TE CONNECTIVITY LTD. 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
Discussion of our financial condition and results of operations for fiscal 2021 compared to fiscal 2020 is presented below. Discussion of our financial condition and results of operations for fiscal 2020 compared to fiscal 2019 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 endedSeptember 25, 2020 .
The following discussion includes organic net sales growth (decline) which is a non-GAAP financial measure. See "Non-GAAP Financial Measure" for additional information regarding this measure.
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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 2021 Performance
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 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
of
quarter of fiscal 2022.
? Net cash provided by continuing operating activities was
fiscal 2021.
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 . 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,
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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.
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 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 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-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 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, including any continued impacts from the COVID-19 pandemic, and its potential effects on our customers and the end markets we serve. We have taken actions to manage costs and will continue to closely manage our costs in line with economic conditions. Additionally, we are managing our capital resources and monitoring capital availability to ensure that we have sufficient resources to fund future capital needs. See further discussion in "Liquidity and Capital Resources."
Acquisitions
During fiscal 2021, we acquired four businesses for a combined cash purchase price of$422 million , net of cash acquired. The acquisitions were reported as part of our Industrial Solutions segment from the date of acquisition.
We acquired five businesses, including First Sensor AG ("First Sensor"), for a
combined cash purchase price of
See Note 5 to the Consolidated Financial Statements for additional information
regarding acquisitions.
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Results of Operations
Net Sales
The following table presents our net sales and the percentage of total net sales
by segment:
Fiscal
2021 2020
($ in millions)
Transportation Solutions $ 8,974 60 % $ 6,845 56 %
Industrial Solutions 3,844 26 3,713 31
Communications Solutions 2,105 14 1,614 13
Total $ 14,923 100 % $ 12,172 100 %
The following table provides an analysis of the change in our net sales by segment:
Change in Net Sales for Fiscal 2021 versus Fiscal 2020
Net Sales Organic Net Sales Acquisitions
Growth Growth Translation (Divestitures)
($ in millions)
Transportation Solutions $ 2,129 31.1 % $ 1,739 25.1 % $ 301 $ 89
Industrial Solutions 131 3.5 49 1.3 93 (11)
Communications Solutions 491 30.4 441 27.2 50 -
Total $ 2,751 22.6 % $ 2,229 18.2 % $ 444 $ 78
Net sales increased$2,751 million , or 22.6%, in fiscal 2021 as compared to fiscal 2020. The increase in net sales resulted primarily from organic net sales growth of 18.2% and the positive impact of foreign currency translation of 3.6% due to the strengthening of certain foreign currencies. The significant, unfavorable impacts from the COVID-19 pandemic were included in our net sales in fiscal 2020.
See further discussion of net sales below under "Segment Results."
Net Sales byGeographic Region . Our business operates in three geographic regions-EMEA,Asia-Pacific , and theAmericas -and our results of operations are influenced by changes in foreign currency exchange rates. Increases or decreases in the value of theU.S. dollar, compared to other currencies, will directly affect our reported results as we translate those currencies intoU.S. dollars at the end of each fiscal period. We sell our products into approximately 140 countries, and approximately 60% of our net sales were invoiced in currencies other than theU.S. dollar in fiscal 2021. The percentage of net sales in fiscal 2021 by major currencies invoiced was as follows: Currencies Percentage U.S. dollar 39 % Euro 32 Chinese renminbi17 Japanese yen 5 All others 7 Total 100 % 25 Table of Contents The following table presents our net sales and the percentage of total net sales by geographic region: Fiscal 2021 2020 ($ in millions) EMEA$ 5,471 37 %$ 4,220 35 % Asia-Pacific 5,374 36 4,246 35 Americas 4,078 27 3,706 30 Total$ 14,923 100 %$ 12,172 100 % The following table provides an analysis of the change in our net sales by geographic region: Change in Net Sales for Fiscal 2021 versus Fiscal 2020 Net Sales Organic Net Sales
Acquisitions
Growth Growth Translation (Divestitures)
($ in millions)
EMEA $ 1,251 29.6 % $ 902 21.1 % $ 278 $ 71
Asia-Pacific 1,128 26.6 924 21.6 214 (10)
Americas 372 10.0 403 10.9 (48) 17
Total $ 2,751 22.6 % $ 2,229 18.2 % $ 444 $ 78
Cost of Sales and Gross Margin
The following table presents cost of sales and gross margin information:
Fiscal
2021 2020 Change
($ in millions)
Cost of sales $ 10,036 $ 8,437 $ 1,599
As a percentage of net sales 67.3 % 69.3 %
Gross margin $ 4,887 $ 3,735 $ 1,152
As a percentage of net sales 32.7 % 30.7 %
In fiscal 2021, gross margin increased
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. 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:
Fiscal
Measure 2021 2020
Copper Lb. $ 3.19 $ 2.78
Gold Troy oz. 1,690 1,395
Silver Troy oz. 21.63 16.21
Palladium Troy oz. 2,276 2,047
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.
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Operating Expenses
The following table presents operating expense information:
Fiscal
2021 2020 Change
($ in millions)
Selling, general, and administrative expenses
10.1 % 11.4 %
Restructuring and other charges, net $ 233 $ 257 $ (24)
Impairment of goodwill - 900 (900)
Selling, General, and Administrative Expenses. 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. 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 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. Annualized cost savings related to actions
initiated in fiscal 2021 are expected to be approximately $80 million and are
expected to be realized by the end of fiscal 2023. Cost savings will be
reflected primarily in cost of sales and selling, general, and administrative
expenses. For fiscal 2022, we expect total restructuring charges to be
approximately $150 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 ofGoodwill . During fiscal 2020, we recorded a goodwill impairment charge of$900 million related to the Sensors reporting unit in our Transportation Solutions segment. See Note 8 to the Consolidated Financial Statements for additional information regarding the impairment of goodwill and our annual goodwill impairment test.
Operating Income
The following table presents operating income and operating margin information:
Fiscal
2021 2020 Change
($ in millions)
Operating income $ 2,434 $ 537 $ 1,897
Operating margin 16.3 % 4.4 %
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Operating income included the following:
Fiscal
2021 2020
(in millions)
Acquisition-related charges:
Acquisition and integration costs $ 31 $ 36
Charges associated with the amortization of
acquisition-related fair value adjustments 3 4
34 40
Restructuring and other charges, net 233
257
Impairment of goodwill - 900
Total $ 267 $ 1,197 See discussion of operating income below under "Segment Results."
Non-Operating Items
The following table presents select non-operating information:
Fiscal
2021 2020 Change
($ in millions)
Other income (expense), net $ (17) $ 20 $ (37)
Income tax expense 123 783 (660)
Effective tax rate 5.2 % 149.4 %
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 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
As of fiscal year end 2021, certain subsidiaries had approximately$32 billion of cumulative undistributed earnings that have been retained indefinitely and reinvested in our global manufacturing operations, including working capital; property, plant, and equipment; intangible assets; and research and development activities. See Note 16 to the Consolidated Financial Statements for additional information regarding undistributed earnings. 28 Table of Contents Segment Results Transportation Solutions
Fiscal
2021 2020
($ in millions)
Automotive $ 6,379 71 % $ 4,903 72 %
Commercial transportation 1,467 16 1,051 15
Sensors 1,128 13 891 13
Total $ 8,974 100 % $ 6,845 100 %
Industry end market information is presented consistently with our internal
(1) 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 2021 versus Fiscal 2020
Net Sales
Organic
Growth Growth Translation Acquisition
($ in millions)
Automotive $ 1,476 30.1 % $ 1,243 25.0 % $ 233 $ -
Commercial transportation 416 39.6 377 35.2 39 -
Sensors 237 26.6 119 13.4 29 89
Total $ 2,129 31.1 % $ 1,739 25.1 % $ 301 $ 89
Net sales in the Transportation Solutions segment increased$2,129 million , or 31.1%, in fiscal 2021 from fiscal 2020 primarily as a result of organic net sales growth of 25.1% and the positive impact of foreign currency translation of 4.4%. In fiscal 2020, our net sales included significant, unfavorable impacts from the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
Automotive-Our organic net sales increased 25.0% in fiscal 2021 with increases
of 28.2% in the
?
attributable primarily to increases in global automotive production and content
gains.
? Commercial transportation-Our organic net sales increased 35.2% in fiscal 2021
with growth across all regions resulting from market growth and content gains.
? Sensors-Our organic net sales increased 13.4% in fiscal 2021 as a result of
strength across all markets.
Operating Income (Loss). The following table presents the Transportation
Solutions segment's operating income (loss) and operating margin information:
Fiscal
2021 2020 Change
($ in millions)
Operating income (loss) $ 1,526 $ (93) $ 1,619
Operating margin 17.0 % (1.4) %
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Operating income (loss) in the Transportation Solutions segment increased $1,619
million in fiscal 2021 as compared to fiscal 2020. Excluding the items below,
operating income increased in fiscal 2021 primarily as a result of higher volume
and, to a lesser degree, improved manufacturing productivity.
Fiscal
2021 2020
(in millions)
Acquisition-related charges:Acquisition and integration costs$ 15 $ 28 Charges associated with the amortization of acquisition-related fair value adjustments 3
4
18 32
Restructuring and other charges, net 135
113
Impairment of goodwill - 900
Total $ 153 $ 1,045
Industrial Solutions
Fiscal
2021 2020
($ in millions)
Industrial equipment $ 1,397 36 % $ 1,098 30 %
Aerospace, defense, oil, and gas 1,035 27 1,201 32
Energy 738 19 717 19
Medical 674 18 697 19
Total $ 3,844 100 % $ 3,713 100 %
Industry end market information is presented consistently with our internal
(1) 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 2021 versus Fiscal 2020
Net Sales Organic Net Sales Acquisition
Growth (Decline) Growth (Decline) Translation (Divestitures)
($ in millions)
Industrial equipment $ 299 27.2 % $ 253 22.7 % $ 46 $ -Aerospace, defense, oil, and gas (166) (13.8)
(209) (17.4) 25 18 Energy 21 2.9 30 4.1 20 (29) Medical (23) (3.3) (25) (3.6) 2 - Total$ 131 3.5 %$ 49 1.3 % $ 93 $ (11) In the Industrial Solutions segment, net sales increased$131 million , or 3.5%, in fiscal 2021 from fiscal 2020 due primarily to the positive impact of foreign currency translation of 2.5% and organic net sales growth of 1.3%. In fiscal 2020, our net sales included significant, unfavorable impacts from the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
Industrial equipment-Our organic net sales increased 22.7% in fiscal 2021 with
? growth in all regions due primarily to strength in factory automation and
controls applications.
Aerospace, defense, oil, and gas-Our organic net sales decreased 17.4% in
? fiscal 2021 primarily as a result of declines in the commercial aerospace
market.
? Energy-Our organic net sales increased 4.1% in fiscal 2021 primarily as a
result of strength in renewable energy applications.
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Medical-Our organic net sales decreased 3.6% in fiscal 2021 due to delays in
? elective procedures during the first half of fiscal 2021, partially offset by
sales increases resulting from market strength in interventional medical
applications in the second half of fiscal 2021.
Operating Income. The following table presents the Industrial Solutions segment's operating income and operating margin information:
Fiscal
2021 2020 Change
($ in millions)
Operating income $ 469 $ 412 $ 57
Operating margin 12.2 % 11.1 %
Operating income in the Industrial Solutions segment increased
Fiscal
2021 2020
(in millions)
Acquisition and integration costs
$ 88 $ 110 Communications Solutions
Fiscal
2021 2020
($ in millions)
Data and devices $ 1,198 57 % $ 973 60 %
Appliances 907 43 641 40
Total $ 2,105 100 % $ 1,614 100 %
Industry end market information is presented consistently with our internal
(1) management reporting and may be revised periodically as management deems
necessary.
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 2021 versus Fiscal 2020
Net Sales Organic Net Sales
Growth Growth Translation
($ in millions)
Data and devices $ 225 23.1 % $ 199 20.5 % $ 26
Appliances 266 41.5 242 37.2 24
Total $ 491 30.4 % $ 441 27.2 % $ 50
Net sales in the Communications Solutions segment increased $491 million , or
30.4%, in fiscal 2021 as compared to fiscal 2020 due primarily to organic net
sales growth of 27.2%. In fiscal 2020, our net sales included unfavorable
impacts from the COVID-19 pandemic. Our organic net sales by industry end market
were as follows:
Data and devices-Our organic net sales increased 20.5% in fiscal 2021 as a
? result of market strength across all regions as well as content growth and
market share gains in high-speed cloud applications.
? Appliances-Our organic net sales increased 37.2% in fiscal 2021 with growth in
all regions attributable primarily to increased demand and market share gains.
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Operating Income. The following table presents the Communications Solutions segment's operating income and operating margin information:
Fiscal
2021 2020 Change
($ in millions)
Operating income $ 439 $ 218 $ 221
Operating margin 20.9 % 13.5 %
In the Communications Solutions segment, operating income increased $221 million
in fiscal 2021 as compared to fiscal 2020. Excluding the items below, operating
income increased due to higher volume and, to a lesser degree, improved
manufacturing productivity.
Fiscal
2021 2020
(in millions)
Acquisition and integration costs
$ 26 $ 42 Liquidity and Capital Resources 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 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. 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 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. Item 1A. 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 inFebruary 2022 , representing$500 million aggregate principal amount. The redemption, which was funded with cash from operations, was completed inNovember 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 TEGSA, our Luxembourg subsidiary, which is the obligor of substantially all of our debt, and toTE 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 2021, we had approximately$4.9 billion of cash, cash equivalents, and intercompany deposits, principally in our subsidiaries, that we have the ability to distribute toTEGSA andTE Connectivity Ltd. but we consider to be permanently reinvested. We estimate that up to$0.7 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 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. 32
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Pension contributions were$61 million and$47 million in fiscal 2021 and 2020, respectively. We expect pension contributions to be$50 million in fiscal 2022, 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$690 million and$560 million in fiscal 2021 and 2020, respectively. We expect fiscal 2022 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 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.
Cash Flows from Financing Activities and Capitalization
Total debt at fiscal year end 2021 and 2020 was
During fiscal 2021, TEGSA, our wholly-owned subsidiary, issued €550 million aggregate principal amount of 0.00% senior notes due inFebruary 2029 . 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 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 inJune 2021 primarily to extend the maturity date fromNovember 2023 toJune 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. 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 2021, 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 toU.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 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. 33 Table of Contents Payments of common share dividends to shareholders were$647 million and$625 million in fiscal 2021 and 2020, respectively. See Note 18 to the Consolidated Financial Statements for additional information regarding dividends on our common shares. InMarch 2021 , our shareholders approved a dividend payment to shareholders of$2.00 per share, payable in four equal quarterly installments of$0.50 per share beginning in the third quarter of fiscal 2021 and ending in the second quarter of fiscal 2022. 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 2021, our board of directors authorized an increase of$1.5 billion in our share repurchase program. We repurchased approximately 7 million of our common shares for$904 million and approximately 6 million of our common shares for$505 million under the share repurchase program during fiscal 2021 and 2020, respectively. At fiscal year end 2021, we had$1.6 billion of availability remaining under our share repurchase authorization.
