10-Q 1 tel-20221230x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended December 30, 2022

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

001-33260

(Commission File Number)

Graphic

TE CONNECTIVITY LTD.

(Exact name of registrant as specified in its charter)

Switzerland
(Jurisdiction of Incorporation)

98-0518048
(I.R.S. Employer Identification No.)

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 January 20, 2023 was 316,456,616.

TE CONNECTIVITY LTD.

INDEX TO FORM 10-Q

   

   

   

Page

Part I.

Financial Information

Item 1.

Financial Statements

1

Condensed Consolidated Statements of Operations for the Quarters Ended December 30, 2022 and December 24, 2021 (unaudited)

1

Condensed Consolidated Statements of Comprehensive Income for the Quarters Ended December 30, 2022 and December 24, 2021 (unaudited)

2

Condensed Consolidated Balance Sheets as of December 30, 2022 and September 30, 2022 (unaudited)

3

Condensed Consolidated Statements of Shareholders’ Equity for the Quarters Ended December 30, 2022 and December 24, 2021 (unaudited)

4

Condensed Consolidated Statements of Cash Flows for the Quarters Ended December 30, 2022 and December 24, 2021 (unaudited)

5

Notes to Condensed Consolidated Financial Statements (unaudited)

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

Item 4.

Controls and Procedures

34

Part II.

Other Information

Item 1.

Legal Proceedings

35

Item 1A.

Risk Factors

35

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 6.

Exhibits

36

Signatures

37

i

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TE CONNECTIVITY LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

For the

Quarters Ended

December 30,

December 24,

    

2022

    

2021

    

(in millions, except per share data)

Net sales

$

3,841

$

3,818

Cost of sales

 

2,654

 

2,588

Gross margin

 

1,187

 

1,230

Selling, general, and administrative expenses

 

392

363

Research, development, and engineering expenses

 

173

175

Acquisition and integration costs

 

9

8

Restructuring and other charges, net

 

111

12

Operating income

502

672

Interest income

9

2

Interest expense

 

(21)

(12)

Other income (expense), net

 

(5)

15

Income from continuing operations before income taxes

 

485

 

677

Income tax expense

 

(87)

(110)

Income from continuing operations

 

398

 

567

Loss from discontinued operations, net of income taxes

 

(1)

(1)

Net income

$

397

$

566

Basic earnings per share:

Income from continuing operations

$

1.26

$

1.73

Income from discontinued operations

 

 

Net income

 

1.25

 

1.73

Diluted earnings per share:

Income from continuing operations

$

1.25

$

1.72

Income from discontinued operations

 

 

Net income

 

1.24

 

1.72

Weighted-average number of shares outstanding:

Basic

 

317

327

Diluted

 

319

330

See Notes to Condensed Consolidated Financial Statements.

1

TE CONNECTIVITY LTD.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

For the

Quarters Ended

December 30,

December 24,

    

2022

    

2021

    

(in millions)

Net income

$

397

$

566

Other comprehensive income:

Currency translation

 

305

18

Adjustments to unrecognized pension and postretirement benefit costs, net of income taxes

 

2

4

Gains on cash flow hedges, net of income taxes

 

69

1

Other comprehensive income

 

376

 

23

Comprehensive income

773

589

Less: comprehensive (income) loss attributable to noncontrolling interests

(9)

6

Comprehensive income attributable to TE Connectivity Ltd.

$

764

$

595

See Notes to Condensed Consolidated Financial Statements.

2

TE CONNECTIVITY LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

December 30,

September 30,

    

2022

    

2022

    

(in millions, except share

data)

Assets

Current assets:

Cash and cash equivalents

$

793

$

1,088

Accounts receivable, net of allowance for doubtful accounts of $45

 

2,910

 

2,865

Inventories

 

2,927

 

2,676

Prepaid expenses and other current assets

 

688

 

639

Total current assets

 

7,318

 

7,268

Property, plant, and equipment, net

 

3,781

 

3,567

Goodwill

 

5,511

 

5,258

Intangible assets, net

 

1,357

 

1,288

Deferred income taxes

 

2,591

 

2,498

Other assets

 

795

 

903

Total assets

$

21,353

$

20,782

Liabilities, redeemable noncontrolling interests, and shareholders' equity

Current liabilities:

Short-term debt

$

820

$

914

Accounts payable

 

1,751

 

1,593

Accrued and other current liabilities

 

1,849

 

