quarter of fiscal 2021. This outlook reflects the positive impact of 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 2021 as compared to the third quarter of fiscal 2020.
The above outlook is based on foreign currency exchange rates that are consistent with current levels.
We are monitoring the current macroeconomic environment and its potential effects on our customers and the end markets we serve, including developments related to the COVID-19 pandemic. We have taken actions to manage costs and will continue to closely manage our costs in line with economic conditions. Additionally, we are managing our capital resources and monitoring capital availability to ensure that we have sufficient resources to fund future capital needs. See further discussion in "Liquidity and Capital Resources."
Acquisition
During the first six months of fiscal 2021, we acquired one business for a cash purchase price of$106 million , net of cash acquired. The acquisition was reported as part of our Industrial Solutions segment from the date of acquisition. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions. 22 Table of Contents Results of Operations Net Sales The following table presents our net sales and the percentage of total net sales by segment: For the For the Quarters Ended Six Months Ended March 26, March 27, March 26, March 27, 2021 2020 2021 2020 ($ in millions) Transportation Solutions$ 2,287 61 %$ 1,857 58 %$ 4,511 62 %$ 3,725 58 % Industrial Solutions 952 26 962 30 1,825 25 1,889 30 Communications Solutions 499 13 376 12 924 13 749 12 Total$ 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 26, 2021 Change in
versusNet Sales for the Quarter EndedMarch 27, 2020 versus
Net Sales OrganicNet Sales AcquisitionsNet Sales OrganicNet 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 increased$543 million , or 17.0%, in the second quarter of fiscal 2021 as compared to the second quarter of fiscal 2020. The increase in net sales resulted from organic net sales growth of 11.0%, the positive impact of foreign currency translation of 4.7% due to the strengthening of certain foreign currencies, and net sales contributions of 1.3% from acquisitions and a divestiture. In the second quarter of fiscal 2021, our net sales declines in the Industrial Solutions segment reflected significant unfavorable impacts from the COVID-19 pandemic. Price erosion adversely affected organic net sales by$20 million in the second quarter of fiscal 2021. In the first six months of fiscal 2021, net sales increased$897 million , or 14.1%, as compared to the first six months of fiscal 2020 due to organic net sales growth of 8.6%, the positive impact of foreign currency translation of 4.0% due to the strengthening of certain foreign currencies, and net sales contributions of 1.5% from acquisitions and a divestiture. In the first six months of fiscal 2021, our net sales declines in the Industrial Solutions segment reflected significant unfavorable impacts from the COVID-19 pandemic. Price erosion adversely affected organic net sales by$46 million in the first six months of fiscal 2021.
See further discussion of net sales below under "Segment Results."
Net Sales byGeographic Region . Our business operates in three geographic regions-Asia-Pacific ,Europe /Middle East /Africa ("EMEA"), and theAmericas -and our results of operations are influenced by changes in foreign currency exchange rates. Increases or decreases in the value of theU.S. dollar, compared to other currencies, will directly affect our reported results as we translate those currencies intoU.S. dollars at the end of each fiscal period.
Approximately 60% of our net sales were invoiced in currencies other than the
23
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The following table presents our net sales and the percentage of total net sales by geographic region(1): For the For the Quarters Ended Six Months Ended March 26, March 27, March 26, March 27, 2021 2020 2021 2020 ($ in millions) Asia-Pacific$ 1,336 36 %$ 991 31 %$ 2,629 36 %$ 2,104 33 % EMEA 1,390 37 1,188 37 2,706 37 2,285 36 Americas 1,012 27 1,016 32 1,925 27 1,974 31 Total$ 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 inNet Sales for the Quarter EndedMarch 26, 2021 Change inNet Sales for the
Six Months Ended
versusNet Sales for the Quarter EndedMarch 27, 2020 versusNet Sales for the Six
Months Ended
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) Asia-Pacific$ 345 34.8 %$ 283 28.7 % $ 65 $ (3)$ 525 25.0 %$ 411 19.6 % $ 117 $ (3) EMEA 202 17.0 62 5.3 102 38 421 18.4 163 7.0 175 83 Americas (4) (0.4) 7 0.7 (17) 6 (49) (2.5) (24) (1.2) (36) 11 Total$ 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 Quarters Ended Six Months Ended March 26, March 27, March 26, March 27, 2021 2020 Change 2021 2020 Change ($ in millions) Cost of sales$ 2,528 $ 2,166 $ 362 $ 4,904 $ 4,304 $ 600 As a percentage of net sales 67.6 % 67.8 % 67.5 % 67.6 % Gross margin$ 1,210 $ 1,029 $ 181 $ 2,356 $ 2,059 $ 297 As a percentage of net sales 32.4 % 32.2 % 32.5 % 32.4 % Gross margin increased$181 million and$297 million in the second quarter and first six months of fiscal 2021, respectively, as compared to the same periods of fiscal 2020. The increases were primarily as a result of higher volume and, to a lesser degree, positive foreign currency translation, lower material costs, and improved manufacturing productivity, partially offset by price erosion.
