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TE CONNECTIVITY LTD. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
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 United States
Dollars, in accordance with accounting principles generally accepted in the
United States of America ("GAAP").
Organic net sales growth and free cash flow are non-GAAP financial measures
which are discussed in Management's Discussion and Analysis of Financial
Condition and Results of Operations. We believe these non-GAAP financial
measures, together with GAAP financial measures, provide useful information to
investors because they reflect the financial measures that management uses in
evaluating the underlying results of our operations. See "Non-GAAP Financial
Measures" for more information about these non-GAAP financial measures,
including our reasons for including the measures and material limitations with
respect to the usefulness of the measures.
Overview
We are a global company that designs and manufactures approximately 500,000
products that connect and protect the flow of power and data inside millions of
products used by consumers and industries. We partner with customers in a broad
array of industries from consumer electronics, energy, and healthcare to
automotive, aerospace, and communication networks.
We operate through three reporting segments: Transportation Solutions,
Communications and Industrial Solutions, and Network Solutions. See Notes 1 and
23 to the Consolidated Financial Statements for additional information regarding
our segments.
We service our customers primarily through our direct sales force that
serves customers in over 150 countries. The sales force is supported by
approximately 7,400 engineers as well as globally deployed manufacturing sites.
Through our sales force and engineering resources, we are able to collaborate
with our customers throughout the world to provide highly engineered products
and solutions to meet their needs.
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Our strategic objective is to increase our net sales and profitability
across our segments in the markets we serve. This strategy is dependent upon the
following strategic priorities:
º •
º Deliver extraordinary customer service;
º •
º Strengthen our innovation leadership;
º •
º Extend our leadership in emerging markets;
º •
º Lead in smart connectivity; and
º •
º Supplement organic growth with strategic partnerships and
acquisitions.
Our business and operating results have been and will continue to be
affected by worldwide economic conditions. Our sales are dependent on certain
industry end markets that are impacted by consumer as well as industrial and
infrastructure spending, and our operating results can be affected by changes in
demand in those markets. Overall, our net sales decreased 3.6% in fiscal 2012 as
compared to fiscal 2011. On an organic basis, net sales decreased 2.7% in fiscal
2012 from fiscal 2011 levels. On an organic basis, we experienced declines in
our sales into industrial and infrastructure based markets, primarily as a
result of weakness in the industrial and data communications end markets in our
Communications and Industrial Solutions segment, and telecom networks and subsea
communications end markets in our Network Solutions segment. On an organic
basis, we experienced modest growth in our sales into consumer based markets, as
growth in the automotive end market in our Transportation Solutions segment was
partially offset by declines within the consumer devices and appliance end
markets in our Communications and Industrial Solutions segment.
The acquisition of Deutsch in April 2012 benefited the automotive and
aerospace, defense, and marine end markets in the Transportation Solutions
segment and contributed net sales of $327 million in fiscal 2012. Fiscal 2011
included an additional week which contributed $267 million in net sales and
$0.08 per share to diluted earnings per share. ADC, which was acquired in
December 2010, contributed net sales of $843 million, of which $24 million
related to the additional week, during fiscal 2011. Also, the acquisition of ADC
resulted in incremental net sales of $154 million in the first quarter of fiscal
2012 over the same period of fiscal 2011.
The March 2011 earthquake, subsequent tsunami, and aftershocks in Japan
caused disruptions in our customers' operations and the supply chains that
support their operations. We estimate that our fiscal 2011 net sales and diluted
earnings per share were negatively impacted by $99 million and $0.07 per share,
respectively, as a result of these disruptions. Our facilities in Japan were not
materially damaged, and we did not experience further negative impacts in fiscal
2012.
Outlook
Net sales in the first quarter of fiscal 2013 are expected to be between
$3.15 billion and $3.25 billion. We expect global automotive production in the
first quarter of fiscal 2013 to be comparable to first quarter fiscal 2012
levels. Our sales into the automotive and aerospace, defense, and marine end
markets will benefit from incremental Deutsch sales which are expected to be
approximately $150 million in the first quarter of fiscal 2013. During the first
quarter of fiscal 2013, we expect continued weakness in the industrial, energy,
and appliance end markets. Also, we expect results in the first quarter of
fiscal 2013 to be negatively impacted by lower spending for broadband networks
equipment and lower levels of project activity in the subsea communications end
market. In the first fiscal quarter of 2013, we expect diluted earnings per
share to be in the range of $0.43 to $0.47 per share.
For fiscal 2013, we expect net sales to be between $13.4 billion and
$14.0 billion, reflecting expected sales increases in the automotive and
aerospace, defense, and marine end markets, offset by continued weakness in the
industrial, appliance, and energy end markets. Our sales into the automotive
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and aerospace, defense, and marine end markets will benefit from incremental
Deutsch sales during the first half of fiscal 2013. We expect global automotive
production and broadband network spending in fiscal 2013 to remain flat at
fiscal 2012 levels. We expect diluted earnings per share to be in the range of
$2.61 to $2.91 per share.
The above outlook is based on foreign exchange rates and commodity prices
that are consistent with current levels.
We are monitoring the current macroeconomic environment and its potential
effects on our customers and the end markets we serve. Additionally, we continue
to closely manage our costs in line with economic conditions. We are also
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
On April 3, 2012, we acquired 100% of the outstanding shares of Deutsch. The
total value paid for the transaction amounted to €1.55 billion (approximately
$2.05 billion using an exchange rate of $1.33 per €1.00), net of cash acquired.
The total value paid included $659 million related to the repayment of Deutsch's
financial debt and accrued interest.
Deutsch is a global leader in high-performance connectors for harsh
environments, and significantly expands our product portfolio and enables us to
better serve customers in the industrial and commercial transportation,
aerospace, defense, and marine, and rail markets. The combined organization
offers a broad product range, global presence, and shared commitment to
innovation, and creates an even greater opportunity to serve the growing market
for harsh environment connectivity applications. We expect to realize cost
savings and other synergies related to operational efficiencies including the
consolidation of manufacturing, marketing, and general and administrative
functions. The acquired Deutsch businesses have been reported primarily in our
Transportation Solutions segment from the date of acquisition.
During fiscal 2012, Deutsch contributed net sales of $327 million and an
operating loss of $54 million to our Consolidated Statement of Operations. The
operating loss included charges of $75 million associated with the amortization
of acquisition-related fair value adjustments primarily related to acquired
inventories and customer order backlog, acquisition costs of $21 million,
restructuring charges of $14 million, and integration costs of $6 million.
In July 2010, we entered into an Agreement and Plan of Merger (the "Merger
Agreement") to acquire 100% of the outstanding stock of ADC, a provider of
broadband communications network connectivity products and related solutions.
Pursuant to the Merger Agreement, we commenced a tender offer through a
subsidiary to purchase all of the issued and outstanding shares of ADC common
stock at a purchase price of $12.75 per share in cash followed by a merger of
the subsidiary with and into ADC, with ADC surviving as an indirect wholly-owned
subsidiary. On December 8, 2010, we acquired 86.8% of the outstanding common
shares of ADC. On December 9, 2010, we exercised our option under the Merger
Agreement to purchase additional shares from ADC that, when combined with the
shares purchased in the tender offer, were sufficient to give us ownership of
more than 90% of the outstanding ADC common shares. On December 9, 2010, upon
effecting a short-form merger under Minnesota law, we owned 100% of the
outstanding shares of ADC for a total purchase price of approximately
$1,263 million in cash (excluding cash acquired of $546 million) and $22 million
representing the fair value of ADC share-based awards exchanged for TE
Connectivity share options and stock appreciation rights.
The acquisition was made to accelerate our growth potential in the global
broadband connectivity market. The combined organization offers a complete
product portfolio across every major geographic
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market. It also added ADC's Distributed Antenna System products, which expanded
our wireless connectivity portfolio to provide greater mobile coverage and
capacity solutions to carrier and enterprise customers as demand for mobile data
continues to expand. We realized cost savings and other synergies through
operational efficiencies including the consolidation of manufacturing,
marketing, and general and administrative functions. The acquired ADC businesses
have been included in the Network Solutions segment from the date of
acquisition.
During fiscal 2011, ADC contributed net sales of $843 million and an
operating loss of $53 million to our Consolidated Statement of Operations. The
operating loss included restructuring charges of $80 million, charges of
$39 million associated with the amortization of acquisition-related fair value
adjustments primarily related to acquired inventories and customer order
backlog, integration costs of $10 million, and acquisition costs of $9 million.
See Note 5 to the Consolidated Financial Statements for additional
information regarding acquisitions.
Restructuring
We continue to streamline our operations and simplify our global
manufacturing footprint by migrating facilities from higher-cost to lower-cost
countries, consolidating within countries, and transferring product lines to
lower-cost countries. These initiatives are designed to help us maintain our
competitiveness in the industry, improve our operating leverage, and position us
for profitability growth in the years ahead. In connection with these
initiatives, we incurred restructuring charges of approximately $127 million
during fiscal 2012, including $14 million associated with the acquisition of
Deutsch. In fiscal 2012, cash spending related to restructuring was
$137 million, including $7 million associated with the acquisition of Deutsch.
In response to a weaker than expected economic environment, we are expanding
our restructuring efforts and expect to incur restructuring charges of
approximately $200 million during fiscal 2013. Annualized cost savings related
to these actions are expected to be approximately $75 million and are expected
to be realized by the end of fiscal 2015. Cost savings will be reflected
primarily in cost of sales and selling, general, and administrative expenses.
In fiscal 2013, we expect total spending, which will be funded with cash
from operations, to be approximately $150 million related to restructuring
actions.
Discontinued Operations
During fiscal 2012, we sold our Touch Solutions business for net cash
proceeds of $380 million, subject to working capital adjustments, of which we
received $370 million during fiscal 2012. We recognized a pre-tax gain of
$5 million on the transaction. The agreement includes contingent earn-out
provisions through 2015 based on business performance. Also, during fiscal 2012,
we sold our TE Professional Services business for net cash proceeds of
$28 million, of which we received $24 million during fiscal 2012, and recognized
a pre-tax gain of $2 million on the transaction.
See Note 4 to our Consolidated Financial Statements for additional
information regarding discontinued operations.
Divestitures
During fiscal 2010, we sold our mechatronics business for net cash proceeds
of $3 million. This business designed and manufactured customer-specific
components, primarily for the automotive industry, and generated sales of
approximately $100 million in fiscal 2010. In connection with the sale, we
recorded a pre-tax loss on sale of $41 million in the Transportation Solutions
segment in fiscal 2010.
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During fiscal 2010, we completed the divestiture of the Dulmison connectors
and fittings product line, which was part of our energy business in the Network
Solutions segment, for net cash proceeds of $12 million. In connection with the
divestiture, we recorded a pre-tax impairment charge related to long-lived
assets and a pre-tax loss on sale, both totaling $13 million in fiscal 2010.
The loss on divestitures and impairment charges are presented in
restructuring and other charges, net on the Consolidated Statements of
Operations. We have presented the loss on divestitures, related long-lived asset
impairments, and operations of the mechatronics business and Dulmison connectors
and fittings product line in continuing operations due to immateriality. See
Note 3 to the Consolidated Financial Statements for additional information
regarding the divestitures.
Company Name Change
In March 2011, our shareholders approved an amendment to our articles of
association to change our name from "Tyco Electronics Ltd." to "TE
Connectivity Ltd." The name change was effective March 10, 2011. Our ticker
symbol "TEL" on the New York Stock Exchange remained unchanged.
The Separation
Tyco Electronics Ltd. was incorporated in fiscal 2000 as a wholly-owned
subsidiary of Tyco International. Effective June 29, 2007, we became the parent
company of the former electronics businesses of Tyco International. On June 29,
2007, Tyco International distributed all of our shares, as well as its shares of
its former healthcare businesses, to its common shareholders.
