What changed in this filing

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Item 7. Management’s Discussion and Analysis

2020-11-10 compared with 2019-11-12 · 195 added, 138 removed, 365 unchanged (48% of the section changed)

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Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended September 27, 2019.

The following discussion includes organic net sales growth which is a non-GAAP financial measure.

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.

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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.

Fiscal 2019 included the following:

● Our fiscal 2019 net sales decreased 3.9% from fiscal 2018 levels due to sales declines in the Communications Solutions and Transportation Solutions segments, partially offset by growth in the Industrial Solutions segment.

Summary of Fiscal 2020 Performance

● Our fiscal 2020 net sales decreased 9.5% from fiscal 2019 levels due to sales declines in the Transportation Solutions segment and, to a lesser degree, the Industrial Solutions and Communications Solutions segments.

On an organic basis, our net sales decreased 9.9% in fiscal 2020 as compared to fiscal 2019.

Our net sales declines included significant unfavorable impacts from the COVID-19 pandemic.

● Our net sales by segment were as follows:

● Transportation Solutions —Our net sales decreased 5.7% due primarily to sales declines in the automotive end market.

● Industrial Solutions —Our net sales increased 2.5% primarily as a result of increased sales in the aerospace, defense, oil, and gas end market.

● Transportation Solutions —Our net sales decreased 12.5% due to sales declines in the automotive end market and, to a lesser degree, the commercial transportation and sensors end markets.

● Industrial Solutions —Our net sales decreased 6.1% primarily as a result of sales declines in the industrial equipment and the aerospace, defense, oil, and gas end markets.

● Communications Solutions —Our net sales decreased 3.5% due to sales declines in both the appliances and the data and devices end markets.

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● Net cash provided by continuing operating activities was $1,991 million in fiscal 2020.

In the first quarter of fiscal 2020, we expect our net sales to be between $3.0 billion and $3.2 billion as compared to $3.35 billion in the first quarter of fiscal 2019.

We expect our net sales to be between $12.7 billion and $13.3 billion in fiscal 2020 as compared to $13.4 billion in fiscal 2019.

These decreases are primarily due to sales declines in the Communications Solutions and Transportation Solutions segments.

Additional information regarding expectations for our reportable segments for the first quarter of fiscal 2020 as compared to the same period of fiscal 2019 and for fiscal 2020 compared to fiscal 2019 is as follows:

● Transportation Solutions —We expect our net sales to decrease in the automotive end market as a result of declines in global automotive production.

However, we expect our content gains to partially offset the impact of the overall market decline.

We expect our net sales to decrease in the commercial transportation end market as a result of market weakness.

● Industrial Solutions —We expect our net sales declines in the industrial equipment end market to be largely offset by sales increases in the aerospace, defense, oil, and gas and the energy end markets.

In the industrial equipment end market, market weakness in industrial applications is expected to be partially offset by continued growth in medical applications.

● Communications Solutions —We expect our net sales to decline in both the data and devices and the appliances end markets due to market weakness across all regions and reduced demand resulting from high inventory levels at distributors.

We expect diluted earnings per share from continuing operations to be in the range of $0.93 to $0.99 per share in the first quarter of fiscal 2020.

In fiscal 2020, we expect diluted earnings per share from continuing operations to be in the range of $4.21 to $4.61 per share.

The outlook for the first quarter of fiscal 2020 as compared to the same period of fiscal 2019 reflects the negative impact of foreign currency exchange rates on net sales and earnings per share of approximately $62 million and $0.03 per share, respectively.

The outlook for fiscal 2020 as compared to fiscal 2019 reflects the negative impact of foreign currency exchange rates on net sales and earnings per share of approximately $229 million and $0.11 per share, respectively.

● We acquired approximately 72% of the outstanding shares of First Sensor AG (“First Sensor”), a provider of sensing solutions based in Germany, during fiscal 2020.

COVID-19 Pandemic and Economic Conditions

A novel strain of coronavirus (“COVID-19”) was first identified in China in December 2019 and subsequently declared a pandemic by the World Health Organization.

To date, COVID-19 has surfaced in nearly all regions around the world and resulted in travel restrictions and business slowdowns or shutdowns in affected areas.

The COVID-19 pandemic negatively affected our sales and operating results during fiscal 2020, and we expect that it will continue to have an impact on our financial condition and results of operations 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 potential 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.

While a number of our businesses are operating as essential businesses, some have had and continue to have adjusted, reduced, or suspended operating activities at certain locations.

In addition, the COVID-19 pandemic may have far-reaching impacts on many additional aspects of our operations, directly and indirectly, including with respect to its impacts on customer behaviors, business and manufacturing operations, inventory, our employees, and the market generally, and the scope and nature of these impacts continue to evolve each day.

We expect to continue to assess the evolving impact of the COVID-19 pandemic and intend to adjust our operations accordingly.

For example, throughout our operations, we have enacted 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.

We expect that the COVID-19 pandemic will continue to impact several of the markets we serve, in particular the automotive and commercial aerospace markets.

We expect these markets to decline in the near term relative to fiscal 2020 and they may decline in future periods.

However, despite these market declines, we expect a slight increase in our total net sales in the first quarter of fiscal 2021 as compared to the first quarter of fiscal 2020.