2,125

Total current liabilities

 

4,420

 

4,632

Long-term debt

 

3,398

 

3,292

Long-term pension and postretirement liabilities

 

728

 

695

Deferred income taxes

 

228

 

244

Income taxes

 

319

 

304

Other liabilities

 

792

 

718

Total liabilities

 

9,885

 

9,885

Commitments and contingencies (Note 9)

Redeemable noncontrolling interests

104

95

Shareholders' equity:

Common shares, CHF 0.57 par value, 330,830,781 shares authorized and issued

 

146

146

Accumulated earnings

 

13,200

 

12,832

Treasury shares, at cost, 14,065,031 and 12,749,540 shares, respectively

 

(1,854)

 

(1,681)

Accumulated other comprehensive loss

 

(128)

 

(495)

Total shareholders' equity

 

11,364

 

10,802

Total liabilities, redeemable noncontrolling interests, and shareholders' equity

$

21,353

$

20,782

See Notes to Condensed Consolidated Financial Statements.

3

TE CONNECTIVITY LTD.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

For the Quarter Ended December 30, 2022

Accumulated

Other

Total

Common Shares

Treasury Shares

Contributed

Accumulated

Comprehensive

Shareholders'

   

Shares

   

Amount

   

Shares

   

Amount

   

Surplus

   

Earnings

   

Loss

   

Equity

   

(in millions)

Balance at September 30, 2022

 

331

$

146

 

(13)

$

(1,681)

$

$

12,832

$

(495)

$

10,802

Net income

 

 

 

 

 

 

397

 

 

397

Other comprehensive income

 

 

 

 

 

 

 

367

 

367

Share-based compensation expense

 

 

 

 

 

32

 

 

 

32

Exercise of share options

 

 

 

 

11

 

 

 

 

11

Restricted share award vestings and other activity

 

 

 

1

 

49

 

(32)

 

(29)

 

 

(12)

Repurchase of common shares

 

 

 

(2)

 

(233)

 

 

 

 

(233)

Balance at December 30, 2022

331

$

146

 

(14)

$

(1,854)

$

$

13,200

$

(128)

$

11,364

For the Quarter Ended December 24, 2021

Accumulated

Other

Total

Common Shares

Treasury Shares

Contributed

Accumulated

Comprehensive

Shareholders'

   

Shares

   

Amount

   

Shares

   

Amount

   

Surplus

   

Earnings

   

Loss

   

Equity

   

(in millions)

Balance at September 24, 2021

 

336

$

148

 

(9)

$

(1,055)

$

$

11,709

$

(168)

$

10,634

Net income

 

 

 

 

 

566

 

 

566

Other comprehensive income

 

 

 

 

 

 

 

29

 

29

Share-based compensation expense

 

 

 

 

 

32

 

 

 

32

Exercise of share options

 

 

 

 

22

 

 

 

 

22

Restricted share award vestings and other activity

 

 

 

1

 

5

 

(32)

 

10

 

 

(17)

Repurchase of common shares

 

 

 

(2)

 

(246)

 

 

 

 

(246)

Balance at December 24, 2021

336

$

148

 

(10)

$

(1,274)

$

$

12,285

$

(139)

$

11,020

See Notes to Condensed Consolidated Financial Statements.

4

TE CONNECTIVITY LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

For the

Quarters Ended

December 30,

December 24,

    

2022

    

2021

    

(in millions)

Cash flows from operating activities:

Net income

$

397

$

566

Loss from discontinued operations, net of income taxes

 

1

 

1

Income from continuing operations

 

398

 

567

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:

Depreciation and amortization

 

187

 

198

Deferred income taxes

 

(35)

 

4

Non-cash lease cost

34

31

Provision for losses on accounts receivable and inventories

 

51

 

33

Share-based compensation expense

 

32

 

32

Other

 

49

 

(9)

Changes in assets and liabilities, net of the effects of acquisitions and divestitures:

Accounts receivable, net

 

(54)

 

148

Inventories

 

(324)

 

(264)

Prepaid expenses and other current assets

 

(86)

 

52

Accounts payable

 

149

 

15

Accrued and other current liabilities

 

(39)

 

(285)

Income taxes

 

25

 

34

Other

 

194

 

(24)

Net cash provided by operating activities

 

581

 

532

Cash flows from investing activities:

Capital expenditures

 

(183)

 

(172)

Proceeds from sale of property, plant, and equipment

 

1

 

54

Acquisition of businesses, net of cash acquired

 

(109)

 

(100)

Proceeds from divestiture of businesses, net of cash retained by businesses sold

16

Other

 

26

 

3

Net cash used in investing activities

 

(265)

 

(199)

Cash flows from financing activities:

Net increase (decrease) in commercial paper

 

(139)

 

479

Repayment of debt

 

(4)

 

(555)

Proceeds from exercise of share options

 

11

 

22

Repurchase of common shares

 

(287)

 

(304)

Payment of common share dividends to shareholders

 

(178)

 

(163)

Other

 

(24)

 

(31)

Net cash used in financing activities

 

(621)

 

(552)

Effect of currency translation on cash

 

10

 

(2)

Net decrease in cash, cash equivalents, and restricted cash

 

(295)

 

(221)

Cash, cash equivalents, and restricted cash at beginning of period

 

1,088

 

1,203

Cash, cash equivalents, and restricted cash at end of period

$

793

$

982

See Notes to Condensed Consolidated Financial Statements.

5

Table of Contents

TE CONNECTIVITY LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. 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 30, 2022.

Unless otherwise indicated, references in the Condensed Consolidated Financial Statements to fiscal 2023 and fiscal 2022 are to our fiscal years ending September 29, 2023 and ended September 30, 2022, respectively.

2. Restructuring and Other Charges, Net

Net restructuring and other charges consisted of the following:

For the

Quarters Ended

December 30,

December 24,

    

2022

    

2021

    

(in millions)

Restructuring charges, net

$

104

$

21

Impairment of held for sale businesses and (gain) loss on divestitures, net

6

(9)

Other charges, net

 

1

 

Restructuring and other charges, net

$

111

$

12

Net restructuring and related charges by segment were as follows:

For the

Quarters Ended

December 30,

December 24,

    

2022

    

2021

    

(in millions)

Transportation Solutions

$

74

$

5

Industrial Solutions

 

6

 

8

Communications Solutions

 

24

 

8

Restructuring charges, net

104

21

Plus: charges included in cost of sales(1)

12

Restructuring and related charges, net

$

104

$

33

(1)Charges included in cost of sales were attributable to inventory-related charges within the Industrial Solutions segment.

6

Table of Contents

TE CONNECTIVITY LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

Activity in our restructuring reserves was as follows:

Balance at

Balance at

  

September 30,

Changes in

Cash

Non-Cash

Currency

December 30,

    

2022

    

Charges

    

Estimate

    

Payments

    

Items

    

Translation

    

2022

    

(in millions)

Fiscal 2023 Actions:

Employee severance

$

$

101

$

$

(6)

$

$

1

$

96

Property, plant, and equipment

4

(4)

Total

105

(6)

(4)

1

96

Fiscal 2022 Actions:

Employee severance

108

4

(7)

(13)

5

97

Facility and other exit costs

1

3

(2)

2

Total

109

7

(7)

(15)

5

99

Pre-Fiscal 2022 Actions:

Employee severance

112

1

(11)

7

109

Facility and other exit costs

7

(2)

(2)

1

4

Total

119

(1)

(13)

8

113

Total Activity

$

228

$

112

$

(8)

$

(34)

$

(4)

$

14

$

308

Fiscal 2023 Actions

During fiscal 2023, we initiated a restructuring program associated with cost structure improvements primarily in the Transportation Solutions and Communications Solutions segments. During the quarter ended December 30, 2022, we recorded restructuring charges of $105 million in connection with this program. We expect to complete all restructuring actions commenced during the quarter ended December 30, 2022 by the end of fiscal 2024, and we expect additional charges related to the actions commenced during the quarter ended December 30, 2022 to be insignificant.

Fiscal 2022 Actions

During fiscal 2022, we initiated a restructuring program associated with footprint consolidation and cost structure improvements across all segments. In connection with this program, during the quarter ended December 24, 2021, we recorded restructuring and related charges of $33 million. We expect to complete all restructuring actions commenced during fiscal 2022 by the end of fiscal 2024 and to incur additional charges of approximately $21 million related primarily to employee severance and facility exit costs.

The following table summarizes charges incurred for the fiscal 2022 program by segment as of December 30, 2022:

Total

Cumulative

Remaining

Expected

Charges

Expected

    

Charges

    

Incurred

    

Charges

    

(in millions)

Transportation Solutions

$

97

$

86

$

11

Industrial Solutions

 

55

 

52

 

3

Communications Solutions

 

30

 

23

 

7

Total

$

182

$

161

$

21

Pre-Fiscal 2022 Actions

During the quarter ended December 30, 2022, we recorded restructuring credits of $1 million related to pre-fiscal 2022 actions. We expect that any additional charges related to restructuring actions commenced prior to 2022 will be insignificant.

7

Table of Contents

TE CONNECTIVITY LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

Total Restructuring Reserves

Restructuring reserves included on the Condensed Consolidated Balance Sheets were as follows:

December 30,

September 30,

    

2022

    

2022

    

(in millions)

Accrued and other current liabilities

$

268

$

182

Other liabilities

 

40

 

46

Restructuring reserves

$

308

$

228

3. Acquisitions

On December 30, 2022, we acquired one business for a cash purchase price of $109 million, net of cash acquired. Due to the timing of the transaction, which was reported as part of our Industrial Solutions segment, we preliminarily allocated the purchase price to goodwill and identifiable intangible assets. Our valuation of identifiable intangible assets, assets acquired, and liabilities assumed is currently in process; therefore, the current allocation is subject to adjustment upon finalization of the valuations. The amount of these potential adjustments could be significant.

We acquired one business for a cash purchase price of $125 million, net of cash acquired, during the quarter ended December 24, 2021. The acquisition was reported as part of our Communications Solutions segment from the date of acquisition. Also during the quarter ended December 24, 2021, we finalized the purchase price allocation of certain fiscal 2021 acquisitions, which included the recognition of $25 million of cash acquired.

4. Inventories

Inventories consisted of the following:

December 30,

September 30,

    

2022

    

2022

    

(in millions)

Raw materials

$

486

$

390

Work in progress

 

1,283

 

1,066

Finished goods

 

1,158

 

1,220

Inventories

$

2,927

$

2,676

8

Table of Contents

TE CONNECTIVITY LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

5. Goodwill

The changes in the carrying amount of goodwill by segment were as follows:

    

Transportation

    

Industrial

    

Communications

    

    

Solutions

Solutions

Solutions

Total

(in millions)

September 30, 2022(1)

$

1,439

$

3,118

$

701

$

5,258

Acquisition

79

79

Currency translation and other

 

48

 

104

 

22

 

174

December 30, 2022(1)

$

1,487

$

3,301

$

723

$

5,511

(1)At December 30, 2022 and September 30, 2022, 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 quarter ended December 30, 2022, we recognized goodwill in the Industrial Solutions segment in connection with a recent acquisition. See Note 3 for additional information regarding acquisitions.

6. Intangible Assets, Net

Intangible assets consisted of the following:

December 30, 2022

September 30, 2022

    

Gross

    

    

Net

    

Gross

    

    

Net

Carrying

Accumulated

Carrying

Carrying

Accumulated

Carrying

Amount

Amortization

Amount

Amount

Amortization

Amount

    

(in millions)

Customer relationships

$

1,781

$

(751)

$

1,030

$

1,642

$

(687)

$

955

Intellectual property

1,218

(902)

316

1,174

(852)

322

Other

 

17

 

(6)

 

11

 

16

 

(5)

 

11

Total

$

3,016

$

(1,659)

$

1,357

$

2,832

$

(1,544)

$

1,288

Intangible asset amortization expense was $46 million and $48 million for the quarters ended December 30, 2022 and December 24, 2021, respectively.

At December 30, 2022, the aggregate amortization expense on intangible assets is expected to be as follows:

    

(in millions)

  

Remainder of fiscal 2023

$

148

Fiscal 2024

167

Fiscal 2025

 

152

Fiscal 2026

 

146

Fiscal 2027

 

127

Fiscal 2028

 

95

Thereafter

 

522

Total

$

1,357

9

Table of Contents

TE CONNECTIVITY LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

7. Debt

As of December 30, 2022, Tyco Electronics Group S.A. (“TEGSA”), our wholly-owned subsidiary, had $231 million of commercial paper outstanding at a weighted-average interest rate of 4.70%. TEGSA had $370 million of commercial paper outstanding at a weighted-average interest rate of 3.45% at September 30, 2022.

The fair value of our debt, based on indicative valuations, was approximately $4,046 million and $3,990 million at December 30, 2022 and September 30, 2022, respectively.

8. Leases

The components of lease cost were as follows: