What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-11-09 compared with 2020-11-10 · 141 added, 180 removed, 380 unchanged (46% of the section changed)

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Summary of Fiscal 2021 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 fiscal 2021 net sales increased 22.6% from fiscal 2020 levels due to sales increases in the Transportation Solutions and Communications Solutions segments, and, to a lesser degree, the Industrial Solutions segment.

On an organic basis, our net sales increased 18.2% in fiscal 2021 as compared to fiscal 2020.

In fiscal 2020, our net sales 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.

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

● Transportation Solutions —Our net sales increased 31.1% with sales increases in all end markets.

● Industrial Solutions —Our net sales increased 3.5% primarily as a result of sales increases in the industrial equipment end market, partially offset by declines in the aerospace, defense, oil, and gas end market.

● Communications Solutions —Our net sales increased 30.4% due to sales increases in both the appliances and the data and devices end markets.

● During fiscal 2021, our shareholders approved a dividend payment to shareholders of $2.00 per share, payable in four equal quarterly installments of $0.50 beginning in the third quarter of fiscal 2021 and ending in the second quarter of fiscal 2022.

● Net cash provided by continuing operating activities was $2,676 million in fiscal 2021.

● 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

COVID-19 Pandemic

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.

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

The pandemic had a significant, negative impact on our sales and operating results during fiscal 2020 and continued to negatively affect certain of our businesses in fiscal 2021.

We do not expect that it will continue to have a significant impact on our sales and operating results in the near term.

The COVID-19 pandemic has impacted and continues to impact our business operations globally, causing disruption in our suppliers’ and customers’ supply chains, some of our business locations to reduce or suspend operations, and a reduction in demand for certain products from direct customers or end markets.

In addition, the pandemic had far-reaching impacts on many additional aspects of our operations, both directly and indirectly, including with respect to its impacts on customer behaviors, business and manufacturing operations, inventory, our employees, and the market generally.

We assessed the impact of the COVID-19 pandemic and adjusted our operations and businesses, a number of which are operating as essential businesses, and will continue to do so if necessary.

Throughout our operations, we implemented additional health and safety measures for the protection of our employees, including providing personal protective equipment, enhanced cleaning and sanitizing of our facilities, and remote working arrangements.

The extent to which the pandemic will continue to impact our business and the markets we serve will depend on future developments which may include the further spread of the virus, variant strains of the virus, and the resumption of high levels of infections and hospitalizations as well as the success of public health advancements, including vaccine production and distribution.

Although we do not expect the COVID-19 pandemic to have a significant impact on our sales and operating results in the near term, it may have a negative impact on our financial condition and results of operations in future periods.

In response to the pandemic and resulting economic environment, we have taken and continue to focus on actions to manage costs.

These include restructuring and other cost reduction initiatives, such as reducing discretionary spending,

capital expenditures, and travel.

We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, suppliers, shareholders, and the communities in which we operate.

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In the first quarter of fiscal 2022, we expect our net sales to be approximately $3.7 billion as compared to $3.5 billion in the first quarter of fiscal 2021.

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.

This increase is the result of sales growth in the Industrial Solutions and Communications Solutions segments, partially offset by sales declines in the Transportation Solution 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.

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

We expect content growth to partially offset the impact of the production decline.

We expect our net sales to increase in the commercial transportation and sensors end markets.

● Industrial Solutions —We expect our net sales increase to be driven by growth in the industrial equipment end market and, to a lesser degree, the medical and energy end markets.

● Communications Solutions —We expect our net sales to increase in both the data and devices and the appliances end markets.

We expect diluted earnings per share from continuing operations to be approximately $1.50 per share in the first quarter of fiscal 2022.

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.

This outlook reflects the negative impact of foreign currency exchange rates on net sales of approximately $19 million in the first quarter of fiscal 2022 as compared to the same period of fiscal 2021.

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 are monitoring the current macroeconomic environment, including any continued impacts from the COVID-19 pandemic, and its potential effects on our customers and the end markets we serve.

We have taken actions to manage costs and will continue to closely manage our costs in line with economic conditions.

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See further discussion in “Liquidity and Capital Resources.”

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.

During fiscal 2021, we acquired four businesses for a combined cash purchase price of $422 million, net of cash acquired.

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

We acquired five businesses, including First Sensor AG (“First Sensor”), for a combined cash purchase price of $336 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.

Results of Operations

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Organic Net Sales

Growth (Decline)

(Divestitures)

($ in millions)

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Communications Solutions

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.

Net sales increased $2,751 million, or 22.6%, in fiscal 2021 as compared to fiscal 2020.

The increase in net sales resulted primarily from organic net sales growth of 18.2% and the positive impact of foreign currency translation of 3.6% due to the strengthening of certain foreign currencies.

The significant, unfavorable impacts from the COVID-19 pandemic were included in our net sales in fiscal 2020.

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.

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.

Increases or decreases in the value of the U.S.

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Organic Net Sales

Growth (Decline)

(Divestitures)

($ in millions)

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As a percentage of net sales

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.

In fiscal 2021, gross margin increased $1,152 million as compared to fiscal 2020 primarily as a result of higher volume and, to a lesser degree, improved manufacturing productivity and the positive impact of foreign currency translation.

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

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:

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.

Cost of sales and gross margin are subject to variability in raw material prices.

As markets recover from the COVID-19 pandemic, increases in consumer demand have led to shortages and price increases in some of our input materials.

In fiscal 2021, we purchased approximately 200 million pounds of copper, 122,000 troy ounces of gold, 2.7 million troy ounces of silver, and 15,000 troy ounces of palladium.

The following table presents the average prices incurred related to copper, gold, silver, and palladium:

In fiscal 2022, we expect to purchase approximately 215 million pounds of copper, 135,000 troy ounces of gold, 2.9 million troy ounces of silver, and 15,000 troy ounces of palladium.

Operating Expenses

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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.

In fiscal 2021, selling, general, and administrative expenses increased $120 million as compared to fiscal 2020 due primarily to higher incentive compensation costs due to improved operational performance, increased selling expenses to support higher sales levels, and the negative impact of foreign currency translation, partially offset by savings attributable to cost control measures and restructuring actions and gains on the sale of real estate.

Restructuring and Other Charges, Net.

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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 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.

During fiscal 2021 and 2020, we initiated restructuring programs across all segments to optimize our manufacturing footprint and improve the cost structure of the organization.

These actions were due in part to the COVID-19 pandemic.

We incurred net restructuring charges of $208 million and $257 million in fiscal 2021 and 2020, respectively.

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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.

For fiscal 2022, we expect total restructuring charges to be approximately $150 million and total spending, which will be funded with cash from operations, to be approximately $200 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.

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

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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Impairment of goodwill

Other items (1)

(1) Represents the write-off of certain spare parts.

See discussion of operating income below under “Segment Results.”

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($ in millions)

Interest expense

Income tax expense (benefit)

Other income (expense), net

Income tax expense

Effective tax rate

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

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.

Other Income (Expense).

See Note 15 to the Consolidated Financial Statements for information regarding net other income (expense) associated with our retirement plans, including a $28 million charge related to the transfer of certain U.S.

pension plan liabilities to an insurance company through the purchase of a group annuity contract in fiscal 2021.

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.

See Note 16 to the Consolidated Financial Statements for discussion of items impacting income tax expense and the effective tax rate, including valuation allowance adjustments in fiscal 2021 and 2020 and the Switzerland Federal Act on Tax Reform and AHV Financing in fiscal 2020.

The valuation allowance for deferred tax assets was $2,729 million and $4,429 million at fiscal year end 2021 and 2020, respectively.

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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

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Organic Net Sales

Growth (Decline)

($ in millions)

Commercial transportation

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.

Net sales in the Transportation Solutions segment increased $2,129 million, or 31.1%, in fiscal 2021 from fiscal 2020 primarily as a result of organic net sales growth of 25.1% and the positive impact of foreign currency translation of 4.4%.

In fiscal 2020, our net sales included significant, unfavorable impacts from 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.

● Automotive —Our organic net sales increased 25.0% in fiscal 2021 with increases of 28.2% in the Americas region, 24.3% in the EMEA region, and 24.2% in the Asia–Pacific region.

Our organic net sales growth across all regions was attributable primarily to increases in global automotive production and content gains.

● Commercial transportation —Our organic net sales increased 35.2% in fiscal 2021 with growth across all regions resulting from market growth and content gains.

● Sensors —Our organic net sales increased 13.4% in fiscal 2021 as a result of strength across all markets.

Operating Income (Loss).

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Operating margin

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:

Operating income (loss) in the Transportation Solutions segment increased $1,619 million in fiscal 2021 as compared to fiscal 2020.

Excluding the items below, operating income increased in fiscal 2021 primarily as a result of higher volume and, to a lesser degree, improved manufacturing productivity.

(in millions)

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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)

Aerospace, defense, oil, and gas

Industrial equipment

Aerospace, defense, oil, and gas

(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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Growth (Decline)

(Divestitures)

($ in millions)

Aerospace, defense, oil, and gas

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.

Aerospace, defense, oil, and gas

In the Industrial Solutions segment, net sales increased $131 million, or 3.5%, in fiscal 2021 from fiscal 2020 due primarily to the positive impact of foreign currency translation of 2.5% and organic net sales growth of 1.3%.

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

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.

● Industrial equipment —Our organic net sales increased 22.7% in fiscal 2021 with growth in all regions due primarily to strength in factory automation and controls applications.

● Aerospace, defense, oil, and gas —Our organic net sales decreased 17.4% in fiscal 2021 primarily as a result of declines in the commercial aerospace market.

● Energy —Our organic net sales increased 4.1% in fiscal 2021 primarily as a result of strength in renewable energy applications.

● Medical —Our organic net sales decreased 3.6% in fiscal 2021 due to delays in elective procedures during the first half of fiscal 2021, partially offset by sales increases resulting from market strength in interventional medical applications in the second half of fiscal 2021.

Operating Income.

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Operating margin

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:

Operating income in the Industrial Solutions segment increased $57 million in fiscal 2021 from fiscal 2020.

Excluding the items below, operating income increased in fiscal 2021 primarily as a result of improved manufacturing productivity.

(in millions)

Acquisition-related charges:

Acquisition and integration costs

Charges associated with the amortization of acquisition-related fair value adjustments

Restructuring and other charges, net

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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Organic Net Sales

Growth (Decline)

($ in millions)

Data and devices

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.

Net sales in the Communications Solutions segment increased $491 million, or 30.4%, in fiscal 2021 as compared to fiscal 2020 due primarily to organic net sales growth of 27.2%.

In fiscal 2020, our net sales included unfavorable impacts from 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.

● Data and devices —Our organic net sales increased 20.5% in fiscal 2021 as a result of market strength across all regions as well as content growth and market share gains in high-speed cloud applications.

● Appliances —Our organic net sales increased 37.2% in fiscal 2021 with growth in all regions attributable primarily to increased demand and market share gains.

Operating Income.

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In the Communications Solutions segment, operating income increased $221 million in fiscal 2021 as compared to fiscal 2020.

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

Excluding the items below, operating income increased due to higher volume and, to a lesser degree, improved manufacturing productivity.

(in millions)

Acquisition and integration costs

Restructuring and other charges, net

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.

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

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

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

We will continue to monitor financial markets and respond as necessary to changing conditions, including any developments related to the COVID-19 pandemic.

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

Risk Factors.”

Risk Factors.” We believe that we have sufficient financial resources and liquidity which will enable us to meet our ongoing working capital and other cash flow needs.

Subsequent to fiscal year end 2021, Tyco Electronics Group S.A.

(“TEGSA”) called for the early redemption of all of its outstanding 3.50% senior notes due in February 2022, representing $500 million aggregate principal amount.

The redemption, which was funded with cash from operations, was completed in November 2021.

As of fiscal year end 2021, 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;

Under current applicable laws, substantially all of these amounts can be repatriated to 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.

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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.

Net cash provided by continuing operating activities increased $685 million to $2,676 million in fiscal 2021 as compared to $1,991 million in fiscal 2020.

The increase resulted primarily from higher pre-tax income, partially offset by higher working capital levels to support increased sales and higher tax payments.

The amount of income taxes paid, net of refunds, during fiscal 2021 and 2020 was $371 million and $257 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 $61 million and $47 million in fiscal 2021 and 2020, respectively.

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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.

During fiscal 2021, we acquired four businesses for a combined cash purchase price of $422 million, net of cash acquired.

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

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

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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 has a five-year unsecured senior revolving credit facility (“Credit Facility”) with 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.