See “Outlook” below for additional information.

In response to the current economic environment and our sales declines relative to fiscal 2019, 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, cutting capital expenditures, reducing travel, and furloughing certain employees.

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.

For further discussion of the risks and uncertainties associated with the COVID-19 pandemic, see “Part I.

Risk Factors.”

In the first quarter of fiscal 2021, we expect our net sales to be approximately $3.2 billion as compared to $3.17 billion in the first quarter of fiscal 2020.

This represents a slight increase resulting from sales growth in the Transportation Solutions and Communications Solutions segments, partially offset by sales declines in the Industrial Solutions segment.

Additional information regarding expectations for our reportable segments is as follows:

● Transportation Solutions —In the automotive end market, we expect our net sales increase resulting from content growth to be offset by sales decreases resulting from declines in global automotive production in the

first quarter of fiscal 2021 as compared to the same period of fiscal 2020.

We expect global automotive production in the first quarter of fiscal 2021 to decline compared to the first quarter of fiscal 2020, but to increase from the fourth quarter of fiscal 2020.

We expect our net sales to increase in the sensors and commercial transportation end markets in the first quarter of fiscal 2021 over the first quarter of fiscal 2020.

Our sales in the sensors end market are expected to benefit from the acquisition of First Sensor.

● Industrial Solutions —We expect our net sales to decline in the aerospace, defense, oil, and gas end market in the first quarter of fiscal 2021 as compared to the same period of fiscal 2020 primarily as a result of weakness in the commercial aerospace market.

We expect the commercial aerospace market to decline over 20% in fiscal 2021 as compared to fiscal 2020.

● Communications Solutions —We expect our net sales to increase in both the data and devices and the appliances end markets in the first quarter of fiscal 2021 as compared to the same period of fiscal 2020.

We expect to continue to benefit from cloud infrastructure spending and a recovery in the appliances market in fiscal 2021 as compared to fiscal 2020.

We expect diluted earnings per share from continuing operations to be approximately $0.83 per share in the first quarter of fiscal 2021.

This outlook reflects the positive impact of foreign currency exchange rates on net sales and earnings per share of approximately $55 million and $0.04 per share, respectively, in the first quarter of fiscal 2021 as compared to the same period of fiscal 2020.

The above outlook is based on foreign currency exchange rates and commodity prices 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.

We continue to closely manage our costs in line with economic conditions.

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.”

Swiss Parliament approved the Federal Act on Tax Reform and AHV Financing (“Swiss Tax Reform”) in September 2018, and it was approved by public vote in May 2019.

Certain measures became effective in fiscal 2019 and accordingly are reflected on our Consolidated Financial Statements.

In October 2019, the canton of Schaffhausen enacted Swiss Tax Reform into law.

We are currently assessing the impacts of the cantonal implementation, including reductions in tax rates.

We expect to recognize approximately $350 million of income tax expense related to the write-down of certain deferred tax assets to the lower tax rates in the first quarter of fiscal 2020, the period of enactment.

This income tax charge is not reflected in the above outlook;

however, our outlook does reflect an expected increase of approximately 400 basis points in our effective tax rate in fiscal 2020 as a result of other provisions of Swiss Tax Reform.

See Note 15 to the Consolidated Financial Statements for additional information regarding Swiss Tax Reform.

During fiscal 2020, we acquired approximately 72% of the outstanding shares of First Sensor for €181 million in cash (equivalent to $201 million using an exchange rate of $1.11 per €1.00), net of cash acquired.

This business has been reported as part of our Transportation Solutions segment from the date of acquisition.

We acquired four additional businesses for a combined cash purchase price of $135 million, net of cash acquired, during fiscal 2020.

The acquisitions were reported as part of our Transportation Solutions and Industrial Solutions segments from the date of acquisition.

During fiscal 2019, we acquired three businesses for a combined cash purchase price of $296 million, net of cash acquired.

The acquisitions were reported as part of our Transportation Solutions segment from the date of acquisition.

We acquired two businesses during fiscal 2018 for a combined cash purchase price of $153 million, net of cash acquired.

In fiscal 2019, we received $13 million as a result of a customary net working capital settlement for one of the acquisitions.

The acquisitions were reported as part of our Industrial Solutions segment from the date of acquisition.

See Note 5 to the Consolidated Financial Statements for additional information regarding acquisitions.

Pending Acquisition

During fiscal 2019, we entered into a business combination agreement and commenced a voluntary public tender offer for all outstanding shares of First Sensor AG (“First Sensor”), a provider of sensing solutions based in Germany.

The offer was accepted for approximately 72% of First Sensor’s shares.

The transaction, including the assumption of First Sensor’s outstanding net debt and minority interest, is valued at approximately €307 million.

Completion of the offer will be subject to customary closing conditions, including regulatory approvals.

We expect to complete the transaction in fiscal 2020.

Discontinued Operations

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Change in Net Sales for Fiscal 2020 versus Fiscal 2019

Organic Net Sales

Growth (Decline)

($ in millions)

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Net sales decreased $1,276 million, or 9.5%, in fiscal 2020 as compared to fiscal 2019.