Results of Operations
Consolidated Operations
Key business factors that influenced our results of operations for the
periods discussed in this report include:
º •
º Raw material prices. We purchased approximately 173 million pounds of
copper, 141,000 troy ounces of gold, and 2.9 million troy ounces of
silver in fiscal 2012. Prices have increased in recent years and
continue to fluctuate. Although copper prices have declined from prior
year levels, they remain high relative to historic levels. The
following table sets forth the average prices incurred related to
copper, gold, and silver during fiscal 2012, 2011, and 2010:
Fiscal
Measure 2012 2011 2010
Copper Lb. $ 3.90 $ 3.99 $ 3.15
Gold Troy oz. $ 1,599 $ 1,382 $ 1,114
Silver Troy oz. $ 34.30 $ 30.27 $ 17.91
In fiscal 2013, we expect to purchase copper, gold, and silver in
quantities similar to fiscal 2012 levels.
º • º Foreign exchange. Approximately 54% of our net sales are invoiced in
currencies other than the U.S. Dollar. Our results of operations are
influenced by changes in foreign currency exchange rates. Increases or
decreases in the value of the U.S. Dollar, compared to other
currencies, will directly affect our reported results as we translate
those currencies into U.S. Dollars at the end
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of each fiscal period. The percentage of net sales in fiscal 2012 by
major currencies invoiced was as follows:
Currencies Percentage
U.S. Dollar 46 %
Euro 28
Japanese Yen 8
Chinese Renminbi 6
Korean Won 3
Brazilian Real 2
British Pound Sterling 2
All others 5
Total 100 %
The following table sets forth certain items from our Consolidated
Statements of Operations and the percentage of net sales that such items
represent for the periods shown.
Fiscal
2012 2011 2010
($ in millions)
Net sales $ 13,282 100.0 % $ 13,778 100.0 % $ 11,681 100.0 %
Cost of sales 9,236 69.5 9,507 69.0 8,038 68.8
Gross margin 4,046 30.5 4,271 31.0 3,643 31.2
Selling, general, and
administrative expenses 1,685 12.7 1,728 12.5 1,490 12.8
Research, development, and
engineering expenses 688 5.2 701 5.1 563 4.8
Acquisition and integration costs 27 0.2 19 0.1 8 0.1
Restructuring and other charges,
net 128 1.0 136 1.0 137 1.2
Pre-separation litigation income - - - - (7 ) (0.1 )
Operating income 1,518 11.4 1,687 12.2 1,452 12.4
Interest income 23 0.2 22 0.2 20 0.2
Interest expense (176 ) (1.3 ) (161 ) (1.2 ) (155 ) (1.3 )
Other income, net 50 0.4 27 0.2 177 1.5
Income from continuing operations
before income taxes 1,415 10.7 1,575 11.4 1,494 12.8
Income tax expense (249 ) (1.9 ) (347 ) (2.5 ) (476 ) (4.1 )
Income from continuing operations 1,166 8.8 1,228 8.9
1,018 8.7
Income (loss) from discontinued
operations, net of income taxes (51 ) (0.4 ) 22 0.2 91 0.8
Net income 1,115 8.4 1,250 9.1 1,109 9.5
Less: net income attributable to
noncontrolling interests (3 ) - (5 ) - (6 ) (0.1 )
Net income attributable to TE
Connectivity Ltd $ 1,112 8.4 % $ 1,245 9.0 % $ 1,103 9.4 %
Net Sales. Net sales decreased $496 million, or 3.6%, to $13,282 million in
fiscal 2012 from $13,778 million in fiscal 2011. On an organic basis, net sales
decreased $372 million, or 2.7%, in fiscal 2012 as compared to fiscal 2011
primarily as a result of decreased net sales in the Communications and
Industrial Solutions segment and, to a lesser degree, the Network Solutions
segment. Foreign currency exchange rates negatively impacted net sales by
$338 million, or 2.4%, in fiscal 2012. Fiscal 2011
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included an additional week which contributed $267 million in net sales.
Deutsch, which was acquired on April 3, 2012, contributed net sales of
$327 million during fiscal 2012. Also, the acquisition of ADC on December 8,
2010 resulted in incremental net sales of $154 million in the first quarter of
fiscal 2012 over the same period of fiscal 2011.
Net sales increased $2,097 million, or 18.0%, to $13,778 million in fiscal
2011 from $11,681 million in fiscal 2010. On an organic basis, net sales
increased $736 million, or 6.3%, in fiscal 2011 as compared to fiscal 2010 due
primarily to growth in the Transportation Solutions segment. Price erosion
adversely affected organic sales by $192 million in fiscal 2011. Foreign
currency exchange rates positively impacted net sales by $391 million, or 3.3%,
in fiscal 2011. Fiscal 2011 included an additional week which contributed
$267 million in net sales. ADC contributed net sales of $843 million, of which
$24 million related to the additional week, during fiscal 2011. The divestitures
of the mechatronics business and the Dulmison connectors and fittings product
line in fiscal 2010 negatively impacted sales by $116 million in fiscal 2011 as
compared to fiscal 2010. See further discussion of organic net sales below under
Results of Operations by Segment.
The following table sets forth the percentage of our total net sales by
geographic region:
Fiscal
2012 2011 2010
Europe/Middle East/Africa (EMEA) 34 % 36 % 35 %
Asia-Pacific 34 33 34
Americas(1) 32 31 31
Total 100 % 100 % 100 %
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º (1)
º The Americas includes our Subsea Communications business.
The following table provides an analysis of the change in our net sales
compared to the prior fiscal year by geographic region:
Fiscal
2012 2011
Change in Net Sales versus Prior Fiscal Year Change in NetSales versus Prior Fiscal Year
Impact of Impact of Acquisition
Organic(1) Translation(2) 53rd Week(3) Acquisitions Total Organic(1) Translation(2) 53rd Week(3) (Divestitures) Total
($ in millions)
EMEA $ (214 ) (4.3 )% $ (327 ) $ (96 ) $ 181 $ (456 ) (9.2 )% $ 570 14.2 % $ 145 $ 96 $ 43 $ 854 20.8 %
Asia-Pacific (15 ) (0.3 )
33 (89 ) 52 (19 ) (0.4 ) 105 3.0 215 89 124 533 13.4
Americas (143 ) (3.3 ) (44 ) (82 ) 248 (21 ) (0.5 ) 61 1.7 31 82 536 710 19.7
Total $ (372 ) (2.7 )% $ (338 ) $ (267 ) $ 481 $ (496 ) (3.6 )% $ 736 6.3 % $ 391 $ 267 $ 703 $ 2,097 18.0 %
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º (1)
º Represents the change in net sales resulting from volume and price changes,
before consideration of acquisitions, divestitures, the impact of changes
in foreign currency exchange rates, and the impact of the 53rd week in
fiscal 2011.
º (2)
º Represents the change in net sales resulting from changes in foreign
currency exchange rates.
º (3)
º Represents the impact of an additional week in fiscal 2011, including
$24 million related to ADC.
The following table sets forth the percentage of our total net sales by
segment:
Fiscal
2012 2011 2010
Transportation Solutions 45 % 41 % 41 %
Communications and Industrial Solutions 30 34 38
Network Solutions 25 25 21
Total 100 % 100 % 100 %
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The following table provides an analysis of the change in our net sales
compared to the prior fiscal year by segment:
Fiscal
2012 2011
Change in Net Sales versus Prior Fiscal Year Change in NetSales versus Prior Fiscal Year
Impact of Impact of Acquisition
Organic(1) Translation(2) 53rd Week(3) Acquisitions Total Organic(1) Translation(2) 53rd Week(3) (Divestitures) Total
($ in millions)
Transportation
Solutions $ 360 6.4 % $ (197 ) $ (112 ) $ 327 $ 378 6.7 % $ 621 13.0 % $ 179
$ 112 $ (82 ) $ 830 17.3 %
Communications
and Industrial
Solutions (545 ) (11.7 ) (40 ) (83 ) - (668 ) (14.3 ) 39 1.0 127 83 (22 ) 227 5.1
Network
Solutions (187 ) (5.4 ) (101 ) (72 ) 154 (206 ) (5.9 ) 76 3.3 85 72 807 1,040 42.4
Total $ (372 ) (2.7 )% $ (338 ) $ (267 ) $ 481 $ (496 ) (3.6 )% $ 736 6.3 % $ 391 $ 267 $ 703 $ 2,097 18.0 %
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º (1)
º Represents the change in net sales resulting from volume and price changes,
before consideration of acquisitions, divestitures, the impact of changes
in foreign currency exchange rates, and the impact of the 53rd week in
fiscal 2011.
º (2)
º Represents the change in net sales resulting from changes in foreign
currency exchange rates.
º (3) º Represents the impact of an additional week in fiscal 2011. Included in
Network Solutions is $24 million related to ADC.
Gross Margin. In fiscal 2012, gross margin was $4,046 million, reflecting a
$225 million decrease from gross margin of $4,271 million in fiscal 2011. Gross
margin as a percentage of net sales decreased to 30.5% in fiscal 2012 from 31.0%
in fiscal 2011. In fiscal 2012, gross margin included charges of $75 million
associated with the amortization of acquisition-related fair value adjustments
primarily related to acquired inventories and customer order backlog associated
with Deutsch, whereas, in fiscal 2011, gross margin included similar charges of
$39 million associated with ADC. Excluding these items, gross margin decreased
in fiscal 2012 as compared to fiscal 2011. The decrease resulted from lower
sales levels and, to a lesser degree, increased material costs and unfavorable
product mix, partially offset by improved manufacturing productivity.
In fiscal 2011, gross margin was $4,271 million, reflecting a $628 million
increase from gross margin of $3,643 million in fiscal 2010. Gross margin as a
percentage of net sales decreased to 31.0% in fiscal 2011 as compared to 31.2%
in fiscal 2010. In fiscal 2011, gross margin included charges of $39 million
related to the acquisition of ADC. Excluding this item, gross margin increased
in fiscal 2011 as compared to fiscal 2010. The increase was due to higher sales
levels and, to a lesser degree, improved manufacturing productivity and cost
reduction benefits from restructuring actions, partially offset by increased
material costs, price erosion, and unfavorable product mix.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses decreased $43 million to $1,685 million in fiscal 2012
from $1,728 million in fiscal 2011. The decrease resulted primarily from cost
control measures and benefits attributable to restructuring actions, partially
offset by the additional selling, general, and administrative expenses of
Deutsch. Selling, general, and administrative expenses as a percentage of net
sales increased to 12.7% in fiscal 2012 from 12.5% in fiscal 2011 primarily as a
result of the decrease in sales.
Selling, general, and administrative expenses increased $238 million in
fiscal 2011 to $1,728 million from $1,490 million in fiscal 2010. The increase
was related primarily to the additional selling, general, and administrative
expenses of ADC and increased selling expenses to support higher sales levels.
Selling, general, and administrative expenses as a percentage of net sales were
12.5% and 12.8% in fiscal 2011 and 2010, respectively.
Acquisition and Integration Costs. In connection with the acquisition of
Deutsch, we incurred acquisition and integration costs of $27 million during
fiscal 2012. In connection with the acquisition of ADC, we incurred acquisition
and integration costs of $19 million and $8 million during fiscal 2011 and 2010,
respectively.
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Restructuring and Other Charges, Net. Net restructuring and other charges
were $128 million, $136 million, and $137 million in fiscal 2012, 2011, and
2010, respectively.
During fiscal 2012, we initiated several restructuring programs resulting in
headcount reductions across all segments. Also, we initiated restructuring
programs associated with the acquisition of Deutsch.
Fiscal 2011 actions were primarily associated with the acquisition of ADC
and related headcount reductions in the Network Solutions segment. Additionally,
we increased reductions-in-force as a result of economic conditions, primarily
in the Communications and Industrial Solutions segment.
Fiscal 2010 actions primarily related to headcount reductions in the
Transportation Solutions segment. Fiscal 2010 charges included a pre-tax loss on
sale of $41 million in the Transportation Solutions segment related to the sale
of our mechatronics business, as well as a long-lived asset impairment charge
and a loss on sale totaling $13 million related to the divestiture of the
Dulmison connectors and fittings product line, which was part of the energy
business in the Network Solutions segment.
See Note 3 to the Consolidated Financial Statements for additional
information regarding net restructuring and other charges.
Pre-separation Litigation Income. During fiscal 2010, Tyco International
settled a class action lawsuit captioned Stumpf v. Tyco International Ltd., et
al. Pursuant to the sharing formula in the Separation and Distribution
Agreement, we recorded income of $7 million during fiscal 2010 relating to the
release of excess reserves. There are no remaining securities lawsuits
outstanding.
Operating Income. Operating income was $1,518 million and $1,687 million in
fiscal 2012 and 2011, respectively. Results for fiscal 2012 included
$116 million of charges related to the acquisition of Deutsch, including
$75 million of charges associated with the amortization of acquisition-related
fair value adjustments primarily related to acquired inventories and customer
order backlog, $27 million of acquisition and integration costs, and $14 million
of net restructuring and other charges. The results for fiscal 2012 also
included $114 million of additional restructuring and other charges. Results for
fiscal 2011 included $138 million of charges related to the acquisition of ADC,
including $80 million of restructuring and other charges, $39 million of charges
associated with the amortization of acquisition-related fair value adjustments
primarily related to acquired inventories and customer order backlog, and
$19 million of acquisition and integration costs. The results for fiscal 2011
also included $56 million of additional restructuring and other charges and an
additional week which contributed $52 million of operating income. Excluding
these items, operating income decreased in fiscal 2012 as compared to fiscal
2011. The decrease resulted from the unfavorable impacts of lower sales levels
and, to a lesser degree, increased material costs and unfavorable product mix,
partially offset by improved manufacturing productivity.
Operating income was $1,687 million in fiscal 2011 compared to
$1,452 million in fiscal 2010. Fiscal 2011 included an additional week which
contributed $52 million of operating income. As discussed above, results for
fiscal 2011 included $138 million of charges related to the acquisition of ADC.
The results for fiscal 2011 also included $56 million of additional
restructuring and other charges. Fiscal 2010 results included restructuring and
other charges, acquisition and integration costs, and pre-separation litigation
income of $134 million, $8 million, and $7 million, respectively. Excluding
these items, operating income increased in fiscal 2011 as compared to fiscal
2010. The increase resulted from higher sales levels and related gross margin
and, to a lesser degree, a reduction in employee incentive compensation-related
expense, cost reduction benefits from restructuring actions, and improved
manufacturing productivity, partially offset by increased material costs, price
erosion, and unfavorable product mix.
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Non-Operating Items
Interest Expense, Net
Net interest expense was $153 million, $139 million, and $135 million in
fiscal 2012, 2011, and 2010, respectively. The increase of $14 million in fiscal
2012 from fiscal 2011 was due to higher average debt levels.
Other Income, Net
In fiscal 2012, 2011, and 2010, we recorded net other income of $50 million,
$27 million, and $177 million, respectively, primarily consisting of income
pursuant to the Tax Sharing Agreement with Tyco International and Covidien. See
Note 12 to the Consolidated Financial Statements for further information
regarding the Tax Sharing Agreement.
The income in fiscal 2011 is net of other expense of $14 million recorded in
connection with the completion of fieldwork and the settlement of certain U.S.
tax matters. See additional information in Note 13 to the Consolidated Financial
Statements.
The income in fiscal 2010 reflects a net increase to the receivable from
Tyco International and Covidien primarily related to certain proposed
adjustments to prior period income tax returns and related accrued interest,
partially offset by a decrease related to the completion of certain non-U.S.
audits of prior year income tax returns.
Income Taxes
Our operations are conducted through our various subsidiaries in a number of
countries throughout the world. We have provided for income taxes based upon the
tax laws and rates in the countries in which our operations are conducted and
income and loss from operations is subject to taxation.
Our effective income tax rate was 17.6% for fiscal 2012 and reflects income
tax benefits recognized in connection with profitability in certain entities
operating in lower tax rate jurisdictions. In addition, the provision for fiscal
2012 reflects an income tax benefit of $107 million recognized in connection
with a reduction in the valuation allowance associated with tax loss
carryforwards in certain non-U.S. locations partially offset by accruals of
interest related to uncertain tax positions.
Our effective income tax rate was 22.0% for fiscal 2011 and reflects income
tax benefits recognized in connection with profitability in certain entities
operating in lower tax rate jurisdictions partially offset by accruals of
interest related to uncertain tax positions. In addition, the effective income
tax rate for fiscal 2011 reflects income tax benefits of $35 million associated
with the completion of fieldwork and the settlement of certain U.S. tax matters.
Our effective income tax rate was 31.9% for fiscal 2010 and reflects charges
of $307 million primarily associated with certain proposed adjustments to prior
year income tax returns and related accrued interest partially offset by income
tax benefits of $101 million recognized in connection with the completion of
certain non-U.S. audits of prior year income tax returns. In addition, the
effective income tax rate for fiscal 2010 reflects an income tax benefit of
$72 million recognized in connection with a reduction in the valuation allowance
associated with tax loss carryforwards in certain non-U.S. locations.
The valuation allowance for deferred tax assets of $1,719 million and
$1,921 million at fiscal year end 2012 and 2011, respectively, relates
principally to the uncertainty of the utilization of certain deferred tax
assets, primarily tax loss, capital loss, and credit carryforwards in various
jurisdictions. We believe that we will generate sufficient future taxable income
to realize the income tax benefits related to the remaining net deferred tax
assets on our Consolidated Balance Sheet. The valuation allowance
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was calculated in accordance with the provisions of ASC 740 which require that a
valuation allowance be established or maintained when it is more likely than not
that all or a portion of deferred tax assets will not be realized.
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, we recognize liabilities for tax and related interest for
issues in the U.S. and other 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; however, 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.
Further, management has reviewed with tax counsel the issues raised by certain
taxing authorities and the adequacy of these recorded amounts. If our current
estimate of tax and interest liabilities is less than the ultimate settlement,
an additional charge to income tax expense may result. If our current estimate
of tax and interest liabilities is more than the ultimate settlement, income tax
benefits may be recognized.
We have provided income taxes for earnings that are currently distributed as
well as the taxes associated with several subsidiaries' earnings that are
expected to be distributed in fiscal 2013. No additional provision has been made
for U.S. or non-U.S. income taxes on the undistributed earnings of subsidiaries
or for unrecognized deferred tax liabilities for temporary differences related
to basis differences in investments in subsidiaries, as such earnings are
expected to be permanently reinvested, the investments are essentially permanent
in duration, or we have concluded that no additional tax liability will arise as
a result of the distribution of such earnings. As of September 28, 2012, certain
subsidiaries had approximately $18 billion of undistributed earnings that we
intend to permanently reinvest. A liability could arise if our intention to
permanently reinvest such earnings were to change and amounts are distributed by
such subsidiaries or if such subsidiaries are ultimately disposed. It is not
practicable to estimate the additional income taxes related to permanently
reinvested earnings or the basis differences related to investments in
subsidiaries.
Income (Loss) from Discontinued Operations, Net of Income Taxes
During fiscal 2012, we sold our Touch Solutions business for net cash
proceeds of $380 million, subject to working capital adjustments, of which we
received $370 million during fiscal 2012. We recognized a pre-tax gain of
$5 million on the transaction. The agreement includes contingent earn-out
provisions through 2015 based on business performance. In connection with the
divestiture, we incurred an income tax charge of $65 million, which is included
in income (loss) from discontinued operations, net of income taxes on the
Consolidated Statement of Operations, primarily as a result of being unable to
realize a tax benefit from the write-off of goodwill at the time of the sale. We
expect to make tax payments of approximately $10 million associated with this
divestiture.
During fiscal 2012, we sold our TE Professional Services business for net
cash proceeds of $28 million, of which we received $24 million during fiscal
2012, and recognized a pre-tax gain of $2 million on the transaction.
Additionally, during fiscal 2012, we recorded a pre-tax impairment charge of
$28 million, which is included in income (loss) from discontinued operations,
net of income taxes on the Consolidated Statement of Operations, to write the
carrying value of this business down to its estimated fair value less costs to
sell.
On December 27, 2011, the New York Court of Claims entered judgment in our
favor in the amount of $25 million, payment of which was received in fiscal
2012, in connection with our former Wireless Systems business's State of New
York contract. This judgment resolved all outstanding issues
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between the parties in this matter. This partial recovery of a previously
recognized loss, net of legal fees, is reflected in income (loss) from
discontinued operations, net of income taxes on the Consolidated Statement of
Operations for fiscal 2012.
In fiscal 2010, we recorded income from discontinued operations of
$44 million primarily in connection with the favorable resolution of certain
litigation contingencies related to the Printed Circuit Group business which was
sold in fiscal 2007.
The Touch Solutions, TE Professional Services, Wireless Systems, and Printed
Circuit Group businesses met the held for sale and discontinued operations
criteria and have been included as such in all periods presented on our
Consolidated Financial Statements. Prior to reclassification to discontinued
operations, the Touch Solutions and TE Professional Services businesses were
included in the Communications and Industrial Solutions and Network Solutions
segments, respectively. The Wireless Systems business was a component of the
former Wireless Systems segment, and the Printed Circuit Group business was a
component of the former Other segment.
See Note 4 to our Consolidated Financial Statements for additional
information regarding discontinued operations.
Results of Operations by Segment
Transportation Solutions
Fiscal
2012 2011 2010
($ in millions)
Net sales $ 6,007 $ 5,629 $ 4,799
Operating income $ 847 $ 848 $ 515
Operating margin 14.1 % 15.1 % 10.7 %
The following table sets forth Transportation Solutions' percentage of total
net sales by primary industry end market(1):
Fiscal
2012 2011 2010
Automotive 86 % 88 % 87 %
Aerospace, Defense, and Marine 14 12 13
Total 100 % 100 % 100 %
--------------------------------------------------------------------------------
º (1)
º Industry end market information about net sales is presented consistently
with our internal management reporting and may be periodically revised as
management deems necessary.
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The following table provides an analysis of the change in Transportation
Solutions' net sales compared to the prior fiscal year by primary industry end
market:
Fiscal
2012 2011
Change in Net Sales versus Prior Fiscal Year Change in Net Sales versus Prior Fiscal Year
Impact of Impact of
Organic(1) Translation(2) 53rd Week(3) Acquisition Total Organic(1) Translation(2) 53rd Week(3) (Divestiture) Total
($ in millions)
Automotive $ 320 6.5 % $ (181 ) $ (102 ) $ 174 $ 211 4.3 % $ 562 13.5 % $ 169 $ 102 $ (82 ) $ 751 18.0 %
Aerospace,
Defense,
and Marine 40 5.6 (16 ) (10 ) 153 167 23.8 59 9.5 10 10 - 79 12.7
Total $ 360 6.4 % $ (197 ) $ (112 ) $ 327 $ 378 6.7 % $ 621 13.0 % $ 179 $ 112 $ (82 ) $ 830 17.3 %
--------------------------------------------------------------------------------
º (1)
º Represents the change in net sales resulting from volume and price changes,
before consideration of acquisitions, divestitures, the impact of changes
in foreign currency exchange rates, and the impact of the 53rd week in
fiscal 2011.
º (2)
º Represents the change in net sales resulting from changes in foreign
currency exchange rates.
º (3)
º Represents the impact of an additional week in fiscal 2011.
Fiscal 2012 Compared to Fiscal 2011
Transportation Solutions' net sales increased $378 million, or 6.7%, to
$6,007 million in fiscal 2012 from $5,629 million in fiscal 2011. Organic net
sales increased by $360 million, or 6.4%, in fiscal 2012 as compared to fiscal
2011. The weakening of certain foreign currencies negatively affected net sales
by $197 million, or 3.5%, in fiscal 2012 as compared to fiscal 2011. Fiscal 2011
included an additional week which contributed approximately $112 million in net
sales. Deutsch contributed net sales of $327 million during fiscal 2012.
In the automotive end market, our organic net sales increased 6.5% in fiscal
2012 as compared to fiscal 2011. The increase was due primarily to growth of
15.1% in the Asia-Pacific region and 11.1% in the Americas region, partially
offset by declines of 1.2% in the EMEA region. Growth in the Asia-Pacific region
resulted from higher automotive production and continued recovery following the
earthquake in Japan. We estimate that the earthquake in Japan negatively
impacted our sales in the automotive end market by $38 million in fiscal 2011.
In the Americas region, growth resulted from increased production in North
America, partially offset by weakness in South America. In the EMEA region,
production levels decreased as a result of financial uncertainty in Europe. In
the aerospace, defense, and marine end market, our organic net sales increased
5.6% in fiscal 2012 as compared to fiscal 2011. The increase was attributable to
increased production in the commercial aviation market, and growth in the marine
market resulting from share gains and increased oil and gas exploration driven
by increased crude oil prices.
Transportation Solutions' operating income of $847 million in fiscal 2012
was flat compared to fiscal 2011. Segment results for fiscal 2012 included
$116 million of charges related to the acquisition of Deutsch, including
$75 million of charges associated with the amortization of acquisition-related
fair value adjustments primarily related to acquired inventories and customer
order backlog, $27 million of acquisition and integration costs, and $14 million
of restructuring and other charges. Segment results also included $16 million of
net charges and $14 million of net credits to restructuring and other charges
(credits) in fiscal 2012 and 2011, respectively. Excluding these items,
operating income increased in fiscal 2012 as compared to fiscal 2011. The
increase resulted primarily from the favorable impacts of higher volume and
pricing actions, partially offset by unfavorable product mix.
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Fiscal 2011 Compared to Fiscal 2010
Transportation Solutions' net sales increased $830 million, or 17.3%, to
$5,629 million in fiscal 2011 from $4,799 million in fiscal 2010 due primarily
to an increase of $751 million in the automotive end market. Organic net sales
increased by $621 million, or 13.0%, in fiscal 2011 as compared to fiscal 2010.
The strengthening of certain foreign currencies positively affected net sales by
$179 million, or 3.7%, in fiscal 2011 as compared to fiscal 2010. Fiscal 2011
included an additional week which contributed approximately $112 million in net
sales. The divestiture of the mechatronics business in fiscal 2010 negatively
impacted sales by $82 million in fiscal 2011 as compared to fiscal 2010.
In the automotive end market, our organic net sales growth was 13.5% in
fiscal 2011 as compared to fiscal 2010. The increase was attributable to growth
of 17.9% in the EMEA region, 14.4% in the Americas region, and 7.7% in the
Asia-Pacific region. Growth in the EMEA and Americas regions resulted from
higher automotive production and increased content per vehicle. Growth in the
Asia-Pacific region was negatively impacted by the earthquake in Japan. We
estimate that the earthquake in Japan negatively impacted our sales in the
automotive end market by $38 million in fiscal 2011. In the aerospace, defense,
and marine end market, our organic net sales increased 9.5% in fiscal 2011 as
compared to fiscal 2010, primarily as a result of increased demand from
commercial aircraft builders as they continue to increase production and growth
in the marine market as a result of increased oil and gas exploration driven by
increasing crude oil prices.
Transportation Solutions' operating income increased $333 million to
$848 million in fiscal 2011 from $515 million in fiscal 2010. Segment results
included $14 million of net credits and $94 million of net charges to
restructuring and other charges (credits) in fiscal 2011 and 2010, respectively.
Excluding these items, operating income increased in fiscal 2011 as compared to
fiscal 2010. The increase was due to favorable impacts of higher volume and
improved manufacturing productivity, partially offset by increases in material
costs and price erosion.
Communications and Industrial Solutions
Fiscal
2012 2011 2010
($ in millions)
Net sales $ 3,990 $ 4,658 $ 4,431
Operating income $ 337 $ 515 $ 618
Operating margin 8.4 % 11.1 % 13.9 %
The following table sets forth Communications and Industrial Solutions'
percentage of total net sales by primary industry end market(1):
Fiscal
2012 2011 2010
Industrial 32 % 33 % 32 %
Consumer Devices 28 27 29
Data Communications 22 23 22
Appliance 18 17 17
Total 100 % 100 % 100 %
--------------------------------------------------------------------------------
º (1)
º Industry end market information about net sales is presented consistently
with our internal management reporting and may be periodically revised as
management deems necessary.
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The following table provides an analysis of the change in Communications and
Industrial Solutions' net sales compared to the prior fiscal year by primary
industry end market:
Fiscal
2012 2011
Change in Net Sales versus Prior Fiscal Year Change in NetSales versus Prior Fiscal Year
Impact of Impact of
Organic(1) Translation(2) 53rd Week(3) Total Organic(1) Translation(2) 53rd Week(3) (Divestiture) Total
($ in millions)
Industrial $ (232 ) (14.9 )% $ (16 ) $ (30 ) $ (278 ) (17.9 )% $ 96 6.9 % $ 43 $ 30 $ (2 ) $ 167 11.9 %
Consumer Devices (79 ) (6.5 ) (1 ) (23 ) (103 ) (8.4 ) (109 ) (7.9 ) 36 23 (20 ) (70 ) (5.3 )
Data Communications (169 ) (15.9 ) (7 ) (16 ) (192 ) (18.0 ) 25 2.6 28 16 - 69 7.2
Appliance (65 ) (8.1 ) (16 ) (14 ) (95 ) (11.8 ) 27 3.6 20 14 - 61 8.1
Total $ (545 ) (11.7 )% $ (40 ) $ (83 ) $ (668 ) (14.3 )% $ 39 1.0 % $ 127 $ 83 $ (22 ) $ 227 5.1 %
--------------------------------------------------------------------------------
º (1)
º Represents the change in net sales resulting from volume and price changes,
before consideration of acquisitions, divestitures, the impact of changes
in foreign currency exchange rates, and the impact of the 53rd week in
fiscal 2011.
º (2)
º Represents the change in net sales resulting from changes in foreign
currency exchange rates.
º (3)
º Represents the impact of an additional week in fiscal 2011.
Fiscal 2012 Compared to Fiscal 2011
In fiscal 2012, Communications and Industrial Solutions' net sales decreased
$668 million, or 14.3%, to $3,990 million from $4,658 million in fiscal 2011.
Organic net sales decreased $545 million, or 11.7%, during fiscal 2012 as
compared to fiscal 2011. We estimate that the earthquake in Japan negatively
impacted our sales in the Communications and Industrial Solutions segment by
$61 million in fiscal 2011. The weakening of certain foreign currencies
negatively affected net sales by $40 million, or 0.9%, in fiscal 2012 as
compared to fiscal 2011. Fiscal 2011 included an additional week which
contributed approximately $83 million in net sales.
In the industrial end market, our organic net sales decreased 14.9% in
fiscal 2012 as compared to fiscal 2011 due to market weakness across all
regions. In the consumer devices end market, our organic net sales decreased
6.5% in fiscal 2012 as compared to fiscal 2011 as a result of weaker demand in
the personal computer and consumer electronics markets, partially offset by
strong demand in the tablet computer market and increased demand in the mobile
phone market. In the data communications end market, our organic net sales
decreased 15.9% in fiscal 2012 from fiscal 2011 as a result of market softness,
primarily in the Asia-Pacific region, and inventory reductions in the supply
chain. In the appliance end market, our organic net sales decreased 8.1% in
fiscal 2012 as compared to fiscal 2011 due primarily to weakness in the
Asia-Pacific and EMEA regions, resulting from lower demand and inventory
reductions in the supply chain, partially offset by growth in demand in the
Americas region.
Communications and Industrial Solutions' operating income decreased
$178 million to $337 million in fiscal 2012 from $515 million in fiscal 2011.
Segment results included restructuring and other charges of $58 million and
$65 million in fiscal 2012 and 2011, respectively. Excluding these items,
operating income decreased in fiscal 2012 as compared to fiscal 2011. The
decrease resulted from the unfavorable impacts of lower volume and increased
materials costs, partially offset by improved manufacturing productivity.
Fiscal 2011 Compared to Fiscal 2010
Communications and Industrial Solutions' net sales increased $227 million,
or 5.1%, to $4,658 million in fiscal 2011 as compared to $4,431 million in
fiscal 2010. Organic net sales increased $39 million, or 1.0%, during fiscal
2011 as compared to fiscal 2010. We estimate that the earthquake in Japan
negatively impacted our organic sales in the Communications and Industrial
Solutions segment by $61 million in fiscal 2011. The strengthening of certain
foreign currencies positively affected net sales by $127 million, or 2.7%, in
fiscal 2011 as compared to fiscal 2010. Fiscal 2011 included an
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additional week which contributed approximately $83 million in net sales. The
divestiture of the mechatronics business in fiscal 2010 negatively impacted
sales by $22 million in fiscal 2011 as compared to fiscal 2010.
In the industrial end market, our organic net sales increased 6.9% in fiscal
2011 as compared to fiscal 2010 due primarily to strong growth in the industrial
machinery market, particularly in the EMEA region, as well as growth in the
commercial and building and factory automation markets. In the consumer devices
end market, our organic net sales decreased 7.9% in fiscal 2011 from fiscal 2010
levels due to weaker demand in the mobile phone and consumer electronics markets
driven by our platform position, the negative impact of the earthquake in Japan,
and soft demand in the personal computer market, partially offset by growth in
the tablet computer market. In the data communications end market, our organic
net sales increased 2.6% in fiscal 2011 as compared to fiscal 2010 due to
strength in sales in the server, data storage, and wireless markets,
particularly in the EMEA region. In the appliance end market, our organic net
sales growth of 3.6% in fiscal 2011 as compared to fiscal 2010 was due to
continued consumer demand in the EMEA region, partially offset by decreases in
the Americas region.
In fiscal 2011, Communications and Industrial Solutions' operating income
decreased $103 million to $515 million from $618 million in fiscal 2010. Segment
results included net restructuring and other charges of $65 million and
$20 million during fiscal 2011 and 2010, respectively. Excluding these items,
operating income decreased in fiscal 2011 as compared to fiscal 2010. The
decrease was attributable to price erosion and increased material costs,
partially offset by volume increases and cost reduction benefits associated with
restructuring actions.
Network Solutions
Fiscal
2012 2011 2010
($ in millions)
Net sales $ 3,285 $ 3,491 $ 2,451
Operating income $ 334 $ 324 $ 312
Operating margin 10.2 % 9.3 % 12.7 %
The following table sets forth Network Solutions' percentage of total net
sales by primary industry end market(1):
Fiscal
2012 2011 2010
Telecom Networks 39 % 39 % 21 %
Energy 25 25 31
Enterprise Networks 21 20 19
Subsea Communications 15 16 29
Total 100 % 100 % 100 %
--------------------------------------------------------------------------------
º (1)
º Industry end market information about net sales is presented consistently
with our internal management reporting and may be periodically revised as
management deems necessary.
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The following table provides an analysis of the change in Network Solutions'
net sales compared to the prior fiscal year by primary industry end market:
Fiscal
2012 2011
Change in Net Sales versus Prior Fiscal Year Change inNet Sales versus Prior Fiscal Year
Impact of Impact of Acquisition
Organic(1) Translation(2) 53rd Week(3) Acquisition Total Organic(1) Translation(2) 53rd Week(3) (Divestiture) Total
($ in millions)
Telecom
Networks $ (110 ) (8.2 )% $ (37 ) $ (32 ) $ 117 $ (62 ) (4.6 )% $ 109 22.6 % $ 33 $ 32 $ 667 $ 841 163.9 %
Energy 14 1.5 (37 ) (14 ) - (37 ) (4.2 ) 81 11.4 34 14 (12 ) 117 15.5Enterprise
Networks - - (29 ) (16 ) 37 (8 ) (1.2 ) 41 9.7 18 16 152 227 49.3
Subsea
Communications (91 ) (15.8 ) 2 (10 ) - (99 ) (17.1 ) (155 ) (21.4 ) - 10 - (145 ) (20.0 )
Total $ (187 ) (5.4 )% $ (101 ) $ (72 ) $ 154 $ (206 ) (5.9 )% $ 76 3.3 % $ 85 $ 72 $ 807 $ 1,040 42.4 %
--------------------------------------------------------------------------------
º (1)
º Represents the change in net sales resulting from volume and price changes,
before consideration of acquisitions, divestitures, the impact of changes
in foreign currency exchange rates, and the impact of the 53rd week in
fiscal 2011.
º (2)
º Represents the change in net sales resulting from changes in foreign
currency exchange rates.
º (3)
º Represents the impact of an additional week in fiscal 2011, including
$24 million related to ADC.
Fiscal 2012 Compared to Fiscal 2011
Network Solutions' net sales decreased $206 million, or 5.9%, to
$3,285 million in fiscal 2012 from $3,491 million in fiscal 2011. Organic net
sales decreased $187 million, or 5.4%, in fiscal 2012 from fiscal 2011. The
weakening of certain foreign currencies negatively affected net sales by
$101 million, or 2.8%, in fiscal 2012 as compared to fiscal 2011. Fiscal 2011
included an additional week which contributed approximately $72 million in net
sales. The acquisition of ADC on December 8, 2010 resulted in incremental net
sales of $154 million in the first quarter of fiscal 2012 over the same period
of fiscal 2011, as ADC contributed net sales of $198 million in the first
quarter of fiscal 2012 as compared to $44 million in the first quarter of fiscal
2011.
In the telecom networks end market, our organic net sales decreased 8.2% in
fiscal 2012 as compared to fiscal 2011 due primarily to decreased capital
investments by major carriers in the telecommunications industry, particularly
in the Americas and EMEA regions. In the energy end market, our organic net
sales increased 1.5% in fiscal 2012 as compared to fiscal 2011 as a result of
growth in the Americas and Asia-Pacific regions. In the enterprise networks end
market, our organic net sales were flat in fiscal 2012 as compared to fiscal
2011 levels as declines resulting from softness in the office networks were
offset by increases resulting from continued data center investments. The subsea
communications end market's organic net sales decreased 15.8% in fiscal 2012 as
compared to fiscal 2011 as a result of lower levels of project activity.
In fiscal 2012, Network Solutions' operating income increased $10 million to
$334 million from $324 million in fiscal 2011. Segment results for fiscal 2012
included $40 million of restructuring and other charges. Segment results for
fiscal 2011 included $138 million of charges related to the acquisition of ADC,
including $80 million of restructuring and other charges, $39 million of charges
associated with the amortization of acquisition-related fair value adjustments
primarily related to acquired inventories and customer order backlog, and
$19 million of acquisition and integration costs. Segment results for fiscal
2011 also included additional restructuring and other charges of $5 million.
Excluding these items, operating income decreased in fiscal 2012 as compared to
fiscal 2011. The decrease was attributable to the unfavorable impact of lower
volume, unfavorable product mix, and price erosion, partially offset by improved
manufacturing productivity.
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Fiscal 2011 Compared to Fiscal 2010
In fiscal 2011, Network Solutions' net sales increased $1,040 million, or
42.4%, to $3,491 million from $2,451 million in fiscal 2010. Organic net sales
increased $76 million, or 3.3%, in fiscal 2011 from fiscal 2010. The
strengthening of certain foreign currencies positively impacted net sales by
$85 million, or 3.3%, in fiscal 2011 as compared to fiscal 2010. Fiscal 2011
included an additional week which contributed approximately $72 million in net
sales. The acquisition of ADC increased sales by $843 million, of which
$24 million is related to the additional week, during fiscal 2011. The
divestiture of the Dulmison connectors and fittings product line in fiscal 2010
negatively impacted sales by $12 million in fiscal 2011 as compared to fiscal
2010.
In the telecom networks end market, our organic net sales increase of 22.6%
in fiscal 2011 as compared to fiscal 2010 was largely due to increased fiber
network investment by telecommunications companies, particularly in the EMEA and
South America regions. In the energy end market, our organic net sales increased
11.4% in fiscal 2011 as compared to fiscal 2010 due primarily to a continuing
strong recovery across all regions. In the enterprise networks end market, our
organic net sales increased 9.7% in fiscal 2011 from fiscal 2010 levels as a
result of increased data center investment in the EMEA region, particularly in
India, and the Asia-Pacific region. The subsea communications end market's
organic net sales decreased 21.4% in fiscal 2011 as compared to fiscal 2010 as a
result of lower levels of project activity.
Network Solutions' operating income increased $12 million to $324 million in
fiscal 2011 from $312 million in fiscal 2010. As discussed above, during fiscal
2011, segment results included $138 million of charges related to the
acquisition of ADC. Segment results also included additional net restructuring
and other charges of $5 million in fiscal 2011. In fiscal 2010, segment results
included $20 million of net restructuring and other charges and $8 million of
acquisition and integration costs. Excluding these items, operating income
increased in fiscal 2011 as compared to fiscal 2010. The increase resulted from
higher volume, partially offset by unfavorable product mix, price erosion, and
increased material costs.
New Segment Structure Effective for Fiscal 2013
Effective for the first quarter of fiscal 2013, we reorganized our
management and segments to better align the organization around our strategy. We
expect the realignment to enable us to better meet our customers' needs and
optimize our efficiency. Our businesses in the former Communications and
Industrial Solutions segment have been moved into other segments. Also, the
Aerospace, Defense, and Marine and Energy businesses, formerly included in the
Transportation Solutions and Network Solutions segments, respectively, have been
moved to the newly created Industrial Solutions segment. The following
represents the new segment structure:
º •
º Transportation Solutions-This segment consists of our Automotive
business.
º • º Industrial Solutions-This segment contains our Industrial, Aerospace,
Defense, and Marine, and Energy businesses.
º •
º Consumer Solutions-Our Consumer Devices and Appliances businesses are
included in this segment.
º •
º Network Solutions-Telecom Networks, Enterprise Networks, Data Communications, and Subsea Communications businesses are presented in
this segment.
In this Annual Report, results for fiscal 2012 and prior periods are
reported on the basis under which we managed our business in fiscal 2012 and do
not reflect the fiscal 2013 segment reorganization.
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Liquidity and Capital Resources
Our ability to fund our future capital needs will be affected by our ability
to continue to generate cash from operations and may be affected by our ability
to access the capital markets, money markets, or other sources of funding, as
well as the capacity and terms of our financing arrangements. We believe that
cash generated from operations and, to the extent necessary, these other sources
of potential funding will be sufficient to meet our anticipated capital needs
for the foreseeable future. Payment of our 6.00% senior notes due in October
2012 was made subsequent to fiscal year end 2012. We may use excess cash to
reduce our outstanding debt, including through the possible repurchase of our
debt in accordance with applicable law, to purchase a portion of our common
shares pursuant to our authorized share repurchase program, to pay distributions
or dividends on our common shares, or to acquire strategic businesses or product
lines. The cost or availability of future funding may be impacted by financial
market conditions. We will continue to monitor financial markets, to respond as
necessary to changing conditions.
As of September 28, 2012, our cash and cash equivalents were held
principally in subsidiaries which are located throughout the world. Under
current laws, substantially all of these amounts can be repatriated to Tyco
Electronics Group S.A. ("TEGSA"), our Luxembourg subsidiary, which is the
obligor of substantially all of our debt, and to TE Connectivity Ltd., our Swiss
parent company; however, the repatriation of these amounts could subject us to
additional tax costs. We provide for tax liabilities in our financial statements
with respect to amounts that we expect to repatriate; however, no tax
liabilities are recorded for amounts that we consider to be permanently
reinvested outside Switzerland (approximately $18 billion as of September 28,
2012). Our current plans do not demonstrate a need to repatriate earnings 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 was $1,888 million in
fiscal 2012 as compared to $1,722 million in fiscal 2011. The increase of
$166 million in fiscal 2012 over fiscal 2011 resulted primarily from improved
working capital, partially offset by lower income levels.
Net cash provided by continuing operating activities was $1,722 million in
fiscal 2011 as compared to $1,603 million in fiscal 2010. The increase of
$119 million in fiscal 2011 over fiscal 2010 primarily resulted from higher
income levels, partially offset by a reduction of accrued and other current
liabilities related to employee compensation-related payments, higher income
taxes paid, and payments for pre-separation tax matters.
Pension and postretirement benefit contributions in fiscal 2012, 2011, and
2010 were $98 million, $90 million, and $180 million, respectively. Fiscal 2010
included $69 million of voluntary pension contributions; there were no voluntary
contributions in fiscal 2012 or 2011. We expect pension and postretirement
benefit contributions to be $103 million in fiscal 2013, before consideration of
voluntary contributions.
The amount of income taxes paid, net of refunds, during fiscal 2012, 2011,
and 2010 was $290 million, $299 million, and $156 million, respectively.
In fiscal 2012, cash payments included $70 million for tax deficiencies
related to U.S. tax matters for the years 1997 through 2000. Also during fiscal
2012, we received net reimbursements of $51 million from Tyco International and
Covidien pursuant to their indemnifications for pre-separation U.S. tax matters.
We expect to make additional net cash payments of approximately $26 million over
the next twelve months related to these matters. These amounts include payments
in which we are the primary obligor to the taxing authorities and for which we
expect a portion to be reimbursed by Tyco International and Covidien under the
Tax Sharing Agreement as well as indemnification payments to
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Tyco International and Covidien under the Tax Sharing Agreement for tax matters
where they are the primary obligor to the taxing authorities. See Note 13 to the
Consolidated Financial Statements for additional information related to
pre-separation tax matters.
In fiscal 2011, cash payments related to pre-separation tax matters were
$129 million, net of indemnification payments under the Tax Sharing Agreement.
In addition to net cash provided by operating activities, we use free cash
flow as a useful measure of our performance and ability to generate cash. Free
cash flow was $1,434 million in fiscal 2012 as compared to $1,342 million in
fiscal 2011 and $1,333 million in fiscal 2010. The increase in free cash flow in
fiscal 2012 as compared to fiscal 2011 was primarily driven by improved working
capital, as adjusted for net payments for pre-separation tax matters of
$19 million and certain Deutsch acquisition-related payments totaling
$37 million, partially offset by lower income levels. The increase in free cash
flow in fiscal 2011 from fiscal 2010 was primarily driven by higher income
levels partially offset by lower working capital levels, as adjusted for net
payments for pre-separation tax matters of $129 million, and increases in
capital expenditures.
The following table sets forth a reconciliation of net cash provided by
continuing operating activities, the most comparable GAAP financial measure, to
free cash flow, a non-GAAP financial measure:
Fiscal
2012 2011 2010
(in millions)Net cash provided by continuing operating activities $ 1,888 $ 1,722 $ 1,603
Capital expenditures
(533 ) (574 ) (380 )
Proceeds from sale of property, plant, and equipment 23 65 16
Payments related to pre-separation tax matters, net 19 129 -
Payments related to accrued interest on debt assumed in
the acquisition of Deutsch
17 - -
Payments to settle acquisition-related foreign currency
derivative contracts
20 - -
Pre-separation litigation payments - - 25
Voluntary pension contributions - - 69
Free cash flow $ 1,434 $ 1,342 $ 1,333
Cash Flows from Investing Activities
We continue to fund capital expenditures to support new programs and to
invest in machinery and our manufacturing facilities to further enhance
productivity and manufacturing capabilities. Capital spending decreased
$41 million in fiscal 2012 to $533 million as compared to $574 million in fiscal
2011. Capital spending was $380 million in fiscal 2010. We expect fiscal 2013
capital spending levels to be approximately 4-5% of net sales.
During fiscal 2012, we acquired Deutsch. The total value paid for the
transaction amounted to €1.55 billion (approximately $2.05 billion using an
exchange rate of $1.33 per €1.00), net of cash acquired of $152 million. The
total value paid included $659 million of debt assumed, including accrued
interest, and paid off in its entirety shortly after the completion of the
acquisition.
During fiscal 2011, we acquired ADC for a total purchase price of
approximately $1,263 million in cash (excluding cash acquired of $546 million)
and $22 million of other non-cash consideration. Short-term investments acquired
in connection with the acquisition of ADC were sold for proceeds of $155 million
in fiscal 2011. Certain other assets acquired in connection with the acquisition
of ADC
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were sold for net proceeds of $111 million, of which approximately $106 million
was received in fiscal 2011. We also acquired another business for $14 million
in cash in fiscal 2011.
During fiscal 2010, we acquired two businesses for $38 million in cash. Also
during fiscal 2010, we paid cash of $55 million to acquire a business that was
sold in fiscal 2012 as part of the divestiture of the Touch Solutions business.
Cash Flows from Financing Activities and Capitalization
Total debt at fiscal year end 2012 and 2011 was $3,711 million and
$2,667 million, respectively. See Note 11 to the Consolidated Financial
Statements for additional information regarding debt.
In February 2012, TEGSA, our wholly-owned subsidiary, issued $250 million
aggregate principal amount of 1.60% senior notes due February 3, 2015 and
$500 million aggregate principal amount of 3.50% senior notes due February 3,
2022. The notes were offered and sold pursuant to an effective registration
statement on Form S-3 filed on January 21, 2011. Interest on the notes is
payable semi-annually on February 3 and August 3 of each year, beginning
August 3, 2012. 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. The
notes are fully and unconditionally guaranteed as to payment on an unsecured
senior basis by TE Connectivity Ltd. Net proceeds from the issuance of the notes
due 2015 and 2022, were approximately $250 million and $498 million,
respectively. In connection with the issuance of the senior notes in February
2012, the commitments of the lenders under a $700 million 364-day credit
agreement, dated as of December 20, 2011, automatically terminated.
On June 24, 2011, TEGSA entered into a five-year unsecured senior revolving
credit facility ("Credit Facility"), with total commitments of $1,500 million.
TEGSA had no borrowings under the Credit Facility at September 28, 2012 and
September 30, 2011.
Borrowings under the Credit Facility bear interest at a rate per annum equal
to, at the option of TEGSA, (1) the London interbank offered rate ("LIBOR") plus
an applicable margin based upon the senior, unsecured, long-term debt rating of
TEGSA, or (2) an alternate base rate equal to the highest of (i) Deutsche Bank
AG New York branch's base rate, (ii) the federal funds effective rate plus 1/2
of 1%, and (iii) one-month LIBOR plus 1%, 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 ranging from 12.5 to 30.0 basis points
based upon the amount of the lenders' commitments under the Credit Facility and
the applicable credit ratings of TEGSA.
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
(as defined in the Credit Facility) to Consolidated EBITDA (as defined in the
Credit Facility) for the then most recently concluded period of four consecutive
fiscal quarters exceeds 3.5 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 September 28, 2012, 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.
In December 2010, TEGSA issued $250 million principal amount of 4.875%
senior notes due January 15, 2021. The notes were offered and sold pursuant to
an effective registration statement on Form S-3 filed on July 1, 2008, as
amended on June 26, 2009. Interest on the notes accrues from the issuance date
at a rate of 4.875% per year and is payable semi-annually on January 15 and
July 15 of each year, beginning July 15, 2011. 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. The notes are fully and unconditionally
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guaranteed as to payment on an unsecured senior basis by TE Connectivity Ltd.
Net proceeds from the issuance were approximately $249 million.
In December 2010, in connection with the acquisition of ADC, we assumed
$653 million of convertible subordinated notes due 2013, 2015, and 2017. Under
the terms of the indentures governing these convertible subordinated notes,
following the acquisition of ADC, the right to convert the notes into shares of
ADC common stock changed to the right to convert the notes into cash. See Note 5
for more information on the ADC acquisition. In fiscal 2011, our ADC subsidiary
commenced offers to purchase the convertible subordinated notes at par plus
accrued interest, pursuant to the terms of the indentures for the notes. During
fiscal 2011, $198 million principal amount of the convertible subordinated notes
due 2013, $136 million principal amount of the convertible subordinated notes
due 2015, and $225 million principal amount of the convertible subordinated
notes due 2017 were purchased for an aggregate purchase price of $560 million.
All of the purchased convertible subordinated notes have been cancelled. Our
debt balance at fiscal year end 2012 included the remaining $90 million of 3.50%
convertible subordinated notes due 2015 and $1 million of floating rate
convertible subordinated notes due 2013.
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. As of fiscal year end 2012, TEGSA had
$300 million of commercial paper outstanding at a weighted-average interest rate
of 0.40%. TEGSA had no commercial paper outstanding at fiscal year end 2011.
TEGSA's payment obligations under its senior notes, commercial paper, and
Credit Facility are fully and unconditionally guaranteed by TE Connectivity Ltd.
Neither TE Connectivity Ltd. nor any of its subsidiaries provides a guarantee as
to payment obligations under the 3.50% convertible subordinated notes due 2015
and other notes issued by ADC prior to its acquisition in December 2010.
Payments of common share dividends and cash distributions to shareholders
were $332 million, $296 million, and $289 million in fiscal 2012, 2011, and
2010, respectively. In October 2009, our shareholders approved a cash
distribution to shareholders in the form of a capital reduction to the par value
of our common shares of CHF 0.34 (equivalent to $0.32) per share, payable in two
equal installments in the first and second quarters of fiscal 2010. We paid the
first and second installments of the distribution at a rate of $0.16 per share
during each of the quarters ended December 25, 2009 and March 26, 2010. These
capital reductions reduced the par value of our common shares from CHF 2.43
(equivalent to $2.24) to CHF 2.09 (equivalent to $1.92).
In March 2010, our shareholders approved a cash distribution to shareholders
in the form of a capital reduction to the par value of our common shares of
CHF 0.72 (equivalent to $0.64) per share, payable in four equal quarterly
installments beginning in the third quarter of fiscal 2010 through the second
quarter of fiscal 2011. We paid the installments of the distribution at a rate
of $0.16 per share during each of the quarters ended June 25, 2010,
September 24, 2010, December 24, 2010, and March 25, 2011. These capital
reductions reduced the par value of our common shares from CHF 2.09 (equivalent
to $1.92) to CHF 1.37 (equivalent to $1.28).
In March 2011, our shareholders approved a dividend payment to shareholders
of CHF 0.68 (equivalent to $0.72) per share out of contributed surplus, payable
in four equal quarterly installments beginning in the third quarter of fiscal
2011 through the second quarter of fiscal 2012. We paid the installments of the
dividend at a rate of $0.18 per share during each of the quarters ended June 24,
2011, September 30, 2011, December 30, 2011, and March 30, 2012.
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In March 2012, our shareholders approved a cash distribution to shareholders
in the form of a capital reduction to the par value of our common shares of
CHF 0.80 (equivalent to $0.84) per share, payable in four equal quarterly
installments beginning in the third quarter of fiscal 2012 through the second
quarter of fiscal 2013. We paid the first and second installments of the
distribution at a rate of $0.21 per share during each of the quarters ended
June 29, 2012 and September 28, 2012. These capital reductions reduced the par
value of our common shares from CHF 1.37 (equivalent to $1.28) to CHF 0.97
(equivalent to $0.86).
Contributed surplus established for Swiss tax and statutory purposes ("Swiss
Contributed Surplus"), subject to certain conditions, is a freely distributable
reserve.
Under Swiss law, subject to certain conditions, distributions to
shareholders made in the form of a reduction of registered share capital or from
reserves from capital contributions (equivalent to Swiss Contributed Surplus)
are exempt from Swiss withholding tax. During fiscal 2012, we received a
favorable outcome from the Swiss tax authorities related to the classification
of Swiss Contributed Surplus that confirms our presentation of Swiss Contributed
Surplus as a free reserve on our statutory Swiss balance sheet. As of
September 28, 2012 and September 30, 2011, Swiss Contributed Surplus was
$8,940 million (equivalent to CHF 9,745 million).
During fiscal 2011, our board of directors authorized a $2,250 million
increase in the share repurchase authorization. We repurchased approximately
6 million of our common shares for $194 million, approximately 25 million of our
common shares for $867 million, and approximately 18 million of our common
shares for $488 million during fiscal 2012, 2011, and 2010, respectively. At
September 28, 2012, we had $1,307 million of availability remaining under our
share repurchase authorization.
Commitments and Contingencies
The following table provides a summary of our contractual obligations and
commitments for debt, minimum lease payment obligations under non-cancelable
leases, and other obligations at fiscal year end 2012:
Payments Due by Fiscal Year
Total 2013 2014 2015 2016 2017 Thereafter
(in millions)
Long-term debt, including
current maturities $ 3,711 $ 1,015 $ 377 $ 340 $ - $ - $ 1,979
Interest on long-term debt(1) 1,464 160 128 115 110 110 841
Operating leases 448 123 97 75 46 34 73
Purchase obligations(2) 127 124 3 - - - -
Total contractual cash
obligations(3)(4)(5) $ 5,750 $ 1,422 $ 605 $ 530 $ 156 $ 144 $ 2,893
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º (1)
º Interest payments exclude the impact of our interest rate swaps.
º (2) º Purchase obligations consist of commitments for purchases of goods and
services.
º (3)
º The table above does not reflect unrecognized tax benefits of
$1,795 million and related accrued interest and penalties of
$1,335 million, the timing of which is uncertain. See Note 17 to the
Consolidated Financial Statements for additional information regarding
unrecognized tax benefits, interest, and penalties.
º (4)
º The table above does not reflect pension and postretirement benefit obligations to certain employees and former employees. We are obligated to
make contributions to our pension plans and postretirement benefit plans;
however, we are unable to determine the amount of plan contributions due to
the inherent uncertainties of obligations of this type, including timing,
interest rate charges, investment performance, and amounts of benefit
payments. We expect to contribute $103 million to pension and
postretirement benefit plans in fiscal 2013, before consideration of
voluntary contributions.
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These plans and our estimates of future contributions and benefit payments
are more fully described in Note 16 to the Consolidated Financial
Statements.
º (5) º Other long-term liabilities of $517 million, of which $227 million related
to our ASC 460 guarantee liabilities, are excluded from the table above as
we are unable to estimate the timing of payment for these items. See
Note 12 to the Consolidated Financial Statements for more information
regarding ASC 460.
Income Tax Matters
In connection with the separation, we entered into a Tax Sharing Agreement
that generally governs our, Covidien's, and Tyco International's respective
rights, responsibilities, and obligations after the distribution with respect to
taxes, including ordinary course of business taxes and taxes, if any, incurred
as a result of any failure of the distribution of all of our shares or the
shares of Covidien to qualify as a tax-free distribution for U.S. federal income
tax purposes within the meaning of Section 355 of the Code or certain internal
transactions undertaken in anticipation of the spin-offs to qualify for
tax-favored treatment under the Code.
Pursuant to the Tax Sharing Agreement, upon separation, we entered into
certain guarantee commitments and indemnifications with Tyco International and
Covidien. Under the Tax Sharing Agreement, we, Tyco International, and Covidien
share 31%, 27%, and 42%, respectively, of certain contingent liabilities
relating to unresolved pre-separation tax matters of Tyco International. The
effect of the Tax Sharing Agreement is to indemnify us for 69% of certain
liabilities settled in cash by us with respect to unresolved pre-separation tax
matters. Pursuant to that indemnification, we have made similar indemnifications
to Tyco International and Covidien with respect to 31% of certain liabilities
settled in cash by the companies relating to unresolved pre-separation tax
matters. If any of the companies responsible for all or a portion of such
liabilities were to default in its payment of costs or expenses related to any
such liability, we would be responsible for a portion of the defaulting party or
parties' obligation. We are responsible for all of our own taxes that are not
shared pursuant to the Tax Sharing Agreement's sharing formula. In addition,
Tyco International and Covidien are responsible for their tax liabilities that
are not subject to the Tax Sharing Agreement's sharing formula.
Prior to separation, certain of our subsidiaries filed combined income tax
returns with Tyco International. Those and other of our subsidiaries' income tax
returns are periodically examined by various tax authorities. In connection with
these examinations, tax authorities, including the IRS, have raised issues and
proposed tax adjustments. Tyco International, as the U.S. income tax audit
controlling party under the Tax Sharing Agreement, is reviewing and contesting
certain of the proposed tax adjustments. Amounts related to these tax
adjustments and other tax contingencies and related interest that management has
assessed under the uncertain tax position provisions of ASC 740, which relate
specifically to our entities have been recorded on the Consolidated Financial
Statements. In addition, we may be required to fund portions of Covidien and
Tyco International's tax obligations. Estimates about these guarantees have also
been recognized on the Consolidated Financial Statements. See Note 12 to the
Consolidated Financial Statements for additional information.
During fiscal 2007, the IRS concluded its field examination of certain of
Tyco International's U.S. federal income tax returns for the years 1997 through
2000 and issued Revenue Agent Reports which reflect the IRS' determination of
proposed tax adjustments for the 1997 through 2000 period. Additionally, the IRS
proposed civil fraud penalties against Tyco International arising from alleged
actions of former executives in connection with certain intercompany transfers
of stock in 1998 and 1999. The penalties were asserted against a prior
subsidiary of Tyco International that was distributed to us in connection with
the separation. Tyco International appealed certain of the proposed adjustments
for the years 1997 through 2000, and Tyco International has now resolved all but
one of the matters associated with the proposed tax adjustments, including
reaching an agreement with the IRS on the penalty adjustment. In October 2012,
the IRS issued special agreement Forms 870-AD concluding its audit of all tax
matters for the period 1997 through 2000, excluding one issue that remains in
dispute as described below.
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The disputed issue involves the tax treatment of certain intercompany debt
transactions. The IRS has asserted that certain intercompany loans originating
during the period 1997 through 2000 did not constitute debt for U.S. federal
income tax purposes and has disallowed related interest deductions recognized on
Tyco International's U.S. income tax returns during the period. Tyco
International contends that the intercompany financing qualified as debt for
U.S. tax purposes and that the interest deductions reflected on the income tax
returns are appropriate. The IRS and Tyco International remain unable to resolve
this matter through the IRS appeals process. We understand that Tyco
International expects to receive statutory notices of deficiency from the IRS
early in our fiscal 2013. Upon receipt of these statutory notices, we expect
that Tyco International will commence litigation of this matter with the IRS in
U.S. federal court. Based upon relevant facts surrounding the intercompany debt
transactions, relevant tax regulations, and applicable case law, we believe that
we are adequately reserved for this matter. However, the ultimate outcome is
uncertain and if the IRS were to prevail on its assertions, our share of the
assessed tax, deficiency interest, and applicable withholding taxes and
penalties could have a material adverse impact on our results of operations and
financial position.
In fiscal 2012, we made payments of $70 million for tax deficiencies related
to undisputed tax adjustments for the years 1997 through 2000. Concurrent with
remitting these payments, we were reimbursed $51 million from Tyco International
and Covidien pursuant to their indemnifications for pre-separation tax matters.
Over the next twelve months, we expect to pay approximately $26 million,
inclusive of related indemnification payments, in connection with these
pre-separation tax matters.
During fiscal 2011, the IRS completed its field examination of certain Tyco
International income tax returns for the years 2001 through 2004, issued Revenue
Agent Reports which reflect the IRS' determination of proposed tax adjustments
for the 2001 through 2004 period, and issued certain notices of deficiency. As a
result of the completion of fieldwork and the settlement of certain tax matters
in fiscal 2011, we recognized income tax benefits of $35 million and other
expense of $14 million pursuant to the Tax Sharing Agreement. Also, in fiscal
2011, we made net cash payments of $154 million related to pre-separation
deficiencies. Tyco International's income tax returns for the years 2001 through
2004 remain subject to adjustment by the IRS upon ultimate resolution of the
disputed issue involving certain intercompany loans originated during the period
1997 through 2000.
The IRS commenced its audit of certain Tyco International income tax returns
for the years 2005 through 2007 in fiscal 2011.
During fiscal 2012, the IRS commenced its audit of our income tax returns
for the years 2008 through 2010.
At September 28, 2012 and September 30, 2011, we have reflected $71 million
and $232 million, respectively, of income tax liabilities related to the audits
of Tyco International's and our income tax returns in accrued and other current
liabilities as certain of these matters could be resolved within the next twelve
months.
We continue to believe that the amounts recorded on our Consolidated
Financial Statements relating to the matters discussed above are appropriate.
However, the ultimate resolution is uncertain and could result in a material
impact to our results of operations, financial position, or cash flows.
Legal Matters
In the ordinary 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. Management believes that these legal proceedings and claims likely
will be resolved over an extended period of time. Although it is not feasible to
predict the outcome of these proceedings,
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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. See "Part I. Item 3. Legal Proceedings" and Note 13 to
the Consolidated Financial Statements for further information regarding legal
proceedings.
At September 28, 2012, we had a contingent purchase price commitment of
$80 million related to our fiscal 2001 acquisition of Com-Net. This represents
the maximum amount payable to the former shareholders of Com-Net only after the
construction and installation of a communications system for the State of
Florida was completed and approved by the State of Florida in accordance with
guidelines set forth in the contract. Under the terms of the purchase and sale
agreement, we do not believe we have any obligation to the sellers. However, the
sellers have contested our position and initiated a lawsuit in June 2006 in the
Court of Common Pleas in Allegheny County, Pennsylvania, which is in the
discovery phase. A liability for this contingency has not been recorded on the
Consolidated Financial Statements as we do not believe that any payment is
probable or reasonably estimable at this time.
Off-Balance Sheet Arrangements
Certain of our segments 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 2013
through the completion of such transactions. The guarantees would be triggered
in the event of nonperformance, and the potential exposure for nonperformance
under the guarantees would not have a material effect on our results of
operations, financial position, or cash flows.
In disposing of assets or businesses, we often provide representations,
warranties, and/or indemnities to cover various risks including unknown damage
to assets, environmental risks involved in the sale of real estate, liability
for investigation and remediation of environmental contamination at waste
disposal sites and manufacturing facilities, and unidentified tax liabilities
and legal fees related to periods prior to disposition. We have no reason to
believe that these uncertainties would have a material adverse effect on our
results of operations, financial position, or cash flows.
At September 28, 2012, we had outstanding letters of credit and letters of
guarantee in the amount of $344 million.
We have recorded liabilities for known indemnifications included as part of
environmental liabilities. See Note 13 to the Consolidated Financial Statements
for a discussion of these liabilities.
In the normal course of business, we are liable for contract completion and
product performance. In the opinion of management, such obligations will not
significantly affect our results of operations, financial position, or cash
flows.
Pursuant to the Tax Sharing Agreement, upon separation, we entered into
certain guarantee commitments and indemnifications with Tyco International and
Covidien. Under the Tax Sharing Agreement, we, Tyco International, and Covidien
share 31%, 27%, and 42%, respectively, of certain contingent liabilities
relating to unresolved pre-separation tax matters of Tyco International. The
effect of the Tax Sharing Agreement is to indemnify us for 69% of certain
liabilities settled in cash by us with respect to unresolved pre-separation tax
matters. Pursuant to that indemnification, we have made similar indemnifications
to Tyco International and Covidien with respect to 31% of certain liabilities
settled in cash by the companies relating to unresolved pre-separation tax
matters. If any of the companies responsible for all or a portion of such
liabilities were to default in its payment of costs or expenses related to any
such liability, we would be responsible for a portion of the defaulting party or
parties' obligation. These arrangements have been valued upon our separation
from Tyco International in accordance with ASC 460 and, accordingly, liabilities
amounting to $241 million were recorded on
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the Consolidated Balance Sheet at September 28, 2012. See Notes 12 and 13 to the
Consolidated Financial Statements for additional information.
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. The following accounting policies are considered to be 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
Our revenue recognition policies are in accordance with ASC 605, Revenue
Recognition. Our revenues are generated principally from the sale of our
products. Revenue from the sale of products is recognized at the time title and
the risks and rewards of ownership pass to the customer. This generally occurs
when the products reach the free-on-board shipping point, the sales price is
fixed and determinable, and collection is reasonably assured. For those items
where title has not yet transferred, we have deferred the recognition of
revenue. A reserve for estimated returns is established at the time of sale
based on historical return experience and is recorded as a reduction of sales.
Other allowances include customer quantity and price discrepancies. A reserve
for other allowances is generally established at the time of sale based on
historical experience and is recorded as a reduction of sales.
Contract revenues for construction related projects are recorded primarily
on the percentage-of-completion method. Profits recognized on contracts in
process are based upon estimated contract revenue and related cost to complete.
Percentage-of-completion is measured based on the ratio of actual costs incurred
to total estimated costs. Revisions in cost estimates as contracts progress have
the effect of increasing or decreasing profits in the current period. Provisions
for anticipated losses are made in the period in which they first become
determinable. In addition, provisions for credit losses related to construction
related projects are recorded as reductions of revenue in the period in which
they first become determinable. Contract revenues for construction related
projects are generated primarily in the Network Solutions segment.
Goodwill and Other Intangible Assets
Acquired intangible assets include both indeterminable-lived residual
goodwill and determinable-lived identifiable intangible assets. Intangible
assets with a determinable life include primarily intellectual property
consisting of patents, trademarks, customer and distributor relationships, and
unpatented technology with estimates of recoverability ranging from 1 to
50 years, amortized generally on a straight-line basis. An evaluation of the
remaining useful life of determinable-lived intangible assets is performed on a
periodic basis and when events and circumstances warrant an evaluation. We
assess determinable-lived intangible assets for impairment consistent with our
policy for assessing other long-lived assets for impairment. Goodwill is
assessed for impairment separately from determinable-lived intangible assets by
comparing the carrying value of each reporting unit to its fair value on the
first day of the fourth fiscal quarter of each year or whenever we believe a
triggering event requiring a more frequent assessment has occurred. In assessing
the existence of a triggering event, management relies on a number of
reporting-unit-specific factors including operating results, business plans,
economic projections, anticipated future cash flows, transactions, and market
place data. There are inherent uncertainties related to these factors and
management's judgment in applying these factors to the goodwill impairment
analysis.
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A reporting unit is generally an operating segment or one level below an
operating segment that constitutes a business for which discrete financial
information is available and regularly reviewed by segment management. At
September 28, 2012, we had eight reporting units, consisting of two units in the
Transportation Solutions segment, three units in the Communications and
Industrial Solutions segment, and three units in the Network Solutions segment,
of which one reporting unit has no goodwill. 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.
When testing for goodwill impairment, we follow the guidance prescribed in
ASC 350, Intangibles-Goodwill and Other. First, we perform a step I goodwill
impairment test to identify a potential impairment. In doing so, we compare the
fair value of a reporting unit with its carrying amount. If the carrying amount
of a reporting unit exceeds its fair value, goodwill may be impaired and a step
II goodwill impairment test is performed to measure the amount of any impairment
loss. In the step II goodwill impairment test, we compare the implied fair value
of reporting unit goodwill with the carrying amount of that goodwill. If the
carrying amount of reporting unit goodwill exceeds the implied fair value of
that goodwill, an impairment loss is recognized in an amount equal to the
excess. The implied fair value of goodwill is determined in a manner consistent
with how goodwill is recognized in a business combination. We allocate the fair
value of a reporting unit to all of the assets and liabilities of that unit,
including intangible assets, as if the reporting unit had been acquired in a
business combination. Any excess of the value of a reporting unit over the
amounts assigned to its assets and liabilities is the implied fair value of
goodwill.
Fair value estimates used in the step I goodwill impairment tests have been
calculated using an income approach based on the present value of future cash
flows of each reporting unit. The income approach has been generally supported
by additional market transaction and guideline analyses. These approaches
incorporate a number of 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 2012 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 future taxable income. In estimating future taxable income, we
develop assumptions including the amount of future state, federal, and non-U.S.
pre-tax operating income, the reversal of temporary differences, and the
implementation of feasible and prudent tax planning strategies. These
assumptions require significant judgment about the forecasts of future 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 primarily dependent on future taxable income in
the appropriate jurisdiction. Any reduction in future taxable income including
any future restructuring activities may
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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. Any changes in a valuation allowance that was established in
connection with an acquisition will be reflected in the income tax provision.
Changes in tax laws and rates also could affect recorded deferred tax assets
and liabilities in the future. Management is not aware of any such changes that
would have a material effect on our results of operations, financial position,
or cash flows.
In addition, 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 the U.S. and other 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;
however, 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. Further, management has reviewed with tax
counsel the issues raised by certain taxing authorities and the adequacy of
these recorded amounts. If our current estimate of tax and interest liabilities
is less than the ultimate settlement, an additional charge to income tax expense
may result. If our current estimate of tax and interest liabilities is more than
the ultimate settlement, income tax benefits may be recognized. These tax
liabilities and related interest are recorded in income taxes and accrued and
other current liabilities on the Consolidated Balance Sheet.
Pension and Postretirement Benefits
Our pension expense and obligations are developed from actuarial
assumptions. The funded status of our defined benefit pension and postretirement
benefit plans is recognized on the Consolidated Balance Sheets. The funded
status is measured as the difference between the fair value of plan assets and
the benefit obligation at the measurement date. For defined benefit pension
plans, the benefit obligation is the projected benefit obligation, which
represents the actuarial present value of benefits expected to be paid upon
retirement factoring in estimated future compensation levels. For the
postretirement benefit plans, the benefit obligation is the accumulated
postretirement benefit obligation, which represents the actuarial present value
of postretirement benefits attributed to employee services already rendered. 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 pension and postretirement 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.
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 2012, a 25
basis point decrease in the
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discount rate would have increased the present value of our pension obligations
by $135 million; a 25 basis point increase would have decreased the present
value of our pension obligations by $121 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 2012 pension expense by $9 million.
During fiscal 2012, our investment committee made the decision to change the
target asset allocation of the U.S. plans' master trust from 30% equity and 70%
fixed income to 10% equity and 90% fixed income in an effort to better protect
the funded status of the U.S. plans' master trust. Asset reallocation will
continue over a multi-year period based on the funded status of the U.S. plans'
master trust and market conditions. We expect to reach our target allocation
when the funded status of the U.S. plans' master trust, as determined by the
Pension Protection Act of 2006 (the "Pension Act"), will be over 100%. Based on
the Pension Act definition of funded status, our target asset allocation is 35%
equity and 65% fixed income at September 28, 2012.
Acquisitions
We account for acquired businesses using the acquisition method of
accounting. This method requires, among other things, that most assets acquired
and liabilities assumed be recognized at fair value as of the acquisition date.
We allocate the purchase price of acquired businesses to the tangible and
intangible assets acquired and liabilities assumed based on the estimated fair
values, or as required by ASC 805. The excess of the purchase price over the
identifiable assets acquired and liabilities assumed is recorded as goodwill. We
may engage independent third-party appraisal firms to assist us in determining
the fair values of assets acquired and liabilities assumed. Such valuations
require management to make significant estimates and assumptions, especially
with respect to intangible assets.
Critical estimates in valuing certain intangible assets include but are not
limited to: future expected cash flows from customer and distributor
relationships, acquired developed technologies, and patents; expected costs to
develop in-process research and development into commercially viable products
and estimated cash flows from projects when completed; brand awareness and
market position, as well as assumptions about the period of time the brand will
continue to be used in our product portfolio; customer and distributor attrition
rates; royalty rates; and discount rates. Management's estimates of fair value
are based upon assumptions believed to be reasonable, but which are inherently
uncertain and unpredictable and, as a result, actual results may differ from
estimates.
Contingent Liabilities
We record a loss contingency when the available information indicates it is
probable that we have incurred a liability and the amount of the loss is
reasonably estimable. When a range of possible losses with equal likelihood
exists, we record the low end of the range. The likelihood of a loss with
respect to a particular contingency is often difficult to predict, and
determining a meaningful estimate of the loss or a range of loss may not be
practicable based on information available. In addition, it is not uncommon for
such matters to be resolved over many years, during which time relevant
developments and new information must continuously be evaluated to determine
whether a loss is probable and a reasonable estimate of that loss can be made.
When a loss is probable but a reasonable estimate cannot be made, or when a loss
is at least reasonably possible, disclosure is provided.
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Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In December 2011 and June 2011, the Financial Accounting Standards Board
("FASB") issued updates to guidance in ASC 220, Comprehensive Income, that
change the presentation and disclosure requirements of comprehensive income in
interim and annual financial statements. These updates to ASC 220 are effective
for us in the first quarter of fiscal 2013; however, we early adopted these
updates during the fourth quarter of fiscal 2012. We now present Consolidated
Statements of Comprehensive Income separately in our Consolidated Financial
Statements.
In May 2011, the FASB issued an update to guidance in ASC 820, Fair Value
Measurement, that clarifies the application of fair value and enhances
disclosure regarding valuation of financial instruments and level 3 fair value
measurement inputs. We adopted these updates to ASC 820 in the second quarter of
fiscal 2012. Adoption did not have a material impact on our Consolidated
Financial Statements.
Non-GAAP Financial Measures
Organic Net Sales Growth
Organic net sales growth is a non-GAAP financial measure. The difference
between reported net sales growth (the most comparable GAAP measure) and organic
net sales growth (the non-GAAP measure) consists of the impact from foreign
currency exchange rates, acquisitions, divestitures, and an additional week in
the fourth quarter of the fiscal year for fiscal years which are 53 weeks in
length. Organic net sales growth is a useful measure of the underlying results
and trends in our business. It excludes items that are not completely under
management's control, such as the impact of changes in foreign currency exchange
rates, and items that do not reflect the underlying growth of the company, such
as acquisition and divestiture activity and the impact of an additional week in
the fourth quarter of the fiscal year for fiscal years which are 53 weeks in
length. The impact of the 53rd week was estimated using an average weekly sales
figure for the last month of the fiscal year.
We believe organic net sales growth provides useful information to investors
because it reflects the underlying growth from the ongoing activities of our
business. Furthermore, it provides investors with a view of our operations from
management's perspective. We use organic net sales growth to monitor and
evaluate performance, as it is an important measure of the underlying results of
our operations. Management uses organic net sales growth together with GAAP
measures such as net sales growth and operating income in its decision making
processes related to the operations of our reporting segments and our overall
company. We believe that investors benefit from having access to the same
financial measures that management uses in evaluating operations. The discussion
and analysis of organic net sales growth in Results of Operations above utilizes
organic net sales growth as management does internally. Because organic net
sales growth calculations may vary among other companies, organic net sales
growth amounts presented above may not be comparable with similarly titled
measures of other companies. Organic net sales growth is a non-GAAP financial
measure that is not meant to be considered in isolation or as a substitute for
GAAP measures. The primary limitation of this measure is that it excludes items
that have an impact on our net sales. This limitation is best addressed by
evaluating organic net sales growth in combination with our GAAP net sales. The
tables presented in "Results of Operations" above provide reconciliations of
organic net sales growth to net sales growth calculated under GAAP.
Free Cash Flow
Free cash flow is a non-GAAP financial measure. The difference between net
cash provided by continuing operating activities (the most comparable GAAP
measure) and free cash flow (the
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non-GAAP measure) consists mainly of significant cash outflows and inflows that
we believe are useful to identify. Free cash flow is a useful measure of our
performance and ability to generate cash. It also is a significant component in
our incentive compensation plans. We believe free cash flow provides useful
information to investors as it provides insight into the primary cash flow
metric used by management to monitor and evaluate cash flows generated from our
operations.
Free cash flow excludes net capital expenditures, voluntary pension
contributions, and the cash impact of special items. Net capital expenditures
are subtracted because they represent long-term commitments. Voluntary pension
contributions are subtracted from the GAAP measure because this activity is
driven by economic financing decisions rather than operating activity. Certain
special items, including net payments related to pre-separation tax matters and
pre-separation litigation payments, are also considered by management in
evaluating free cash flow. We believe investors should also consider these items
in evaluating our free cash flow.
Free cash flow as presented herein may not be comparable to similarly-titled
measures reported by other companies. The primary limitation of this measure is
that it excludes items that have an impact on our GAAP cash flow. Also, it
subtracts certain cash items that are ultimately within management's and the
board of directors' discretion to direct and may imply that there is less or
more cash available for our programs than the most comparable GAAP measure
indicates. This limitation is best addressed by using free cash flow in
combination with the GAAP cash flow results. It should not be inferred that the
entire free cash flow amount is available for future discretionary expenditures,
as our definition of free cash flow does not consider certain non-discretionary
expenditures, such as debt payments. In addition, we may have other
discretionary expenditures, such as discretionary dividends, share repurchases,
and business acquisitions, that are not considered in the calculation of free
cash flow.
The tables presented in "Liquidity and Capital Resources" above provide
reconciliations of free cash flow to cash flows from continuing operating
activities calculated under GAAP.
Forward-Looking Information
Certain statements in this 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, the effects of competition, and the effects of
future legislation or regulations. Forward-looking statements include all
statements that are not historical facts and can be identified by the use of
forward-looking terminology such as the words "believe," "expect," "plan,"
"intend," "anticipate," "estimate," "predict," "potential," "continue," "may,"
"should," or the negative of these terms or similar expressions.
Forward-looking statements involve risks, uncertainties, and assumptions.
Actual results may differ materially from those expressed in these
forward-looking statements. You should not put 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 also cause our results to differ materially from those expressed
in forward-looking statements:
º •
º Conditions in the global or regional economies and global capital
markets, and cyclical industry conditions;
º •
º Conditions affecting demand for products in the industries we serve,
particularly the automotive industry and the telecommunications,
computer, and consumer electronics industries;
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º •
º Competition and pricing pressure;
º • º Market acceptance of new product introductions and product innovations
and product life cycles;
º •
º Raw material availability, quality, and cost;
º •
º Fluctuations in foreign currency exchange rates;
º •
º Financial condition and consolidation of customers and vendors;
º •
º Reliance on third-party suppliers;
º •
º Our ability to attract and retain highly qualified personnel;
º •
º Risks associated with our acquisition of Deutsch;
º •
º Risks associated with future acquisitions and divestitures;
º •
º Global risks of business interruptions such as natural disasters and
political, economic, and military instability;
º • º Risks related to compliance with current and future environmental and
other laws and regulations;
º •
º Our ability to protect our intellectual property rights;
º •
º Risks of litigation;
º •
º Our ability to operate within the limitations imposed by our debt
instruments;
º •
º Risks relating to our separation on June 29, 2007 from Tyco
International Ltd.;
º • º The possible effects on us of various U.S. and non-U.S. legislative
proposals and other initiatives that, if adopted, could materially
increase our worldwide corporate effective tax rate and negatively
impact our U.S. government contracts business;
º •
º Various risks associated with being a Swiss corporation;
º •
º The impact of fluctuations in the market price of our shares; and
º •
º 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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