The Credit Facility was amended in June 2021 primarily to extend the maturity date from November 2023 to June 2026.

The amended Credit Facility contains customary provisions for the replacement of London Interbank Offered Rate (“LIBOR”) with successor rates and amends certain representations, warranties, and covenants applicable to us and TEGSA as obligors under the credit agreement.

TEGSA had no borrowings under the Credit Facility at fiscal year end 2021 or 2020.

Borrowings under the Credit Facility bear interest at a rate per annum equal to, at the option of TEGSA, (1) LIBOR or, upon a phase-out of LIBOR, an alternative benchmark rate, (2) an alternate base rate equal to the highest of (i) Bank of America, N.A.’s base rate, (ii) the federal funds effective rate plus 1 / 2 of 1%, and (iii) one-month LIBOR, or an alternative benchmark rate, plus 1%, (3) an alternative currency daily rate, or (4) an alternative currency term rate, plus, in each case, an applicable margin based upon the senior, unsecured, long-term debt rating of TEGSA.

TEGSA is required to pay an annual facility fee.

Based on the applicable credit ratings of TEGSA, this fee ranges from 5.0 to 12.5 basis points of the lenders’ commitments under the Credit Facility.

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.

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

TEGSA had no borrowings under the commercial paper program at fiscal year end 2021 or 2020.

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.

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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.

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.

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Loss from continuing operations

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 2022 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.

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 2021, we had outstanding letters of credit, letters of guarantee, and surety bonds of $135 million, excluding those related to our Subsea Communications (“SubCom”) business which are discussed below.

During 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 performance guarantees and letters of credit had a combined value of approximately $119 million as of fiscal year end 2021 and are expected to expire at various dates through fiscal 2025.

During fiscal 2021, we amended our agreement with SubCom and removed a requirement to issue new performance guarantees for certain projects entered into by the SubCom business following the sale.

As of fiscal year end 2021, 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.

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:

The following table provides a summary of our contractual obligations and commitments for debt, minimum lease payment obligations under non-cancelable leases, and other material obligations at fiscal year end 2021:

Payments Due by Fiscal Year

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See Note 15 to the Consolidated Financial Statements for additional information regarding these plans and our estimates of future contributions and benefit payments.

(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.

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.

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.

Trade Compliance Matters

We are investigating our past compliance with relevant U.S.

trade controls and have made voluntary disclosures of apparent trade controls violations to the U.S.

Department of Commerce’s Bureau of Industry and Security (“BIS”) and the U.S.

State Department’s Directorate of Defense Trade Controls (“DDTC”).

We are cooperating with the BIS and DDTC on these matters, and both our internal assessment and the resulting investigations by the agencies remain ongoing.

We are unable to predict the timing and final outcome of the agencies’ investigations.

An unfavorable outcome may include fines or penalties imposed in response to our disclosures, but we are not yet able to reasonably estimate the extent of any such fines or penalties.

While we have reserved for potential fines and penalties relating to these matters based on our current understanding of the facts, the investigations into these matters have yet to be completed and the final outcome of such investigations and related fines and penalties may differ from amounts currently reserved.

Critical Accounting Policies and Estimates

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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.

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.

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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 .

We account for goodwill and other intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other .

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

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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.

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 more frequently if events or changes in circumstances indicate that the asset may be impaired.

In assessing a potential impairment, 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.

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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).

The income approach is supported by a guideline analysis (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

See Note 8 to the Consolidated Financial Statements for information regarding our interim goodwill impairment test and partial impairment charge of $900 million recorded in the second quarter of fiscal 2020.

We completed our annual goodwill impairment test in the fourth quarter of fiscal 2021 and determined that no impairment existed.

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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.

Management is not aware of any enacted 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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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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Based on the funded status of the plans as of fiscal year end 2021, 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

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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) 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.

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● 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 business interruptions due to natural disasters or other disasters such as the COVID-19 pandemic, which have impacted 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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● risks related to compliance with current and future environmental and other laws and regulations;

● risks associated with compliance with applicable antitrust or competition laws or applicable trade regulations;

● our ability to protect our intellectual property rights;

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● the possible effects on us of various non-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.

legislative proposals and other initiatives that, if adopted, could materially increase our worldwide corporate effective tax rate, increase global cash taxes, and negatively impact our U.S.

government contracts business;

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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