We use a wide variety of raw materials in the manufacture of our products. Cost of sales and gross margin are subject to variability in raw material prices which continue to fluctuate for many of the raw materials we use, including copper, gold, silver, and palladium. We expect to purchase approximately 200 million pounds of copper, 120,000 troy ounces
24
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of gold, 2.6 million troy ounces of silver, and 15,000 troy ounces of palladium in fiscal 2021. The following table presents the average prices incurred related to copper, gold, silver, and palladium: For the For the Quarters Ended Six Months Ended March 26, March 27, March 26, March 27, Measure 2021 2020 2021 2020 Copper Lb.$ 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 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 increased$49 million and$43 million in the second quarter and first six months of fiscal 2021, respectively, from the same periods of fiscal 2020 primarily as a result of 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 2021 and 2020, we initiated restructuring programs across all segments to optimize our manufacturing footprint and improve the cost structure of the organization. We incurred net restructuring charges of$160 million during the first six months of fiscal 2021, of which$153 million related to the fiscal 2021 restructuring program. Annualized cost savings related to the fiscal 2021 actions commenced during the first six months of fiscal 2021 are expected to be approximately$60 million and are expected to be realized by the end of fiscal 2023. Cost savings will be reflected primarily in cost of sales and selling, general, and administrative expenses. For fiscal 2021, we expect total restructuring charges to be approximately$200 million and total spending, which will be funded with cash from operations, to be approximately$230 million .
See Note 2 to the Condensed Consolidated Financial Statements for additional information regarding net restructuring and other charges.
Impairment ofGoodwill . During the second quarter of fiscal 2020, we recorded a goodwill impairment charge of$900 million related to the Sensors reporting unit in our Transportation Solutions segment. 25 Table of Contents Operating Income (Loss) The following table presents operating income (loss) and operating margin information: For the For the Quarters Ended Six Months Ended March 26, March 27, March 26, March 27, 2021 2020 Change 2021 2020 Change ($ 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 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$ 6 $ 12 $ 14 $ 19 Charges associated with the amortization of acquisition-related fair value adjustments 2 - 3 - 8 12 17 19 Restructuring and other charges, net 17
22 184 46 Impairment of goodwill - 900 - 900 Total$ 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 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 12 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, including the Switzerland Federal Act on Tax Reform and AHV Financing and the termination of the Tax Sharing Agreement in fiscal 2020. 26 Table of Contents Segment Results Transportation Solutions
For the For the Quarters Ended Six Months Ended March 26, March 27, March 26, March 27, 2021 2020 2021 2020 ($ in millions) Automotive$ 1,630 71 %$ 1,365 73 %$ 3,259 72 %$ 2,770 74 % Commercial transportation 382 17 294 16 713 16 552 15 Sensors 275 12 198 11 539 12 403 11 Total$ 2,287 100 %$ 1,857 100 %$ 4,511 100 %$ 3,725 100 %
Industry end market information is presented consistently with our internal (1) 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 inNet Sales for the Quarter EndedMarch 26, 2021 Change in Net
Sales for the Six Months Ended
versusNet Sales for the Quarter EndedMarch 27, 2020 versus Net
Sales for the Six Months Ended
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 increased$430 million , or 23.2%, in the second quarter of fiscal 2021 from the second quarter of fiscal 2020 due to organic net sales growth of 15.3%, the positive impact of foreign currency translation of 5.6%, and sales contributions from an acquisition of 2.3%. Our organic net sales by industry end market were as follows:
Automotive-Our organic net sales increased 13.5% in the second quarter of
fiscal 2021 with increases of 28.3% in the
?
and EMEA regions resulted from increases in automotive production as well as
content gains. Our growth in the
gains.
Commercial transportation-Our organic net sales increased 24.8% in the second
? quarter of fiscal 2021 with growth across all regions as a result of market
growth and content gains.
? Sensors-Our organic net sales increased 13.4% in the second quarter of fiscal
2021 due to strength across all markets.
In the first six months of fiscal 2021, net sales in the Transportation Solutions segment increased$786 million , or 21.1%, as compared to the first six months of fiscal 2020 as a result of organic net sales growth of 13.8%, the positive impact of foreign currency translation of 4.9%, and sales contributions from an acquisition of 2.4%. Our organic net sales by industry end market were as follows:
Automotive-Our organic net sales increased 12.4% in the first six months of
? fiscal 2021 with increases of 18.8% in the
EMEA region, and 7.2% in theAmericas region. Our growth in 27 Table of Contents
the
production and content gains. In the
result of content gains.
Commercial transportation-Our organic net sales increased 24.9% in the first
? six months of fiscal 2021 due to growth across all regions resulting from
market growth and content gains.
? Sensors-Our organic net sales increased 8.2% in the first six months of fiscal
2021 as a result of strength across all markets.
Operating Income (Loss). The following table presents the Transportation Solutions segment's operating income (loss) and operating margin information: For the For the Quarters Ended Six Months Ended March 26, March 27, March 26, March 27, 2021 2020 Change 2021 2020 Change ($ in millions) Operating income (loss)$ 398 $ (606) $ 1,004 $ 706 $ (290) $ 996 Operating margin 17.4 % (32.6) % 15.7 % (7.8) % Operating income (loss) in the Transportation Solutions segment increased$1,004 million and$996 million in the second quarter and first six months of fiscal 2021, respectively, as compared to the same periods of fiscal 2020. Excluding the items below, operating income (loss) increased primarily as a result of
higher volume. For the For the Quarters Ended Six Months Ended March 26, March 27, March 26, March 27, 2021 2020 2021 2020 (in millions) Acquisition-related charges:
Acquisition and integration costs$ 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 Industrial Solutions
For the For the Quarters Ended Six Months Ended March 26, March 27, March 26, March 27, 2021 2020 2021 2020 ($ in millions)
Aerospace, defense, oil, and gas
517 28 %$ 627 33 % Industrial equipment 339 36 280 29 634 35 543 29 Medical 161 17 186 19 317 17 365 19 Energy 185 19 178 19 357 20 354 19 Total$ 952 100 %$ 962 100 %$ 1,825 100 %$ 1,889 100 %
Industry end market information is presented consistently with our internal (1) management reporting and may be revised periodically as management deems
necessary. 28 Table of Contents
The following table provides an analysis of the change in the Industrial Solutions segment's net sales by industry end market:
Change inNet Sales for the Quarter EndedMarch 26, 2021 Change in Net
Sales for the Six Months Ended
versusNet Sales for the Quarter EndedMarch 27, 2020 versus Net
Sales for the Six Months Ended
Net Sales OrganicNet Sales AcquisitionNet Sales OrganicNet 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$10 million , or 1.0%, in the second quarter of fiscal 2021 as compared to the second quarter of fiscal 2020 due primarily to organic net sales declines of 4.2%, partially offset by the positive impact of foreign currency translation of 3.2%. Net sales in the second quarter of fiscal 2021 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 20.8% in the
? second quarter of fiscal 2021 due primarily to reduced demand in the commercial
aerospace market.
Industrial equipment-Our organic net sales increased 15.7% in the second
? quarter of fiscal 2021 due to growth in all regions primarily as a result of
strength in factory automation and controls applications.
? Medical-Our organic net sales decreased 13.4% in the second quarter of fiscal
2021 due primarily to continued delays in elective procedures.
? Energy-Our organic net sales increased 4.0% in the second quarter of fiscal
2021 primarily as a result of growth in solar applications.
In the first six months of fiscal 2021, net sales in the Industrial Solutions segment decreased$64 million , or 3.4%, as compared to the first six months of fiscal 2020 primarily as a result of organic net sales declines of 6.3%, partially offset by the positive impact of foreign currency translation of 2.8%. Our net sales declines reflected significant unfavorable impacts of the COVID-19 pandemic in the first six months of fiscal 2021. Our organic net sales by industry end market were as follows:
Aerospace, defense, oil, and gas-Our organic net sales decreased 21.4% in the
? first six months of fiscal 2021 primarily as a result of reduced demand in the
commercial aerospace market.
Industrial equipment-Our organic net sales increased 11.8% in the first six
? months of fiscal 2021 with growth in all regions due primarily to strength in
factory automation and controls applications.
? Medical-Our organic net sales decreased 13.5% in the first six months of fiscal
2021 primarily as a result of continued delays in elective procedures.
Energy-Our organic net sales were flat in the first six months of fiscal 2021
? with growth in the
applications, offset by declines in the EMEA region. 29 Table of Contents
Operating Income. The following table presents the Industrial Solutions segment's operating income and operating margin information:
For the For the Quarters Ended Six Months Ended March 26, March 27, March 26, March 27, 2021 2020 Change 2021 2020 Change ($ in millions) Operating income$ 111 $ 142 $ (31) $ 187 $ 257 $ (70) Operating margin 11.7 % 14.8 % 10.2 % 13.6 %
Operating income in the Industrial Solutions segment decreased
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
For the For the Quarters Ended Six Months Ended March 26, March 27, March 26, March 27, 2021 2020 2021 2020 ($ in millions) Data and devices$ 278 56 %$ 218 58 %$ 512 55 %$ 437 58 % Appliances 221 44 158 42 412 45 312 42 Total$ 499 100 %$ 376 100 %$ 924 100 %$ 749 100 %
Industry end market information is presented consistently with our internal (1) 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 inNet Sales for the Quarter EndedMarch 26, 2021 Change inNet Sales
for the Six Months Ended
versusNet Sales for the Quarter EndedMarch 27, 2020 versusNet Sales
for the Six Months Ended
Net Sales Organic Net Sales Net Sales
Organic
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 Table of Contents Net sales in the Communications Solutions segment increased$123 million , or 32.7%, in the second quarter of fiscal 2021 as compared to the second quarter of fiscal 2020 due primarily to organic net sales growth of 28.7%. Our organic net sales by industry end market were as follows:
Data and devices-Our organic net sales increased 24.0% in the second quarter of
? fiscal 2021 primarily as a result of market strength as well as market share
gains and content growth in high-speed cloud applications.
Appliances-Our organic net sales increased 35.3% in the second quarter of
? fiscal 2021 due to sales growth in all regions primarily attributable to market
improvements and market share gains.
In the first six months of fiscal 2021, net sales in the Communications
Solutions segment increased
Data and devices-Our organic net sales increased 14.4% in the first six months
? of fiscal 2021 due primarily to market strength as well as market share gains
and content growth in high-speed cloud applications.
Appliances-Our organic net sales increased 28.3% in the first six months of
? fiscal 2021 as a result of sales growth in all regions due primarily to market
improvements and market share gains.
Operating Income. The following table presents the Communications Solutions segment's operating income and operating margin information:
For the For the Quarters Ended Six Months Ended March 26, March 27, March 26, March 27, 2021 2020 Change 2021 2020 Change ($ in millions) Operating income$ 103 $ 49 $ 54 $ 167 $ 89 $ 78 Operating margin 20.6 % 13.0 % 18.1 % 11.9 % Operating income in the Communications Solutions segment increased$54 million and$78 million in the second quarter and first six months of fiscal 2021, respectively, as compared to the same periods of fiscal 2020. Excluding the item below, operating income increased due primarily to higher volume and 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 generate cash from operations and may be affected by our access to capital markets, money markets, or other sources of funding, as well as the capacity and terms of our financing arrangements. We believe that cash generated from operations and, to the extent necessary, these other sources of potential funding will be sufficient to meet our anticipated capital needs for the foreseeable future, including the payment of €350 million of fixed-to-floating rate senior notes due inJune 2021 and$500 million of 3.50% senior notes due inFebruary 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 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 Table of Contents
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.
Cash Flows from Operating Activities
In the first six months of fiscal 2021, net cash provided by operating activities increased$328 million to$1,220 million from$892 million in the first six months of fiscal 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 was$181 million and$144 million , respectively.
Cash Flows from Investing Activities
Capital expenditures were$284 million and$309 million in the first six months of fiscal 2021 and 2020, respectively. We expect fiscal 2021 capital spending levels to be approximately 4-5% of net sales. We believe our capital funding levels are adequate to support new programs, and we continue to invest in our manufacturing infrastructure to further enhance productivity and manufacturing capabilities. During the first six months of fiscal 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, during the first six months of 2020. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions.
Cash Flows from Financing Activities and Capitalization
Total debt at
In the second quarter of fiscal 2021,Tyco Electronics Group S.A. ("TEGSA"), our wholly-owned subsidiary, issued €550 million aggregate principal amount of 0.00% senior notes due inFebruary 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 ofNovember 2023 and total commitments of$1.5 billion . TEGSA had no borrowings under the Credit Facility atMarch 26, 2021 orSeptember 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 ofMarch 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
We repurchased approximately 3 million of our common shares for$309 million and approximately 5 million of our common shares for$423 million under the share repurchase program during the first six months of fiscal 2021 and 2020, respectively. AtMarch 26, 2021 , we had$686 million of availability remaining under our share repurchase authorization. 32 Table of Contents
Summarized Guarantor Financial Information
As discussed above, our senior notes, commercial paper, and Credit Facility are issued by TEGSA and are fully and unconditionally guaranteed on an unsecured basis by TEGSA's parent,TE Connectivity Ltd. In addition to being the issuer of our debt securities, TEGSA owns, directly or indirectly, all of our operating subsidiaries. The following tables present summarized financial information, excluding investments in and equity in earnings of our non-guarantor subsidiaries, forTE Connectivity Ltd. and TEGSA on a combined basis. March 26, September 25, 2021 2020 (in millions) Balance Sheet Data: Total current assets$ 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
Includes
(1) 25, 2020, respectively, of intercompany loans receivable from non-guarantor
subsidiaries.
Includes
(2)
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 relevantU.S. trade controls and have made voluntary disclosures of apparent trade controls violations to theU.S. Department of Commerce's Bureau of Industry and Security ("BIS") and theU.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. 33 Table of Contents 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 2021 through the completion of such transactions. The guarantees would be triggered in the event of nonperformance, and the potential exposure for nonperformance under the guarantees would not have a material effect on our results of operations, financial position, or cash flows. 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
During fiscal 2019, we sold ourSubCom business. In connection with the sale, we contractually agreed to continue to honor performance guarantees and letters of credit related to theSubCom business' 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 ofMarch 26, 2021 and are expected to expire at various dates through fiscal 2025. During the second quarter of fiscal 2021, we amended our agreement withSubCom and removed the requirement to issue new performance guarantees. We have contractual recourse against theSubCom business if we are required to perform on anySubCom guarantees; however, based on historical experience, we do not anticipate having to perform. Critical Accounting Policies and Estimates The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses. Our accounting policies for revenue recognition, goodwill and other intangible assets, income taxes, and pension 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 endedSeptember 25, 2020 . There were no significant changes to this information during the first six months of fiscal 2021. Non-GAAP Financial Measure
Organic Net Sales Growth (Decline)
We present organic net sales growth (decline) as we believe it is appropriate for investors to consider this adjusted financial measure in addition to results in accordance with GAAP. Organic net sales growth (decline) represents net sales growth (decline) (the most comparable GAAP financial measure) excluding the impact of foreign currency exchange rates, and acquisitions and divestitures that occurred in the preceding twelve months, if any. Organic net sales growth (decline) is a useful measure of our performance because it excludes items that are not completely under management's control, such as the impact of changes in foreign currency exchange rates, and items that do not reflect the underlying growth of the company, such as acquisition and divestiture activity. Organic net sales growth (decline) provides useful information about our results and the trends of our business. Management uses this measure to monitor and evaluate performance. Also, management uses this measure together with GAAP financial measures in its decision-making processes related to the operations of our reportable segments and our overall company. It is also a significant component in our incentive compensation plans. We believe that investors benefit from having access to the same financial measures that management uses in evaluating operations. The tables presented in 34
Table of Contents
"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 theU.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.
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