The decrease in net sales resulted from the negative impact of foreign currency translation of 3.0% due to the weakening of certain foreign currencies and organic net sales declines 1.7%, partially offset by sales contributions from acquisitions of 0.8%.

The decrease in net sales resulted from organic net sales declines of 9.9% and the negative impact of foreign currency translation of 0.8% due to the weakening of certain foreign currencies, partially offset by sales contributions from acquisitions of 1.2%.

Price erosion adversely affected organic net sales by $173 million in fiscal 2020.

In fiscal 2020, our net sales declines included significant unfavorable impacts from the COVID-19 pandemic.

See further discussion of net sales below under “Segment Results.”

Net Sales by Geographic Region.

Our business operates in three geographic regions—EMEA, Asia–Pacific, and the Americas—and our results of operations are influenced by changes in foreign currency exchange rates.

Our business operates in three geographic regions—Asia–Pacific, 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.

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Change in Net Sales for Fiscal 2020 versus Fiscal 2019

Organic Net Sales

Growth (Decline)

($ in millions)

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As a percentage of net sales

In fiscal 2019, gross margin decreased $351 million as compared to fiscal 2018, primarily as a result of lower volume, unfavorable product mix, negative foreign currency translation, and price erosion, partially offset by lower material costs.

Gross margin as a percentage of net sales decreased to 32.7% in fiscal 2019 from 33.9% in fiscal 2018.

In fiscal 2020, gross margin decreased $659 million as compared to fiscal 2019 primarily as a result of lower volume and, to a lesser degree, price erosion and lower manufacturing productivity, partially offset by lower material costs.

We use a wide variety of raw materials in the manufacture of our products.

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Restructuring and other charges, net

Impairment of goodwill

Selling, General, and Administrative Expenses.

In fiscal 2019, selling, general, and administrative expenses decreased $104 million as compared to fiscal 2018 due primarily to lower incentive compensation costs as well as cost control measures and savings attributable to restructuring actions.

Selling, general, and administrative expenses as a percentage of net sales decreased to 11.1% in fiscal 2019 from 11.4% in fiscal 2018.

In fiscal 2020, selling, general, and administrative expenses decreased $98 million as compared to fiscal 2019 due primarily to reduced selling expenses, cost control measures, and savings attributable to restructuring actions.

Restructuring and Other Charges, Net.

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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 2019, we initiated a restructuring program associated with footprint consolidation and structural improvements impacting all segments.

During fiscal 2018, we initiated a restructuring program associated with footprint consolidation and structural improvements primarily impacting the Industrial Solutions and Transportation Solutions segments.

In connection with these initiatives, we incurred net restructuring charges of $255 million and $140 million in fiscal 2019 and 2018, respectively.

During fiscal 2020 and 2019, we initiated restructuring programs associated with footprint consolidation and structural improvements impacting all segments.

The fiscal 2020 actions were due in part to the COVID-19 pandemic.

We incurred net restructuring charges of $257 million and $255 million in fiscal 2020 and 2019, respectively.

Annualized cost savings related to actions initiated in fiscal 2020 are expected to be approximately $200 million and are expected to be realized by the end of fiscal 2022.

Cost savings will be reflected primarily in cost of sales and selling, general, and administrative expenses.

In response to market weakness in fiscal 2019, we initiated incremental restructuring actions, primarily consisting of employee severance, to broaden the scope of our cost reduction initiatives and accelerate cost reduction and factory footprint consolidation activities.

We previously disclosed that we expected total restructuring charges to be approximately $375 million in fiscal 2019.

We now expect certain of these actions to occur in fiscal 2020 or 2021.

For fiscal 2020, we currently expect total restructuring charges to be approximately $200 million to $250 million and total spending, which will be funded with cash from operations, to be approximately $300 million.

For fiscal 2021, we currently expect total restructuring charges to be approximately $200 million and total spending, which will be funded with cash from operations, to be approximately $250 million.

See Note 3 to the Consolidated Financial Statements for additional information regarding net restructuring and other charges.

Impairment of Goodwill.

As a result of current and projected declines in sales and profitability, due in part to the impact of the COVID-19 pandemic and projected reductions in global automotive production as of March 2020, of the Sensors reporting unit of the Transportation Solutions segment during the second quarter of fiscal 2020, we determined that an indicator of impairment had occurred and goodwill impairment testing of this reporting unit was required.

As discussed in Note 2 to the Consolidated Financial Statements, during the second quarter of fiscal 2020, we adopted Accounting Standards Update (“ASU”) No.

2017-04, Simplifying the Test for Goodwill Impairment , which simplifies the subsequent measurement of goodwill by eliminating step 2 of the goodwill impairment test.

Under the new standard, goodwill impairment is measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill.

We determined the fair value of the Sensors reporting unit to be $1.0 billion as of March 27, 2020.

This valuation was based on a discounted cash flows analysis incorporating our estimate of future operating performance, which we consider to be a level 3 unobservable input in the fair value hierarchy, and was corroborated using a market approach valuation.

The goodwill impairment test indicated that the carrying value of the reporting unit exceeded its fair value by $900 million.

As a result, we recorded a partial impairment charge of $900 million in the second quarter of fiscal 2020.

As of fiscal year end 2020, the Sensors reporting unit had a remaining goodwill allocation of $511 million.

See Note 8 to the Consolidated Financial Statements for additional information regarding the impairment of goodwill and our annual goodwill impairment test.

Operating Income

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Restructuring and other charges, net

Impairment of goodwill

Other items (1)

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Interest expense

Income tax benefit

Income tax expense (benefit)

Effective tax rate

Loss from discontinued operations, net of income taxes

Income (loss) from discontinued operations, net of income taxes

Interest Expense.

Interest expense decreased $39 million during the fiscal 2019 due primarily to the expansion of our cross-currency swap program.

Under the terms of the fiscal 2019 contracts, we receive interest in U.S.

Interest expense decreased $20 million during fiscal 2020 due primarily to a lower cost of debt and our cross-currency swap program that hedges our net investment in certain foreign operations.

The aggregate notional value of the contracts under this program was $1,664 million at fiscal year end 2020.

Under the terms of these contracts, we receive interest in U.S.

dollars at a weighted-average rate of 2.4% per annum and pay no interest.

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Income Taxes.

See Note 15 to the Consolidated Financial Statements for discussion of items impacting income tax benefit and the effective tax rate for fiscal 2019 and 2018, including Swiss Tax Reform and the U.S.

Tax Cuts and Jobs Act.

See Note 16 to the Consolidated Financial Statements for discussion of items impacting income tax expense (benefit) and the effective tax rate for fiscal 2020 and 2019, including the Switzerland Federal Act on Tax Reform and AHV Financing (“Swiss Tax Reform”), increases to the valuation allowance for certain deferred tax assets, and the termination of the Tax Sharing Agreement.

The valuation allowance for deferred tax assets was $4,429 million and $4,970 million at fiscal year end 2020 and 2019, respectively.

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See Note 16 to the Consolidated Financial Statements for additional information regarding undistributed earnings.

Loss from Discontinued Operations, Net of Income Taxes.

Income (Loss) from Discontinued Operations, Net of Income Taxes.

During fiscal 2019, we sold our SubCom business for net cash proceeds of $297 million and incurred a pre-tax loss on sale of $86 million.

The net sales of the business were $41 million and $702 million in fiscal 2019 and 2018, respectively.

The net sales of the business were $41 million in fiscal 2019.

The results for fiscal 2019 represent one month of activity.

In fiscal 2018, net sales and operating income were negatively impacted by production delays on a program.

See Note 4 to the Consolidated Financial Statements for additional information regarding discontinued operations.

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Change in Net Sales for Fiscal 2020 versus Fiscal 2019

Organic Net Sales

Growth (Decline)

($ in millions)

Commercial transportation

Net sales in the Transportation Solutions segment decreased $469 million, or 5.7%, in fiscal 2019 from fiscal 2018 primarily as a result of the negative impact of foreign currency translation of 3.3% and organic net sales declines of 2.8%.

Net sales in the Transportation Solutions segment decreased $976 million, or 12.5%, in fiscal 2020 from fiscal 2019 as a result of organic net sales declines of 13.5% and the negative impact of foreign currency translation of 0.9%, partially offset by sales contributions from acquisitions of 1.9%.

Net sales declines in fiscal 2020 included significant unfavorable impacts of the COVID-19 pandemic.

Our organic net sales by industry end market were as follows:

● Automotive —Our organic net sales decreased 3.3% in fiscal 2019.

The decrease resulted from declines of 6.4% and 3.4% in the Asia–Pacific and EMEA regions, respectively, partially offset by growth of 3.7% in the Americas region.

Our declines in the Asia–Pacific and EMEA regions resulted primarily from declines in automotive production.

In the Americas region, our growth was attributable to electronification and market share gains.

● Commercial transportation —Our organic net sales decreased 3.9% in fiscal 2019 as a result of market weakness in all regions.

● Sensors —Our organic net sales increased 1.4% in fiscal 2019 due primarily to growth in the industrial equipment end market.

Operating Income.

The following table presents the Transportation Solutions segment’s operating income and operating margin information:

● Automotive —Our organic net sales decreased 12.9% in fiscal 2020 with declines of 18.0% in the Americas region, 16.7% in the EMEA region, and 6.4% in the Asia–Pacific region.

Our overall organic net sales decreased as a result of declines in global automotive production;

however, our sales decreased at a lesser rate than global automotive production due to content gains.

● Commercial transportation —Our organic net sales decreased 14.4% in fiscal 2020 due to market weakness in the Americas and EMEA regions, partially offset by growth in the Asia–Pacific region.

● Sensors —Our organic net sales decreased 16.3% in fiscal 2020 as a result of weakness across all markets.

Operating Income (Loss).

The following table presents the Transportation Solutions segment’s operating income (loss) and operating margin information:

($ in millions)

Operating income

Operating income (loss)

Operating margin

Operating income in the Transportation Solutions segment decreased $352 million in fiscal 2019 as compared to fiscal 2018.

The Transportation Solutions segment’s operating income included the following:

Operating income (loss) in the Transportation Solutions segment decreased $1,319 million in fiscal 2020 as compared to fiscal 2019.

The Transportation Solutions segment’s operating income (loss) included the following:

(in millions)

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Restructuring and other charges, net

Excluding these items, operating income decreased in fiscal 2019 primarily as a result of lower volume, unfavorable product mix, and price erosion, partially offset by lower material costs.

