Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the accompanying notes included elsewhere in this Annual Report. 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. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this Annual Report, particularly in “Risk Factors” and “Forward-Looking Information.”
Our Consolidated Financial Statements have been prepared in U.S. dollars, in accordance with accounting principles generally accepted in the U.S. (“GAAP”).
Discussion of our financial condition and results of operations for fiscal 2020 compared to fiscal 2019 is presented below. Discussion of our financial condition and results of operations for fiscal 2019 compared to fiscal 2018 can be found in “Part II. Item 7. 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 (decline) which is a non-GAAP financial measure. See “Non-GAAP Financial Measure” for additional information regarding this measure.
Overview
We are 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.
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 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.
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● Communications Solutions —Our net sales decreased 3.5% due to sales declines in both the appliances and the data and devices end markets.
● During fiscal 2020, our shareholders approved a dividend payment to shareholders of $1.92 per share, payable in four equal quarterly installments of $0.48 beginning in the third quarter of fiscal 2020 and ending in the second quarter of fiscal 2021.
● Net cash provided by continuing operating activities was $1,991 million in fiscal 2020.
● 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. Item 1A. Risk Factors.”
Outlook
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
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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, 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.”
Acquisitions
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.
See Note 5 to the Consolidated Financial Statements for additional information regarding acquisitions.
Discontinued Operations
In fiscal 2019, we sold our Subsea Communications (“SubCom”) business for net cash proceeds of $297 million and incurred a pre-tax loss on sale of $86 million. The SubCom business met the held for sale and discontinued operations criteria and has been reported as such in all periods presented on our Consolidated Financial Statements. Prior to reclassification to discontinued operations, the SubCom business was included in the Communications Solutions segment.
See Note 4 to the Consolidated Financial Statements for additional information regarding discontinued operations.
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Results of Operations
Net Sales
The following table presents our net sales and the percentage of total net sales by segment:
Fiscal
2020
2019
($ in millions)
Transportation Solutions
$
6,845
56
%
$
7,821
58
%
Industrial Solutions
3,713
31
3,954
30
Communications Solutions
1,614
13
1,673
12
Total
$
12,172
100
%
$
13,448
100
%
The following table provides an analysis of the change in our net sales by segment:
Change in Net Sales for Fiscal 2020 versus Fiscal 2019
Net Sales
Organic Net Sales
Growth (Decline)
Growth (Decline)
Translation
Acquisitions
($ in millions)
Transportation Solutions
$
(976)
(12.5)
%
$
(1,066)
(13.5)
%
$
(65)
$
155
Industrial Solutions
(241)
(6.1)
(212)
(5.4)
(29)
—
Communications Solutions
(59)
(3.5)
(54)
(3.2)
(5)
—
Total
$
(1,276)
(9.5)
%
$
(1,332)
(9.9)
%
$
(99)
$
155
Net sales decreased $1,276 million, or 9.5%, in fiscal 2020 as compared to fiscal 2019. 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 $173 million in fiscal 2020. In fiscal 2020, our net sales declines included significant unfavorable impacts from the COVID-19 pandemic.
See further discussion of net sales below under “Segment Results.”
