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TE CONNECTIVITY LTD. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[July 24, 2014]

TE CONNECTIVITY LTD. - 10-Q - 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 Condensed Consolidated Financial Statements and the accompanying notes included elsewhere in this Quarterly 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 as a result of many factors, including but not limited to those under the heading "Forward-Looking Information" and "Part II. Item 1A. Risk Factors." Our Condensed Consolidated Financial Statements have been prepared in United States ("U.S.") Dollars, in accordance with accounting principles generally accepted in the U.S. ("GAAP").



Organic net sales growth and free cash flow are non-GAAP financial measures which are discussed herein. 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 TE Connectivity Ltd. ("TE Connectivity" or the "Company," which may be referred to as "we," "us," or "our") is a world leader in connectivity. We design and manufacture products to connect power, data, and signal in a broad array of industries including automotive, energy, industrial, broadband communications, consumer devices, healthcare, and aerospace and defense. We help our customers solve the need for more energy efficiency, always-on communications, and ever-increasing productivity.


During fiscal 2014, we realigned certain businesses, principally the Relay Products business, within our segment reporting structure to better align our product portfolio. The Relay Products business, which was previously included in the Consumer Solutions segment, has been moved to the Industrial Solutions segment. We continue to operate through four reporting segments: Transportation Solutions, Industrial Solutions, Network Solutions, and Consumer Solutions. See Note 18 to the Condensed Consolidated Financial Statements for additional information regarding our segments. Prior period segment results have been restated to conform to the current segment reporting structure.

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 increased 3.8% and 5.0% in the third quarter and first nine months of fiscal 2014, respectively, as compared to the same periods of fiscal 2013. Increased net sales in the Transportation Solutions segment and, to a lesser degree, the Industrial Solutions segment were partially offset by declines in the Network Solutions segment. On an organic basis, net sales increased 2.6% and 5.2% in the third quarter and first nine months of fiscal 2014, respectively, as compared to the same periods of fiscal 2013. In the Transportation Solutions segment, our sales in the automotive end market increased 8.3% and 11.7% on an organic basis in the third quarter and first nine months of fiscal 2014, respectively, with sales increases in all regions. In the Industrial Solutions segment, our organic net sales increased 4.3% and 4.9% in the third quarter and first nine months of fiscal 2014, respectively, due primarily to growth in the industrial equipment and aerospace, defense, oil, and gas end markets, driven by the Asia-Pacific region. In the Network Solutions segment, on an organic basis, 31-------------------------------------------------------------------------------- Table of Contents our net sales decreased 8.3% and 3.4% in the third quarter and first nine months of fiscal 2014, respectively, due primarily to declines in the subsea communications and data communications end markets. In the Consumer Solutions segment, our organic net sales were flat in the third quarter and the first nine months of fiscal 2014 as compared to the same periods of fiscal 2013 as declines in the consumer devices end market were offset by increases in the appliances end market.

Outlook In the fourth quarter of fiscal 2014, we expect net sales to be between $3.56 billion and $3.66 billion. This reflects sales increases of approximately 10% in the Industrial Solutions segment and approximately 7% to 9% in the Transportation Solutions segment, partially offset by slight sales decreases in the Network Solutions and Consumer Solutions segments relative to the fourth quarter of fiscal 2013. In the Industrial Solutions segment, we expect our sales to increase approximately 25% in the aerospace, defense, oil, and gas end market and to increase modestly in the energy and industrial equipment end markets in the fourth quarter of fiscal 2014 as compared to the same period of fiscal 2013.

In the Transportation Solutions segment, we expect our sales growth to outpace an anticipated 5% growth in global automotive production in the fourth quarter of fiscal 2014 as compared to the same period of fiscal 2013. In the Network Solutions segment, we expect our sales decreases in the subsea communications end market and, to a lesser degree, the data communications end market to be partially offset by a slight sales increase in the enterprise networks end market as compared to the fourth quarter of fiscal 2013. We expect our net sales in the subsea communications end market to be approximately $85 million in the fourth quarter of fiscal 2014. In the Consumer Solutions segment, we expect our sales decrease in the consumer devices end market to be partially offset by our sales increase in the appliances end market in the fourth quarter of fiscal 2014 as compared to the fourth quarter of fiscal 2013. We expect diluted earnings per share to be in the range of $0.93 to $0.97 per share in the fourth quarter of fiscal 2014.

For fiscal 2014, we expect net sales to be between $13.9 billion and $14.0 billion, primarily reflecting sales increases of approximately 11% in the Transportation Solutions segment and, to a lesser degree, in the Industrial Solutions segment, partially offset by a modest sales decline in the Network Solutions segment from fiscal 2013 levels. In the Consumer Solutions segment, we expect our sales to decrease slightly as compared to fiscal 2013. In the Transportation Solutions segment, we expect our sales growth to outpace an anticipated 5% growth in global automotive production from fiscal 2013 levels.

In the Industrial Solutions segment, we expect our sales to increase approximately 12% in the aerospace, defense, oil, and gas end market and, to a lesser degree, increase in the industrial equipment end market as compared to fiscal 2013. In the Network Solutions segment, we expect our sales decreases in the subsea communications end market and, to a lesser degree, the data communications end market to be partially offset by a sales increase in the telecom networks end market in fiscal 2014 as compared to fiscal 2013. We expect our net sales in the subsea communications end market to be approximately $285 million in fiscal 2014. In the Consumer Solutions segment, we expect our sales decrease in the consumer devices end market to be partially offset by our sales increase in the appliances end market in fiscal 2014 as compared to fiscal 2013. We expect diluted earnings per share to be in the range of $3.62 to $3.66 per share in fiscal 2014.

The above outlook is based on foreign exchange rates and commodity prices that are consistent with current levels. It does not include results related to the anticipated acquisition of Measurement Specialties, Inc. ("Measurement Specialties").

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 also are managing our capital resources and monitoring capital availability to ensure that we have sufficient resources to fund future capital needs. (See further discussion in "Liquidity and Capital Resources.") 32-------------------------------------------------------------------------------- Table of Contents Acquisitions On June 18, 2014, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Measurement Specialties under which we agreed to acquire Measurement Specialties for $86 per share in cash, for a total transaction value of approximately $1.7 billion, including the assumption of debt.

The transaction is expected to close in calendar year 2014 and is subject to customary closing conditions including approval and adoption of the Merger Agreement by Measurement Specialties' shareholders, regulatory approvals, and other customary conditions.

On June 30, 2014, we acquired the SEACON Group, a leading provider of underwater connector technology and systems, for $452 million in cash.