Impairment of goodwill

Excluding these items, operating income decreased in fiscal 2020 primarily as a result of lower volume and, to a lesser degree, price erosion and lower manufacturing productivity, partially offset by lower material costs.

Industrial Solutions

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($ in millions)

Industrial equipment

Aerospace, defense, oil, and gas

Industrial equipment

(1) Industry end market information is presented consistently with our internal management reporting and may be revised periodically as management deems necessary.

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Change in Net Sales for Fiscal 2020 versus Fiscal 2019

Organic Net Sales

Growth (Decline)

($ in millions)

Industrial equipment

Aerospace, defense, oil, and gas

In the Industrial Solutions segment, net sales increased $98 million, or 2.5%, in fiscal 2019 from fiscal 2018 due to organic net sales growth of 3.1% and sales contributions from an acquisition of 1.9%, partially offset by the negative impact of foreign currency translation of 2.5%.

Industrial equipment

In the Industrial Solutions segment, net sales decreased $241 million, or 6.1%, in fiscal 2020 from fiscal 2019 due primarily to organic net sales declines of 5.4%.

Significant unfavorable impacts of the COVID-19 pandemic were included in our net sales declines in fiscal 2020.

Our organic net sales by industry end market were as follows:

● Industrial equipment —Our organic net sales decreased 3.4% in fiscal 2019 primarily as a result of market weakness in industrial applications, particularly in the Asia-Pacific and EMEA regions, partially offset by strength in medical applications.

● Aerospace, defense, oil, and gas —Our organic net sales increased 14.1% in fiscal 2019 due to growth in the oil and gas, commercial aerospace, and defense markets.

● Energy —Our organic net sales increased 2.7% in fiscal 2019 primarily as a result of growth in the Americas region, partially offset by declines in the EMEA region.

● Aerospace, defense, oil, and gas —Our organic net sales decreased 7.8% in fiscal 2020 due primarily to weakness in the commercial aerospace market, partially offset by strength in the defense market.

● Industrial equipment —Our organic net sales decreased 10.7% in fiscal 2020 as a result of market weakness in industrial applications across all regions.

● Medical —Our organic net sales decreased 1.3% in fiscal 2020 due primarily to delays in elective procedures.

● Energy —Our organic net sales increased 4.3% in fiscal 2020 primarily as a result of growth in the EMEA and Americas regions.

Operating Income.

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Operating margin

Operating income in the Industrial Solutions segment increased $78 million in fiscal 2019 from fiscal 2018.

Operating income in the Industrial Solutions segment decreased $131 million in fiscal 2020 from fiscal 2019.

The Industrial Solutions segment’s operating income included the following:

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Restructuring and other charges, net

Excluding these items, operating income increased in fiscal 2019 primarily as a result of higher volume and improved manufacturing productivity.

Excluding these items, operating income decreased in fiscal 2020 primarily as a result of lower volume, partially offset by lower material costs.

Communications Solutions

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Change in Net Sales for Fiscal 2020 versus Fiscal 2019

Organic Net Sales

Growth (Decline)

($ in millions)

Data and devices

Net sales in the Communications Solutions segment decreased $169 million, or 9.2%, in fiscal 2019 as compared to fiscal 2018 due to organic net sales declines of 7.0% and the negative impact of foreign currency translation of 2.2%.

Net sales in the Communications Solutions segment decreased $59 million, or 3.5%, in fiscal 2020 as compared to fiscal 2019 due primarily to organic net sales declines of 3.2%.

In fiscal 2020, our net sales declines included unfavorable impacts of the COVID-19 pandemic.

Our organic net sales by industry end market were as follows:

● Data and devices —Our organic net sales decreased 5.4% in fiscal 2019 as a result of market weakness across all regions.

● Appliances —Our organic net sales decreased 9.3% in fiscal 2019 due to market weakness across all regions and reduced demand resulting from high inventory levels at distributors.

● Data and devices —Our organic net sales decreased 2.5% in fiscal 2020 primarily as a result of market weakness in the Americas and EMEA regions, partially offset by increased sales to cloud infrastructure customers.

● Appliances —Our organic net sales decreased 4.4% in fiscal 2020 due primarily to market weakness in the EMEA and Americas regions.

Operating Income.

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Operating margin

In the Communications Solutions segment, operating income decreased $79 million in fiscal 2019 as compared to fiscal 2018.

In the Communications Solutions segment, operating income increased $9 million in fiscal 2020 as compared to fiscal 2019.

The Communications Solutions segment’s operating income included the following:

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Restructuring and other charges, net

Excluding these items, operating income decreased in fiscal 2019 due primarily to lower volume.

Excluding these items, fiscal 2020 operating income was consistent with fiscal 2019 levels.

Liquidity and Capital Resources

Our ability to fund our future capital needs will be affected by our ability to continue to generate cash from operations and may be affected by our ability to access the capital markets, money markets, or other sources of funding, as well as the capacity and terms of our financing arrangements.

We believe that cash generated from operations and, to the extent necessary, these other sources of potential funding will be sufficient to meet our anticipated capital needs for the foreseeable future, including the payment of $350 million of floating rate senior notes due in fiscal 2020, the pending acquisition of First Sensor, and cash spending related to restructuring initiatives.

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 payments of $250 million of 4.875% senior notes due in January 2021 and €350 million of fixed-to-floating rate senior notes due in June 2021, and compensation payments to First Sensor minority shareholders.

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.

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 uncertainty surrounding the duration and scope of the COVID-19 pandemic and it may have a material impact on our liquidity and financial conditions.

We believe that we have sufficient financial resources and liquidity which, along with managing expenses and capital structure flexibility, will enable us to meet our ongoing working capital and other cash flow needs during the COVID-19 pandemic and resulting period of economic uncertainty which included reduced sales and net

income levels for us in fiscal 2020 relative to fiscal 2019 and may include reduced sales and income levels in future periods.

For further information on the risks and uncertainties associated with the COVID-19 pandemic, see “Part I.

Risk Factors.”

As of fiscal year end 2020, our cash and cash equivalents were held in subsidiaries which are located in various countries throughout the world.

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(“TEGSA”), our Luxembourg subsidiary, which is the obligor of substantially all of our debt, and to TE Connectivity Ltd., our Swiss parent company;

however, the repatriation of these amounts could subject us to additional

however, the repatriation of these amounts could subject us to additional tax expense.

We provide for tax liabilities on the Consolidated Financial Statements with respect to amounts that we expect to repatriate;

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Cash Flows from Operating Activities

Net cash provided by continuing operating activities increased $153 million to $2,454 million in fiscal 2019 as compared to $2,301 million in fiscal 2018.

The increase resulted primarily from higher collections of accounts receivable and fluctuations in cash collateral requirements under our cross-currency swap contracts, partially offset by a decrease in pre-tax income levels.

Net cash provided by continuing operating activities decreased $463 million to $1,991 million in fiscal 2020 as compared to $2,454 million in fiscal 2019.

The decrease resulted primarily from lower pre-tax income levels.

The amount of income taxes paid, net of refunds, during fiscal 2020 and 2019 was $257 million and $338 million, respectively.

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See Note 16 to the Consolidated Financial Statements for additional information regarding Swiss Tax Reform.

Pension contributions in fiscal 2019 and 2018, were $45 million and $54 million, respectively.

Pension contributions were $47 million and $45 million in fiscal 2020 and 2019, respectively.

We expect pension contributions to be $69 million in fiscal 2021, before consideration of any voluntary contributions.

For additional information regarding pensions, see Note 15 to the Consolidated Financial Statements.

Cash Flows from Investing Activities

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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 fiscal 2020, we acquired five businesses, including First Sensor, for a combined cash purchase price of $336 million, net of cash acquired.

During fiscal 2019, we acquired three businesses for a combined cash purchase price of $296 million, net of cash acquired.

We acquired two businesses during fiscal 2018 for a combined cash purchase price of $153 million, net of cash acquired.

In fiscal 2019, we received $13 million as a result of a customary net working capital settlement for one of the acquisitions.

See Note 5 to the Consolidated Financial Statements for additional information regarding acquisitions.

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See Note 11 to the Consolidated Financial Statements for additional information regarding debt.

During fiscal 2019, TEGSA, our 100%-owned subsidiary, issued €350 million aggregate principal amount of fixed-to-floating rate senior notes due June 2021.

The fixed-to-floating rate senior notes bear interest at a rate of 0% until June 2020 and then at a rate of three-month Euro Interbank Offered Rate (“EURIBOR”) plus 0.30% per year until maturity.

In June 2020, we may, at our option, redeem the fixed-to-floating rate senior notes, as a whole, at 100% of the principal amount.

Also, during fiscal 2019, TEGSA issued $350 million aggregate principal amount of floating rate senior notes due June 2020.

The floating rate senior notes bear interest at a rate of three-month London Interbank Offered Rate (“LIBOR”) plus 0.45% per year.

The fixed-to-floating rate senior notes and floating rate senior 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 total commitments of $1.5 billion.

The Credit Facility was amended in November 2018 primarily to extend the maturity date from December 2020 to November 2023.

The amended Credit Facility contains provisions that allow for incremental commitments of up to $500 million, an option to temporarily increase the financial ratio covenant following a qualified acquisition, and borrowings in designated currencies.

During fiscal 2020, TEGSA, our wholly-owned subsidiary, issued €550 million aggregate principal amount of 0.00% senior notes due in February 2025.

The notes are TEGSA’s unsecured senior obligations and rank equally in right of payment with all existing and any future senior indebtedness of TEGSA and senior to any subordinated indebtedness that TEGSA may incur.

TEGSA has a five-year unsecured senior revolving credit facility (“Credit Facility”) with a maturity date of November 2023 and total commitments of $1.5 billion.

The Credit Facility contains provisions that allow for incremental commitments of up to $500 million, an option to temporarily increase the financial ratio covenant following a qualified

acquisition, and borrowings in designated currencies.

TEGSA had no borrowings under the Credit Facility at fiscal year end 2020 or 2019.

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Borrowings under the commercial paper program are backed by the Credit Facility.

TEGSA’s payment obligations under its senior notes, commercial paper, and Credit Facility are fully and unconditionally guaranteed by its parent, TE Connectivity Ltd.

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 $625 million and $608 million in fiscal 2020 and 2019, respectively.

See Note 18 to the Consolidated Financial Statements for additional information regarding dividends on our common shares.

In March 2020, our shareholders approved a dividend payment to shareholders of $1.92 per share, payable in four equal quarterly installments of $0.48 per share beginning in the third quarter of fiscal 2020 and ending in the second quarter of fiscal 2021.

Future dividends on our common shares, if any, must be approved by our shareholders.

In exercising their discretion to recommend to the shareholders that such dividends be approved, our board of directors will consider our results of operations, cash requirements and surplus, financial condition, statutory requirements of applicable law, contractual restrictions, and other factors that they may deem relevant.

In both fiscal 2019 and 2018, our board of directors authorized increases of $1.5 billion in our share repurchase program.

In fiscal 2019, our board of directors authorized an increase of $1.5 billion in our share repurchase program.

We repurchased approximately 6 million of our common shares for $505 million and approximately 12 million of our common shares for $1,014 million under the share repurchase program during fiscal 2020 and 2019, respectively.

At fiscal year end 2020, we had $1.0 billion of availability remaining under our share repurchase authorization.

Summarized Guarantor Financial Information

In March 2020, the SEC adopted amendments to the financial disclosure requirements of Regulation S-X for subsidiary issuers and guarantors of registered debt securities and for affiliates whose securities are pledged as collateral for registered securities.

The amended disclosure requirements permit alternative disclosures of summarized financial information for subsidiary issuers and guarantors and allow for these disclosures to be made outside the Consolidated Financial Statements and accompanying notes.

We elected to early adopt these amendments in fiscal 2020.

As discussed above, our senior notes, commercial paper, and Credit Facility are issued by TEGSA and are fully and unconditionally guaranteed on an unsecured basis by TEGSA’s parent, TE Connectivity Ltd.

In addition to being the issuer of our debt securities, TEGSA owns, directly or indirectly, all of our operating subsidiaries.

The following tables present

summarized financial information, excluding investments in and equity in earnings of our non-guarantor subsidiaries, for TE Connectivity Ltd.

and TEGSA on a combined basis.

Fiscal Year End

(in millions)

Balance Sheet Data:

Total current assets

Total noncurrent assets (1)

Total current liabilities

Total noncurrent liabilities (2)

(1) Includes $3,275 million and $2,562 million as of fiscal year end 2020 and 2019, respectively, of intercompany loans receivable from non-guarantor subsidiaries.

(2) Includes $20,016 million and $16,033 million as of fiscal year end 2020 and 2019, respectively, of intercompany loans payable to non-guarantor subsidiaries.

(in millions)

Statement of Operations Data:

Loss from continuing operations

Commitments and Contingencies

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Interest payments on debt are projected for future periods using rates in effect as of fiscal year end 2020 and are subject to change in future periods.

(3) See “Recently Issued Accounting Pronouncements” in Note 2 to the Consolidated Financial Statements for information regarding our adoption of Accounting Standards Codifications (“ASC”) 842, Leases, in fiscal 2020.

(3) Operating leases represents the undiscounted lease payments.

See Note 12 to the Consolidated Financial Statements for additional information regarding leases.

(4) Purchase obligations consist primarily of commitments for purchases of goods and services.

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In connection with the sale, we contractually agreed to continue to honor performance guarantees and letters of credit related to the SubCom business’ projects that existed as of the date of sale.

These guarantees had a combined value of approximately $1.55 billion as of fiscal year end 2019 and are expected to expire at various dates through fiscal 2025;

however, the majority are expected to expire by fiscal year end 2020.

These guarantees had a combined value of approximately $600 million as of fiscal year end 2020 and are expected to expire at various dates through fiscal 2025.

Also, under the terms of the definitive agreement, we are required to issue up to $300 million of new performance guarantees, subject to certain limitations, for projects entered into by the SubCom business following the sale for a period of up to three years.

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Revenue Recognition

We account for revenue in accordance with ASC 606, Revenue from Contracts with Customers .

We account for revenue in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers .

Our revenues are generated principally from the sale of our products.

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Since we typically invoice our customers when we satisfy our performance obligations, we do not have material contract assets or contract liabilities.

Our credit terms are customary and do not contain significant financing components that extend beyond one year of fulfillment of performance obligations.

Our credit terms are customary and do

not contain significant financing components that extend beyond one year of fulfillment of performance obligations.

We apply the practical expedient of ASC 606 with respect to financing components and do not evaluate contracts in which payment is due within one year of satisfaction of the related performance obligation.

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Our estimates of variable consideration and ultimate determination of the estimated amounts to include in the transaction price are based primarily on our assessment of anticipated performance and historical and forecasted information that is reasonably available to us.

See Note 2 to the Consolidated Financial Statements for information regarding our adoption of ASC 606 in fiscal 2019.

Goodwill and Other Intangible Assets

We account for goodwill and other intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other , as updated by ASU No.

2017-04, Simplifying the Test for Goodwill Impairment .

Intangible assets include both indeterminable-lived residual goodwill and determinable-lived identifiable intangible assets.

