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 more information on this measure.
TE Connectivity Ltd.("TE Connectivity" or the "Company," which may be referred to as "we," "us," or "our") is a global industrial technology leader creating a safer, sustainable, productive, and connected future. Our broad range of connectivity and sensor solutions, proven in the harshest environments, enable advancements in transportation, industrial applications, medical technology, energy, data communications, and the home.
The first quarter of fiscal 2022 included the following:
Our net sales increased by 8.4% in the first quarter of fiscal 2022 compared to
the same period of fiscal 2021 due to sales growth in industrial solutions
? and Communications Solutions, partially offset by lower sales in
the Transportation Solutions segment. On an organic basis, our net sales
increased by 8.0% in the first quarter of fiscal 2022 compared to the same
period of the 2021 financial year.
? Our net sales by segment were as follows:
? Transportation Solutions – Our net sales decreased 3.0% in the first quarter of
fiscal 2022 primarily due to lower automotive end-market sales.
Industrial Solutions-Our net sales increased 21.3% in the first quarter of
? fiscal year 2022 primarily due to increased sales in the
equipment end market.
Communications Solutions-Our net sales increased 41.4% in the first quarter of
? fiscal 2022 due to increased data and device sales and the
appliance end markets.
? Net cash provided by operating activities was
of fiscal 2022. COVID-19 Pandemic The COVID-19 pandemic has affected nearly all regions around the world and resulted in business slowdowns or shutdowns and travel restrictions in affected areas. The pandemic had a negative impact on certain of our businesses in fiscal 2021. The pandemic has not had a significant impact on our ability to staff our operations, and we do not expect that it will continue to have a significant impact on our businesses in the near term. Throughout our operations, we implemented additional health and safety measures for the protection of our employees, including providing personal protective equipment, enhanced cleaning and sanitizing of our facilities, and remote working arrangements. 19
The COVID-19 pandemic has impacted and continues to impact our business operations globally, causing disruption in our suppliers' and customers' supply chains, some of our business locations to reduce or suspend operations, and a reduction in demand for certain products from direct customers or end markets. In addition, the pandemic had far-reaching impacts on many additional aspects of our operations, both directly and indirectly, including with respect to its impacts on customer behaviors, business and manufacturing operations, inventory, our employees, and the market generally. We assessed the impact of the COVID-19 pandemic and adjusted our operations and businesses, a number of which are operating as essential businesses, and will continue to do so if necessary. The extent to which the pandemic will continue to impact our business and the markets we serve will depend on future developments which may include the further spread of the virus, variant strains of the virus, and the resumption of high levels of infections and hospitalizations as well as the success of public health advancements, including vaccine production and distribution. Although we do not expect the COVID-19 pandemic to have a significant impact on our businesses in the near term, it may have a negative impact on our financial condition, liquidity, and results of operations in future periods. In response to the pandemic and resulting economic environment, we have taken and continue to focus on actions to manage costs. These include restructuring and other cost reduction initiatives, such as reducing discretionary spending and travel. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, suppliers, shareholders, and the communities in which we operate.
In the second quarter of fiscal 2022, we expect our net sales to be approximately
$3.8 billionas compared to $3.7 billionin the second quarter of fiscal 2021. This increase reflects sales growth in the Industrial Solutions and Communications Solutions segments, partially offset by sales declines in the Transportation Solutions segment driven primarily by an approximate 5% decline in global automotive production. We expect diluted earnings per share from continuing operations to be approximately $1.52per share in the second quarter of fiscal 2022. This outlook reflects the negative impact of foreign currency exchange rates on net sales and earnings per share of approximately $111 millionand $0.03per share, respectively, in the second quarter of fiscal 2022 as compared to the second quarter of fiscal 2021. This outlook is based on foreign currency exchange rates and commodity prices that are consistent with current levels. On December 27, 2021, the canton of Schaffhausenin Switzerlandenacted a reduction to its corporate income tax rate. We expect to recognize approximately $25 millionof income tax expense related to the write-down of certain deferred tax assets to the lower tax rate in the second quarter of fiscal 2022, the period of enactment. This income tax charge is reflected in the above outlook. We are monitoring the current macroeconomic environment, including any continued impacts from the COVID-19 pandemic, and its potential effects on our customers and the end markets we serve. We have taken actions to manage costs and will continue to closely manage our costs in line with economic conditions. Additionally, we are managing our capital resources and monitoring capital availability to ensure that we have sufficient resources to fund future capital needs. See further discussion in "Liquidity and Capital Resources."
During the first quarter of fiscal 2022, we acquired one business for a cash purchase price of
$125 million, net of cash acquired. The acquisition was reported as part of our Communications Solutions segment from the date of acquisition. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions. 20 Table of Contents Results of Operations Net Sales The following table presents our net sales and the percentage of total net sales by segment: For the Quarters Ended December 24, December 25, 2021 2020 ($ in millions) Transportation Solutions $ 2,15856 % $ 2,22463 % Industrial Solutions 1,059 28 873 25 Communications Solutions 601 16 425 12 Total $ 3,818100 % $ 3,522100 %
The following table presents an analysis of the evolution of our turnover by segment:
Sales for the quarter ended
Net Sales Organic Net Sales Acquisitions Growth (Decline) Growth (Decline) Translation (Divestitures) ($ in millions) Transportation Solutions
$ (66)(3.0) % $ (42)(1.8) % $ (24)$ - Industrial Solutions 186 21.3 154 17.6 (20) 52 Communications Solutions 176 41.4 172 40.2 (1) 5 Total $ 2968.4 % $ 2848.0 % $ (45)$ 57 Net sales increased $296 million, or 8.4%, in the first quarter of fiscal 2022 as compared to the first quarter of fiscal 2021. The increase in net sales resulted from organic net sales growth of 8.0% and net sales contributions of 1.7% from acquisitions and divestitures, partially offset by the negative impact of foreign currency translation of 1.3% due to the weakening of certain foreign currencies. Pricing actions positively affected organic net sales by $52 millionin the first quarter of fiscal 2022.
See more details on net sales below under “Segment results”.
Net Salesby Geographic Region. Our business operates in three geographic regions- Europe/ Middle East/ Africa("EMEA"), Asia-Pacific, and the Americas-and our results of operations are influenced by changes in foreign currency exchange rates. Increases or decreases in the value of the U.S.dollar, compared to other currencies, will directly affect our reported results as we translate those currencies into U.S.dollars at the end of each fiscal period.
Approximately 60% of our net sales were invoiced in currencies other than the
The following table presents our net sales and percentage of total net sales by geographic region(1):
For the Quarters Ended December 24, December 25, 2021 2020 ($ in millions) EMEA
$ 1,31434 % $ 1,31637 % Asia-Pacific 1,470 39 1,293 37 Americas 1,034 27 913 26 Total $ 3,818100 % $ 3,522100 %
(1) Net sales to external customers are allocated to the countries
on the legal entity that records the sale. 21 Table of Contents The following table provides an analysis of the change in our net sales by geographic region: Change in Net Sales for the Quarter Ended December 24, 2021 versus Net Sales for the Quarter Ended December 25, 2020 Net Sales Organic Net Sales Acquisitions Growth (Decline) Growth Translation (Divestitures) ($ in millions) EMEA
$ (2)(0.2) % $ 60.3 % $ (44)$ 36 Asia-Pacific 177 13.7 164 12.6 - 13 Americas 121 13.3 114 12.5 (1) 8 Total $ 2968.4 % $ 2848.0 % $ (45)$ 57
Cost of sales and gross margin
The following table presents information on cost of sales and gross margin:
For the Quarters Ended December 24, December 25, 2021 2020 Change ($ in millions) Cost of sales
$ 2,588 $ 2,376 $ 212As a percentage of net sales 67.8 % 67.5 % Gross margin $ 1,230 $ 1,146 $ 84As a percentage of net sales 32.2 % 32.5 %
Gross margin increased
We use a wide variety of raw materials in the manufacture of our products and cost of sales and gross margin are subject to variability in raw material prices. As markets recover from the COVID-19 pandemic, increases in consumer demand have led to shortages and price increases in some of our input materials. During the past several quarters, copper, gold, silver, and palladium prices as well as the prices of certain other raw materials have increased from prior year levels. The following table presents the average prices incurred related to copper, gold, silver, and palladium: For the Quarters Ended December 24, December 25, Measure 2021 2020 Copper Lb.
$ 3.80 $ 2.88Gold Troy oz. 1,797 1,599 Silver Troy oz. 23.56 19.70 Palladium Troy oz. 2,356 2,137 We expect to purchase approximately 220 million pounds of copper, 125,000 troy ounces of gold, 2.9 million troy ounces of silver, and 15,000 troy ounces of palladium in fiscal 2022. 22 Table of Contents Operating Expenses
The following table presents information on operating expenses:
For the Quarters Ended December 24, December 25, 2021 2020 Change ($ in millions)
Selling, general, and administrative expenses $ 363 $ 361
$ 2As a percentage of net sales 9.5 % 10.2 % Restructuring and other charges, net $ 12
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased slightly in the first quarter of fiscal 2022 from the first quarter of fiscal 2021 due primarily to increased selling expenses to support higher sales levels, largely offset by a gain on the sale of real estate. Restructuring and Other Charges, Net. We are committed to continuous productivity improvements, and we evaluate opportunities to simplify our global manufacturing footprint, migrate facilities to lower-cost regions, reduce fixed costs, and eliminate excess capacity. These initiatives are designed to help us maintain our competitiveness in the industry, improve our operating leverage, and position us for future growth. During fiscal 2022 and 2021, we initiated restructuring programs associated with footprint consolidation and cost structure improvements across all segments. We incurred net restructuring and related charges of
$33 millionduring the first quarter of fiscal 2022, of which $12 millionwas recorded in cost of sales. Annualized cost savings related to the fiscal 2022 actions commenced during the first quarter of fiscal 2022 are expected to be approximately $28 millionand are expected to be realized by the end of fiscal 2024. Cost savings will be reflected primarily in cost of sales and selling, general, and administrative expenses. For fiscal 2022, we expect total restructuring charges to be approximately $150 millionand total spending, which will be funded with cash from operations, to be approximately $190 million.
See Note 2 to the condensed consolidated financial statements for more information on net restructuring charges and other charges.
The following table presents operating income and operating margin information: For the Quarters Ended December 24, December 25, 2021 2020 Change ($ in millions) Operating income $ 672 $ 448
$ 224Operating margin 17.6 % 12.7 % 23 Table of Contents
Operating income includes the following items:
For the Quarters Ended December 24, December 25, 2021 2020 (in millions) Acquisition-related charges: Acquisition and integration costs $ 8 $ 8 Charges associated with the amortization of acquisition-related fair value adjustments 8 1 16 9 Restructuring and other charges, net 12 167 Restructuring-related charges recorded in cost of sales 12 - Total $ 40 $ 176
See discussion of operating income below under “Segment results”.
The following table presents certain non-operational information:
For the Quarters Ended December 24, December 25, 2021 2020 Change ($ in millions) Income tax expense $ 110 $ 60
$ 50Effective tax rate 16.2 % 13.8 % Income Taxes. See Note 12 to the Condensed Consolidated Financial Statements for discussion of items impacting income tax expense and the effective tax rate for the first quarters of fiscal 2022 and 2021.
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