Restructuring We are committed to continuous productivity improvements and consistently evaluate opportunities to simplify our global manufacturing footprint, migrate facilities to lower-cost regions, reduce fixed costs, and eliminate excess capacity. These initiatives are designed to help us maintain our competitiveness in the industry, improve our operating leverage, and position us for future growth. In connection with these initiatives and in response to market conditions, we incurred net restructuring charges of $45 million during the first nine months of fiscal 2014 and expect to incur net restructuring charges of approximately $65 million during fiscal 2014. Cash spending related to restructuring was $118 million during the first nine months of fiscal 2014, and we expect total spending, which will be funded with cash from operations, to be approximately $190 million in fiscal 2014. Total annualized cost savings related to all actions commenced in fiscal 2014 are estimated to be approximately $30 million and are expected to be realized by the end of fiscal 2016.

Annualized cost savings related to actions commenced in fiscal 2013 are estimated to be approximately $115 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.

Results of Operations Key business factors that influenced our results of operations for the periods discussed in this report include: º • º Raw material prices. We expect to purchase approximately 175 million pounds of copper, 129,000 troy ounces of gold, and 2.6 million troy ounces of silver in fiscal 2014. Prices continue to fluctuate. The following table sets forth the average copper, gold, and silver prices incurred, inclusive of the impact of commodity hedges.

For the For the Quarters Ended Nine Months Ended June 27, June 28, June 27, June 28, Measure 2014 2013 2014 2013 Copper Lb. $ 3.22 $ 3.50 $ 3.30 $ 3.56 Gold Troy oz. $ 1,384 $ 1,588 $ 1,425 $ 1,644 Silver Troy oz. $ 22.38 $ 28.05 $ 23.94 $ 30.17 º • º Foreign exchange. Approximately 55% 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 of each fiscal period.

33 -------------------------------------------------------------------------------- Table of Contents Consolidated Operations Net Sales. Net sales increased $131 million, or 3.8%, to $3,580 million in the third quarter of fiscal 2014 from $3,449 million in the third quarter of fiscal 2013. On an organic basis, net sales increased $89 million, or 2.6%, in the third quarter of fiscal 2014 from the third quarter of fiscal 2013 due primarily to increased net sales in the Transportation Solutions segment and, to a lesser degree, the Industrial Solutions segment, partially offset by decreased net sales in the Network Solutions segment. Price erosion adversely affected organic sales by $70 million in the third quarter of fiscal 2014 as compared to the third quarter of fiscal 2013. Foreign currency exchange rates positively impacted net sales by $41 million in the third quarter of fiscal 2014 as compared to the same period of fiscal 2013.

In the first nine months of fiscal 2014, net sales increased $489 million, or 5.0%, to $10,337 million from $9,848 million in the first nine months of fiscal 2013. On an organic basis, net sales increased $512 million, or 5.2%, in the first nine months of fiscal 2014 as compared to the same period of fiscal 2013 as a result of increased net sales in the Transportation Solutions segment and, to a lesser degree, the Industrial Solutions segment, partially offset by decreased net sales in the Network Solutions segment. Price erosion adversely affected organic sales by $193 million in the first nine months of fiscal 2014 as compared to the same period of fiscal 2013. Foreign currency exchange rates positively impacted net sales by $22 million in the first nine months of fiscal 2014 as compared to the first nine months of fiscal 2013.

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: For the For the Quarters Ended Nine Months Ended June 27, June 28, June 27, June 28, 2014 2013 2014 2013 Europe/Middle East/Africa ("EMEA") 36 % 35 % 36 % 34 % Asia-Pacific 32 32 33 33 Americas 32 33 31 33 Total 100 % 100 % 100 % 100 % The following table provides an analysis of the change in our net sales by geographic region: Change in Net Sales for the Quarter Ended June 27, 2014 Change in Net Sales for theNine Months Ended June 27, 2014 versus Net Sales for the Quarter Ended June 28, 2013 versus Net Sales for the Nine Months Ended June 28, 2013 Acquisitions Acquisitions Organic(1) Translation(2) (Divestiture) Total Organic(1) Translation(2) (Divestitures) Total ($ in millions) EMEA $ 23 1.9 % $ 57 $ (4 ) $ 76 6.3 % $ 179 5.3 % $ 144 $ (14 ) $ 309 9.1 % Asia-Pacific 68 6.3 (4 ) - 64 5.8 282 8.7 (78 ) (34 ) 170 5.2 Americas (2 ) (0.2 ) (12 ) 5 (9 ) (0.8 ) 51 1.6 (44 ) 3 10 0.3 Total $ 89 2.6 % $ 41 $ 1 $ 131 3.8 % $ 512 5.2 % $ 22 $ (45 ) $ 489 5.0 % -------------------------------------------------------------------------------- º (1) º Represents the change in net sales resulting from volume and price changes, before consideration of acquisitions, divestitures, and the impact of changes in foreign currency exchange rates.

º (2) º Represents the change in net sales resulting from changes in foreign currency exchange rates.

34 -------------------------------------------------------------------------------- Table of Contents The following table sets forth the percentage of our total net sales by segment: For the For the Quarters Ended Nine Months Ended June 27, June 28, June 27, June 28, 2014 2013 2014 2013 Transportation Solutions 44 % 42 % 44 % 42 % Industrial Solutions 24 23 23 23 Network Solutions 21 23 21 23 Consumer Solutions 11 12 12 12 Total 100 % 100 % 100 % 100 % The following table provides an analysis of the change in our net sales by segment: Change in Net Sales for the Quarter Ended June 27, 2014 Change in Net Salesfor the Nine Months Ended June 27, 2014 versus Net Sales for the Quarter Ended June 28, 2013 versus Net Sales for the Nine Months Ended June 28, 2013 Acquisitions Acquisitions Organic(1) Translation(2) (Divestiture) Total Organic(1) Translation(2) (Divestitures) Total ($ in millions) Transportation Solutions $ 119 8.3 % $ 28 $ - $ 147 10.2 % $ 481 11.7 % $ 28 $ - $ 509 12.5 % Industrial Solutions 35 4.3 10 1 46 5.7 112 4.9 14 (6 ) 120 5.3 Network Solutions (67 ) (8.3 ) 2 - (65 ) (8.1 ) (74 ) (3.4 ) (10 ) (39 ) (123 ) (5.4 ) Consumer Solutions 2 0.4 1 - 3 0.7 (7 ) (0.6 ) (10 ) - (17 ) (1.4 ) Total $ 89 2.6 % $ 41 $ 1 $ 131 3.8 % $ 512 5.2 % $ 22 $ (45 ) $ 489 5.0 % -------------------------------------------------------------------------------- º (1) º Represents the change in net sales resulting from volume and price changes, before consideration of acquisitions, divestitures, and the impact of changes in foreign currency exchange rates.

º (2) º Represents the change in net sales resulting from changes in foreign currency exchange rates.

