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 "Part I. Item 1A. 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 2022 compared to fiscal 2021 is presented below. Discussion of our financial condition and results of operations for fiscal 2021 compared to fiscal 2020 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 24, 2021 . The following discussion includes organic net sales growth which is a non-GAAP financial measure. See "Non-GAAP Financial Measure" for additional information regarding this measure. 22 Table of Contents 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 2022 Performance
Our fiscal 2022 net sales increased 9.1% from fiscal 2021 levels due to sales
? increases in the Communications Solutions and Industrial Solutions segments
and, to a lesser degree, the Transportation Solutions segment. On an organic
basis, our net sales increased 12.1% in fiscal 2022 as compared to fiscal 2021.
? Our net sales by segment were as follows:
Transportation Solutions-Our net sales increased 2.7% with sales increases in
? the automotive and commercial transportation end markets, partially offset by
sales declines in the sensors end market.
? Industrial Solutions-Our net sales increased 17.6% primarily as a result of
sales increases in the industrial equipment end market.
? Communications Solutions-Our net sales increased 20.8% due primarily to sales
increases in the data and devices end market.
? Fiscal 2022 included an additional week which contributed
sales.
During fiscal 2022, our shareholders approved a dividend payment to
? shareholders of
of
quarter of fiscal 2023.
? Net cash provided by continuing operating activities was
fiscal 2022. Economic Conditions Our business and operating results have been and will continue to be affected by worldwide economic conditions. The global economy has been impacted by the COVID-19 pandemic and the military conflict betweenRussia andUkraine as well as supply chain disruptions and inflationary cost pressures. See "Russia -Ukraine Military Conflict" and "COVID-19 Pandemic" for additional information. Our business operates globally and changes in foreign currency exchange rates may have a significant impact on our results. Foreign currency translation negatively impacted our net sales by$723 million in fiscal 2022 as compared to fiscal 2021. We expect translation to continue to have a negative impact on our operating results in fiscal 2023. We expect translation to negatively impact our net sales by approximately$1 billion in fiscal 2023 as compared to fiscal 2022 as a result of continued strength of theU.S. dollar against other currencies. We are monitoring the current environment and its potential effects on our customers and the end markets we serve. As a result of inflationary pressure, we have implemented price increases for a number of our products. Also, we have taken and continue to focus on actions to manage costs, including restructuring and other cost reduction initiatives such as reducing discretionary spending and travel. Additionally, we are managing our capital resources and monitoring capital availability to ensure that we have sufficient resources to fund our future capital needs. See further discussion in "Liquidity and Capital Resources."
Russia-Ukraine Military Conflict
We are monitoring the military conflict betweenRussia andUkraine , escalating tensions in surrounding countries, and associated sanctions. We suspended our business operations inRussia , and our operations inUkraine have been reduced to focus on the safety of our employees. We have experienced increased costs for transportation, energy, and raw materials due in part to the negative impact of theRussia -Ukraine military conflict on the global economy. The increased costs and 23 Table of Contents
supply chain disruptions resulting from the conflict have not been material to our business, and we have been able to partially mitigate them through price increases or productivity. NeitherRussia norUkraine represents a material portion of our business, and the military conflict has not had a significant impact on our business, financial condition, or result of operations during fiscal 2022. The full impact of the military conflict on our business operations and financial performance remains uncertain. The extent to which the conflict may impact our business in future periods will depend on future developments, including the severity and duration of the conflict, its impact on regional and global economic conditions, and supply chain disruptions. We will continue to actively monitor the conflict and assess the related sanctions and other effects and may take further actions if necessary.
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 negative impact on certain of our businesses in fiscal
2021 and continued to impact certain of our operations in China for a period of
time in fiscal 2022. The pandemic has not had a significant impact on our
ability to staff our operations, and we do not expect that it will continue to
have a significant impact on our businesses globally in the near term.
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 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.