Summarized Guarantor Financial Information
As discussed above, our senior notes, commercial paper, and Credit Facility are issued by TEGSA and are fully and unconditionally guaranteed on an unsecured basis by TEGSA's parent,TE Connectivity Ltd. In addition to being the issuer of our debt securities, TEGSA owns, directly or indirectly, all of our operating subsidiaries. The following tables present summarized financial information, excluding investments in and equity in earnings of our non-guarantor subsidiaries, forTE Connectivity Ltd. and TEGSA on a combined basis. Fiscal Year End 2021 2020 (in millions) Balance Sheet Data: Total current assets$ 452 $ 134 Total noncurrent assets(1) 1,829 3,282
Total current liabilities 1,144 1,237 Total noncurrent liabilities(2) 12,443 23,549
Includes
(1) 2020, respectively, of intercompany loans receivable from non-guarantor
subsidiaries.
Includes
(2) 2020, respectively, of intercompany loans payable to non-guarantor
subsidiaries.
Fiscal
2021 2020
(in millions)
Statement of Operations Data:
Loss from continuing operations
(479) (202)
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.
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
34
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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
During fiscal 2019, we sold ourSubCom business. In connection with the sale, we contractually agreed to continue to honor performance guarantees and letters of credit related to theSubCom 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 withSubCom and removed a requirement to issue new performance guarantees for certain projects entered into by theSubCom business following the sale. As of fiscal year end 2021, there were no such new performance guarantees outstanding. We have contractual recourse against theSubCom business if we are required to perform on anySubCom 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 theSubCom 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 material obligations at fiscal year end 2021:
Payments Due by Fiscal Year
Total 2022 2023 2024 2025 2026 Thereafter
(in millions)
Debt(1) $ 4,119 $ 503 $ 651 $ 353 $ 646 $ 352 $ 1,614
Interest payments on debt(2) 758 84 80 72 60 54 408
Operating leases(3) 468 118 104 83 63 40 60
Purchase obligations(4) 1,063 1,041 17 2 - - 3
Total contractual cash obligations(5)(6)
(1) Debt represents principal payments. See Note 11 to the Consolidated Financial
Statements for additional information regarding debt.
Interest payments exclude the impact of our interest rate swap and (2) cross-currency swap contracts. Interest payments on debt are projected for
future periods using rates in effect as of fiscal year end 2021 and are
subject to change in future periods.
Operating leases represents the undiscounted lease payments. See Note 12 to (3) the Consolidated Financial Statements for additional information regarding
leases.
(4) Purchase obligations consist primarily of commitments for purchases of goods
and services.
The above table does not reflect unrecognized income tax benefits of
million and related accrued interest and penalties of
for additional information regarding unrecognized income tax benefits,
interest, and penalties.
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 (6) timing, interest rate charges, investment performance, and amounts of benefit
payments. We expect to contribute
2022, 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.
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
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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, orcash flows. Trade Compliance Matters
We are investigating our past compliance with relevantU.S. trade controls and have made voluntary disclosures of apparent trade controls violations to theU.S. Department of Commerce's Bureau of Industry and Security ("BIS") and theU.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 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 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.
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.
We account for goodwill and other intangible assets in accordance with ASC 350, Intangibles-Goodwill and Other.
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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 2021, 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 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. 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 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 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. 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. 37
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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 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. 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-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 2021, a 25-basis-point decrease in the discount rate would have increased the present value of our pension obligations by$127 million ; a 25-basis-point increase would have decreased the present value of our pension obligations by$119 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 2021 pension expense by$13 million . At fiscal year end 2021, the long-term target asset allocation in ourU.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 2021, our target asset allocation is 67% return-seeking and 33% liability-hedging. 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
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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.
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;
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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 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
? 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;
? risks associated with compliance with applicable antitrust or competition laws
or applicable trade 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-
? and other initiatives that, if adopted, could materially increase our worldwide
corporate effective tax rate, increase global cash taxes, and negatively impact
our
? 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.
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.
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