Gross Margin. In the third quarter of fiscal 2014, gross margin was $1,204 million, reflecting a $72 million increase from gross margin of $1,132 million in the third quarter of fiscal 2013. In the first nine months of fiscal 2014, gross margin increased $321 million to $3,494 million as compared to $3,173 million in the first nine months of fiscal 2013. The increases in gross margin resulted primarily from improved manufacturing productivity and, to a lesser degree, decreased materials costs and higher volume, partially offset by price erosion. Gross margin as a percentage of net sales increased to 33.6% in the third quarter of fiscal 2014 from 32.8% in the third quarter of fiscal 2013. In the first nine months of fiscal 2014, gross margin as a percentage of net sales increased to 33.8% from 32.2% in the same period of fiscal 2013.

Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased $27 million to $483 million in the third quarter of fiscal 2014 from $456 million in the third quarter of fiscal 2013.

Selling, general, and administrative expenses increased $99 million to $1,421 million in the first nine months of fiscal 2014 as compared to $1,322 million in the same period of fiscal 2013. The increases in selling, general, and administrative expenses resulted primarily from increased selling expenses to support higher sales levels, partially offset by savings attributable to restructuring actions. Selling, general, and administrative expenses as a percentage of net sales increased to 13.5% in the third quarter of fiscal 2014 from 13.2% in the same period of fiscal 2013. In the first nine months of fiscal 2014, selling, general, and administrative expenses as a percentage of net sales increased to 13.7% from 13.4% in the same period of fiscal 2013.

Restructuring and Other Charges, Net. Net restructuring and other charges were $14 million and $67 million in the third quarters of fiscal 2014 and 2013, respectively, and $42 million and $240 million in the first nine months of fiscal 2014 and 2013, respectively. During fiscal 2014, we initiated a restructuring program primarily associated with headcount reductions and manufacturing site and product line closures in the Network Solutions and Consumer Solutions segments. During fiscal 2013, 35-------------------------------------------------------------------------------- Table of Contents we initiated a restructuring program associated with headcount reductions and manufacturing site closures impacting all segments. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding net restructuring and other charges.

Operating Income. In the third quarter of fiscal 2014, operating income was $535 million as compared to $439 million in the third quarter of fiscal 2013.

Results for the third quarter of fiscal 2014 included $14 million of net restructuring and other charges and $1 million of acquisition and integration costs. Results for the third quarter of fiscal 2013 included $67 million of net restructuring and other charges and $3 million of acquisition and integration costs.

Operating income was $1,524 million and $1,091 million in the first nine months of fiscal 2014 and 2013, respectively. Results for the first nine months of fiscal 2014 included $42 million of net restructuring and other charges and $2 million of acquisition and integration costs. Results for the first nine months of fiscal 2013 included $240 million of net restructuring and other charges and $11 million of acquisition and integration costs.

See further discussion of operating income below under "Results of Operations by Segment." Non-Operating Items Other Income (Expense), Net. We recorded net other income of $9 million and $18 million during the quarters ended June 27, 2014 and June 28, 2013, respectively, primarily consisting of income pursuant to the Tax Sharing Agreement with Tyco International Ltd. ("Tyco International") and Covidien plc ("Covidien"). See Note 9 to the Condensed Consolidated Financial Statements for further information regarding the Tax Sharing Agreement.

We recorded net other income of $57 million and net other expense of $199 million during the nine months ended June 27, 2014 and June 28, 2013, respectively, primarily pursuant to the Tax Sharing Agreement with Tyco International and Covidien. The net other income in the nine months ended June 27, 2014 included $18 million of income related to our share of a settlement agreement entered into by Tyco International with a former subsidiary, CIT Group Inc., which arose from a pre-separation claim for which we were entitled to 31% once resolved. The net other expense in the nine months ended June 28, 2013 included $231 million related to the effective settlement of all undisputed tax matters for the period 1997 through 2000. See Note 10 to the Condensed Consolidated Financial Statements for additional information.

Income Taxes. We recorded income tax provisions of $113 million and $93 million for the quarters ended June 27, 2014 and June 28, 2013, respectively. The tax provision for the quarter ended June 28, 2013 reflects charges related to adjustments to prior year income tax returns, partially offset by tax benefits recognized in connection with the lapse of statutes of limitations for examinations of prior year income tax returns.

We recorded an income tax provision of $376 million and an income tax benefit of $92 million for the nine months ended June 27, 2014 and June 28, 2013, respectively. The tax provision for the nine months ended June 27, 2014 reflects income tax charges related to adjustments to prior year income tax returns, as well as an income tax charge related to the impact of certain non-U.S. tax law changes and the associated increase in the valuation allowance for tax loss carryforwards. The tax benefit for the nine months ended June 28, 2013 reflects a $331 million income tax benefit related to the effective settlement of all undisputed tax matters for the period 1997 through 2000. In addition, the tax benefit for the nine months ended June 28, 2013 reflects charges related to adjustments to prior year income tax returns, partially offset by tax benefits recognized in connection with the lapse of statutes of limitations for examinations of prior year income tax returns.

36-------------------------------------------------------------------------------- Table of Contents Results of Operations by Segment Transportation Solutions For the For the Quarters Ended Nine Months Ended June 27, June 28, June 27, June 28, 2014 2013 2014 2013 ($ in millions) Net sales $ 1,585 $ 1,438 $ 4,596 $ 4,087 Operating income $ 335 $ 282 $ 978 $ 715 Operating margin 21.1 % 19.6 % 21.3 % 17.5 % Quarter Ended June 27, 2014 Compared to Quarter Ended June 28, 2013 Net sales in the Transportation Solutions segment increased $147 million, or 10.2%, to $1,585 million in the third quarter of fiscal 2014 from $1,438 million in the third quarter of fiscal 2013. The strengthening of certain foreign currencies positively impacted net sales by $28 million in the third quarter of fiscal 2014 as compared to the same period of fiscal 2013. Organic net sales increased $119 million, or 8.3%, during the third quarter of fiscal 2014 from the same period of fiscal 2013.

In the automotive end market, which is the Transportation Solutions segment's primary industry end market, our organic net sales increased 8.3% in the third quarter of fiscal 2014 as compared to the third quarter of fiscal 2013. The increase resulted from growth of 10.4% in the Asia-Pacific region, 9.3% in the Americas region, and 6.0% in the EMEA region. In the Asia-Pacific region, growth was driven by increased demand in China, partially offset by declines in certain southeastern Asia-Pacific areas. Growth in the Americas region was driven by strong consumer demand in North America, share gains, and increased content per vehicle. In the EMEA region, growth resulted primarily from increased exports to other regions and, to a lesser degree, increased local demand. In the commercial vehicle market, our organic net sales increase was due to stronger market conditions, strength in the China and U.S. truck markets, and the acceleration of purchases related to emission standard changes in China and the EMEA region.

In the third quarter of fiscal 2014, operating income in the Transportation Solutions segment increased $53 million to $335 million from $282 million in the third quarter of fiscal 2013. Segment results for the third quarter of fiscal 2013 included $1 million of net restructuring and other charges and $1 million of acquisition and integration costs. Excluding these items, operating income increased in the third quarter of fiscal 2014 over the third quarter of fiscal 2013 due primarily to higher volume and improved manufacturing productivity, partially offset by price erosion.

Nine Months Ended June 27, 2014 Compared to Nine Months Ended June 28, 2013 In the first nine months of fiscal 2014, net sales in our Transportation Solutions segment increased $509 million, or 12.5%, to $4,596 million from $4,087 million in the first nine months of fiscal 2013. The strengthening of certain foreign currencies positively impacted net sales by $28 million in the first nine months of fiscal 2014 as compared to the same period of fiscal 2013.

Organic net sales increased by $481 million, or 11.7%, in the first nine months of fiscal 2014 over the first nine months of fiscal 2013.

In the automotive end market, our organic net sales increased 11.7% in the first nine months of fiscal 2014 as compared to the first nine months of fiscal 2013. The increase was due to growth of 14.8% in the Asia-Pacific region, 11.2% in the Americas region, and 9.5% in the EMEA region. The Asia-Pacific region growth was driven by increased demand in China, partially offset by declines in certain southeastern Asia-Pacific areas. Growth in the Americas region was driven by strong consumer demand in North America, share gains, and increased content per vehicle. In the EMEA region, 37-------------------------------------------------------------------------------- Table of Contents growth resulted primarily from increased exports to other regions and, to a lesser degree, increased local demand. In the commercial vehicle market, our organic net sales increase was due to stronger market conditions, strength in the China and U.S. truck markets, and the acceleration of purchases related to emission standard changes in China and the EMEA region.

Operating income in our Transportation Solutions segment increased $263 million to $978 million in the first nine months of fiscal 2014 from $715 million in the same period of fiscal 2013. Segment results for the first nine months of fiscal 2013 included $29 million of net restructuring and other charges and $5 million of acquisition and integration costs. Excluding these items, operating income increased in the first nine months of fiscal 2014 over the same period of fiscal 2013 primarily as a result of higher volume and improved manufacturing productivity, partially offset by price erosion.

Industrial Solutions For the For the Quarters Ended Nine Months Ended June 27, June 28, June 27, June 28, 2014 2013 2014 2013 ($ in millions) Net sales $ 849 $ 803 $ 2,401 $ 2,281 Operating income $ 125 $ 84 $ 330 $ 235 Operating margin 14.7 % 10.5 % 13.7 % 10.3 % The following table sets forth the Industrial Solutions segment's percentage of total net sales by primary industry end market(1): For the For the Quarters Ended Nine Months Ended June 27, June 28, June 27, June 28, 2014 2013 2014 2013 Industrial Equipment 41 % 42 % 42 % 41 % Aerospace, Defense, Oil, and Gas 34 32 34 33 Energy 25 26 24 26 Total 100 % 100 % 100 % 100 % -------------------------------------------------------------------------------- º (1) º Industry end market information is presented consistently with our internal management reporting and may be periodically revised as management deems necessary.

The following table provides an analysis of the change in the Industrial Solutions segment's net sales by primary industry end market: Change in Net Sales for the Quarter Ended June 27, 2014 Change in Net Sales for the Nine Months Ended June 27, 2014 versus Net Sales for the Quarter Ended June 28, 2013 versus Net Sales for the Nine Months Ended June 28, 2013 Acquisitions Acquisitions Organic(1) Translation(2) (Divestiture) Total Organic(1) Translation(2) (Divestiture) Total ($ in millions) Industrial Equipment $ 10 3.0 % $ 4 $ - $ 14 4.2 % $ 61 6.5 % $ 5 $ - $ 66 7.1 % Aerospace, Defense, Oil, and Gas 22 8.3 4 5 31 11.9 41 5.4 9 6 56 7.4 Energy 3 1.3 2 (4 ) 1 0.5 10 1.7 - (12 ) (2 ) (0.3 ) Total $ 35 4.3 % $ 10 $ 1 $ 46 5.7 % $ 112 4.9 % $ 14 $ (6 ) $ 120 5.3 % -------------------------------------------------------------------------------- º (1) º Represents the change in net sales resulting from volume and price changes, before consideration of acquisitions, divestitures, and the impact of changes in foreign currency exchange rates.

º (2) º Represents the change in net sales resulting from changes in foreign currency exchange rates.

38 -------------------------------------------------------------------------------- Table of Contents Quarter Ended June 27, 2014 Compared to Quarter Ended June 28, 2013 Net sales in the Industrial Solutions segment increased $46 million, or 5.7%, to $849 million in the third quarter of fiscal 2014 from $803 million in the third quarter of fiscal 2013. Organic net sales increased $35 million, or 4.3%, during the third quarter of fiscal 2014 as compared to the same period of fiscal 2013.

In the industrial equipment end market, our organic net sales increased 3.0% in the third quarter of fiscal 2014 as compared to the third quarter of fiscal 2013 due to strength in the Asia-Pacific region, particularly in China. In the aerospace, defense, oil, and gas end market, our organic net sales increased 8.3% in the third quarter of fiscal 2014 as compared to the same period of fiscal 2013. The increase resulted from continued strength in commercial aviation and growth in oil and gas. In the energy end market, our organic net sales increased 1.3% in the third quarter of fiscal 2014 as compared to the third quarter of fiscal 2013 as growth in the Americas and Asia-Pacific regions was partially offset by a decline in the EMEA region.

In the third quarter of fiscal 2014, operating income in the Industrial Solutions segment increased $41 million to $125 million from $84 million in the third quarter of fiscal 2013. Segment results for the third quarter of fiscal 2014 included $1 million of net restructuring and other charges and $1 million of acquisition and integration costs. Segment results for the third quarter of fiscal 2013 included $22 million of net restructuring and other charges and $2 million of acquisition and integration costs. Excluding these items, operating income increased in the third quarter of fiscal 2014 over the same period of fiscal 2013 due primarily to improved manufacturing productivity and higher volume, partially offset by price erosion.

Nine Months Ended June 27, 2014 Compared to Nine Months Ended June 28, 2013 In the first nine months of fiscal 2014, net sales in our Industrial Solutions segment increased $120 million, or 5.3%, to $2,401 million from $2,281 million in the same period of fiscal 2013. Organic net sales increased $112 million, or 4.9%, during the first nine months of fiscal 2014 as compared to the first nine months of fiscal 2013.

In the industrial equipment end market, our organic net sales increased 6.5% in the first nine months of fiscal 2014 as compared to the same period of fiscal 2013 as a result of market recovery, particularly in the Asia-Pacific region and, to a lesser degree, the EMEA region. In the aerospace, defense, oil, and gas end market, our organic net sales increased 5.4% in the first nine months of fiscal 2014 from the first nine months of fiscal 2013. The increase was attributable to continued strength in commercial aviation and growth in oil and gas. In the energy end market, our organic net sales increased 1.7% in the first nine months of fiscal 2014 from the same period of fiscal 2013 primarily as a result of growth in the Asia-Pacific and Americas regions, partially offset by a decline in the EMEA region.

Operating income in the Industrial Solutions segment increased $95 million to $330 million in the first nine months of fiscal 2014 from $235 million in the same period of fiscal 2013. Segment results for the first nine months of fiscal 2014 included $7 million of net restructuring and other charges and $2 million of acquisition and integration costs. Segment results for the first nine months of fiscal 2013 included $55 million of net restructuring and other charges and $6 million of acquisition and integration costs. Excluding these items, operating income increased in the first nine months of fiscal 2014 as compared to the same period of fiscal 2013 primarily as a result of improved manufacturing productivity and higher volume, partially offset by price erosion.

39-------------------------------------------------------------------------------- Table of Contents Network Solutions For the For the Quarters Ended Nine Months Ended June 27, June 28, June 27, June 28, 2014 2013 2014 2013 ($ in millions) Net sales $ 738 $ 803 $ 2,139 $ 2,262 Operating income $ 39 $ 48 $ 108 $ 103 Operating margin 5.3 % 6.0 % 5.0 % 4.6 % The following table sets forth the Network Solutions segment's percentage of total net sales by primary industry end market(1): For the For the Quarters Ended Nine Months Ended June 27, June 28, June 27, June 28, 2014 2013 2014 2013 Telecom Networks 47 % 43 % 46 % 41 % Data Communications 25 24 24 26 Enterprise Networks 21 20 21 20 Subsea Communications 7 13 9 13 Total 100 % 100 % 100 % 100 % -------------------------------------------------------------------------------- º (1) º Industry end market information is presented consistently with our internal management reporting and may be periodically revised as management deems necessary.

The following table provides an analysis of the change in the Network Solutions segment's net sales by primary industry end market: Change in Net Sales for the Quarter Ended June 27, 2014 Change in Net Sales for the Nine Months Ended June 27, 2014 versus Net Sales for the Quarter Ended June 28, 2013 versus Net Sales for the Nine Months Ended June 28, 2013 Organic(1) Translation(2) Total Organic(1) Translation(2) Divestiture Total ($ in millions) Telecom Networks $ (4 ) (1.2 )% $ 3 $ (1 ) (0.3 )% $ 46 4.9 % $ 4 $ - $ 50 5.4 % Data Communications (10 ) (5.0 ) 2 (8 ) (4.2 ) (39 ) (6.7 ) (1 ) (39 ) (79 ) (13.5 ) Enterprise Networks (1 ) (0.6 ) (3 ) (4 ) (2.5 ) 15 3.2 (13 ) - 2 0.4 Subsea Communications (52 ) (50.1 ) - (52 ) (50.1 ) (96 ) (32.8 ) - - (96 ) (32.8 ) Total $ (67 ) (8.3 )% $ 2 $ (65 ) (8.1 )% $ (74 ) (3.4 )% $ (10 ) $ (39 ) $ (123 ) (5.4 )% -------------------------------------------------------------------------------- º (1) º Represents the change in net sales resulting from volume and price changes, before consideration of acquisitions, divestitures, and the impact of changes in foreign currency exchange rates.

º (2) º Represents the change in net sales resulting from changes in foreign currency exchange rates.

Quarter Ended June 27, 2014 Compared to Quarter Ended June 28, 2013 In the third quarter of fiscal 2014, net sales in the Network Solutions segment decreased $65 million, or 8.1%, to $738 million from $803 million in the third quarter of fiscal 2013. Organic net sales decreased $67 million, or 8.3% in the third quarter of fiscal 2014 as compared to the same period of fiscal 2013.

In the telecom networks end market, our organic net sales decreased 1.2% in the third quarter of fiscal 2014 as compared to the third quarter of fiscal 2013 as a result of weakness in the Asia-Pacific region, partially offset by growth in the fiber business in the EMEA region. In the data communications end market, our organic net sales decreased 5.0% in the third quarter of fiscal 2014 from the same period of fiscal 2013 as a result of market weakness across all regions and the exit of certain product lines. In the enterprise networks end market, our organic net sales in the third quarter 40-------------------------------------------------------------------------------- Table of Contents of fiscal 2014 were consistent with third quarter fiscal 2013 levels as weak demand in the EMEA region was offset by flat sales in the Asia-Pacific and Americas regions. In the subsea communications end market, our organic net sales decreased 50.1% in the third quarter of fiscal 2014 as compared to the third quarter of fiscal 2013 as a result of lower project volume.

Operating income in the Network Solutions segment decreased $9 million to $39 million in the third quarter of fiscal 2014 from $48 million in the third quarter of fiscal 2013. Segment results included $1 million and $26 million of net restructuring and other charges in the third quarters of fiscal 2014 and 2013, respectively. Excluding these items, operating income decreased in the third quarter of fiscal 2014 as compared to the same period of fiscal 2013 primarily as a result of price erosion and lower volume, partially offset by improved manufacturing productivity.

Nine Months Ended June 27, 2014 Compared to Nine Months Ended June 28, 2013 Net sales in our Network Solutions segment decreased $123 million, or 5.4%, to $2,139 million in the first nine months of fiscal 2014 from $2,262 million in the first nine months of fiscal 2013. Organic net sales decreased $74 million, or 3.4% in the first nine months of fiscal 2014 as compared to the first nine months of fiscal 2013.

In the telecom networks end market, our organic net sales increased 4.9% in the first nine months of fiscal 2014 over the same period of fiscal 2013 due primarily to growth in the fiber business in the EMEA region. In the data communications end market, our organic net sales decreased 6.7% in the first nine months of fiscal 2014 from the first nine months of fiscal 2013 due to market weakness, particularly in the EMEA region, and the exit of certain product lines. In the enterprise networks end market, our organic net sales increased 3.2% in the first nine months of fiscal 2014 as compared to the first nine months of fiscal 2013 as a result of increased demand, particularly in the Americas region. In the subsea communications end market, our organic net sales decreased 32.8% in the first nine months of fiscal 2014 as compared to the same period of fiscal 2013 due to lower project volume.

Operating income in the Network Solutions segment increased $5 million to $108 million in the first nine months of fiscal 2014 from $103 million in the same period of fiscal 2013. Segment results included net restructuring and other charges of $22 million and $76 million in the first nine months of fiscal 2014 and 2013, respectively. Excluding these items, operating income decreased in the first nine months of fiscal 2014 as compared to the first nine months of fiscal 2013 due primarily to price erosion, partially offset by improved manufacturing productivity.

Consumer Solutions For the For the Quarters Ended Nine Months Ended June 27, June 28, June 27, June 28, 2014 2013 2014 2013 ($ in millions) Net sales $ 408 $ 405 $ 1,201 $ 1,218 Operating income $ 36 $ 25 $ 108 $ 38 Operating margin 8.8 % 6.2 % 9.0 % 3.1 % 41 -------------------------------------------------------------------------------- Table of Contents The following table sets forth the Consumer Solutions segment's percentage of total net sales by primary industry end market(1): For the For the Quarters Ended Nine Months Ended June 27, June 28, June 27, June 28, 2014 2013 2014 2013 Consumer Devices 56 % 60 % 59 % 63 % Appliances 44 40 41 37 Total 100 % 100 % 100 % 100 % -------------------------------------------------------------------------------- º (1) º Industry end market information is presented consistently with our internal management reporting and may be periodically revised as management deems necessary.

The following table provides an analysis of the change in the Consumer Solutions segment's net sales by primary industry end market: Change in Net Sales for the Quarter Ended June 27, 2014 Change in Net Sales for the Nine Months Ended June 27, 2014 versus Net Sales for the Quarter Ended June 28, 2013 versus Net Sales for the Nine Months Ended June 28, 2013 Organic(1) Translation(2) Total Organic(1) Translation(2) Total ($ in millions) Consumer Devices $ (12 ) (5.1 )% $ (1 ) $ (13 ) (5.3 )% $ (40 ) (5.2 )% $ (10 ) $ (50 ) (6.6 )% Appliances 14 8.6 2 16 9.9 33 7.2 - 33 7.2 Total $ 2 0.4 % $ 1 $ 3 0.7 % $ (7 ) (0.6 )% $ (10 ) $ (17 ) (1.4 )% -------------------------------------------------------------------------------- º (1) º Represents the change in net sales resulting from volume and price changes, before consideration of acquisitions, divestitures, and the impact of changes in foreign currency exchange rates.

º (2) º Represents the change in net sales resulting from changes in foreign currency exchange rates.

Quarter Ended June 27, 2014 Compared to Quarter Ended June 28, 2013 In the third quarter of fiscal 2014, net sales in the Consumer Solutions segment were flat as compared to the third quarter of fiscal 2013. Organic net sales were also flat during the third quarter of fiscal 2014 as compared to the same period of fiscal 2013.

In the consumer devices end market, our organic net sales decreased 5.1% in the third quarter of fiscal 2014 from the third quarter of fiscal 2013 as a result of significant declines in our sales into the mobile phone and personal computer markets, partially offset by increases in our sales in the tablet computer market. In the appliances end market, our organic net sales increased 8.6% in the third quarter of fiscal 2014 as compared to the same period of fiscal 2013. The increase was attributable to increased demand and share gains in the Americas and Asia-Pacific regions.

Operating income in the Consumer Solutions segment increased $11 million to $36 million in the third quarter of fiscal 2014 from $25 million in the third quarter of fiscal 2013. Segment results included $12 million and $18 million of net restructuring and other charges in the third quarters of fiscal 2014 and 2013, respectively. Excluding these items, operating income increased in the third quarter of fiscal 2014 as compared to the third quarter of fiscal 2013.

The impact of improved manufacturing productivity was partially offset by price erosion.

Nine Months Ended June 27, 2014 Compared to Nine Months Ended June 28, 2013 Net sales in our Consumer Solutions segment decreased $17 million, or 1.4%, to $1,201 million in the first nine months of fiscal 2014 from $1,218 million in the first nine months of fiscal 2013. Organic net sales were flat during the first nine months of fiscal 2014 as compared to the first nine months of fiscal 2013.

42 -------------------------------------------------------------------------------- Table of Contents In the consumer devices end market, our organic net sales decreased 5.2% in the first nine months of fiscal 2014 as compared to the same period of fiscal 2013 due to declines in our sales into the mobile phone and personal computer markets, partially offset by increased demand and new product launches in the tablet computer market. In the appliances end market, our organic net sales increased 7.2% in the first nine months of fiscal 2014 as compared to the first nine months of fiscal 2013 due to increased demand and share gains in the Asia-Pacific region and, to a lesser degree, the Americas region.

In the first nine months of fiscal 2014, operating income in the Consumer Solutions segment increased $70 million to $108 million as compared to $38 million in the first nine months of fiscal 2013. Segment results included net restructuring and other charges of $13 million and $80 million in the first nine months of fiscal 2014 and 2013, respectively. Excluding these items, operating income was flat in the first nine months of fiscal 2014 as compared to the first nine months of fiscal 2013. The impact of improved manufacturing productivity was offset by price erosion.

Liquidity and Capital Resources The following table summarizes our cash flow from operating, investing, and financing activities, as reflected on the Condensed Consolidated Statements of Cash Flows: For the Nine Months Ended June 27, June 28, 2014 2013 (in millions) Net cash provided by operating activities $ 1,334 $ 1,453 Net cash used in investing activities (471 ) (357 ) Net cash used in financing activities (650 ) (1,411 ) Effect of currency translation on cash (3 ) (12 ) Net increase (decrease) in cash and cash equivalents $ 210 $ (327 ) Our ability to fund our future capital needs will be affected by our continued ability to generate cash from operations and may be affected by our ability to access the capital markets, money markets, or other sources of funding, as well as the capacity and terms of our financing arrangements. We believe that cash generated from operations and, to the extent necessary, these other sources of potential funding will be sufficient to meet our anticipated capital needs for the foreseeable future, including the payment of $250 million of 1.60% senior notes due in February 2015. 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. We intend to fund the proposed acquisition of Measurement Specialties, including Measurement Specialties' debt to be repaid at closing, with approximately $400 million of our cash and cash equivalents and approximately $1.3 billion of funds from any combination of the issuance of registered or unregistered notes, the issuance of commercial paper, and, if necessary, borrowing under our existing credit facilities. The cost or availability of future funding may be impacted by financial market conditions. We will continue to monitor financial markets and respond as necessary to changing conditions.

43-------------------------------------------------------------------------------- Table of Contents Cash Flows from Operating Activities Net cash provided by continuing operating activities was $1,341 million in the first nine months of fiscal 2013 as compared to $1,453 million in the first nine months of fiscal 2013. Higher accounts receivable levels and net payments made in relation to pre-separation tax matters were partially offset by higher income levels.

The amount of income taxes paid, net of refunds, during the first nine months of fiscal 2014 and 2013 was $205 million and $229 million, respectively.

In the first nine months of fiscal 2013, these payments included $67 million for tax deficiencies related to pre-separation tax matters. Also, during the first nine months of fiscal 2014 and 2013, we made net payments of $179 million and received net reimbursements of $39 million, respectively, from Tyco International and Covidien pursuant to their indemnifications for pre-separation U.S. tax matters. We expect to make net cash payments related to pre-separation tax matters of approximately $32 million during the next twelve months. 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 Tyco International and Covidien under the Tax Sharing Agreement for tax matters where they are the primary obligor to the taxing authorities. See Note 10 to the Condensed Consolidated Financial Statements for additional information related to pre-separation tax matters.

In addition to net cash provided by operating activities, we use free cash flow, a non-GAAP financial measure, as a useful measure of our ability to generate cash. Free cash flow was $1,069 million in the first nine months of fiscal 2014 as compared to $1,088 million in the first nine months of fiscal 2013. The decrease in free cash flow was primarily driven by the changes in net cash provided by continuing operating activities discussed above and higher 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.

For the Nine Months Ended June 27, June 28, 2014 2013 (in millions) Net cash provided by continuing operating activities $ 1,341 $ 1,453 Capital expenditures (476 ) (412 ) Proceeds from sale of property, plant, and equipment 25 19 Payments related to pre-separation U.S. tax matters, net 179 28 Free cash flow $ 1,069 $ 1,088 Cash Flows from Investing Activities Capital spending increased $64 million in the first nine months of fiscal 2014 to $476 million as compared to $412 million in the first nine months of fiscal 2013. We expect fiscal 2014 capital spending levels to be approximately 4% to 5% of net sales. We believe our capital funding levels are adequate to support new programs, and we continue to invest in our manufacturing infrastructure to further enhance productivity and manufacturing capabilities.

Cash Flows from Financing Activities and Capitalization Total debt at June 27, 2014 and September 27, 2013 was $3,000 million and $3,014 million, respectively. See Note 8 to the Condensed Consolidated Financial Statements for additional information regarding debt.

44-------------------------------------------------------------------------------- Table of Contents In June 2014, Tyco Electronics Group S.A. ("TEGSA"), our 100%-owned subsidiary, entered into a 364-day credit agreement ("364-Day Credit Facility") with total commitments of $1 billion. Under the terms of the agreement, the commitments will be reduced upon certain events, including the incurrence of certain types of debt, certain equity issuances, and certain dispositions. TEGSA had no borrowings under the 364-Day Credit Facility at June 27, 2014.

Borrowings under the 364-Day 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) Citibank, N.A.'s prime 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 7.5 to 25.0 basis points based upon the amount of the lenders' commitments under the 364-Day Credit Facility and the applicable credit ratings of TEGSA.

TEGSA has a five-year unsecured senior revolving credit facility ("Five-Year Credit Facility") with total commitments of $1,500 million. This facility expires in August 2018. TEGSA had no borrowings under the Five-Year Credit Facility at June 27, 2014 and September 27, 2013.

The 364-Day Credit Facility and the Five-Year Credit Facility (together, the "Credit Facilities") contain financial ratio covenants providing that if, as of the last day of each fiscal quarter, our ratio of Consolidated Total Debt (as defined in the Credit Facilities) to Consolidated EBITDA (as defined in the Credit Facilities) for the then most recently concluded period of four consecutive fiscal quarters exceeds 3.75 to 1.0, an Event of Default (as defined in the Credit Facilities) is triggered. The Credit Facilities and our other debt agreements contain other customary covenants. None of our covenants are presently considered restrictive to our operations. As of June 27, 2014, 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 addition to the Credit Facilities, TEGSA is the borrower under the outstanding senior notes and commercial paper. TEGSA's payment obligations under its senior notes, commercial paper, and Credit Facilities are fully and unconditionally guaranteed by its parent, 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 issued by ADC Telecommunications, Inc. prior to its acquisition in December 2010.

During November 2013, TEGSA redeemed all of its outstanding 5.95% senior notes due 2014, representing $300 million principal amount. We paid an immaterial premium in connection with the early redemption. In addition, TEGSA issued $325 million aggregate principal amount of 2.375% senior notes due December 17, 2018. 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.

Payments of common share dividends and cash distributions to shareholders were $324 million and $281 million in the first nine months of fiscal 2014 and 2013, respectively. We paid a cash dividend of $0.25 per share to shareholders out of contributed surplus in each of the first and second quarters of fiscal 2014.

In March 2014, our shareholders approved a dividend payment to shareholders of CHF 1.04 (equivalent to $1.16) per share out of contributed surplus, payable in four equal quarterly installments beginning in the third quarter of fiscal 2014 through the second quarter of fiscal 2015. We paid the first installment of the dividend at a rate of $0.29 per share in the third quarter of fiscal 2014.

45-------------------------------------------------------------------------------- Table of Contents In the first quarter of fiscal 2014, our board of directors authorized an increase of $1 billion in the share repurchase program. We repurchased approximately 8 million of our common shares for $441 million and approximately 16 million of our common shares for $619 million under our share repurchase authorization during the nine months ended June 27, 2014 and June 28, 2013, respectively. At June 27, 2014, we had $1,038 million of availability remaining under our share repurchase authorization.

Commitments and Contingencies Legal Proceedings 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, 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. However, the proceedings discussed below in "Income Tax Matters" could have a material effect on our results of operations, financial position, or cash flows.

At June 27, 2014, 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 was completed for 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. A liability for this contingency has not been recorded on the Condensed Consolidated Financial Statements as we do not believe that any payment is probable at this time.

Income Tax Matters 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 ("Covidien"), to its common shareholders (the "separation").

In connection with the separation, we entered into a Tax Sharing Agreement that generally governs our, Tyco International's, and Covidien'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 Internal Revenue Code (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. See Note 9 to the Condensed Consolidated Financial Statements for additional information regarding the Tax Sharing Agreement.

46-------------------------------------------------------------------------------- Table of Contents During fiscal 2007, the Internal Revenue Service ("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 that reflected 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 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 the amount of $21 million. In October 2012, the IRS issued special agreement Forms 870-AD, effectively settling its audit of all tax matters for the period 1997 through 2000, excluding one issue that remains in dispute as described below. As a result of these developments, in the first nine months of fiscal 2013, we recognized an income tax benefit of $331 million, representing a reduction in tax reserves for the matters that were effectively settled, and other expense of $231 million, representing a reduction of associated indemnification receivables, pursuant to the Tax Sharing Agreement with Tyco International and Covidien.

The disputed issue involves the tax treatment of certain intercompany debt transactions. The IRS field examination asserted that certain intercompany loans originating during the period 1997 through 2000 did not constitute debt for U.S.

federal income tax purposes and disallowed approximately $2.7 billion of related interest deductions recognized during the period on Tyco International's U.S.

income tax returns. In addition, if the IRS is ultimately successful in asserting its claim, it is likely to disallow an additional $6.6 billion of interest deductions reflected on U.S. income tax returns in years subsequent to fiscal 2000. 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 were unable to resolve this matter through the IRS appeals process. On June 20, 2013, Tyco International advised us that it had received Notices of Deficiency from the IRS for certain former U.S. subsidiaries of Tyco International increasing taxable income by approximately $2.9 billion in connection with the audit of Tyco International's fiscal years 1997 through 2000. The Notices of Deficiency assert that Tyco International owes additional taxes totaling $778 million, associated penalties of $154 million, and withholding taxes of $105 million. In addition, Tyco International received Final Partnership Administrative Adjustments for certain U.S. partnerships owned by former U.S. subsidiaries with respect to which Tyco International estimates an additional tax deficiency of approximately $30 million will be asserted. The amounts asserted by the IRS exclude any applicable deficiency interest, and do not reflect any impact to subsequent period tax liabilities in the event that the IRS were to prevail on some or all of its assertions. We understand that Tyco International strongly disagrees with the IRS position and has filed petitions in the U.S. Tax Court contesting the IRS' proposed adjustments. Tyco International has advised us that it believes there are meritorious defenses for the tax filings in question and that the IRS positions with regard to these matters are inconsistent with the applicable tax laws and existing U.S. Treasury regulations.

Resolution of this matter in the U.S. Tax Court could take several years and no payments to the IRS with respect to these matters would be required until the matter is fully and finally resolved. In accordance with the Tax Sharing Agreement, we, Tyco International, and Covidien would share 31%, 27%, and 42%, respectively, of any payments made in connection with these matters.

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, financial position, and cash flows. We have reviewed the Notices of Deficiency, the relevant facts surrounding the intercompany debt transactions, relevant tax regulations, and applicable case law, and we continue to believe that we are appropriately reserved for this matter.

47-------------------------------------------------------------------------------- Table of Contents During the first nine months of fiscal 2014, we made net payments of $179 million related to pre-separation tax matters, including $198 million of indemnification payments made to Tyco International and Covidien during the quarter ended June 27, 2014 in connection with their advanced payments for expected deficiencies made to the IRS for the 2005 through 2007 audit cycle. We made net payments of $28 million related to pre-separation tax matters during the first nine months of fiscal 2013. 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. For the undisputed issues for years 2001 through 2004, it is our understanding that Tyco International expects the IRS to issue general agreement Forms 870 during fiscal 2014. The IRS commenced its audit of certain Tyco International income tax returns for the years 2005 through 2007 in fiscal 2011, and it is our understanding that Tyco International expects the IRS to issue general agreement Forms 870 during fiscal 2014. Also, during fiscal 2012, the IRS commenced its audit of our income tax returns for the years 2008 through 2010. We expect fieldwork for the 2008 through 2010 audit to conclude in fiscal 2015. Over the next twelve months, we expect to make net cash payments of approximately $32 million in connection with pre-separation tax matters.

At June 27, 2014 and September 27, 2013, we have reflected $59 million and $15 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 believe that the amounts recorded on our Condensed 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.

Off-Balance Sheet Arrangements In certain instances, we have guaranteed the performance of third parties and provided financial guarantees for uncompleted work and financial commitments. The terms of these guarantees vary with end dates ranging from fiscal 2014 through the completion of such transactions. The guarantees would be triggered in the event of nonperformance, and the potential exposure for nonperformance under the guarantees would not have a material effect on our results of operations, financial position, or cash flows.

In disposing of assets or businesses, we often provide representations, warranties, and/or indemnities to cover various risks including unknown damage to assets, environmental risks involved in the sale of real estate, liability for investigation and remediation of environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not expect that these uncertainties will have a material adverse effect on our results of operations, financial position, or cash flows.

At June 27, 2014, we had outstanding letters of credit and letters of guarantee in the amount of $316 million.

We have recorded liabilities for known indemnifications included as part of environmental liabilities. See Note 10 to the Condensed 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 48-------------------------------------------------------------------------------- Table of Contents 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 Accounting Standards Codification ("ASC") 460, Guarantees, and, accordingly, liabilities amounting to $21 million were recorded on the Condensed Consolidated Balance Sheet at June 27, 2014. See Notes 9 and 10 to the Condensed Consolidated Financial Statements for additional information.

Critical Accounting Policies and Estimates The preparation of the Condensed 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 accounting policies for revenue recognition, goodwill and other intangible assets, income taxes, pension and postretirement benefits, acquisitions, and contingent liabilities are based on, among other things, judgments and assumptions made by management. During the nine months ended June 27, 2014, there were no significant changes to these policies or to the underlying accounting assumptions and estimates used in these policies from those disclosed in the Consolidated Financial Statements and accompanying notes contained in our Annual Report on Form 10-K for the fiscal year ended September 27, 2013.

Accounting Pronouncements Recently Issued Accounting Pronouncements In May 2014, the Financial Accounting Standards Board ("FASB") issued ASC 606, Revenue from Contracts with Customers. This guidance supersedes ASC 605, Revenue Recognition, and introduces a single, comprehensive, five-step revenue recognition model. ASC 606 also enhances disclosures related to revenue recognition. ASC 606 will be effective for us in the first quarter of fiscal 2018 and allows for either a full retrospective or a modified retrospective approach at adoption. We are continuing to assess the impact of adopting ASC 606, but do not expect adoption to have a material impact on our results of operations or financial position.

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, and divestitures. 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.

49-------------------------------------------------------------------------------- Table of Contents 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 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 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 is defined as net cash provided by continuing operating activities excluding voluntary pension contributions and the cash impact of special items, minus net capital expenditures. Net capital expenditures consist of capital expenditures less proceeds from the sale of property, plant, and equipment. These items are subtracted because they represent long-term commitments. Voluntary pension contributions are excluded 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, also are 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.

50-------------------------------------------------------------------------------- Table of Contents Forward-Looking Information Certain statements in this quarterly report on Form 10-Q 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 II. Item 1A. Risk Factors" of this report and "Part I. Item 1A. Risk Factors," in our Annual Report on Form 10-K for the fiscal year ended September 27, 2013, 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; 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 risks associated with our proposed acquisition of Measurement Specialties; º • º risks associated with current and 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; 51 -------------------------------------------------------------------------------- Table of Contents 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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