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. While
certain of our operations were shut down in China for a period of time in fiscal
2022, we do not expect the COVID-19 pandemic to have a significant impact on our
businesses globally in the near term. However, it may have a negative impact on
our financial condition and results of operations in future periods.
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 2023, we expect our net sales to be approximately$3.75 billion as compared to$3.8 billion in the first quarter of fiscal 2022. We expect diluted earnings per share from continuing operations to be approximately$1.31 per share in the first quarter of fiscal 2023. This outlook reflects the negative impact of foreign currency exchange rates on net sales and earnings per share of approximately$400 million and$0.19 per share, respectively, in the first quarter of fiscal 2023 as compared to the same period of fiscal 2022. Also, this outlook is based on foreign currency exchange rates and commodity prices that are consistent with current levels.
Acquisitions
During fiscal 2022, we acquired three businesses for a combined cash purchase price of$245 million , net of cash acquired. The acquisitions were reported as part of our Communications Solutions segment from the date of acquisition. We acquired four businesses for a combined cash purchase price of$422 million , net of cash acquired, during fiscal 2021. The acquisitions were reported as part of our Industrial Solutions segment from the date of acquisition. 24
Table of Contents
See Note 4 to the Consolidated Financial Statements for additional information regarding acquisitions.
Results of Operations
Net Sales
The following table presents our net sales and the percentage of total net sales
by segment:
Fiscal
2022 2021
($ in millions)
Transportation Solutions $ 9,219 56 % $ 8,974 60 %
Industrial Solutions 4,520 28 3,844 26
Communications Solutions 2,542 16 2,105 14
Total $ 16,281 100 % $ 14,923 100 %
The following table provides an analysis of the change in our net sales by segment:
Change in Net Sales for Fiscal 2022 versus Fiscal 2021
Net Sales Organic Net Sales Acquisitions
Growth Growth Translation (Divestitures)
($ in millions)
Transportation Solutions $ 245 2.7 % $ 727 8.1 % $ (482) $ -
Industrial Solutions 676 17.6 638 16.6 (187) 225
Communications Solutions 437 20.8 438 20.8 (54) 53
Total $ 1,358 9.1 % $ 1,803 12.1 % $ (723) $ 278
Net sales increased$1,358 million , or 9.1%, in fiscal 2022 as compared to fiscal 2021. The increase in net sales resulted from organic net sales growth of 12.1% and net sales contributions of 1.9% from acquisitions and divestitures, partially offset by the negative impact of foreign currency translation of 4.9% due to the weakening of certain foreign currencies. In fiscal 2022, pricing actions positively affected organic net sales by$509 million . Fiscal 2022 included an additional week which contributed$306 million in net sales. The impact of the additional week was estimated using an average sales figure for the fourth quarter of the fiscal year. See further discussion of net sales below under "Segment Results."Net Sales byGeographic Region . Our business operates in three geographic regions-Asia-Pacific , EMEA, and theAmericas -and our results of operations are influenced by changes in foreign currency exchange rates. Increases or decreases in the value of theU.S. dollar, compared to other currencies, will directly affect our reported results as we translate those currencies intoU.S. dollars at the end of each fiscal period. We sell our products into approximately 140 countries, and approximately 60% of our net sales were invoiced in currencies other than theU.S. dollar in fiscal 2022. The percentage of net sales in fiscal 2022 by major currencies invoiced was as follows: Currencies Percentage U.S. dollar 43 % Euro 29 Chinese renminbi17 Japanese yen 5 All others 6 Total 100 % The following table presents our net sales and the percentage of total net sales by geographic region: Fiscal 2022 2021 ($ in millions) Asia-Pacific$ 5,771 35 %$ 5,374 36 % EMEA 5,707 35 5,471 37 Americas 4,803 30 4,078 27 Total$ 16,281 100 %$ 14,923 100 % 25 Table of Contents The following table provides an analysis of the change in our net sales by geographic region: Change in Net Sales for Fiscal 2022 versus Fiscal 2021 Net Sales Organic Net Sales Acquisitions Growth Growth Translation (Divestitures) ($ in millions) Asia-Pacific$ 397 7.4 %$ 543 10.1 %$ (200) $ 54 EMEA 236 4.3 595 10.9 (520) 161 Americas 725 17.8 665 16.3 (3) 63 Total$ 1,358 9.1 %$ 1,803 12.1 %$ (723) $ 278
Cost of Sales and Gross Margin
The following table presents cost of sales and gross margin information:
Fiscal
2022 2021 Change
($ in millions)
Cost of sales $ 11,037 (1) $ 10,036 $ 1,001
As a percentage of net sales 67.8 % 67.3 %
Gross margin $ 5,244 (1) $ 4,887 $ 357
As a percentage of net sales 32.2 % 32.7 %
(1) Fiscal 2022 included an additional week.
In fiscal 2022, gross margin increased$357 million as compared to fiscal 2021 primarily as a result of higher volume and the positive impact of pricing actions, partially offset by inflationary pressure on material and operating costs and the negative impact of foreign currency translation. We use a wide variety of raw materials in the manufacture of our products, and cost of sales and gross margin are subject to variability in raw material prices. In recent years, raw material prices and availability have been affected by worldwide economic conditions, including the impacts of the COVID-19 pandemic, supply chain disruptions, and inflationary cost pressures. As a result, we have experienced shortages and price increases in some of our input materials-including copper, gold, silver, and palladium-however, we have been able to initiate pricing actions which have partially offset these impacts. The following table presents the average prices incurred related to copper, gold, silver, and palladium: Fiscal Measure 2022 2021 Copper Lb.$ 4.08 $ 3.19 Gold Troy oz. 1,828 1,690 Silver Troy oz. 24.23 21.63 Palladium Troy oz. 2,337 2,276 In fiscal 2022, we purchased approximately 215 million pounds of copper, 129,000 troy ounces of gold, 2.7 million troy ounces of silver, and 13,000 troy ounces of palladium. We expect to purchase approximately 215 million pounds of copper, 125,000 troy ounces of gold, 2.7 million troy ounces of silver, and 10,000 troy ounces of palladium in fiscal 2023. 26 Table of Contents Operating Expenses
The following table presents operating expense information:
Fiscal
2022 2021 Change
($ in millions)
Selling, general, and administrative expenses
72
As a percentage of net sales 9.7 % 10.1 % Restructuring and other charges, net$ 141 $ 233 $
(92)
(1) Fiscal 2022 included an additional week.
Selling, General, and Administrative Expenses. In fiscal 2022, selling, general, and administrative expenses increased$72 million as compared to fiscal 2021 due primarily to increased selling expenses to support higher sales levels, the impact of inflation, and incremental expenses attributable to recent acquisitions, partially offset by the positive impact of foreign currency translation. 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 2022 and 2021, we initiated restructuring programs associated with footprint consolidation and cost structure improvements across all segments. We incurred net restructuring and related charges of$153 million , of which$16 million was recorded in cost of sales, in fiscal 2022 and$208 million in fiscal 2021. Annualized cost savings related to actions initiated in fiscal 2022 are expected to be approximately$120 million and are expected to be realized by the end of fiscal 2025. Cost savings will be reflected primarily in cost of sales and selling, general, and administrative expenses. For fiscal 2023, we expect total restructuring charges to be approximately$150 million and total spending, which will be funded with cash from operations, to be approximately$165 million .
See Note 3 to the Consolidated Financial Statements for additional information regarding net restructuring and other charges.
Operating Income
The following table presents operating income and operating margin information:
Fiscal
2022 2021 Change
($ in millions)
Operating income $ 2,756 (1) $ 2,434 $ 322
Operating margin 16.9 % 16.3 %
(1) Fiscal 2022 included an additional week.
27
Table of Contents
Operating income included the following:
Fiscal
2022 2021
(in millions)
Acquisition-related charges:
Acquisition and integration costs $ 45 $ 31
Charges associated with the amortization of
acquisition-related fair value adjustments 83
53 34
Restructuring and other charges, net 141
233
Restructuring-related charges recorded in cost of sales 16
-
Total $ 210 $ 267 See discussion of operating income below under "Segment Results."
Non-Operating Items
The following table presents select non-operating information:
Fiscal
2022 2021 Change
($ in millions)
Other income (expense), net $ 28 $ (17) $ 45
Income tax expense 306 123 183
Effective tax rate 11.2 % 5.2 %
Other Income (Expense). We recorded net periodic pension benefit credit of$25 million and cost of$12 million in net other income (expense) in fiscal 2022 and 2021, respectively. See Note 14 to the Consolidated Financial Statements for additional information regarding our retirement plans. Also, in fiscal 2022, we recorded other income of$11 million related to an indemnification receivable associated with an income tax audit. See Note 15 to the Consolidated Financial Statements for further information regarding income taxes.
Income Taxes. See Note 15 to the Consolidated Financial Statements for discussion of items impacting income tax expense and the effective tax rate.
The valuation allowance for deferred tax assets was
As of fiscal year end 2022, certain subsidiaries had approximately$33.6 billion of cumulative undistributed earnings that have been retained indefinitely and reinvested in our global manufacturing operations, including working capital; property, plant, and equipment; intangible assets; and research and development activities. See Note 15 to the Consolidated Financial Statements for additional information regarding undistributed earnings. 28 Table of Contents Segment Results Transportation Solutions
Fiscal
2022 2021
($ in millions)
Automotive $ 6,527 71 % $ 6,379 71 %
Commercial transportation 1,582 17 1,467 16
Sensors 1,110 12 1,128 13
Total $ 9,219 100 % $ 8,974 100 %
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 2022 versus Fiscal 2021
Net Sales Organic Net Sales
Growth (Decline) Growth Translation
($ in millions)
Automotive $ 148 2.3 % $ 515 8.1 % $ (367)
Commercial transportation 115 7.8 178 12.1 (63)
Sensors (18) (1.6) 34 3.0 (52)
Total $ 245 2.7 % $ 727 8.1 % $ (482)
Net sales in the Transportation Solutions segment increased $245 million , or
2.7%, in fiscal 2022 from fiscal 2021 as a result of organic net sales growth of
8.1%, partially offset by the negative impact of foreign currency translation of
5.4%. Fiscal 2022 included an additional week which contributed $180 million in
net sales. In fiscal 2022, pricing actions positively affected organic net sales
by $330 million . Our organic net sales by industry end market were as follows:
Automotive-Our organic net sales increased 8.1% in fiscal 2022 with increases
of 9.8% in the
? the EMEA region. Our organic net sales growth across all regions was
attributable primarily to increased content per vehicle. Global automotive
production was consistent with fiscal 2021 levels.
Commercial transportation-Our organic net sales increased 12.1% in fiscal 2022
? due primarily to growth in the
share gains.
Sensors-Our organic net sales increased 3.0% in fiscal 2022 as a result of
? growth in industrial applications, partially offset by declines in
transportation applications.
Operating Income. The following table presents the Transportation Solutions segment's operating income and operating margin information:
Fiscal
2022 2021 Change
($ in millions)
Operating income $ 1,534 (1) $ 1,526 $ 8
Operating margin 16.6 % 17.0 %
(1) Fiscal 2022 included an additional week.
Operating income in the Transportation Solutions segment increased$8 million in fiscal 2022 as compared to fiscal 2021. Excluding the items below, operating income decreased in fiscal 2022 primarily as a result of inflationary pressure on 29 Table of Contents material and operating costs and the negative impact of foreign currency translation, partially offset by the positive impact of pricing actions and higher volume. Fiscal 2022 2021 (in millions) Acquisition-related charges: Acquisition and integration costs$ 16 $ 15 Charges associated with the amortization of acquisition-related fair value adjustments -
3
16 18
Restructuring and other charges, net 68
135
Total $ 84 $ 153
Industrial Solutions
Fiscal
2022 2021
($ in millions)
Industrial equipment $ 1,934 43 % $ 1,397 36 %
Aerospace, defense, and marine 1,087 24 1,035 27
Energy 804 18 738 19
Medical 695 15 674 18
Total $ 4,520 100 % $ 3,844 100 %
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 2022 versus Fiscal 2021
Net Sales Organic Net Sales Acquisitions
Growth Growth Translation (Divestitures)
($ in millions)Industrial equipment$ 537 38.4 %$ 400 28.5 %$ (100) $ 237 Aerospace, defense, and marine 52 5.0 91
8.7 (38) (1)
Energy 66 8.9 119 16.0 (42) (11)
Medical 21 3.1 28 4.2 (7) -
Total $ 676 17.6 % $ 638 16.6 % $ (187) $ 225
In the Industrial Solutions segment, net sales increased $676 million , or 17.6%,
in fiscal 2022 from fiscal 2021 due to organic net sales growth of 16.6% and net
sales contributions of 5.9% from acquisitions and divestitures, partially offset
by the negative impact of foreign currency translation of 4.9%. Fiscal 2022
included an additional week which contributed $84 million in net sales. In
fiscal 2022, pricing actions positively affected organic net sales by $147
million . Our organic net sales by industry end market were as follows:
Industrial equipment-Our organic net sales increased 28.5% in fiscal 2022 as a
? result of growth in all regions and continued strength in factory automation
and controls applications.
Aerospace, defense, and marine-Our organic net sales increased 8.7% in fiscal
? 2022 due primarily to growth in the commercial aerospace market and, to a
lesser degree, the defense market.
? Energy-Our organic net sales increased 16.0% in fiscal 2022 due to growth
across all regions and continued strength in renewable energy applications.
30
Table of Contents
Medical-Our organic net sales increased 4.2% in fiscal 2022 as a result of
? market growth in surgical and imaging as well as interventional medical
applications.
Operating Income. The following table presents the Industrial Solutions segment's operating income and operating margin information:
Fiscal
2022 2021 Change
($ in millions)
Operating income $ 620 (1) $ 469 $ 151
Operating margin 13.7 % 12.2 %
(1) Fiscal 2022 included an additional week.
Operating income in the Industrial Solutions segment increased$151 million in fiscal 2022 from fiscal 2021. Excluding the items below, operating income increased in fiscal 2022 primarily as a result of higher volume and the positive impact of pricing actions, partially offset by inflationary pressure on material and operating costs. Fiscal 2022 2021 (in millions) Acquisition-related charges:
Acquisition and integration costs$ 24 $ 15 Charges associated with the amortization of acquisition-related fair value adjustments 8
-
32 15
Restructuring and other charges, net 50
73
Restructuring-related charges recorded in cost of sales 16
-
Total $ 98 $ 88
Communications Solutions
Fiscal
2022 2021
($ in millions)
Data and devices $ 1,576 62 % $ 1,198 57 %
Appliances 966 38 907 43
Total $ 2,542 100 % $ 2,105 100 %
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 2022 versus Fiscal 2021
Net Sales Organic Net Sales
Growth Growth Translation Acquisitions
($ in millions)
Data and devices $ 378 31.6 % $ 355 29.6 % $ (30) $ 53
Appliances 59 6.5 83 9.2 (24) -
Total $ 437 20.8 % $ 438 20.8 % $ (54) $ 53
Net sales in the Communications Solutions segment increased $437 million , or
20.8%, in fiscal 2022 as compared to fiscal 2021 due primarily to organic net
sales growth of 20.8%. Fiscal 2022 included an additional week which contributed
$42 million in net sales. Our organic net sales by industry end market were
as
follows:
31
Table of Contents
? Data and devices-Our organic net sales increased 29.6% in fiscal 2022 as a
result of market strength in all regions and content and share gains.
Appliances-Our organic net sales increased 9.2% in fiscal 2022 due to sales
? growth in the
partially offset by declines in the
Operating Income. The following table presents the Communications Solutions segment's operating income and operating margin information:
Fiscal
2022 2021 Change
($ in millions)
Operating income $ 602 (1) $ 439 $ 163
Operating margin 23.7 % 20.9 %
(1) Fiscal 2022 included an additional week.
In the Communications Solutions segment, operating income increased$163 million in fiscal 2022 as compared to fiscal 2021. Excluding the items below, operating income increased due primarily to higher volume, partially offset by inflationary pressure on material and operating costs. Fiscal 2022 2021 (in millions)
Acquisition and integration costs
$ 28 $ 26 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, including the payment of €550 million of 1.10% senior notes due inMarch 2023 . We may use excess cash to purchase a portion of our common shares pursuant to our authorized share repurchase program, to acquire strategic businesses or product lines, to pay dividends on our common shares, or to reduce our outstanding debt. The cost or availability of future funding may be impacted by financial market conditions. We will continue to monitor financial markets and respond as necessary to changing conditions. We believe that we have sufficient financial resources and liquidity which will enable us to meet our ongoing working capital and other cash flow needs. As of fiscal year end 2022, 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 toTyco Electronics Group S.A. ("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 2022, we had approximately$7.0 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 an immaterial amount of tax expense would be recognized on the Consolidated Financial Statements if our intention to permanently reinvest these amounts were to change. Our current plans do not demonstrate a need to repatriate cash, cash equivalents, and intercompany deposits that are designated as permanently reinvested in order to fund our operations, including investing and financing activities.
Cash Flows from Operating Activities
Net cash provided by continuing operating activities decreased$208 million to$2,468 million in fiscal 2022 as compared to$2,676 million in fiscal 2021. The decrease resulted primarily from the impact of increased working capital 32
Table of Contents
levels, partially offset by higher pre-tax income. The amount of income taxes
paid, net of refunds, during fiscal 2022 and 2021 was
Pension contributions were$42 million and$61 million in fiscal 2022 and 2021, respectively. We expect pension contributions to be$43 million in fiscal 2023, before consideration of any voluntary contributions. For additional information regarding pensions, see Note 14 to the Consolidated Financial Statements.
Cash Flows from Investing Activities
Capital expenditures were$768 million and$690 million in fiscal 2022 and 2021, respectively. We expect fiscal 2023 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 2022, we acquired three businesses for a combined cash purchase price of$245 million , net of cash acquired. We acquired four businesses for a combined cash purchase price of$422 million , net of cash acquired, during fiscal 2021. See Note 4 to the Consolidated Financial Statements for additional information regarding acquisitions.
Cash Flows from Financing Activities and Capitalization
Total debt at fiscal year end 2022 and 2021 was
During fiscal 2022, TEGSA, our wholly-owned subsidiary, issued$600 million aggregate principal amount of 2.50% senior notes due inFebruary 2032 . 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
Borrowings under the Credit Facility bear interest at a rate per annum equal to,
at the option of TEGSA, (1) the term secured overnight financing rate ("Term
SOFR") (as defined in the Credit Facility), (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) the Term SOFR for a one-month interest
period 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 2022, we were in compliance with all of our debt covenants
and believe that we will continue to be in compliance with our existing
covenants for the foreseeable future.
Periodically, TEGSA issues commercial paper to U.S. institutional accredited
investors and qualified institutional buyers in accordance with available
exemptions from the registration requirements of the Securities Act of 1933 as
part of our ongoing effort to maintain financial flexibility and to potentially
decrease the cost of borrowings. Borrowings under the commercial paper program
are backed by the Credit Facility. At fiscal year end 2022, TEGSA had $370
million of commercial paper outstanding at a weighted-average interest rate of
3.45%. TEGSA had no commercial paper outstanding at fiscal year end 2021.
TEGSA's payment obligations under its senior notes, commercial paper, and Credit
Facility are fully and unconditionally guaranteed on an unsecured basis byits parent,TE Connectivity Ltd. 33 Table of Contents Payments of common share dividends to shareholders were$685 million and$647 million in fiscal 2022 and 2021, respectively. See Note 17 to the Consolidated Financial Statements for additional information regarding dividends on our common shares. InMarch 2022 , our shareholders approved a dividend payment to shareholders of$2.24 per share, payable in four equal quarterly installments of$0.56 per share beginning in the third quarter of fiscal 2022 and ending in the second quarter of fiscal 2023. 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 2022, our board of directors authorized an increase of$1.5 billion in our share repurchase program. We repurchased approximately ten million of our common shares for$1,409 million and approximately seven million of our common shares for$904 million under the share repurchase program during fiscal 2022 and 2021, respectively. At fiscal year end 2022, we had$1.7 billion of availability remaining under our share repurchase authorization.
Summarized Guarantor Financial Information
As discussed above, our senior notes, commercial paper, and Credit Facility are issued by TEGSA and are fully and unconditionally guaranteed on an unsecured basis by TEGSA's parent,TE Connectivity Ltd. In addition to being the issuer of our debt securities, TEGSA owns, directly or indirectly, all of our operating subsidiaries. The following tables present summarized financial information, excluding investments in and equity in earnings of our non-guarantor subsidiaries, forTE Connectivity Ltd. and TEGSA on a combined basis. Fiscal Year End 2022 2021 (in millions) Balance Sheet Data: Total current assets$ 1,400 $ 452 Total noncurrent assets(1) 2,769 1,829 Total current liabilities 1,937 1,144
Total noncurrent liabilities(2) 15,871 12,443
Includes
(1) 2021, respectively, of intercompany loans receivable from non-guarantor
subsidiaries.
Includes
(2) 2021, respectively, of intercompany loans payable to non-guarantor
subsidiaries.
Fiscal
2022 2021
(in millions)
Statement of Operations Data:
Loss from continuing operations
(35) (479)
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 2023
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
Table of Contents
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 2022, 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$115 million as of fiscal year end 2022 and are expected to expire at various dates through fiscal 2027. 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. 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 2022:
Payments Due
In Fiscal 2023 Thereafter Total
(in millions)
Long-term debt:
Principal payments(1) $ 914 $ 3,330 $ 4,244
Interest payments on debt(2) 93 720 813
Operating leases(3) 126 334 460
Purchase obligations(4) 1,150 39 1,189Total contractual cash obligations(5)(6) $ 2,283
(1) See Note 10 to the Consolidated Financial Statements for additional
information regarding debt.
Interest payments exclude the impact of interest rate swap and cross-currency (2) swap contracts. Interest payments on debt are projected for future periods
using rates in effect as of fiscal year end 2022 and are subject to change in
future periods.
Operating leases represents the undiscounted lease payments. See Note 11 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
2023, before consideration of any voluntary contributions. See Note 14 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 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.
35
Table of Contents
Trade Compliance Matters
We have been 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 the resulting
investigations by the agencies remain ongoing. We have also been contacted by
the U.S. Department of Justice concerning aspects of these matters. 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. Although 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.
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
36
Table of Contents
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 2022, 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.
We completed our annual goodwill impairment test in the fourth quarter of fiscal 2022 and determined that no impairment existed.
Income Taxes
In determining pre-tax income for financial statement purposes, we must make
certain estimates and judgments. These estimates and judgments affect the
calculation of certain tax liabilities and the determination of the
recoverability of certain deferred tax assets, which arise from temporary
differences between the income tax return and financial statement recognition of
revenue and expense.
In evaluating our ability to recover our deferred tax assets, we consider all
available positive and negative evidence including our past operating results,
the existence of cumulative losses in the most recent years, and our forecast of
taxable income. In estimating future taxable income, we develop assumptions
including the amount of pre-tax operating income in various tax jurisdictions,
the reversal of temporary differences, and the implementation of feasible and
prudent tax planning strategies. These assumptions require significant judgment
about the forecasts of taxable income and are consistent with the plans and
estimates we are using to manage the underlying businesses.
We currently have recorded significant valuation allowances that we intend to
maintain until it is more likely than not the deferred tax assets will be
realized. Our income tax expense recorded in the future will be reduced to the
extent of decreases in our valuation allowances. The realization of our
remaining deferred tax assets is dependent primarily on future taxable income in
the appropriate jurisdictions. Any reduction in future taxable income including
any future restructuring activities may require that we record an additional
valuation allowance against our deferred tax assets. An increase in the
valuation allowance would result in additional income tax expense in such period
and could have a significant impact on our future earnings.
Changes in tax laws and rates also could affect recorded deferred tax assets and
liabilities in the future. Management is not aware of any enacted changes that
would have a material effect on our results of operations, financial position,
or cash flows.
37
Table of Contents
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 trustees 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 discount rates and expected long-term returns 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. Discount rates represent the market rate for high-quality fixed income investments and are 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 discount rates increases the present value of pension benefit obligations. At fiscal year end 2022, a 25-basis-point decrease in discount rates would have increased the present value of our pension obligations by$64 million ; a 25-basis-point increase would have decreased the present value of our pension obligations by$61 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 rates of return on plan assets. A 50-basis-point decrease or increase in the expected long-term returns on plan assets would have increased or decreased, respectively, our fiscal 2022 pension expense by$11 million . At fiscal year end 2022, the long-term target asset allocation in ourU.S. plans' master trust is 25% return-seeking assets and 75% 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 110%. Based on the funded status of the plans as of fiscal year end 2022, 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 issued accounting pronouncements.
Non-GAAP Financial Measure
Organic Net Sales Growth
We present organic net sales growth as we believe it is appropriate for
investors to consider this adjusted financial measure in addition to results in
accordance with GAAP. Organic net sales growth represents net sales growth (the
most comparable GAAP financial measure) excluding the impact of foreign currency
exchange rates, and acquisitions and divestitures that occurred in the preceding
twelve months, if any. Organic net sales growth is a useful measure of our
performance because it excludes items that are not completely under management's
control, such as the impact of changes in
38
Table of Contents
foreign currency exchange rates, and items that do not reflect the underlying growth of the company, such as acquisition and divestiture activity.
Organic net sales growth provides useful information about our results and the
trends of our business. Management uses this measure to monitor and evaluate
performance. Also, management uses this measure together with GAAP financial
measures in its decision-making processes related to the operations of our
reportable segments and our overall company. It is also a significant component
in our incentive compensation plans. We believe that investors benefit from
having access to the same financial measures that management uses in evaluating
operations. The tables presented in "Results of Operations" and "Segment
Results" provide reconciliations of organic net sales growth to net sales growth
calculated in accordance with GAAP.
Organic net sales growth is a non-GAAP financial measure and should not be
considered a replacement for results in accordance with GAAP. This non-GAAP
financial measure may not be comparable to similarly-titled measures reported by
other companies. The primary limitation of this measure is that it excludes the
financial impact of items that would otherwise either increase or decrease our
reported results. This limitation is best addressed by using organic net sales
growth in combination with net sales growth to better understand the amounts,
character, and impact of any increase or decrease in reported amounts.
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,
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Exchange Act. 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 also include statements addressing our environmental,
social, governance, and sustainability plans and goals. 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," "aspire," "estimate,"
"predict," "potential," "goal," "target," "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, including recession, inflation, and higher
interest rates;
? 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;
39
Table of Contents
? reliance on third-party suppliers;
? risks associated with current and future acquisitions and divestitures;
global risks of business interruptions due to natural disasters or other
disasters such as the COVID-19 pandemic, which have 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 the
? continuing military conflict between
invasion of
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.
© Edgar Online, source