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Goodwill impairment is evaluated by comparing the carrying value of each reporting unit to its fair value on the first day of the fourth fiscal quarter of each year or whenever we believe a triggering event requiring a more frequent assessment has occurred.

In assessing the existence of a triggering event, management relies on several reporting unit-specific factors including operating results, business plans, economic projections, anticipated future cash flows, transactions, and market place data.

There are inherent uncertainties related to these factors and management’s judgment in applying these factors to the impairment analysis.

When testing for goodwill impairment, we perform a step I goodwill impairment test to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount.

If the carrying amount of a reporting unit exceeds its fair value, goodwill may be impaired and a step II goodwill impairment test is performed to measure the amount of impairment, if any.

In the step II goodwill impairment test, we compare the implied fair value of reporting unit goodwill with the carrying amount of that goodwill.

If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.

The implied fair value of goodwill is determined in a manner consistent with how goodwill is recognized in a business combination.

We allocate the fair value of a reporting unit to the assets and liabilities of that unit, including intangible assets, as if the reporting unit had been acquired in a business combination.

Any excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.

Fair value estimates used in the step I goodwill impairment tests are calculated using an income approach based on the present value of future cash flows of each reporting unit.

The income approach has been supported by guideline analyses (a market approach).

When testing for goodwill impairment, we identify potential impairment by comparing the fair value of a reporting unit with its carrying amount.

If the carrying amount of a reporting unit exceeds its fair value, a goodwill impairment charge will be recorded for the amount of the excess, limited to the total amount of goodwill allocated to the reporting unit.

Fair value estimates used in the goodwill impairment tests are calculated using an income approach based on the present value of future cash flows of each reporting unit.

The income approach is supported by guideline analyses (a market approach).

These approaches incorporate several assumptions including future growth rates, discount rates, income tax rates, and market activity in assessing fair value and are reporting unit specific.

Changes in economic and operating conditions impacting these assumptions could result in goodwill impairments in future periods.

See Note 8 to the Consolidated Financial Statements for information regarding our early adoption of ASU 2017-04, our interim goodwill impairment test, and partial impairment charge of $900 million recorded in the second quarter of fiscal

We completed our annual goodwill impairment test in the fourth quarter of fiscal 2020 and determined that no impairment existed.

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An increase in the valuation allowance would result in additional income tax expense in such period and could have a significant impact on our future earnings.

Changes in tax laws and rates, including Swiss Tax Reform, also could affect recorded deferred tax assets and liabilities in the future.

See Note 15 to the Consolidated Financial Statements for additional information regarding Swiss Tax Reform.

Management is not aware of any other such changes that would have a material effect on our results of operations, financial position, or cash flows.

Changes in tax laws and rates also could affect recorded deferred tax assets and liabilities in the future.

Management is not aware of any such changes that would have a material effect on our results of operations, financial position, or cash flows.

The calculation of our tax liabilities includes estimates for uncertainties in the application of complex tax regulations across multiple global jurisdictions where we conduct our operations.

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These tax liabilities and related interest are recorded in income taxes and accrued and other current liabilities on the Consolidated Balance Sheets.

Pension Plans

Our defined benefit pension plan expense and obligations are developed from actuarial assumptions.

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Actual results may differ from actuarial assumptions.

The discount rate represents the market rate for high-quality fixed income investments and is used to calculate the present value of the expected future cash flows for benefit obligations to be paid under our pension plans.

The discount rate represents the market rate for high-

quality fixed income investments and is used to calculate the present value of the expected future cash flows for benefit obligations to be paid under our pension plans.

A decrease in the discount rate increases the present value of pension benefit obligations.

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Accounting Pronouncements

See Note 2 to the Consolidated Financial Statements for information regarding recently issued and recently adopted accounting pronouncements.

See Note 2 to the Consolidated Financial Statements for information regarding recently adopted accounting pronouncements.

Non-GAAP Financial Measure

Organic Net Sales Growth

We present organic net sales growth 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 represents net sales growth (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 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 provides useful information about our results and the trends of our business.

Management uses organic net sales growth to monitor and evaluate performance.

Also, management uses organic net sales growth together with GAAP financial measures in its decision-making processes related to the operations of our reportable segments and our overall company.

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 “Results of Operations” and “Segment Results” provide reconciliations of organic net sales growth to net sales growth calculated in accordance with GAAP.

Organic net sales growth is a non-GAAP financial measure and should not be considered a replacement for results in accordance with GAAP.

The tables presented in “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 in combination with net sales growth to better understand the amounts, character, and impact of any increase or decrease in reported amounts.

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

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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,” “should,” or the negative of these terms or similar expressions.

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.

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● conditions affecting demand for products in the industries we serve, particularly the automotive industry;

● risk of future goodwill impairment;

● competition and pricing pressure;

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● risks associated with current and future acquisitions and divestitures;

● global risks of business interruptions such as natural disasters;

● global risks of business interruptions due to natural disasters or other disasters such as the COVID-19 pandemic, which have and could continue to negatively impact our results of operations as well as customer behaviors, business, and manufacturing operations as well as our facilities and the facilities of our suppliers, and other aspects of our business;

● global risks of political, economic, and military instability, including volatile and uncertain economic conditions in China;

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis