Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the accompanying notes included elsewhere in this Annual Report. The following discussion may contain forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this Annual Report, particularly in "Risk Factors" and "Forward-Looking Information."

Our Consolidated Financial Statements have been prepared in U.S. dollars, in accordance with accounting principles generally accepted in the U.S. ("GAAP").

The following discussion includes organic net sales growth which is a non-GAAP financial measure. See "Non-GAAP Financial Measure" for additional information regarding this measure.

**Overview **

We are a global technology and manufacturing leader creating a safer, sustainable, productive, and connected future. For more than 75 years, our connectivity and sensor solutions, proven in the harshest environments, have enabled advancements in transportation, industrial applications, medical technology, energy, data communications, and the home.

Fiscal 2017 highlights included the following:

Our fiscal 2017 net sales increased 7.1% over fiscal 2016 levels due to growth in the Transportation Solutions and Industrial Solutions segments and, to a lesser degree, the Communications Solutions segment. On an organic basis, our net sales increased 6.0% in fiscal 2017 as compared to fiscal 2016.

Our net sales by segment were as follows:

Transportation Solutions—Our net sales increased 8.2% as a result of increased sales in the automotive and commercial transportation end markets and, to a lesser degree, the sensors end market.

Industrial Solutions—Our net sales increased 9.1% due to increased sales in the industrial equipment end market where we benefitted from sales contributions from recent acquisitions, partially offset by decreased sales in the aerospace, defense, oil, and gas and the energy end markets.

Communications Solutions—Our net sales increased 1.9% due primarily to sales increases in the appliances and subsea communications end markets, partially offset by sales declines in the data and devices end market resulting from the divestiture of our Circuit Protection Devices ("CPD") business in fiscal 2016.

During fiscal 2017, our shareholders approved a dividend payment to shareholders of $1.60 per share, payable in four equal quarterly installments of $0.40 beginning in the third quarter of fiscal 2017 and ending in the second quarter of fiscal 2018.

Net cash provided by continuing operating activities was $2,322 million in fiscal 2017.

**Outlook **

In the first quarter of fiscal 2018, we expect our net sales to be between $3.35 billion and $3.45 billion as compared to $3,063 million in the first quarter of fiscal 2017. We expect our net sales

to be between $13.7 billion and $14.1 billion in fiscal 2018 as compared to $13,113 million in fiscal 2017. These increases reflect sales growth in the Transportation Solutions and Industrial Solutions segments, and to a lesser degree, the Communications Solutions segment relative to the same periods of fiscal 2017.

Additional information regarding expectations for our reportable segments for the first quarter of fiscal 2018 as compared to the same period of fiscal 2017 and for fiscal 2018 compared to fiscal 2017 is as follows:

Transportation Solutions—We expect our net sales to increase in the automotive end market due primarily to increased content per vehicle and sales contributions from a recent acquisition. We expect global automotive production to be flat in the first quarter of fiscal 2018 and to increase approximately 1% in fiscal 2018. We also expect continued growth in the commercial transportation and sensors end markets.

Industrial Solutions—We expect our net sales to increase in the industrial equipment end market due primarily to continued growth in the factory automation and controls market and the medical market.

Communications Solutions—We expect our net sales growth in the appliances and the data and devices end markets to be partially offset by sales declines in the subsea communications end market.

In the first quarter of fiscal 2018, we expect diluted earnings per share from continuing operations to be in the range of $1.12 to $1.16 per share. We expect diluted earnings per share from continuing operations to be in the range of $4.78 to $4.98 per share in fiscal 2018.

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."

**Acquisitions **

During fiscal 2017, we acquired two businesses for a combined cash purchase price of $250 million, net of cash acquired.

We acquired four businesses, including the Creganna Medical group ("Creganna"), for a combined cash purchase price of $1.3 billion, net of cash acquired, during fiscal 2016.

During fiscal 2015, we acquired Measurement Specialties, Inc. ("Measurement Specialties"), a leading global designer and manufacturer of sensors and sensor-based systems. The total value paid was approximately $1.7 billion, net of cash acquired, and included $225 million for the repayment of Measurement Specialties' debt and accrued interest. Also during fiscal 2015, we acquired three additional businesses for $241 million in cash, net of cash acquired.

See Note 5 to the Consolidated Financial Statements for additional information regarding acquisitions.

**Divestiture **

During fiscal 2016, we sold our CPD business for net cash proceeds of $333 million. We recognized a pre-tax gain of $144 million on the transaction. The CPD business was reported as part of the Data and Devices business within our Communications Solutions segment.

**Results of Operations **

**Net Sales **

The following table presents our net sales and the percentage of total net sales by segment:

		Fiscal
		2017						2016						2015
		($ in millions)
Transportation Solutions		$	7,039			53	%	$	6,503			53	%	$	6,351			52	%
Industrial Solutions			3,507			27			3,215			26			3,179			26
Communications Solutions			2,567			20			2,520			21			2,703			22
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Total		$	13,113			100	%	$	12,238			100	%	$	12,233			100	%
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The following table provides an analysis of the change in our net sales compared to the prior fiscal year by segment:

		Fiscal
		2017																		2016
		Change in Net Sales versus Prior Fiscal Year																		Change in Net Sales versus Prior Fiscal Year
		Net Sales Growth						Organic Net Sales Growth						Translation			Acquisitions (Divestiture)			Net Sales Growth						Organic Net Sales Growth						Translation			Acquisitions (Divestiture)
		($ in millions)
Transportation Solutions		$	536			8.2	%	$	553			8.5	%	$	(47	)	$	30		$	152			2.4	%	$	310			4.9	%	$	(174	)	$	16
Industrial Solutions			292			9.1			50			1.6			(20	)		262			36			1.1			(89	)		(2.8	)		(63	)		188
Communications Solutions			47			1.9			133			5.4			(16	)		(70	)		(183	)		(6.8	)		(43	)		(1.6	)		(17	)		(123	)
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Total		$	875			7.1	%	$	736			6.0	%	$	(83	)	$	222		$	5			—	%	$	178			1.5	%	$	(254	)	$	81
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Net sales increased $875 million, or 7.1%, in fiscal 2017 as compared to fiscal 2016. The increase in net sales resulted from organic net sales growth of 6.0% and net sales contributions from acquisitions and a divestiture of 1.8%, partially offset by the negative impact of foreign currency translation of 0.7% due to the weakening of certain foreign currencies. Organic net sales were adversely affected by price erosion of $218 million in fiscal 2017. Fiscal 2016 included an additional week which contributed $238 million in net sales. The impact of the additional week was estimated using an average weekly sales figure for the last month of the fiscal year.

Net sales were flat in fiscal 2016 as compared to fiscal 2015. Organic net sales growth of 1.5% and net sales contributions from acquisitions and a divestiture of 0.6% were offset by the negative impact of foreign currency translation of 2.1% due to the weakening of certain foreign currencies. Organic net sales were adversely affected by price erosion of $188 million in fiscal 2016. As discussed above, the additional week contributed $238 million in net sales in fiscal 2016.

See further discussion of net sales below under "Segment Results."

Net Sales by Geographic Region. Our business operates in three geographic regions—the Americas, EMEA, and Asia–Pacific—and 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. We sell our products into approximately 150 countries, and approximately 55% of our net sales were invoiced in currencies other than the U.S. dollar in fiscal 2017. The percentage of net sales in fiscal 2017 by major currencies invoiced was as follows:

Currencies		Percentage
U.S. dollar			45	%
Euro			28
Chinese renminbi			12
Japanese yen			6
All others			9
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Total			100	%
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The following table presents our net sales and the percentage of total net sales by geographic region:

		Fiscal
		2017						2016						2015
		($ in millions)
Americas		$	4,401			34	%	$	4,199			34	%	$	4,138			34	%
EMEA			4,401			34			4,116			34			3,992			33
Asia–Pacific			4,311			32			3,923			32			4,103			33
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Total		$	13,113			100	%	$	12,238			100	%	$	12,233			100	%
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The following table provides an analysis of the change in our net sales compared to the prior fiscal year by geographic region:

		Fiscal
		2017																		2016
		Change in Net Sales versus Prior Fiscal Year																		Change in Net Sales versus Prior Fiscal Year
		Net Sales Growth						Organic Net Sales Growth						Translation			Acquisitions (Divestiture)			Net Sales Growth						Organic Net Sales Growth						Translation			Acquisitions (Divestiture)
		($ in millions)
Americas		$	202			4.8	%	$	100			2.4	%	$	6		$	96		$	61			1.5	%	$	15			0.4	%	$	(58	)	$	104
EMEA			285			6.9			139			3.4			(23	)		169			124			3.1			194			4.9			(141	)		71
Asia–Pacific			388			9.9			497			12.7			(66	)		(43	)		(180	)		(4.4	)		(31	)		(0.7	)		(55	)		(94	)
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Total		$	875			7.1	%	$	736			6.0	%	$	(83	)	$	222		$	5			—	%	$	178			1.5	%	$	(254	)	$	81
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**Cost of Sales and Gross Margin **

The following table presents cost of sales and gross margin information:

		Fiscal									Fiscal 2017 versus 2016			Fiscal 2016 versus 2015
		2017			2016			2015
		($ in millions)
Cost of sales		$	8,663		$	8,205		$	8,146		$	458		$	59
As a percentage of net sales			66.1	%		67.0	%		66.6	%		(0.9	)%		0.4	%
Gross margin		$	4,450		$	4,033	(1)	$	4,087		$	417		$	(54	)
As a percentage of net sales			33.9	%		33.0	%		33.4	%		0.9	%		(0.4	)%

(1)

Fiscal 2016 included an additional week which contributed $89 million in gross margin.

Gross margin increased $417 million in fiscal 2017 as compared to fiscal 2016 due primarily to higher volume and lower material costs, partially offset by price erosion. In fiscal 2016, gross margin decreased $54 million as compared to fiscal 2015. In fiscal 2016, gross margin included charges of $10 million from the amortization of acquisition-related fair value adjustments to acquired inventories and customer order backlog associated primarily with Creganna. In fiscal 2015, gross margin included charges of $36 million from the amortization of acquisition-related fair value adjustments to acquired inventories and customer order backlog associated primarily with Measurement Specialties. Excluding these charges, gross margin decreased in fiscal 2016 due primarily to unfavorable product mix and price erosion, partially offset by lower material costs.

Cost of sales and gross margin are subject to variability in raw material prices which continue to fluctuate for many of the raw materials used in the manufacture of our products. In fiscal 2017, we purchased approximately 188 million pounds of copper, 122,000 troy ounces of gold, and 2.6 million troy ounces of silver. The following table presents the average prices incurred related to copper, gold, and silver.

				Fiscal
		Measure		2017			2016			2015
Copper		Lb.		$	2.44		$	2.49		$	3.06
Gold		Troy oz.			1,229			1,212			1,267
Silver		Troy oz.			16.75			16.08			18.51

In fiscal 2018, we expect to purchase approximately 200 million pounds of copper, 130,000 troy ounces of gold, and 2.6 million troy ounces of silver.

**Operating Expenses **

The following table presents operating expense information:

		Fiscal									Fiscal 2017 versus 2016			Fiscal 2016 versus 2015
		2017			2016			2015
		($ in millions)
Selling, general, and administrative expenses		$	1,591		$	1,463		$	1,504		$	128		$	(41	)
As a percentage of net sales			12.1	%		12.0	%		12.3	%		0.1	%		(0.3	)%
Research, development, and engineering expenses		$	658		$	644		$	627		$	14		$	17
Acquisition and integration costs			6			22			55			(16	)		(33	)
Restructuring and other charges, net			148			2			152			146			(150	)

Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased $128 million in fiscal 2017 as compared to fiscal 2016 primarily as a result of increased incentive compensation costs, increased selling expenses to support higher sales levels, and increased costs associated with long-term expense reduction initiatives. In fiscal 2016, selling, general, and administrative expenses decreased $41 million as compared to fiscal 2015 due primarily to cost control measures and savings attributable to restructuring actions.

Acquisition and Integration Costs. We incurred acquisition and integration costs of $6 million, $22 million, and $55 million during fiscal 2017, 2016, and 2015, respectively. In fiscal 2016, acquisition and integration costs related primarily to the acquisitions of Creganna and Measurement Specialties. In fiscal 2015, acquisition and integration costs related primarily to the acquisitions of Measurement Specialties and the SEACON Group.

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 2017, we initiated a restructuring program associated with footprint consolidation related to recent acquisitions and structural improvements impacting all segments. During fiscal 2016, we initiated a restructuring program associated with headcount reductions impacting all segments and product line closures in the Communications Solutions segment. During fiscal 2015, we initiated a restructuring program associated with headcount reductions and product line closures, primarily impacting the Communications Solutions and Industrial Solutions segments.

In connection with these initiatives, we recorded net restructuring charges of $147 million, $125 million, and $93 million in fiscal 2017, 2016, and 2015, respectively. Annualized cost savings related to actions initiated in fiscal 2017 are expected to be approximately $125 million and are expected to be realized by the end of fiscal 2019. Cost savings will be reflected primarily in cost of sales and selling, general, and administrative expenses. During fiscal 2018, we expect net restructuring charges to be similar to fiscal 2017 levels, and we expect total spending, which will be funded with cash from operations, to be approximately $130 million.

During fiscal 2016, we recognized a pre-tax gain of $144 million on the sale of our CPD business.

During fiscal 2017, 2016, and 2015, we incurred net other charges of $1 million, $21 million, and $59 million, respectively, primarily in connection with the divestiture of certain businesses.

See Note 3 to the Consolidated Financial Statements for additional information regarding net restructuring and other charges.

**Operating Income **

The following table presents operating income and operating margin information:

		Fiscal									Fiscal 2017 versus 2016			Fiscal 2016 versus 2015
		2017			2016			2015
		($ in millions)
Operating income		$	2,047		$	1,902	(1)	$	1,749		$	145		$	153
Operating margin			15.6	%		15.5	%		14.3	%		0.1	%		1.2	%

(1)

Fiscal 2016 included an additional week which contributed $55 million in operating income.

Operating income included the following:

		Fiscal
		2017			2016			2015
		(in millions)
Acquisition related charges:
Acquisition and integration costs		$	6		$	22		$	55
Charges associated with the amortization of acquisition-related fair value adjustments			5			10			36
Restructuring charges related to acquisitions			—			—			3
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			11			32			94
Restructuring and other charges, net			148			2			149
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Total		$	159		$	34		$	243
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See discussion of operating income below under "Segment Results."

**Non-Operating Items **

The following table presents select non-operating information:

		Fiscal									Fiscal 2017 versus 2016			Fiscal 2016 versus 2015
		2017			2016			2015
		($ in millions)
Other expense, net		$	9		$	632		$	55		$	(623	)	$	577
Income tax expense (benefit)			255			(779	)		337			1,034			(1,116	)
Effective tax rate			13.2	%		(67.0	)%		21.4	%		80.2	%		(88.4	)%
Income from discontinued operations, net of income taxes		$	10		$	68		$	1,182		$	(58	)	$	(1,114	)

Other Expense, Net. In fiscal 2017, 2016, and 2015, we recorded net other expense primarily pursuant to the Tax Sharing Agreement with Tyco International plc ("Tyco International") and Covidien plc ("Covidien"). See Note 16 to the Consolidated Financial Statements for further information regarding net other expense.

Income Taxes. See Note 15 to the Consolidated Financial Statements for information regarding items impacting income tax expense (benefit) and the effective tax rate for fiscal 2017, 2016, and 2015.

The valuation allowance for deferred tax assets was $3,627 million and $3,096 million at fiscal year end 2017 and 2016, respectively. See Note 15 to the Consolidated Financial Statements for further information regarding the valuation allowance for deferred tax assets.

As of fiscal year end 2017, certain subsidiaries had approximately $22 billion of cumulative undistributed earnings that have been retained indefinitely and reinvested in our global manufacturing operations, including working capital; property, plant, and equipment; intangible assets; and research and development activities. See Note 15 to the Consolidated Financial Statements for additional information regarding undistributed earnings.

Income from Discontinued Operations, Net of Income Taxes. During fiscal 2015, we sold our Broadband Network Solutions ("BNS") business for $3.0 billion in cash and recognized a pre-tax gain of $1.1 billion on the transaction. During fiscal 2016, we recognized an additional pre-tax gain of $29 million on the divestiture, related primarily to pension and net working capital adjustments.

In fiscal 2006, the former shareholders of Com-Net initiated a lawsuit related to our fiscal 2001 acquisition of Com-Net. In connection with the Com-Net case, we recorded a reserve and pre-tax charges of $127 million during fiscal 2015. During fiscal 2016, we recorded pre-tax credits of $30 million, representing a release of excess reserves. These amounts were reflected in income from discontinued operations on the Consolidated Statements of Operations as the Com-Net case was associated with our former Wireless Systems business which was sold in fiscal 2009.

The BNS and Wireless Systems businesses met the discontinued operations criteria and were reported as such in all periods presented on the Consolidated Financial Statements. Prior to reclassification to discontinued operations, the BNS and Wireless Systems businesses were included in the former Network Solutions and Wireless Systems segments, respectively. See Note 4 to the Consolidated Financial Statements for additional information regarding discontinued operations.

**Segment Results **

**Transportation Solutions **

Net Sales. The following table presents the Transportation Solutions segment's net sales and the percentage of total net sales by primary industry end market(1):

		Fiscal
		2017						2016						2015
		($ in millions)
Automotive		$	5,228			74	%	$	4,912			75	%	$	4,780			75	%
Commercial transportation			997			14			825			13			820			13
Sensors			814			12			766			12			751			12
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Total		$	7,039			100	%	$	6,503			100	%	$	6,351			100	%
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(1)

Industry end market information is presented consistently with our internal 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 compared to the prior fiscal year by primary industry end market:

		Fiscal
		2017																		2016
		Change in Net Sales versus Prior Fiscal Year																		Change in Net Sales versus Prior Fiscal Year
		Net Sales Growth						Organic Net Sales Growth						Translation			Acquisition			Net Sales Growth						Organic Net Sales Growth						Translation			Acquisition
		($ in millions)
Automotive		$	316			6.4	%	$	349			7.1	%	$	(33	)	$	—		$	132			2.8	%	$	266			5.6	%	$	(134	)	$	—
Commercial transportation			172			20.8			181			21.9			(9	)		—			5			0.6			21			2.6			(16	)		—
Sensors			48			6.3			23			3.0			(5	)		30			15			2.0			23			3.1			(24	)		16
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Total		$	536			8.2	%	$	553			8.5	%	$	(47	)	$	30		$	152			2.4	%	$	310			4.9	%	$	(174	)	$	16
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Net sales in the Transportation Solutions segment increased $536 million, or 8.2%, in fiscal 2017 from fiscal 2016 primarily as a result of organic net sales growth of 8.5%. Fiscal 2016 included an additional week which contributed $130 million in net sales. Our organic net sales by primary industry end market were as follows:

Automotive—Our organic net sales increased 7.1% in fiscal 2017. The increase resulted from growth of 11.1% in the Asia–Pacific region, 5.6% in the EMEA region, and 1.4% in the Americas region. Our growth in the Asia–Pacific region was driven by increased demand in China resulting from a tax incentive program, market share gains, and increased electronification. In the EMEA region, our organic net sales growth was driven by market

growth, electronification, and new model launches. Our growth in the Americas region resulted from continued market recovery in South America.

Commercial transportation—Our organic net sales increased 21.9% in fiscal 2017 primarily as a result of growth in the heavy truck market in all regions and content gains in China.

Sensors—Our organic net sales increased 3.0% in fiscal 2017 due primarily to growth in the industrial equipment and commercial transportation markets, partially offset by declines in the data and devices market.

In fiscal 2016, net sales in the Transportation Solutions segment increased $152 million, or 2.4%, from fiscal 2015 due primarily to organic net sales growth of 4.9%, partially offset by the negative impact of foreign currency translation of 2.7%. As discussed above, the additional week contributed $130 million in net sales in fiscal 2016. Our organic net sales by primary industry end market were as follows:

Automotive—Our organic net sales increased 5.6% in fiscal 2016. The increase was due primarily to growth of 8.4% in the Asia–Pacific region and 5.9% in the EMEA region, partially offset by a decrease of 0.9% in the Americas region. In the Asia–Pacific region, our growth was driven by increased electronification and market share gains in China. In the EMEA region, our organic net sales increased due to electronification and new model launches. The Americas region was adversely impacted by market weakness in North America and macroeconomic conditions in South America.

Commercial transportation—Our organic net sales increased 2.6% in fiscal 2016 due primarily to growth in the heavy truck market in the EMEA region and China.

Sensors—Our organic net sales increased 3.1% in fiscal 2016 primarily as a result of increased sales in the automotive, aerospace and defense, and industrial equipment markets.

Operating Income. The following table presents the Transportation Solutions segment's operating income and operating margin information:

		Fiscal									Fiscal 2017 versus 2016			Fiscal 2016 versus 2015
		2017			2016			2015
		($ in millions)
Operating income		$	1,299		$	1,191		$	1,193		$	108		$	(2	)
Operating margin			18.5	%		18.3	%		18.8	%		0.2	%		(0.5	)%

In fiscal 2017, operating income in the Transportation Solutions segment increased $108 million from fiscal 2016. Operating income in the Transportation Solutions segment was flat in fiscal 2016 as

compared to fiscal 2015. The Transportation Solutions segment's operating income included the following:

		Fiscal
		2017			2016			2015
		(in millions)
Acquisition related charges:
Acquisition and integration costs		$	3		$	9		$	28
Charges associated with the amortization of acquisition-related fair value adjustments			—			—			30
Restructuring charges related to acquisitions			—			—			3
​	​	​	​	​	​	​	​	​	​	​
			3			9			61
Restructuring and other charges, net			67			46			39
​	​	​	​	​	​	​	​	​	​	​
Total		$	70		$	55		$	100
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

Excluding these items, operating income increased in fiscal 2017 primarily as a result of higher volume, partially offset by price erosion. In fiscal 2016, excluding these items, operating income decreased primarily as a result of price erosion and the negative impact of changes in foreign currency exchange rates, partially offset by lower material costs.

**Industrial Solutions **

Net Sales. The following table presents the Industrial Solutions segment's net sales and the percentage of total net sales by primary industry end market(1):

		Fiscal
		2017						2016						2015
		($ in millions)
Industrial equipment		$	1,747			50	%	$	1,419			44	%	$	1,323			42	%
Aerospace, defense, oil, and gas			1,075			31			1,100			34			1,151			36
Energy			685			19			696			22			705			22
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	3,507			100	%	$	3,215			100	%	$	3,179			100	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

(1)

Industry end market information is presented consistently with our internal management reporting and may be revised periodically as management deems necessary.

The following table provides an analysis of the change in the Industrial Solutions segment's net sales compared to the prior fiscal year by primary industry end market:

		Fiscal
		2017																		2016
		Change in Net Sales versus Prior Fiscal Year																		Change in Net Sales versus Prior Fiscal Year
		Net Sales Growth						Organic Net Sales Growth						Translation			Acquisitions			Net Sales Growth						Organic Net Sales Growth						Translation			Acquisitions
		($ in millions)
Industrial equipment		$	328			23.1	%	$	77			5.5	%	$	(10	)	$	261		$	96			7.3	%	$	(69	)		(5.2	)%	$	(14	)	$	179
Aerospace, defense, oil, and gas			(25	)		(2.3	)		(19	)		(1.7	)		(7	)		1			(51	)		(4.4	)		(45	)		(3.8	)		(15	)		9
Energy			(11	)		(1.6	)		(8	)		(1.0	)		(3	)		—			(9	)		(1.3	)		25			3.6			(34	)		—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	292			9.1	%	$	50			1.6	%	$	(20	)	$	262		$	36			1.1	%	$	(89	)		(2.8	)%	$	(63	)	$	188
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

In the Industrial Solutions segment, net sales increased $292 million, or 9.1%, in fiscal 2017 from fiscal 2016 due to sales contributions from acquisitions of 8.1% and organic net sales growth of 1.6%, partially offset by the negative impact of foreign currency translation of 0.6%. Fiscal 2016 included an

additional week which contributed $65 million in net sales. Our organic net sales by primary industry end market were as follows:

Industrial equipment—Our organic net sales increased 5.5% in fiscal 2017 due primarily to growth in the factory automation and controls market and the medical market.

Aerospace, defense, oil, and gas—Our organic net sales decreased 1.7% in fiscal 2017 due to continued weakness in the oil and gas market and declines in our sales into the commercial aerospace market, partially offset by growth in the defense market.

Energy—Our organic net sales decreased 1.0% in fiscal 2017 due to declines in the EMEA and Americas regions, partially offset by growth in the Asia–Pacific region.

Net sales in the Industrial Solutions segment increased $36 million, or 1.1%, in fiscal 2016 as compared to fiscal 2015 due to sales contributions from acquisitions of 5.9%, partially offset by organic net sales declines of 2.8% and the negative impact of foreign currency translation of 2.0%. As discussed above, the additional week contributed $65 million in net sales in fiscal 2016. Our organic net sales by primary industry end market were as follows:

Industrial equipment—Our organic net sales decreased 5.2% in fiscal 2016 as a result of weakness in industrial markets, particularly in the Americas and Asia–Pacific regions.

Aerospace, defense, oil, and gas—Our organic net sales decreased 3.8% in fiscal 2016. The decrease was attributable to declines in the oil and gas market, partially offset by growth in the commercial aerospace market and, to a lesser degree, the defense market. In the oil and gas market, our organic net sales decrease was due to continued market weakness resulting from declines in oil prices. In the commercial aerospace market, our organic net sales increased due primarily to customer growth and market share gains.

Energy—Our organic net sales increased 3.6% in fiscal 2016 primarily as a result of growth in the Americas and EMEA regions.

Operating Income. The following table presents the Industrial Solutions segment's operating income and operating margin information:

		Fiscal									Fiscal 2017 versus 2016			Fiscal 2016 versus 2015
		2017			2016			2015
		($ in millions)
Operating income		$	364		$	343		$	352		$	21		$	(9	)
Operating margin			10.4	%		10.7	%		11.1	%		(0.3	)%		(0.4	)%

Operating income in the Industrial Solutions segment increased $21 million in fiscal 2017 as compared to fiscal 2016 and decreased $9 million in fiscal 2016 as compared to fiscal 2015. The Industrial Solutions segment's operating income included the following:

		Fiscal
		2017			2016			2015
		(in millions)
Acquisition related charges:
Acquisition and integration costs		$	3		$	13		$	27
Charges associated with the amortization of acquisition-related fair value adjustments			5			10			6
​	​	​	​	​	​	​	​	​	​	​
			8			23			33
Restructuring and other charges, net			73			31			44
​	​	​	​	​	​	​	​	​	​	​
Total		$	81		$	54		$	77
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

Excluding these items, operating income increased in fiscal 2017 primarily as a result of higher volume, partially offset by price erosion. In fiscal 2016, excluding these items, operating income decreased due primarily to unfavorable product mix and price erosion, partially offset by lower material costs.

**Communications Solutions **

Net Sales. The following table presents the Communications Solutions segment's net sales and the percentage of total net sales by primary industry end market(1):

		Fiscal
		2017						2016						2015
		($ in millions)
Data and devices		$	963			38	%	$	1,020			40	%	$	1,357			50	%
Subsea communications			928			36			885			35			709			26
Appliances			676			26			615			25			637			24
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	2,567			100	%	$	2,520			100	%	$	2,703			100	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

(1)

Industry end market information is presented consistently with our internal 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 compared to the prior fiscal year by primary industry end market:

		Fiscal
		2017																		2016
		Change in Net Sales versus Prior Fiscal Year																		Change in Net Sales versus Prior Fiscal Year
		Net Sales Growth						Organic Net Sales Growth						Translation			Divestiture			Net Sales Growth						Organic Net Sales Growth						Translation			Divestiture
		($ in millions)
Data and devices		$	(57	)		(5.6	)%	$	23			2.3	%	$	(10	)	$	(70	)	$	(337	)		(24.8	)%	$	(208	)		(17.8	)%	$	(6	)	$	(123	)
Subsea communications			43			4.9			43			4.9			—			—			176			24.8			176			24.8			—			—
Appliances			61			9.9			67			10.8			(6	)		—			(22	)		(3.5	)		(11	)		(1.8	)		(11	)		—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	47			1.9	%	$	133			5.4	%	$	(16	)	$	(70	)	$	(183	)		(6.8	)%	$	(43	)		(1.6	)%	$	(17	)	$	(123	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

Net sales in the Communications Solutions segment increased $47 million, or 1.9%, in fiscal 2017 as compared to fiscal 2016 as a result of organic net sales growth of 5.4%, partially offset by sales declines resulting from a divestiture of 2.8% and the negative impact of foreign currency translation of

0.7%. Fiscal 2016 included an additional week which contributed $43 million in net sales. Our organic net sales by primary industry end market were as follows:

Data and devices—Our organic net sales increased 2.3% in fiscal 2017 primarily as a result of increased sales to cloud infrastructure customers, partially offset by sales declines resulting from weakness in the wireless market.

Subsea communications—Our organic net sales increased 4.9% in fiscal 2017 as a result of increased project activity.

Appliances—Our organic net sales increased 10.8% in fiscal 2017 due primarily to growth in the Asia–Pacific region as a result of increased market demand and share gains.

In fiscal 2016, net sales in the Communications Solutions segment decreased $183 million, or 6.8%, as compared to fiscal 2015 due to sales declines resulting from a divestiture of 4.6%, organic net sales declines of 1.6%, and the negative impact of foreign currency translation of 0.6%. As discussed above, the additional week contributed $43 million in net sales in fiscal 2016. Our organic net sales by primary industry end market were as follows:

Data and devices—Our organic net sales decreased 17.8% in fiscal 2016 as a result of the strategic exit of certain low margin product lines and market weakness in all regions.

Subsea communications—Our organic net sales increased 24.8% in fiscal 2016 due to increased project activity.

Appliances—Our organic net sales decreased 1.8% in fiscal 2016 due primarily to high inventory levels at distributors in the first half of the year and lower demand in the Asia–Pacific and Americas regions, partially offset by growth in the EMEA region.

Operating Income. The following table presents the Communications Solutions segment's operating income and operating margin information:

		Fiscal									Fiscal 2017 versus 2016			Fiscal 2016 versus 2015
		2017			2016			2015
		($ in millions)
Operating income		$	384		$	368		$	204		$	16		$	164
Operating margin			15.0	%		14.6	%		7.5	%		0.4	%		7.1	%

In the Communications Solutions segment, operating income increased $16 million in fiscal 2017 as compared to fiscal 2016 and increased $164 million in fiscal 2016 as compared to fiscal 2015. The Communications Solutions segment's operating income included the following:

		Fiscal
		2017			2016			2015
		(in millions)
Restructuring and other charges (credits), net		$	8		$	(75	)(1)	$	66

(1)

Includes pre-tax gain of $144 million on the sale of our CPD business during fiscal 2016.

Excluding these items, operating income increased in fiscal 2017 due primarily to higher volume and improved manufacturing productivity, partially offset by price erosion. In fiscal 2016, excluding these items, operating income increased as a result of lower material costs and savings attributable to restructuring actions, partially offset by the impact of unfavorable product mix, 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. 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, including through the possible repurchase of our debt in accordance with applicable law. Payment of our $708 million of 6.55% senior notes due in October 2017 was made after fiscal year end 2017. 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.

As of fiscal year end 2017, our cash and cash equivalents were held in subsidiaries which are located in various countries throughout the world. Under current applicable laws, substantially all of these amounts can be repatriated to Tyco Electronics Group S.A. ("TEGSA"), our Luxembourg subsidiary, which is the obligor of substantially all of our debt, and to TE Connectivity Ltd., our Swiss parent company; however, the repatriation of these amounts could subject us to additional tax expense. We provide for tax liabilities on the Consolidated Financial Statements with respect to amounts that we expect to repatriate; however, no tax liabilities are recorded for amounts that we consider to be retained indefinitely and reinvested in our global manufacturing operations. As of fiscal year end 2017, we had approximately $6.3 billion of cash, cash equivalents, and intercompany deposits, principally in our subsidiaries, that we have the ability to distribute to TEGSA and TE Connectivity Ltd. but we consider to be permanently reinvested. We estimate that approximately $1.2 billion of tax expense would be recognized on the Consolidated Financial Statements if our intention to permanently reinvest these amounts were to change. Our current plans do not demonstrate a need to repatriate cash, cash equivalents, and intercompany deposits that are designated as permanently reinvested in order to fund our operations, including investing and financing activities.

**Cash Flows from Operating Activities **

Net cash provided by continuing operating activities increased $278 million to $2,322 million in fiscal 2017 as compared to $2,044 million in fiscal 2016. The increase resulted primarily from higher pre-tax income levels, an increase in accrued and other current liabilities related to employee compensation, and a decrease in net payments related to pre-separation tax matters, partially offset by the impact of increased sales on accounts receivable levels.

Net cash provided by continuing operating activities was $2,044 million in fiscal 2016 as compared to $1,636 million in fiscal 2015. The increase resulted primarily from the favorable effects of changes in accounts receivable and inventory levels, partially offset by an increase in net payments related to pre-separation tax matters.

The amount of income taxes paid, net of refunds, during fiscal 2017, 2016, and 2015 was $323 million, $806 million, and $350 million, respectively. In fiscal 2017, 2016, and 2015, these amounts included refunds of $23 million, payments of $471 million, and payments of $47 million, respectively, related to pre-separation tax matters. During fiscal 2016 and 2015, we received net reimbursements of $321 million and $7 million, respectively, from Tyco International and Covidien pursuant to their indemnifications for pre-separation tax matters.

See Note 12 to the Consolidated Financial Statements for further information regarding the Tax Sharing Agreement associated with pre-separation tax matters. For additional information regarding payments related to pre-separation tax matters, see Note 15 to the Consolidated Financial Statements.

Pension contributions in fiscal 2017, 2016, and 2015 were $48 million, $67 million, and $66 million, respectively. We expect pension contributions to be $62 million in fiscal 2018, before consideration of any voluntary contributions. There were no voluntary pension contributions in fiscal 2017, 2016, or 2015.

**Cash Flows from Investing Activities **

Capital expenditures were $702 million, $628 million, and $600 million in fiscal 2017, 2016, and 2015, respectively. We expect fiscal 2018 capital spending levels to be approximately 5% of net sales. We believe our capital funding levels are adequate to support new programs, and we continue to invest in our manufacturing infrastructure to further enhance productivity and manufacturing capabilities.

We acquired two businesses during fiscal 2017 for a combined cash purchase price of $250 million, net of cash acquired. During fiscal 2016, we acquired four businesses, including Creganna, for a combined cash purchase price of $1.3 billion, net of cash acquired. During fiscal 2015, we acquired Measurement Specialties. The total value paid for the transaction was approximately $1.7 billion, net of cash acquired, and included $225 million for the repayment of Measurement Specialties' debt and accrued interest. Also during fiscal 2015, we acquired three additional businesses for $241 million in cash, net of cash acquired. See Note 5 to the Consolidated Financial Statements for additional information regarding acquisitions.

During fiscal 2016, we received net cash proceeds of $333 million related to the sale of our CPD business. See Note 3 to the Consolidated Financial Statements for further information. We received net cash proceeds of $3.0 billion related to the sale of our BNS business during fiscal 2015. See Note 4 to the Consolidated Financial Statements for further information.

**Cash Flows from Financing Activities and Capitalization **

Total debt at fiscal year end 2017 and 2016 was $4,344 million and $4,070 million, respectively. See Note 11 to the Consolidated Financial Statements for additional information regarding debt.

During August 2017, TEGSA, our 100%-owned subsidiary, issued $400 million aggregate principal amount of 3.125% senior notes due August 2027 and $100 million aggregate principal amount of 3.45% senior notes due August 2024. The 3.45% senior notes were issued under an existing indenture under which TEGSA had previously issued $250 million aggregate principal amount. The notes are TEGSA's unsecured senior obligations and rank equally in right of payment with all existing and any future senior indebtedness of TEGSA and senior to any subordinated indebtedness that TEGSA may incur.

TEGSA has a five-year unsecured senior revolving credit facility ("Credit Facility") with a maturity date of December 2020 and total commitments of $1,500 million. TEGSA had no borrowings under the Credit Facility at fiscal year end 2017 or 2016.

The Credit Facility contains a financial ratio covenant providing that if, as of the last day of each fiscal quarter, our ratio of Consolidated Total Debt to Consolidated EBITDA (as defined in the Credit Facility) for the then most recently concluded period of four consecutive fiscal quarters exceeds 3.75 to 1.0, an Event of Default (as defined in the Credit Facility) is triggered. The Credit Facility and our other debt agreements contain other customary covenants. None of our covenants are presently considered restrictive to our operations. As of fiscal year end 2017, we were in compliance with all of our debt covenants and believe that we will continue to be in compliance with our existing covenants for the foreseeable future.

Periodically, TEGSA issues commercial paper to U.S. institutional accredited investors and qualified institutional buyers in accordance with available exemptions from the registration requirements of the Securities Act of 1933 as part of our ongoing effort to maintain financial flexibility

and to potentially decrease the cost of borrowings. Borrowings under the commercial paper program are backed by the Credit Facility.

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 $546 million, $509 million, and $502 million in fiscal 2017, 2016, and 2015, respectively. See Note 18 to the Consolidated Financial Statements for additional information regarding dividends on our common shares.

Future dividends on our common shares, if any, must be approved by our shareholders. In exercising their discretion to recommend to the shareholders that such dividends be approved, our board of directors will consider our results of operations, cash requirements and surplus, financial condition, statutory requirements of applicable law, contractual restrictions, and other factors that they may deem relevant.

During fiscal 2016 and 2015, our board of directors authorized increases of $1.0 billion and $3.0 billion, respectively, in the share repurchase program. We repurchased approximately 8 million of our common shares for $621 million, 43 million of our common shares for $2,610 million, and 18 million of our common shares for $1,163 million under the share repurchase program during fiscal 2017, 2016, and 2015, respectively. At fiscal year end 2017, we had $480 million of availability remaining under our share repurchase authorization.