Net Sales by Geographic Region. Our business operates in three geographic regions—Asia–Pacific, EMEA, and the Americas—and our results of operations are influenced by changes in foreign currency exchange rates. Increases or decreases in the value of the U.S. dollar, compared to other currencies, will directly affect our reported results as we translate those currencies into U.S. dollars at the end of each fiscal period. We sell our products into approximately 140 countries, and approximately 60% of our net sales were invoiced in currencies other than the U.S. dollar in fiscal 2020. The percentage of net sales in fiscal 2020 by major currencies invoiced was as follows:
Currencies
Percentage
U.S. dollar
43
%
Euro
29
Chinese renminbi
15
Japanese yen
6
All others
7
Total
100
%
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The following table presents our net sales and the percentage of total net sales by geographic region:
Fiscal
2020
2019
($ in millions)
Asia–Pacific
$
4,246
35
%
$
4,401
33
%
EMEA
4,220
35
4,823
36
Americas
3,706
30
4,224
31
Total
$
12,172
100
%
$
13,448
100
%
The following table provides an analysis of the change in our net sales by geographic region:
Change in Net Sales for Fiscal 2020 versus Fiscal 2019
Net Sales
Organic Net Sales
Growth (Decline)
Growth (Decline)
Translation
Acquisitions
($ in millions)
Asia–Pacific
$
(155)
(3.5)
%
$
(123)
(2.8)
%
$
(32)
$
—
EMEA
(603)
(12.5)
(676)
(14.0)
(28)
101
Americas
(518)
(12.3)
(533)
(12.6)
(39)
54
Total
$
(1,276)
(9.5)
%
$
(1,332)
(9.9)
%
$
(99)
$
155
Cost of Sales and Gross Margin
The following table presents cost of sales and gross margin information:
Fiscal
2020
2019
Change
($ in millions)
Cost of sales
$
8,437
$
9,054
$
(617)
As a percentage of net sales
69.3
%
67.3
%
Gross margin
$
3,735
$
4,394
$
(659)
As a percentage of net sales
30.7
%
32.7
%
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. Cost of sales and gross margin are subject to variability in raw material prices which continue to fluctuate for many of the raw materials we use, including copper, gold, and silver. In fiscal 2020, we purchased approximately 160 million pounds of copper, 107,000 troy ounces of gold, and 2.2 million troy ounces of silver. The following table presents the average prices incurred related to copper, gold, and silver:
Fiscal
Measure
2020
2019
Copper
Lb.
$
2.78
$
2.93
Gold
Troy oz.
1,395
1,309
Silver
Troy oz.
16.21
16.42
In fiscal 2021, we expect to purchase approximately 155 million pounds of copper, 105,000 troy ounces of gold, and 2.2 million troy ounces of silver.
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Operating Expenses
The following table presents operating expense information:
Fiscal
2020
2019
Change
($ in millions)
Selling, general, and administrative expenses
$
1,392
$
1,490
$
(98)
As a percentage of net sales
11.4
%
11.1
%
Restructuring and other charges, net
$
257
$
255
$
2
Impairment of goodwill
900
—
900
Selling, General, and Administrative Expenses. 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. 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 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. 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 $511 million. See Note 8 to the Consolidated Financial Statements for additional information regarding the impairment of goodwill and our annual goodwill impairment test.
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Operating Income
The following table presents operating income and operating margin information:
Fiscal
2020
2019
Change
($ in millions)
Operating income
$
537
$
1,978
$
(1,441)
Operating margin
4.4
%
14.7
%
Operating income included the following:
Fiscal
2020
2019
(in millions)
Acquisition-related charges:
Acquisition and integration costs
$
36
$
27
Charges associated with the amortization of acquisition-related fair value adjustments
4
3
40
30
Restructuring and other charges, net
257
255
Impairment of goodwill
900
—
Other items (1)
—
17
Total
$
1,197
$
302
(1) Represents the write-off of certain spare parts.
See discussion of operating income below under “Segment Results.”
Non-Operating Items
The following table presents select non-operating information:
Fiscal
2020
2019
Change
($ in millions)
Interest expense
$
48
$
68
$
(20)
Income tax expense (benefit)
783
(15)
798
Effective tax rate
149.4
%
(0.8)
%
Income (loss) from discontinued operations, net of income taxes
$
18
$
(102)
$
120
Interest Expense. 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. See Note 14 to the Consolidated Financial Statements for additional information regarding our cross-currency swap program.
Income Taxes. 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. See Note 16 to the Consolidated Financial Statements for further information regarding the valuation allowance for deferred tax assets.
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As of fiscal year end 2020, certain subsidiaries had approximately $29 billion of cumulative undistributed earnings that have been retained indefinitely and reinvested in our global manufacturing operations, including working capital; property, plant, and equipment; intangible assets; and research and development activities. See Note 16 to the Consolidated Financial Statements for additional information regarding undistributed earnings.
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 $41 million in fiscal 2019. The results for fiscal 2019 represent one month of activity. See Note 4 to the Consolidated Financial Statements for additional information regarding discontinued operations.
Segment Results
Transportation Solutions
Net Sales. The following table presents the Transportation Solutions segment’s net sales and the percentage of total net sales by industry end market (1) :
Fiscal
2020
2019
($ in millions)
Automotive
$
4,903
72
%
$
5,686
73
%
Commercial transportation
1,051
15
1,221
15
Sensors
891
13
914
12
Total
$
6,845
100
%
$
7,821
100
%
(1) Industry end market information is presented consistently with our internal management reporting and may be revised periodically as management deems necessary.
The following table provides an analysis of the change in the Transportation Solutions segment’s net sales by industry end market:
Change in Net Sales for Fiscal 2020 versus Fiscal 2019
Net Sales
Organic Net Sales
Growth (Decline)
Growth (Decline)
Translation
Acquisitions
($ in millions)
Automotive
$
(783)
(13.8)
%
$
(742)
(12.9)
%
$
(41)
$
—
Commercial transportation
(170)
(13.9)
(176)
(14.4)
(21)
27
Sensors
(23)
(2.5)
(148)
(16.3)
(3)
128
Total
$
(976)
(12.5)
%
$
(1,066)
(13.5)
%
$
(65)
$
155
Net sales in the Transportation Solutions segment decreased $976 million, or 12.5%, in fiscal 2020 from fiscal 2019 as a result of organic net sales declines of 13.5% and the negative impact of foreign currency translation of 0.9%, partially offset by sales contributions from acquisitions of 1.9%. Net sales declines in fiscal 2020 included significant unfavorable impacts of the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
● Automotive —Our organic net sales decreased 12.9% in fiscal 2020 with declines of 18.0% in the Americas region, 16.7% in the EMEA region, and 6.4% in the Asia–Pacific region. Our overall organic net sales decreased as a result of declines in global automotive production; however, our sales decreased at a lesser rate than global automotive production due to content gains.
● Commercial transportation —Our organic net sales decreased 14.4% in fiscal 2020 due to market weakness in the Americas and EMEA regions, partially offset by growth in the Asia–Pacific region.
● Sensors —Our organic net sales decreased 16.3% in fiscal 2020 as a result of weakness across all markets.
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Operating Income (Loss). The following table presents the Transportation Solutions segment’s operating income (loss) and operating margin information:
Fiscal
2020
2019
Change
($ in millions)
Operating income (loss)
$
(93)
$
1,226
$
(1,319)
Operating margin
(1.4)
%
15.7
%
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:
Fiscal
2020
2019
(in millions)
Acquisition-related charges:
Acquisition and integration costs
$
28
$
17
Charges associated with the amortization of acquisition-related fair value adjustments
4
—
32
17
Restructuring and other charges, net
113
144
Impairment of goodwill
900
—
Other items
—
14
Total
$
1,045
$
175
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
Net Sales. The following table presents the Industrial Solutions segment’s net sales and the percentage of total net sales by industry end market (1) :
Fiscal
2020
2019
($ in millions)
Aerospace, defense, oil, and gas
$
1,201
32
%
$
1,306
33
%
Industrial equipment
1,098
30
1,242
31
Medical
697
19
707
18
Energy
717
19
699
18
Total
$
3,713
100
%
$
3,954
100
%
(1) Industry end market information is presented consistently with our internal management reporting and may be revised periodically as management deems necessary.
