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July 29, 2021, 10:02 a.m. EDT

10-Q: TE CONNECTIVITY LTD.

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(EDGAR Online via COMTEX) -- 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 third quarter and first nine months of fiscal 2021 included the following:

Our net sales increased 50.9% and 24.6% in the third quarter and first nine months of fiscal 2021, respectively, as compared to the same periods of fiscal 2020 due to sales growth in the Transportation Solutions segment and, to a ? lesser degree, the Communications Solutions and Industrial Solutions segments.

? Our net sales by segment were as follows:

Transportation Solutions-Our net sales increased 80.5% and 36.1% in the third ? quarter and first nine months of fiscal 2021, respectively, with sales increases in all end markets.

Industrial Solutions-Our net sales increased 15.8% in the third quarter of fiscal 2021 primarily as a result of sales increases in the industrial ? equipment end market. In the first nine months of fiscal 2021, our net sales increased 2.7% due primarily to sales increases in the industrial equipment end market, partially offset by declines in the aerospace, defense, oil, and gas end market.

Communications Solutions-Our net sales increased 35.0% and 27.6% in the third ? quarter and first nine 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 $1,902 million in the first nine months of fiscal 2021.

COVID-19 Pandemic

The COVID-19 pandemic has affected nearly all regions around the world and resulted in business slowdowns or shutdowns and travel restrictions in affected areas. The pandemic had a significant, negative impact on our sales and

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operating results during fiscal 2020 and continued to negatively affect certain of our businesses in fiscal 2021. We do not expect that it will continue to have a significant impact on our businesses in the near term.

The COVID-19 pandemic impacted our business operations globally, causing disruption in our suppliers' and customers' supply chains, some of our business locations to reduce or suspend operations, and a reduction in demand for certain products from direct customers or end markets. In addition, the pandemic had far-reaching impacts on many additional aspects of our operations, both directly and indirectly, including with respect to its impacts on customer behaviors, business and manufacturing operations, inventory, our employees, and the market generally. We assessed the impact of the COVID-19 pandemic and adjusted our operations and businesses, a number of which are operating as essential businesses, and will continue to do so if necessary. Throughout our operations, we implemented additional health and safety measures for the protection of our employees, including providing personal protective equipment, enhanced cleaning and sanitizing of our facilities, and remote working arrangements.

The extent to which the pandemic will continue to impact our business and the markets we serve will depend on future developments which may include the further spread of the virus, variant strains of the virus, and the resumption of high levels of infections and hospitalizations as well as the success of public health advancements, including vaccine production and distribution. Although we do not expect the COVID-19 pandemic to have a significant impact on our businesses in the near term, it may have a negative impact on our financial condition, liquidity, and results of operations in future periods.

In response to the pandemic and resulting economic environment, we have taken and continue to focus on actions to manage costs. These include restructuring and other cost reduction initiatives, such as reducing discretionary spending, 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 fourth quarter of fiscal 2021, we expect our net sales to be approximately $3.8 billion as compared to $3.26 billion in the fourth quarter of fiscal 2020. This increase reflects sales growth in the Transportation Solutions and Communications Solutions segments and, to a lesser degree, the Industrial Solutions segment. We expect diluted earnings per share from continuing operations to be approximately $1.55 per share in the fourth quarter of fiscal 2021. This outlook reflects the positive impact of foreign currency exchange rates on net sales and earnings per share of approximately $82 million and $0.03 per share, respectively, in the fourth quarter of fiscal 2021 as compared to the fourth quarter of fiscal 2020.

For fiscal 2021, we expect our net sales to be approximately $14.9 billion as compared to $12.17 billion in fiscal 2020. This increase reflects sales growth in the Transportation Solutions segment and, to a lesser degree, the Communications Solutions and Industrial Solutions segments relative to fiscal 2020. We expect diluted earnings per share from continuing operations to be approximately $5.94 per share in fiscal 2021. This outlook reflects the positive impact of foreign currency exchange rates on net sales and earnings per share of approximately $473 million and $0.18 per share, respectively, in fiscal 2021 as compared to 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, including any developments related to the COVID-19 pandemic, and its potential effects on our customers and the end markets we serve. We have taken actions to manage costs and will continue to closely manage our costs in line with economic conditions. Additionally, we are managing our capital resources and monitoring capital availability to ensure that we have sufficient resources to fund future capital needs. See further discussion in "Liquidity and Capital Resources."

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Acquisitions

During the first nine months of fiscal 2021, we acquired two businesses for a combined cash purchase price of $125 million, net of cash acquired. The acquisitions were 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.







                                     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                         Nine Months Ended
                                          June 25,            June 26,             June 25,            June 26,
                                            2021                2020                 2021                2020
                                                                     ($ in millions)
        Transportation Solutions        $ 2,265    59 %     $ 1,255    49 %     $  6,776    61 %     $ 4,980    56 %
        Industrial Solutions              1,002    26           865    34          2,827    25         2,754    31
        Communications Solutions            578    15           428    17          1,502    14         1,177    13
        Total                           $ 3,845   100 %     $ 2,548   100 %     $ 11,105   100 %     $ 8,911   100 %
        


The following table provides an analysis of the change in our net sales by segment:







                                                  Change in Net Sales for the Quarter Ended June 25, 2021                                     Change in Net Sales for the Nine Months Ended June 25, 2021
                                                   versus Net Sales for the Quarter Ended June 26, 2020                                        versus Net Sales for the Nine Months Ended June 26, 2020
                                       Net Sales               Organic Net Sales                            Acquisition             Net Sales                Organic Net Sales                             Acquisitions
                                         Growth                      Growth               Translation      (Divestitures)             Growth                 Growth (Decline)           Translation       (Divestitures)
                                                                                                                     ($ in millions)
        Transportation Solutions $     1,010       80.5 %    $       921       71.6 %    $          89    $              -    $     1,796       36.1 %    $     1,438        28.4 %    $          269    $             89
        Industrial Solutions             137       15.8              109       12.6                 33                 (5)             73        2.7              (8)       (0.4)                  84                 (3)
        Communications Solutions         150       35.0              134       30.8                 16                   -            325       27.6              285        24.1                  40                   -
        Total                    $     1,297       50.9 %    $     1,164       45.0 %    $         138    $            (5)    $     2,194       24.6 %    $     1,715        19.0 %    $          393    $             86
        


Net sales increased $1,297 million, or 50.9%, in the third quarter of fiscal 2021 as compared to the third quarter of fiscal 2020. The increase in net sales resulted primarily from organic net sales growth of 45.0% and the positive impact of foreign currency translation of 5.4% due to the strengthening of certain foreign currencies. In the third quarter of fiscal 2020, our net sales included significant, unfavorable impacts from the COVID-19 pandemic.

In the first nine months of fiscal 2021, net sales increased $2,194 million, or 24.6%, as compared to the first nine months of fiscal 2020 due to organic net sales growth of 19.0%, the positive impact of foreign currency translation of 4.5% due to the strengthening of certain foreign currencies, and net sales contributions of 1.1% from acquisitions and divestitures. The significant, unfavorable impacts of the COVID-19 pandemic were included in our net sales in the first nine months of fiscal 2020. Price erosion adversely affected organic net sales by $47 million in the first nine months of fiscal 2021.

See further discussion of net sales below under "Segment Results."

Net Sales by Geographic Region. Our business operates in three geographic regions-Asia-Pacific, Europe/Middle East/Africa ("EMEA"), and the Americas-and our results of operations are influenced by changes in foreign currency exchange rates. Increases or decreases in the value of the U.S. dollar, compared to other currencies, will directly affect our reported results as we translate those currencies into U.S. dollars at the end of each fiscal period.

Approximately 60% of our net sales were invoiced in currencies other than the U.S. dollar in the first nine months of fiscal 2021.

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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                         Nine Months Ended
                          June 25,            June 26,             June 25,            June 26,
                            2021                2020                 2021                2020
                                                     ($ in millions)
        Asia-Pacific    $ 1,384    36 %     $ 1,032    41 %     $  4,013    36 %     $ 3,136    35 %
        EMEA              1,413    37           777    30          4,119    37         3,062    34
        Americas          1,048    27           739    29          2,973    27         2,713    31
        Total           $ 3,845   100 %     $ 2,548   100 %     $ 11,105   100 %     $ 8,911   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 June 25, 2021                                  Change in Net Sales for the Nine Months Ended June 25, 2021
                                        versus Net Sales for the Quarter Ended June 26, 2020                                      versus Net Sales for the Nine Months Ended June 26, 2020
                              Net Sales             Organic Net Sales                          Acquisition              Net Sales                Organic Net Sales                           Acquisitions
                               Growth                    Growth              Translation      (Divestitures)             Growth                       Growth                Translation     (Divestitures)
                                                                                                          ($ in millions)
        Asia-Pacific    $       352      34.1 %   $       294      27.9 %   $          61    $            (3)    $        877       28.0 %    $        705       22.3 %    $         178   $            (6)
        EMEA                    636      81.9             552      69.3                89                 (5)           1,057       34.5               715       22.8                264                 78
        Americas                309      41.8             318      42.9              (12)                   3             260        9.6               295       10.8               (49)                 14
        Total           $     1,297      50.9 %   $     1,164      45.0 %   $         138    $            (5)    $      2,194       24.6 %    $      1,715       19.0 %    $         393   $             86
        








        Cost of Sales and Gross Margin
        The following table presents cost of sales and gross margin information:
                                                            For the                                  For the
                                                         Quarters Ended                         Nine Months Ended
                                                     June 25,      June 26,                   June 25,      June 26,
                                                       2021          2020        Change         2021          2020       Change
                                                                                  ($ in millions)
        Cost of sales                               $    2,577    $    1,841    $    736     $    7,481    $    6,145    $ 1,336
        As a percentage of net sales                      67.0 %        72.3 %                     67.4 %        69.0 %
        Gross margin                                $    1,268    $      707    $    561     $    3,624    $    2,766    $   858
        As a percentage of net sales                      33.0 %        27.7 %                     32.6 %        31.0 %
        


Gross margin increased $561 million and $858 million in the third quarter and first nine 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, improved manufacturing productivity and the positive impact of foreign currency translation.

We use a wide variety of raw materials in the manufacture of our products and cost of sales and gross margin are subject to variability in raw material prices. As markets recover from the COVID-19 pandemic, increases in consumer demand have led to shortages and price increases in some of our input materials. During the third quarter and first nine months of fiscal 2021, copper, gold, silver, and palladium prices as well as the prices of certain other raw materials have

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increased from prior year levels. The following table presents the average prices incurred related to copper, gold, silver, and palladium:







                                         For the                     For the
                                      Quarters Ended            Nine Months Ended
                                  June 25,      June 26,      June 25,      June 26,
                     Measure        2021          2020          2021          2020
        Copper            Lb.    $     3.41    $     2.78    $     3.07    $     2.80
        Gold         Troy oz.         1,735         1,411         1,664         1,380
        Silver       Troy oz.         22.92         15.97         21.11         16.13
        Palladium    Troy oz.         2,438         1,998         2,229         2,020
        


We expect to purchase approximately 200 million pounds of copper, 125,000 troy ounces of gold, 2.7 million troy ounces of silver, and 15,000 troy ounces of palladium in fiscal 2021.







        Operating Expenses
        The following table presents operating expense information:
                                                                  For the                                 For the
                                                              Quarters Ended                         Nine Months Ended
                                                          June 25,       June 26,                  June 25,      June 26,
                                                            2021           2020       Change         2021          2020       Change
                                                                                       ($ in millions)
        Selling, general, and administrative expenses    $      366     $      321    $    45     $    1,128    $    1,040    $    88
        As a percentage of net sales                            9.5 %         12.6 %                    10.2 %        11.7 %
        Restructuring and other charges, net             $       11     $       98    $  (87)     $      195    $      144    $    51
        Impairment of goodwill                                    -              -          -              -           900      (900)
        


Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased $45 million in the third quarter of fiscal 2021 from the third quarter of fiscal 2020 due primarily to increased selling expenses to support higher sales levels, higher incentive compensation costs due to improved operational performance, and the negative impact of foreign currency translation, partially offset by savings attributable to restructuring actions and gains on the sale of real estate. In the first nine months of fiscal 2021, selling, general, and administrative expenses increased $88 million from the same period of fiscal 2020 due primarily to higher incentive compensation costs, the negative impact of foreign currency translation, and increased selling expenses, partially offset by savings attributable to cost control measures and restructuring actions and gains on the sale of real estate.

Restructuring and Other Charges, Net. We are committed to continuous productivity improvements, and we evaluate opportunities to simplify our global manufacturing footprint, migrate facilities to lower-cost regions, reduce fixed costs, and eliminate excess capacity. These initiatives are designed to help us maintain our competitiveness in the industry, improve our operating leverage, and position us for future growth.

During fiscal 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 $170 million during the first nine months of fiscal 2021, of which $162 million related to the fiscal 2021 restructuring program. Annualized cost savings related to the fiscal 2021 actions commenced during the first nine months of fiscal 2021 are expected to be approximately $75 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 $200 million.

See Note 2 to the Condensed Consolidated Financial Statements for additional information regarding net restructuring and other charges.

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Impairment of Goodwill. During the first nine months of fiscal 2020, we recorded a goodwill impairment charge of $900 million related to the Sensors reporting unit in our Transportation Solutions segment.







        Operating Income
        The following table presents operating income and operating margin information:
                                   For the                                  For the
                                Quarters Ended                         Nine Months Ended
                            June 25,     June 26,                   June 25,       June 26,
                              2021         2020        Change         2021           2020       Change
                                                          ($ in millions)
        Operating income    $     714    $     134    $    580     $     1,774     $     190    $ 1,584
        Operating margin         18.6 %        5.3 %                      16.0 %         2.1 %
        


Operating income included the following:







                                                                    For the                      For the
                                                                Quarters Ended              Nine Months Ended
                                                            June 25,       June 26,      June 25,       June 26,
                                                              2021           2020          2021           2020
                                                                                (in millions)
        Acquisition-related charges:
        Acquisition and integration costs                  $        9      $       8    $       23     $        27
        Charges associated with the amortization of
        acquisition-related fair value adjustments                  -              -             3               -
                                                                    9              8            26              27
        Restructuring and other charges, net                       11             98           195             144
        Impairment of goodwill                                      -              -             -             900
        Total                                              $       20      $     106    $      221     $     1,071
        


See discussion of operating income below under "Segment Results."







        Non-Operating Items
        The following table presents select non-operating information:
                                                              For the                                 For the
                                                           Quarters Ended                        Nine Months Ended
                                                       June 25,      June 26,                 June 25,       June 26,
                                                         2021          2020       Change        2021           2020       Change
                                                                                    ($ in millions)
        Income tax expense                            $      124    $      185    $  (61)     $     290     $      674    $ (384)
        Effective tax rate                                  17.6 %       145.7 %                   16.6 %        360.4 %
        


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 third quarters and first nine months of fiscal 2021 and 2020, including the Switzerland Federal Act on Tax Reform and AHV Financing and an increase to the valuation allowance for certain non-U.S. deferred tax assets in fiscal 2020.

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                                        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
                                               Quarters Ended                          Nine Months Ended
                                        June 25,             June 26,            June 25,            June 26,
                                          2021                 2020                2021                2020
                                                                   ($ in millions)
        Automotive                   $ 1,600     71 %     $   797     63 %     $ 4,859    72 %     $ 3,567    71 %
        Commercial transportation        382     17           233     19         1,095    16           785    16
        Sensors                          283     12           225     18           822    12           628    13
        Total                        $ 2,265    100 %     $ 1,255    100 %     $ 6,776   100 %     $ 4,980   100 %
        


Industry end market information is presented consistently with our internal

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 June 25, 2021                             Change in Net Sales for the Nine Months Ended June 25, 2021
                                                   versus Net Sales for the Quarter Ended June 26, 2020                               versus Net Sales for the Nine Months Ended June 26, 2020
                                                 Net Sales                 Organic Net Sales                                 Net Sales                Organic Net Sales
                                                  Growth                         Growth               Translation             Growth                       Growth                Translation      Acquisition
        . . .
        


Jul 29, 2021

COMTEX_390609708/2041/2021-07-29T10:02:29

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