TE CONNECTIVITY LTD. 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 on Form 10-Q. 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
The following discussion includes organic net sales growth (decline) which is a non-GAAP financial measure. See "Non-GAAP Financial Measure" for additional information regarding this measure.
Overview
TE Connectivity Ltd. ("TE Connectivity" or the "Company," which may be referred
to as "we," "us," or "our") is a global industrial technology leader creating a
safer, sustainable, productive, and connected future. Our broad range of
connectivity and sensor solutions, proven in the harshest environments, enable
advancements in transportation, industrial applications, medical technology,
energy, data communications, and the home.
The first quarter of fiscal 2020 included the following:
Our net sales decreased 5.3% in the first quarter of fiscal 2020 as compared to
the first quarter of fiscal 2019, due to sales declines in the Transportation
? Solutions and Communications Solutions segments. On an organic basis, our net
sales decreased 4.8% during the first quarter of fiscal 2020 as compared to the
first quarter of fiscal 2019.
? Our net sales by segment were as follows:
? Transportation Solutions-Our net sales decreased 5.9% in the first quarter of
fiscal 2020 due to sales declines in all end markets.
Industrial Solutions-Our net sales were flat in the first quarter of fiscal
? 2020 with sales declines in the industrial equipment end market offset by
increased sales in the aerospace, defense, oil, and gas, the energy, and the
medical end markets.
Communications Solutions-Our net sales decreased 13.9% in the first quarter of
? fiscal 2020 due to sales declines in both the data and devices and the
appliances end markets.
? Net cash provided by continuing operating activities was
first quarter of fiscal 2020.
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Outlook
In the second quarter of fiscal 2020, we expect our net sales to be between
$3.1 billion and $3.3 billion as compared to $3.4 billion in the second quarter
of fiscal 2019, with sales declines in all segments. Additional information
regarding expectations for our reportable segments for the second quarter of
fiscal 2020 as compared to the same period of fiscal 2019 is as follows:
Transportation Solutions-We expect our net sales to decrease in the automotive
? end market due primarily to declines in global automotive production. We also
expect our net sales to decline in the commercial transportation end market as
a result of continued market weakness.
Industrial Solutions-We expect our net sales to decline in the industrial
? equipment end market due to continued market weakness. This decrease is
expected to be partially offset by our net sales growth in the medical end
market.
Communications Solutions-We expect our net sales to decline in both the data
? and devices and the appliances end markets as a result of reduced demand
resulting from high inventory levels at distributors and market weakness across
all regions.
We expect diluted earnings per share from continuing operations to be in the range of$1.05 to$1.11 per share in the second quarter of fiscal 2020. This outlook reflects the negative impact of foreign currency exchange rates on net sales and earnings per share of approximately$77 million and$0.04 per share, respectively, in the second quarter of fiscal 2020 as compared to the second quarter of fiscal 2019. For fiscal 2020, we expect our net sales to be between$12.85 billion and$13.25 billion as compared to$13.4 billion in fiscal 2019. This decrease is driven by sales declines in theTransportation Solutions and Communications Solutions segments relative to fiscal 2019. Additional information regarding expectations for our reportable segments for fiscal 2020 compared to fiscal 2019 is as follows:
Transportation Solutions-We expect our net sales to decrease in the automotive
end market as a result of declines in global automotive production. However, we
? expect our content gains to partially offset the impact of the overall market
decline. We expect our net sales to decrease in the commercial transportation
end market due to market weakness.
Industrial Solutions-We expect our net sales growth in the medical and the
? aerospace, defense, oil, and gas end markets to be offset by declines in the
industrial equipment end market due primarily to reduced demand resulting from
high inventory levels at distributors.
Communications Solutions-We expect our net sales to decline in the data and
? devices and the appliances end markets due to market weakness and reduced
demand resulting from high inventory levels at distributors.
In fiscal 2020, we expect diluted earnings per share from continuing operations to be in the range of$3.23 to$3.53 per share. This outlook reflects the negative impact of foreign currency exchange rates on net sales and earnings per share of approximately$209 million and$0.11 per share, respectively, in fiscal 2020 as compared to fiscal 2019.
The above outlook is based on foreign currency exchange rates and commodity prices that are consistent with current levels.
We are monitoring the current macroeconomic environment and its potential
effects on our customers and the end markets we serve. We continue to closely
manage our costs in line with economic conditions. Additionally, we are managing
our capital resources and monitoring capital availability to ensure that we have
sufficient resources to fund future capital needs. See further discussion in
"Liquidity and Capital Resources."
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Acquisitions
During the first quarter of fiscal 2020, we acquired two businesses for a
combined cash purchase price of
Pending Acquisition
During fiscal 2019, we entered into a business combination agreement and
commenced a voluntary public tender offer for all outstanding shares of First
Sensor AG ("First Sensor"), a provider of sensing solutions based in Germany .
The offer was accepted for approximately 72% of First Sensor's shares. The
transaction, including the assumption of First Sensor's outstanding net debt, is
valued at approximately €330 million, based on the tendered shares and an
estimated premium for untendered shares. Completion of the offer will be subject
to customary closing conditions, including receipt of any outstanding regulatory
approvals. We expect to complete the transaction in fiscal 2020.
Results of Operations
The following table presents our net sales and the percentage of total net sales
by segment:
For the
Quarters Ended
December 27, December 28,
2019 2018
($ in millions)
Transportation Solutions $ 1,868 59 % $ 1,986 59 %
Industrial Solutions 927 29 928 28
Communications Solutions 373 12 433 13
Total $ 3,168 100 % $ 3,347 100 %
The following table provides an analysis of the change in our net sales by segment:
Changes in Net Sales for the Quarter Ended
versus Net Sales for the Quarter Ended
Net Sales Organic Net Sales
Growth (Decline) Growth (Decline) Translation Acquisitions
($ in millions)
Transportation Solutions $ (118) (5.9) % $ (113) (5.6) % $ (30) $ 25
Industrial Solutions (1) (0.1) 11 1.2 (12) -
Communications Solutions (60) (13.9) (59) (13.7) (1) -
Total $ (179) (5.3) % $ (161) (4.8) % $ (43) $ 25
Net sales decreased $179 million , or 5.3%, in the first quarter of fiscal 2020
as compared to the first quarter of fiscal 2019. The decrease in net sales
resulted from organic net sales declines of 4.8% and the negative impact of
foreign currency translation of 1.2% due to the weakening of certain foreign
currencies, partially offset by sales contributions from acquisitions of 0.7%.
Price erosion adversely affected organic net sales by $41 million in the first
quarter of fiscal 2020.
See further discussion of net sales below under "Segment Results."
Net Sales byGeographic Region . Our business operates in three geographic regions-Europe /Middle East /Africa ("EMEA"),Asia-Pacific and theAmericas -and our results of operations are influenced by changes in foreign currency exchange rates. Increases or decreases in the value of theU.S. dollar, compared to other currencies, will directly affect our reported results as we translate those currencies intoU.S. dollars at the end of each fiscal period. 28
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Approximately 60% of our net sales were invoiced in currencies other than the
The following table presents our net sales and the percentage of total net sales by geographic region(1):
For the
Quarters Ended
December 27, December 28,
2019 2018
($ in millions)
EMEA $ 1,097 35 % $ 1,171 35 %
Asia-Pacific 1,113 35 1,173 35
Americas 958 30 1,003 30
Total $ 3,168 100 % $ 3,347 100 %
(1) Net sales to external customers are attributed to individual countries based
on the legal entity that records the sale.
The following table provides an analysis of the change in our net sales by
geographic region:
Change in Net Sales for the Quarter Ended December 27, 2019
versus Net Sales for the Quarter Ended December 28, 2018
Net Sales Organic Net Sales
Growth (Decline) Growth (Decline) Translation Acquisitions
($ in millions)
EMEA $ (74) (6.3) % $ (54) (4.5) % $ (31) $ 11
Asia-Pacific (60) (5.1) (53) (4.5) (7) -
Americas (45) (4.5) (54) (5.4) (5) 14
Total $ (179) (5.3) % $ (161) (4.8) % $ (43) $ 25
Cost of Sales and Gross Margin
The following table presents cost of sales and gross margin information:
For the
Quarters Ended
December 27, December 28,
2019 2018 Change
($ in millions)
Cost of sales $ 2,138 $ 2,233 $ (95)
As a percentage of net sales 67.5 % 66.7 %
Gross margin $ 1,030 $ 1,114 $ (84)
As a percentage of net sales 32.5 % 33.3 %
Gross margin decreased $84 million in the first quarter of fiscal 2020 primarily
as a result of lower volume and price erosion, partially offset by lower
material costs. Gross margin as a percentage of net sales decreased to 32.5% in
the first quarter of fiscal 2020 from 33.3% in the first quarter of fiscal 2019.
We use a wide variety of raw materials in the manufacture of our products. Cost
of sales and gross margin are subject to variability in raw material prices
which continue to fluctuate for many of the raw materials we use, including
copper, gold, and silver. We expect to purchase approximately 175 million pounds
of copper, 125,000 troy ounces of gold,
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and 2.4 million troy ounces of silver in fiscal 2020. The following table presents the average prices incurred related to copper, gold, and silver:
For the
Quarters Ended
December 27, December 28,
Measure 2019 2018
Copper Lb. $ 2.84 $ 2.88
Gold Troy oz. 1,354 1,293
Silver Troy oz. 16.26 16.60
Operating Expenses
The following table presents operating expense information:
For the
Quarters Ended
December 27, December 28,
2019 2018 Change
($ in millions)Selling, general, and administrative expenses $ 367 $ 389$ (22) As a percentage of net sales 11.6 %
11.6 %
Restructuring and other charges, net $ 24 $ 75$ (51) Selling, General, and Administrative Expenses. Selling, general, and administrative expenses decreased$22 million in the first quarter of fiscal 2020 from the first quarter of fiscal 2019 due primarily to cost control measures and savings attributable to restructuring actions as well as reduced selling expenses. Selling, general, and administrative expenses as a percentage of net sales was 11.6% in both the first quarters of fiscal 2020 and 2019. Restructuring and Other Charges, Net. We are committed to continuous productivity improvements, and we evaluate opportunities to simplify our global manufacturing footprint, migrate facilities to lower-cost regions, reduce fixed costs, and eliminate excess capacity. These initiatives are designed to help us maintain our competitiveness in the industry, improve our operating leverage, and position us for future growth. During fiscal 2020 and 2019, we initiated restructuring programs associated with footprint consolidation and structural improvements across all segments. In connection with these initiatives, we incurred net restructuring charges of$24 million during the first quarter of fiscal 2020, of which$15 million related to the fiscal 2020 restructuring program. Annualized cost savings related to the fiscal 2020 actions commenced during the first quarter of fiscal 2020 are expected to be approximately$20 million and are expected to be realized by the end of fiscal 2022. Cost savings will be reflected primarily in cost of sales and selling, general, and administrative expenses. For fiscal 2020, we expect total restructuring charges to be approximately$200 million to$250 million and total spending, which will be funded with cash from operations, to be approximately$220 million .
See Note 2 to the Condensed Consolidated Financial Statements for additional information regarding net restructuring and other charges.
Operating Income
The following table presents operating income and operating margin information:
For the
Quarters Ended
December 27, December 28,
2019 2018 Change
($ in millions)
Operating income $ 471 $ 484 $ (13)
Operating margin 14.9 % 14.5 %
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Operating income included the following:
For the
Quarters Ended
December 27, December 28,
2019 2018
(in millions)
Acquisition-related charges:
Acquisition and integration costs $ 7 $ 5
Charges associated with the amortization of
acquisition-related fair value adjustments - 1
7 6
Restructuring and other charges, net 24 75
Total $ 31 $ 81
See discussion of operating income below under "Segment Results."
Non-Operating Items
The following table presents select non-operating information:
For the
Quarters Ended
December 27, December 28,
2019 2018 Change
($ in millions)
Interest expense $ 12 $ 27 $ (15)
Income tax expense $ 447 $ 78 $ 369
Effective tax rate 95.1 % 16.9 %
Income (loss) from discontinued operations, net of
income taxes $ 3 Interest Expense. Interest expense decreased$15 million in the first quarter of fiscal 2020 as compared to the first quarter of fiscal 2019 due primarily to the cross-currency swap program that hedges our net investment in certain foreign operations. Under the terms of these contracts, we receive interest inU.S. dollars at a weighted-average rate of 2.76% per annum and pay no interest. See Note 11 to the Condensed Consolidated Financial Statements for additional information regarding our cross-currency swap program. Income Taxes. See Note 13 to the Condensed Consolidated Financial Statements for discussion of items impacting income tax expense and the effective tax rate for the first quarters of fiscal 2020 and 2019, including the Switzerland Federal Act on Tax Reform and AHV Financing. Income (Loss) from Discontinued Operations, Net of Income Taxes. During the first quarter of fiscal 2019, we sold ourSubsea Communications ("SubCom") business for net cash proceeds of$288 million and incurred a pre-tax loss on sale of$96 million . The SubCom business met the held for sale and discontinued operations criteria and was reported as such in all periods presented on the Condensed Consolidated Financial Statements. Prior to reclassification to discontinued operations, the SubCom business was included in the Communications Solutions segment. The net sales of the business were$41 million in the first quarter of fiscal 2019 which represented one month of activity. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding discontinued operations. 31 Table of Contents Segment Results Transportation Solutions
For the
Quarters Ended
December 27, December 28,
2019 2018
($ in millions)
Automotive $ 1,405 75 % $ 1,469 74 %
Commercial transportation 258 14 297 15
Sensors 205 11 220 11
Total $ 1,868 100 % $ 1,986 100 %
Industry end market information is presented consistently with our internal (1) management reporting and may be revised periodically as management deems
necessary.
The following table provides an analysis of the change in the Transportation Solutions segment's net sales by industry end market:
Change in Net Sales for the Quarter Ended
versus Net Sales for
the Quarter Ended
Net Sales Organic Net Sales
Growth (Decline) Growth (Decline) Translation Acquisitions
($ in millions)
Automotive $ (64) (4.4) % $ (43) (2.9) % $ (21) $ -
Commercial transportation (39) (13.1) (45) (15.6) (7) 13
Sensors (15) (6.8) (25) (11.3) (2) 12
Total $ (118) (5.9) % $ (113) (5.6) % $ (30) $ 25
Net sales in the Transportation Solutions segment decreased $118 million , or
5.9%, in the first quarter of fiscal 2020 from the first quarter of fiscal 2019
due to organic net sales declines of 5.6% and the negative impact of foreign
currency translation of 1.5%, partially offset by sales contributions from
acquisitions of 1.2%. Our organic net sales by industry end market were as
follows:
Automotive-Our organic net sales decreased 2.9% in the first quarter of fiscal
? 2020 due to declines in global automotive production. Organic net sales
declines were 4.4%, 3.2%, and 1.8% in the
regions, respectively.
Commercial transportation-Our organic net sales decreased 15.6% in the first
? quarter of fiscal 2020 primarily as a result of market weakness in the
and EMEA regions.
? Sensors-Our organic net sales decreased 11.3% in the first quarter of fiscal
2020 due to weakness in commercial transportation and industrial applications.
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Operating Income. The following table presents the Transportation Solutions segment's operating income and operating margin information:
For the
Quarters Ended
December 27, December 28,
2019 2018 Change
($ in millions)
Operating income $ 316 $ 332 $ (16)
Operating margin 16.9 % 16.7 %
Operating income in the Transportation Solutions segment decreased $16 million
in the first quarter of fiscal 2020 as compared to the first quarter of fiscal
2019. The Transportation Solutions segment's operating income included the
following:
For the
Quarters Ended
December 27, December 28,
2019 2018
(in millions)
Acquisition and integration costs $ 5 $ 3
Restructuring and other charges, net 4 21
Total $ 9 $ 24
Excluding these items, operating income decreased in the first quarter of fiscal
2020 primarily as a result of lower volume and price erosion, partially offset
by lower material costs.
Industrial Solutions
For the
Quarters Ended
December 27, December 28,
2019 2018
($ in millions)
Aerospace, defense, oil, and gas $ 309 33 % $ 285 31 %
Industrial equipment 263 28 315 34
Medical 179 20 168 18
Energy 176 19 160 17
Total $ 927 100 % $ 928 100 %
Industry end market information is presented consistently with our internal (1) management reporting and may be revised periodically as management deems
necessary.
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The following table provides an analysis of the change in the Industrial Solutions segment's net sales by industry end market:
Change in Net Sales for the Quarter Ended
versus Net Sales for the Quarter Ended
Net Sales Organic Net Sales
Growth (Decline) Growth (Decline) Translation
($ in millions)Aerospace, defense, oil, and gas$ 24 8.4 %
$ 27 9.4 % $ (3) Industrial equipment (52) (16.5) (47) (15.0) (5) Medical 11 6.5 12 6.9 (1) Energy 16 10.0 19 12.1 (3) Total$ (1) (0.1) %$ 11 1.2 %$ (12) In the Industrial Solutions segment, net sales were flat in the first quarter of fiscal 2020 as compared to the same period of fiscal 2019 with the negative impact of foreign currency translation of 1.3% largely offset by organic net sales growth of 1.2%. Our organic net sales by industry end market were as follows:
Aerospace, defense, oil, and gas-Our organic net sales increased 9.4% in the
? first quarter of fiscal 2020 as a result of strength in the defense, oil and
gas, and commercial aerospace markets.
Industrial equipment-Our organic net sales decreased 15.0% in the first quarter
? of fiscal 2020 due to market weakness across all regions and reduced demand
resulting from high inventory levels at distributors.
? Medical-Our organic net sales increased 6.9% in the first quarter of fiscal
2020 due primarily to strength in interventional medical applications.
? Energy-Our organic net sales increased 12.1% in the first quarter of fiscal
2020 with growth in all regions.
Operating Income. The following table presents the Industrial Solutions segment's operating income and operating margin information:
For the
Quarters Ended
December 27, December 28,
2019 2018 Change
($ in millions)
Operating income $ 115 $ 100 $ 15
Operating margin 12.4 % 10.8 %
Operating income in the Industrial Solutions segment increased $15 million in
the first quarter of fiscal 2020 as compared to the first quarter of fiscal
2019. The Industrial Solutions segment's operating income included the
following:
For the
Quarters Ended
December 27, December 28,
2019 2018
(in millions)
Acquisition-related charges:
Acquisition and integration costs $ 2 $ 2
Charges associated with the amortization of
acquisition-related fair value adjustments - 1
2 3
Restructuring and other charges, net 15 35
Total $ 17 $ 38
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Excluding these items, operating income decreased slightly in the first quarter of fiscal 2020 as compared to the first quarter of fiscal 2019.
Communications Solutions
For the
Quarters Ended
December 27, December 28,
2019 2018
($ in millions)
Data and devices $ 219 59 % $ 257 59 %
Appliances 154 41 176 41
Total $ 373 100 % $ 433 100 %
Industry end market information is presented consistently with our internal (1) management reporting and may be revised periodically as management deems
necessary.
The following table provides an analysis of the change in the Communications Solutions segment's net sales by industry end market:
Change in Net
Sales for the Quarter Ended
versus Net Sales for the Quarter Ended
Net Sales Organic Net Sales
Growth (Decline) Growth (Decline) Translation
($ in millions)
Data and devices $ (38) (14.8) % $ (38) (14.8) % $ -
Appliances (22) (12.5) (21) (11.4) (1)
Total $ (60) (13.9) % $ (59) (13.7) % $ (1)
Net sales in the Communications Solutions segment decreased$60 million , or 13.9%, in the first quarter of fiscal 2020 as compared to the first quarter of fiscal 2019 due primarily to organic net sales declines of 13.7%. Our organic net sales by industry end market were as follows:
Data and devices-Our organic net sales decreased 14.8% in the first quarter of
? fiscal 2020 as a result of reduced demand resulting from high inventory levels
at distributors and market weakness across all regions.
Appliances-Our organic net sales decreased 11.4% in the first quarter of fiscal
? 2020 due to reduced demand resulting from high inventory levels at distributors
and market declines in all regions.
Operating Income. The following table presents the Communications Solutions segment's operating income and operating margin information:
For the
Quarters Ended
December 27, December 28,
2019 2018 Change
($ in millions)
Operating income $ 40 $ 52 $ (12)
Operating margin 10.7 % 12.0 %
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Operating income in the Communications Solutions segment decreased $12 million
in the first quarter of fiscal 2020 as compared to the first quarter of fiscal
2019. The Communications Solutions segment's operating income included the
following:
For the
Quarters Ended
December 27, December 28,
2019 2018
Restructuring and other charges, net $ 5 $ 19
Excluding these items, operating income decreased in the first quarter of fiscal 2020 due primarily to lower volume and price erosion.
Liquidity and Capital Resources
Our ability to fund our future capital needs will be affected by our ability to
continue to generate cash from operations and may be affected by our ability to
access the capital markets, money markets, or other sources of funding, as well
as the capacity and terms of our financing arrangements. We believe that cash
generated from operations and, to the extent necessary, these other sources of
potential funding will be sufficient to meet our anticipated capital needs for
the foreseeable future, including the payment of $350 million of floating rate
senior notes due in fiscal 2020, the pending acquisition of First Sensor, and
cash spending related to restructuring initiatives. We may use excess cash to
purchase a portion of our common shares pursuant to our authorized share
repurchase program, to acquire strategic businesses or product lines, to pay
dividends on our common shares, or to reduce our outstanding debt. The cost or
availability of future funding may be impacted by financial market conditions.
We will continue to monitor financial markets and respond as necessary to
changing conditions.
Cash Flows from Operating Activities
In the first quarter of fiscal 2020, net cash provided by continuing operating activities increased$83 million to$411 million from$328 million in the first quarter of fiscal 2019. The increase resulted primarily from a reduction in income tax payments and lower incentive compensation payments. The amount of income taxes paid, net of refunds, during the first quarters of fiscal 2020 and 2019 was$43 million and$75 million , respectively.
Cash Flows from Investing Activities
Capital expenditures were$176 million and$210 million in the first quarters of fiscal 2020 and 2019, respectively. We expect fiscal 2020 capital spending levels to be approximately 5-6% of net sales. We believe our capital funding levels are adequate to support new programs, and we continue to invest in our manufacturing infrastructure to further enhance productivity and manufacturing capabilities.
During the first quarter of fiscal 2020, we acquired two businesses for a
combined cash purchase price of
During the first quarter of fiscal 2019, we received net cash proceeds of
Cash Flows from Financing Activities and Capitalization
Total debt atDecember 27, 2019 andSeptember 27, 2019 was$3,973 million and$3,965 million , respectively. See Note 8 to the Condensed Consolidated Financial Statements for additional information regarding debt.Tyco Electronics Group S.A. ("TEGSA") has a five-year unsecured senior revolving credit facility ("Credit Facility") with a maturity date ofNovember 2023 and total commitments of$1.5 billion . TEGSA had no borrowings under the Credit Facility atDecember 27, 2019 orSeptember 27, 2019 . 36
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The Credit Facility contains a financial ratio covenant providing that if, as of the last day of each fiscal quarter, our ratio of Consolidated Total Debt to Consolidated EBITDA (as defined in the Credit Facility) for the then most recently concluded period of four consecutive fiscal quarters exceeds 3.75 to 1.0, an Event of Default (as defined in the Credit Facility) is triggered. The Credit Facility and our other debt agreements contain other customary covenants. None of our covenants are presently considered restrictive to our operations. As ofDecember 27, 2019 , 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 Facility, TEGSA is the borrower under our senior notes and commercial paper. TEGSA's payment obligations under its senior notes, commercial paper, and Credit Facility are fully and unconditionally guaranteed by its parent,TE Connectivity Ltd.
Payments of common share dividends to shareholders were
We repurchased approximately 2 million of our common shares for$143 million and approximately 6 million of our common shares for$495 million under the share repurchase program during the first quarters of fiscal 2020 and 2019, respectively. AtDecember 27, 2019 , we had$1.4 billion of availability remaining under our share repurchase authorization. Commitments and Contingencies
Legal Proceedings
In the normal course of business, we are subject to various legal proceedings and claims, including patent infringement claims, product liability matters, employment disputes, disputes on agreements, other commercial disputes, environmental matters, antitrust claims, and tax matters, including non-income tax matters such as value added tax, sales and use tax, real estate tax, and transfer tax. Although it is not feasible to predict the outcome of these proceedings, based upon our experience, current information, and applicable law, we do not expect that the outcome of these proceedings, either individually or in the aggregate, will have a material effect on our results of operations, financial position, or cash flows.
Guarantees
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 2020 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
As discussed above, in the first quarter of fiscal 2019, we sold our SubCom business. In connection with the sale, we contractually agreed to continue to honor performance guarantees and letters of credit related to the SubCom business' projects that existed as of the date of sale. These guarantees had a combined value of approximately$1.2 billion as ofDecember 27, 2019 and are expected to expire at various dates through fiscal 2025. Also, under the terms of the definitive agreement, we are required to issue up to$300 million of new performance guarantees, subject to certain limitations, for projects entered into by the SubCom business following the sale for a period of up to three years. As ofDecember 27, 2019 , there were no such new performance guarantees outstanding. We have contractual recourse against the SubCom business if we are required to perform on any SubCom guarantees; however, based on historical experience, we do not anticipate having 37
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to perform. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding the divestiture of the SubCom business.
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, and pension are based on, among other things, judgments
and assumptions made by management. For additional information regarding these
policies and the underlying accounting assumptions and estimates used in these
policies, refer to the Consolidated Financial Statements and accompanying notes
contained in our Annual Report on Form 10-K for the fiscal year ended September
27 , 2019.There were no significant changes to this information during the first
quarter of fiscal 2020.
Accounting Pronouncements
See Note 1 to the Condensed Consolidated Financial Statements for information
regarding recently adopted accounting pronouncements including adoption of ASU
2016-02 which codified Accounting Standards Codification ("ASC") 842, Leases.
Non-GAAP Financial Measure
Organic Net Sales Growth (Decline)
We present organic net sales growth (decline) as we believe it is appropriate
for investors to consider this adjusted financial measure in addition to results
in accordance with GAAP. Organic net sales growth (decline) represents net sales
growth (decline) (the most comparable GAAP financial measure) excluding the
impact of foreign currency exchange rates, and acquisitions and divestitures
that occurred in the preceding twelve months, if any. Organic net sales growth
(decline) is a useful measure of our performance because it excludes items that
are not completely under management's control, such as the impact of changes in
foreign currency exchange rates, and items that do not reflect the underlying
growth of the company, such as acquisition and divestiture activity.
Organic net sales growth (decline) provides useful information about our results
and the trends of our business. Management uses this measure to monitor and
evaluate performance. Also, management uses this measure together with GAAP
financial measures in its decision-making processes related to the operations of
our reportable segments and our overall company. It is also a significant
component in our incentive compensation plans. We believe that investors benefit
from having access to the same financial measures that management uses in
evaluating operations. The tables presented in "Results of Operations" and
"Segment Results" provide reconciliations of organic net sales growth (decline)
to net sales growth (decline) calculated in accordance with GAAP.
Organic net sales growth (decline) is a non-GAAP financial measure and should
not be considered a replacement for results in accordance with GAAP. This
non-GAAP financial measure may not be comparable to similarly-titled measures
reported by other companies. The primary limitation of this measure is that it
excludes the financial impact of items that would otherwise either increase or
decrease our reported results. This limitation is best addressed by using
organic net sales growth (decline) in combination with net sales growth
(decline) to better understand the amounts, character, and impact of any
increase or decrease in reported amounts.
Forward-Looking Information
Certain statements in this 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,
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divestitures, the effects of competition, and the effects of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words "believe," "expect," "plan," "intend," "anticipate," "estimate," "predict," "potential," "continue," "may," and "should," or the negative of these terms or similar expressions. Forward-looking statements involve risks, uncertainties, and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. Investors should not place undue reliance on any forward-looking statements. We do not have any intention or obligation to update forward-looking statements after we file this report except as required by law.
The following and other risks, which are described in greater detail in "Part I.
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