The following table provides an analysis of the change in the Industrial Solutions segment’s net sales by industry end market:
Change in Net Sales for Fiscal 2020 versus Fiscal 2019
Net Sales
Organic Net Sales
Growth (Decline)
Growth (Decline)
Translation
($ in millions)
Aerospace, defense, oil, and gas
$
(105)
(8.0)
%
$
(100)
(7.8)
%
$
(5)
Industrial equipment
(144)
(11.6)
(133)
(10.7)
(11)
Medical
(10)
(1.4)
(9)
(1.3)
(1)
Energy
18
2.6
30
4.3
(12)
Total
$
(241)
(6.1)
%
$
(212)
(5.4)
%
$
(29)
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In the Industrial Solutions segment, net sales decreased $241 million, or 6.1%, in fiscal 2020 from fiscal 2019 due primarily to organic net sales declines of 5.4%. Significant unfavorable impacts of the COVID-19 pandemic were included in our net sales declines in fiscal 2020. Our organic net sales by industry end market were as follows:
● Aerospace, defense, oil, and gas —Our organic net sales decreased 7.8% in fiscal 2020 due primarily to weakness in the commercial aerospace market, partially offset by strength in the defense market.
● Industrial equipment —Our organic net sales decreased 10.7% in fiscal 2020 as a result of market weakness in industrial applications across all regions.
● Medical —Our organic net sales decreased 1.3% in fiscal 2020 due primarily to delays in elective procedures.
● Energy —Our organic net sales increased 4.3% in fiscal 2020 primarily as a result of growth in the EMEA and Americas regions.
Operating Income. The following table presents the Industrial Solutions segment’s operating income and operating margin information:
Fiscal
2020
2019
Change
($ in millions)
Operating income
$
412
$
543
$
(131)
Operating margin
11.1
%
13.7
%
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:
Fiscal
2020
2019
(in millions)
Acquisition-related charges:
Acquisition and integration costs
$
8
$
10
Charges associated with the amortization of acquisition-related fair value adjustments
—
3
8
13
Restructuring and other charges, net
102
63
Other items
—
2
Total
$
110
$
78
Excluding these items, operating income decreased in fiscal 2020 primarily as a result of lower volume, partially offset by lower material costs.
Communications Solutions
Net Sales. The following table presents the Communications Solutions segment’s net sales and the percentage of total net sales by industry end market (1) :
Fiscal
2020
2019
($ in millions)
Data and devices
$
973
60
%
$
993
59
%
Appliances
641
40
680
41
Total
$
1,614
100
%
$
1,673
100
%
(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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The following table provides an analysis of the change in the Communications Solutions segment’s net sales by industry end market:
Change in Net Sales for Fiscal 2020 versus Fiscal 2019
Net Sales
Organic Net Sales
Growth (Decline)
Growth (Decline)
Translation
($ in millions)
Data and devices
$
(20)
(2.0)
%
$
(23)
(2.5)
%
$
3
Appliances
(39)
(5.7)
(31)
(4.4)
(8)
Total
$
(59)
(3.5)
%
$
(54)
(3.2)
%
$
(5)
Net sales in the Communications Solutions segment decreased $59 million, or 3.5%, in fiscal 2020 as compared to fiscal 2019 due primarily to organic net sales declines of 3.2%. In fiscal 2020, our net sales declines included unfavorable impacts of the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
● Data and devices —Our organic net sales decreased 2.5% in fiscal 2020 primarily as a result of market weakness in the Americas and EMEA regions, partially offset by increased sales to cloud infrastructure customers.
● Appliances —Our organic net sales decreased 4.4% in fiscal 2020 due primarily to market weakness in the EMEA and Americas regions.
Operating Income. The following table presents the Communications Solutions segment’s operating income and operating margin information:
Fiscal
2020
2019
Change
($ in millions)
Operating income
$
218
$
209
$
9
Operating margin
13.5
%
12.5
%
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:
Fiscal
2020
2019
(in millions)
Restructuring and other charges, net
$
42
$
48
Other items
—
1
Total
$
42
$
49
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 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, 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
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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. Item 1A. 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. Under current applicable laws, substantially all of these amounts can be repatriated to Tyco Electronics Group S.A. (“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 tax expense. We provide for tax liabilities on the Consolidated Financial Statements with respect to amounts that we expect to repatriate; however, no tax liabilities are recorded for amounts that we consider to be retained indefinitely and reinvested in our global manufacturing operations. As of fiscal year end 2020, we had approximately $5.3 billion of cash, cash equivalents, and intercompany deposits, principally in our subsidiaries, that we have the ability to distribute to TEGSA and TE Connectivity Ltd. but we consider to be permanently reinvested. We estimate that up to $0.8 billion of tax expense would be recognized on the Consolidated Financial Statements if our intention to permanently reinvest these amounts were to change. Our current plans do not demonstrate a need to repatriate cash, cash equivalents, and intercompany deposits that are designated as permanently reinvested in order to fund our operations, including investing and financing activities.
Cash Flows from Operating Activities
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. We do not expect a significant change in our income tax payments as a result of Swiss Tax Reform. See Note 16 to the Consolidated Financial Statements for additional information regarding Swiss Tax Reform.
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
Capital expenditures were $560 million and $749 million in fiscal 2020 and 2019, respectively. We expect fiscal 2021 capital spending levels to be approximately 5% of net sales. We believe our capital funding levels are adequate to support new programs, and we continue to invest in our manufacturing infrastructure to further enhance productivity and manufacturing capabilities.
During 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. See Note 5 to the Consolidated Financial Statements for additional information regarding acquisitions.
During fiscal 2019, we received net cash proceeds of $297 million related to the sale of our SubCom business. See additional information in Note 4 to the Consolidated Financial Statements.
Cash Flows from Financing Activities and Capitalization
Total debt at fiscal year end 2020 and 2019 was $4,146 million and $3,965 million, respectively. See Note 11 to the Consolidated Financial Statements for additional information regarding debt.
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
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acquisition, and borrowings in designated currencies. TEGSA had no borrowings under the Credit Facility at fiscal year end 2020 or 2019.
The Credit Facility contains a financial ratio covenant providing that if, as of the last day of each fiscal quarter, our ratio of Consolidated Total Debt to Consolidated EBITDA (as defined in the Credit Facility) for the then most recently concluded period of four consecutive fiscal quarters exceeds 3.75 to 1.0, an Event of Default (as defined in the Credit Facility) is triggered. The Credit Facility and our other debt agreements contain other customary covenants. None of our covenants are presently considered restrictive to our operations. As of fiscal year end 2020, we were in compliance with all of our debt covenants and believe that we will continue to be in compliance with our existing covenants for the foreseeable future.
Periodically, TEGSA issues commercial paper to U.S. institutional accredited investors and qualified institutional buyers in accordance with available exemptions from the registration requirements of the Securities Act of 1933 as part of our ongoing effort to maintain financial flexibility and to potentially decrease the cost of borrowings. 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 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 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
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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
2020
2019
(in millions)
Balance Sheet Data:
Total current assets
$
134
$
89
Total noncurrent assets (1)
3,282
2,634
Total current liabilities
1,237
1,014
Total noncurrent liabilities (2)
23,549
19,475
(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.
Fiscal
2020
2019
(in millions)
Statement of Operations Data:
Loss from continuing operations
$
(206)
$
(341)
Net loss
(202)
(391)
Commitments and Contingencies
The following table provides a summary of our contractual obligations and commitments for debt, minimum lease payment obligations under non-cancelable leases, and other obligations at fiscal year end 2020:
Payments Due by Fiscal Year
Total
2021
2022
2023
2024
2025
Thereafter
(in millions)
Debt (1)
$
4,161
$
693
$
506
$
641
$
352
$
641
$
1,328
Interest payments on debt (2)
865
103
88
79
72
60
463
Operating leases (3)
485
116
98
75
60
49
87
Purchase obligations (4)
611
593
8
6
1
—
3
Total contractual cash obligations (5)(6)(7)
$
6,122
$
1,505
$
700
$
801
$
485
$
750
$
1,881
(1) Debt represents principal payments. See Note 11 to the Consolidated Financial Statements for additional information regarding debt.
(2) Interest payments exclude the impact of our interest rate swap and cross-currency swap contracts. 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) 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.
(5) The above table does not reflect unrecognized income tax benefits of $414 million and related accrued interest and penalties of $42 million, the timing of which is uncertain. See Note 16 to the Consolidated Financial Statements for additional information regarding unrecognized income tax benefits, interest, and penalties.
(6) The above table does not reflect pension obligations to certain employees and former employees. We are obligated to make contributions to our pension plans; however, we are unable to determine the amount of plan contributions due to the inherent uncertainties of obligations of this type, including timing, interest rate charges, investment performance, and amounts of benefit payments. We expect to contribute $69 million to pension plans in fiscal 2021, before consideration of any voluntary contributions. See Note 15 to the Consolidated Financial Statements for additional information regarding these plans and our estimates of future contributions and benefit payments.
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(7) Other long-term liabilities of $874 million are excluded from the above table as we are unable to estimate the timing of payment for these items.
Legal Proceedings
In the normal course of business, we are subject to various legal proceedings and claims, including patent infringement claims, product liability matters, employment disputes, disputes on agreements, other commercial disputes, environmental matters, antitrust claims, and tax matters, including non-income tax matters such as value added tax, sales and use tax, real estate tax, and transfer tax. Although it is not feasible to predict the outcome of these proceedings, based upon our experience, current information, and applicable law, we do not expect that the outcome of these proceedings, either individually or in the aggregate, will have a material effect on our results of operations, financial position, or cash flows.
Off-Balance Sheet Arrangements
In certain instances, we have guaranteed the performance of third parties and provided financial guarantees for uncompleted work and financial commitments. The terms of these guarantees vary with end dates ranging from fiscal 2021 through the completion of such transactions. The guarantees would be triggered in the event of nonperformance, and the potential exposure for nonperformance under the guarantees would not have a material effect on our results of operations, financial position, or cash flows.
In disposing of assets or businesses, we often provide representations, warranties, and/or indemnities to cover various risks including unknown damage to assets, environmental risks involved in the sale of real estate, liability for investigation and remediation of environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not expect that these uncertainties will have a material adverse effect on our results of operations, financial position, or cash flows.
At fiscal year end 2020, we had outstanding letters of credit, letters of guarantee, and surety bonds of $249 million.
As discussed above, in fiscal 2019, we sold our SubCom business. 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 $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. At fiscal year end 2020, there were no such new performance guarantees outstanding. We have contractual recourse against the SubCom business if we are required to perform on any SubCom guarantees; however, based on historical experience, we do not anticipate having to perform. See Note 4 to the Consolidated Financial Statements for additional information regarding the divestiture of the SubCom business.
Critical Accounting Policies and Estimates
The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses. Our significant accounting policies are summarized in Note 2 to the Consolidated Financial Statements. We believe the following accounting policies are the most critical as they require significant judgments and assumptions that involve inherent risks and uncertainties. Management’s estimates are based on the relevant information available at the end of each period.
Revenue Recognition
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. Revenue is recognized as performance obligations under the terms of a contract, such as a purchase order with a customer, are satisfied; generally this occurs with the transfer of control. We transfer control and recognize revenue when we ship product to our customers, the customers accept and have legal title for the product, and we have a right to payment for such product. Revenue is measured as the amount of consideration that we expect to receive in exchange for those products and excludes taxes assessed by governmental authorities and collected from customers concurrent with the sale of products. Shipping and handling costs are treated as fulfillment costs and are included in cost of sales. 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
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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. Since our performance obligations to deliver products are part of contracts that generally have original durations of one year or less, we have elected to use the optional exemption to not disclose the aggregate amount of transaction prices associated with unsatisfied or partially satisfied performance obligations as of fiscal year end 2020.
We generally warrant that our products will conform to our, or mutually agreed to, specifications and that our products will be free from material defects in materials and workmanship for a limited time. We limit our warranty to the replacement or repair of defective parts, or a refund or credit of the price of the defective product. We do not account for these warranties as separate performance obligations.
Although products are generally sold at fixed prices, certain distributors and customers receive incentives or awards, such as sales rebates, return allowances, scrap allowances, and other rights, which are accounted for as variable consideration. We estimate these amounts in the same period revenue is recognized based on the expected value to be provided to customers and reduce revenue accordingly. 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.
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. Intangible assets with determinable lives primarily include intellectual property, consisting of patents, trademarks, and unpatented technology, and customer relationships. Recoverability estimates range from 1 to 50 years and costs are generally amortized on a straight-line basis. Evaluations of the remaining useful lives of determinable-lived intangible assets are performed on a periodic basis and when events and circumstances warrant.
We test for goodwill impairment at the reporting unit level. A reporting unit is generally an operating segment or one level below an operating segment (a “component”) if the component constitutes a business for which discrete financial information is available and regularly reviewed by segment management. At fiscal year end 2020, we had five reporting units, all of which contained goodwill. There were two reporting units in both the Transportation Solutions and Industrial Solutions segments and one reporting unit in the Communications Solutions segment. When changes occur in the composition of one or more reporting units, goodwill is reassigned to the reporting units affected based on their relative fair values. We review our reporting unit structure each year as part of our annual goodwill impairment test, or more frequently based on changes in our structure.
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 marketplace 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 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
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2020. We completed our annual goodwill impairment test in the fourth quarter of fiscal 2020 and determined that no impairment existed.
Income Taxes
In determining income for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of the recoverability of certain deferred tax assets, which arise from temporary differences between the income tax return and financial statement recognition of revenue and expense.
In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent years, and our forecast of taxable income. In estimating future taxable income, we develop assumptions including the amount of pre-tax operating income in various tax jurisdictions, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.
We currently have recorded significant valuation allowances that we intend to maintain until it is more likely than not the deferred tax assets will be realized. Our income tax expense recorded in the future will be reduced to the extent of decreases in our valuation allowances. The realization of our remaining deferred tax assets is dependent primarily on future taxable income in the appropriate jurisdictions. Any reduction in future taxable income including any future restructuring activities may require that we record an additional valuation allowance against our deferred tax assets. 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 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. Under the uncertain tax position provisions of ASC 740, Income Taxes , we recognize liabilities for tax and related interest for issues in tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and related interest will be due. These tax liabilities and related interest are reflected net of the impact of related tax loss carryforwards, as such tax loss carryforwards will be applied against these tax liabilities and will reduce the amount of cash tax payments due upon the eventual settlement with the tax authorities. These estimates may change due to changing facts and circumstances. Due to the complexity of these uncertainties, the ultimate resolution may result in a settlement that differs from our current estimate of the tax liabilities and related interest. 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. The funded status of our plans is recognized on the Consolidated Balance Sheets and is measured as the difference between the fair value of plan assets and the projected benefit obligation at the measurement date. The projected benefit obligation represents the actuarial present value of benefits projected to be paid upon retirement factoring in estimated future compensation levels. The fair value of plan assets represents the current market value of cumulative company and participant contributions made to irrevocable trust funds, held for the sole benefit of participants, which are invested by the trustee of the funds. The benefits under our defined benefit pension plans are based on various factors, such as years of service and compensation.
Net periodic pension benefit cost is based on the utilization of the projected unit credit method of calculation and is charged to earnings on a systematic basis over the expected average remaining service lives of current participants, or, for inactive plans, over the remaining life expectancy of participants.
Two critical assumptions in determining pension expense and obligations are the discount rate and expected long-term return on plan assets. We evaluate these assumptions at least annually. Other assumptions reflect demographic factors such as retirement, mortality, and employee turnover. These assumptions are evaluated periodically and updated to reflect our actual experience. Actual results may differ from actuarial assumptions. The discount rate represents the market rate for high-
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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. At fiscal year end 2020, a 25-basis-point decrease in the discount rate would have increased the present value of our pension obligations by $143 million; a 25-basis-point increase would have decreased the present value of our pension obligations by $131 million. We consider the current and expected asset allocations of our pension plans, as well as historical and expected long-term rates of return on those types of plan assets, in determining the expected long-term rate of return on plan assets. A 50-basis-point decrease or increase in the expected long-term return on plan assets would have increased or decreased, respectively, our fiscal 2020 pension expense by $12 million.
At fiscal year end 2020, the long-term target asset allocation in our U.S. plans’ master trust is 5% return-seeking assets and 95% liability-hedging assets. Asset re-allocation to meet that target is occurring over a multi-year period based on the funded status. We expect to reach our target allocation when the funded status of the plans exceeds 115%. Based on the funded status of the plans as of fiscal year end 2020, our target asset allocation is 67% return-seeking and 33% liability-hedging.
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 (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 (decline) to net sales growth (decline) calculated in accordance with GAAP.
Organic net sales growth (decline) is a non-GAAP financial measure and should not be considered a replacement for results in accordance with GAAP. This non-GAAP financial measure may not be comparable to similarly-titled measures reported by other companies. The primary limitation of this measure is that it excludes the financial impact of items that would otherwise either increase or decrease our reported results. This limitation is best addressed by using organic net sales growth (decline) in combination with net sales growth (decline) to better understand the amounts, character, and impact of any increase or decrease in reported amounts.
Forward-Looking Information
Certain statements in this Annual Report are “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These statements are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include, among others, the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities, potential operating performance improvements, acquisitions, divestitures, the effects of competition, and the effects of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believe,” “expect,” “plan,” “intend,” “anticipate,” “estimate,” “predict,” “potential,” “continue,” “may,” and “should,” or the negative of these terms or similar expressions.
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Forward-looking statements involve risks, uncertainties, and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. Investors should not place undue reliance on any forward-looking statements. We do not have any intention or obligation to update forward-looking statements after we file this report except as required by law.
The following and other risks, which are described in greater detail in “Part I. Item 1A. Risk Factors,” as well as other risks described in this Annual Report, could cause our results to differ materially from those expressed in forward- looking statements:
● conditions in the global or regional economies and global capital markets, and cyclical industry conditions;
● conditions affecting demand for products in the industries we serve, particularly the automotive industry;
● risk of future goodwill impairment;
● competition and pricing pressure;
● market acceptance of our new product introductions and product innovations and product life cycles;
● raw material availability, quality, and cost;
● fluctuations in foreign currency exchange rates and impacts of offsetting hedges;
● financial condition and consolidation of customers and vendors;
● reliance on third-party suppliers;
● risks associated with current and future acquisitions and divestitures;
● 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;
● risks associated with security breaches and other disruptions to our information technology infrastructure;
● risks related to compliance with current and future environmental and other laws and regulations;
● our ability to protect our intellectual property rights;
● risks of litigation;
● our ability to operate within the limitations imposed by our debt instruments;
● the possible effects on us of various non-U.S. and U.S. legislative proposals and other initiatives that, if adopted, could materially increase our worldwide corporate effective tax rate and negatively impact our U.S. government contracts business;
● various risks associated with being a Swiss corporation;
● the impact of fluctuations in the market price of our shares; and
● the impact of certain provisions of our articles of association on unsolicited takeover proposals.
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There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business.