**Commitments and Contingencies **

The following table provides a summary of our contractual obligations and commitments for debt, minimum lease payment obligations under non-cancelable leases, and other obligations at fiscal year end 2017:

					Payments Due by Fiscal Year
		Total			2018			2019			2020			2021			2022			Thereafter
		(in millions)
Debt(1)		$	4,356		$	710		$	580		$	—		$	250		$	500		$	2,316
Interest payments on debt(2)			1,239			146			119			109			103			88			674
Operating leases			454			110			85			62			51			42			104
Purchase obligations(3)			485			460			12			10			—			—			3
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total contractual cash obligations(4)(5)(6)		$	6,534		$	1,426		$	796		$	181		$	404		$	630		$	3,097
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

(1)

Debt represents principal payments. See Note 11 to the Consolidated Financial Statements for additional information regarding debt.

(2)

Interest payments exclude the impact of our interest rate swaps.

(3)

Purchase obligations consist primarily of commitments for purchases of goods and services.

(4)

The above table does not reflect unrecognized income tax benefits of $501 million and related accrued interest and penalties of $60 million, the timing of which is uncertain. See Note 15 to the Consolidated Financial Statements for additional information regarding unrecognized income tax benefits, interest, and penalties.

(5)

The above table does not reflect pension obligations to certain employees and former employees. We are obligated to make contributions to our pension plans; however, we are unable to determine the amount of plan contributions due to the inherent uncertainties of obligations of this type, including timing, interest rate charges, investment performance, and amounts of benefit payments. We expect to contribute $62 million to pension plans in fiscal 2018, before consideration of any voluntary contributions. See Note 14 to the

Consolidated Financial Statements for additional information regarding these plans and our estimates of future contributions and benefit payments.

(6)

Other long-term liabilities of $482 million are excluded from the above table as we are unable to estimate the timing of payment for these items.

**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.

**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 2018 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 fiscal year end 2017, we had outstanding letters of credit, letters of guarantee, and surety bonds of $298 million.

**Critical Accounting Policies and Estimates **

The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses. Our significant accounting policies are summarized in Note 2 to the Consolidated Financial Statements. We believe the following accounting policies are the most critical as they require significant judgments and assumptions that involve inherent risks and uncertainties. Management's estimates are based on the relevant information available at the end of each period.

**Revenue Recognition **

Our revenue recognition policies are in accordance with Accounting Standards Codification ("ASC") 605, Revenue Recognition. Our revenues are generated principally from the sale of our products. Revenue from the sale of products is recognized at the time title and the risks and rewards of ownership pass to the customer. This generally occurs when the products reach the shipping point, the sales price is fixed and determinable, and collection is reasonably assured. A reserve for estimated returns is established at the time of sale based on historical return experience and is recorded as a reduction of sales. Other allowances include customer quantity and price discrepancies. A reserve for

other allowances is generally established at the time of sale based on historical experience and also is recorded as a reduction of sales.

Contract revenues for construction related projects, which are generated in the Communications Solutions segment, are recorded primarily using the percentage-of-completion method. Profits recognized on contracts in process are based upon estimated contract revenue and related cost to complete. Percentage-of-completion is measured based on the ratio of actual costs incurred to total estimated costs. Revisions in cost estimates as contracts progress have the effect of increasing or decreasing profits in the current period. Provisions for anticipated losses are made in the period in which they first become determinable. In addition, provisions for credit losses related to unbilled receivables on construction related projects are recorded as reductions of revenue in the period in which they first become determinable.

**Goodwill and Other Intangible Assets **

Intangible assets include both indeterminable-lived residual goodwill and determinable-lived identifiable intangible assets. Intangible assets with determinable lives primarily include intellectual property, consisting of patents, trademarks, and unpatented technology, and customer relationships. Recoverability estimates range from 1 to 50 years and costs are generally amortized on a straight-line basis. Evaluations of the remaining useful lives of determinable-lived intangible assets are performed on a periodic basis and when events and circumstances warrant.

We test for goodwill impairment at the reporting unit level. A reporting unit is generally an operating segment or one level below an operating segment that constitutes a business for which discrete financial information is available and regularly reviewed by segment management. At fiscal year end 2017, we had six reporting units, five of which contained goodwill. There were two reporting units in each of our three segments. When changes occur in the composition of one or more reporting units, goodwill is reassigned to the reporting units affected based on their relative fair values. We review our reporting unit structure each year as part of our annual goodwill impairment test, or more frequently based on changes in our structure.

Goodwill impairment is evaluated by comparing the carrying value of each reporting unit to its fair value on the first day of the fourth fiscal quarter of each year or whenever we believe a triggering event requiring a more frequent assessment has occurred. In assessing the existence of a triggering event, management relies on a number of reporting unit-specific factors including operating results, business plans, economic projections, anticipated future cash flows, transactions, and market place data. There are inherent uncertainties related to these factors and management's judgment in applying these factors to the impairment analysis.

When testing for goodwill impairment, we perform a step I goodwill impairment test to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, goodwill may be impaired and a step II goodwill impairment test is performed to measure the amount of impairment, if any. In the step II goodwill impairment test, we compare the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. The implied fair value of goodwill is determined in a manner consistent with how goodwill is recognized in a business combination. We allocate the fair value of a reporting unit to the assets and liabilities of that unit, including intangible assets, as if the reporting unit had been acquired in a business combination. Any excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.

Fair value estimates used in the step I goodwill impairment tests are calculated using an income approach based on the present value of future cash flows of each reporting unit. The income approach

generally has been supported by guideline analyses (a market approach). These approaches incorporate a number of assumptions including future growth rates, discount rates, income tax rates, and market activity in assessing fair value and are reporting unit specific. Changes in economic and operating conditions impacting these assumptions could result in goodwill impairments in future periods.

We completed our annual goodwill impairment test in the fourth quarter of fiscal 2017 and determined that no impairment existed.

**Income Taxes **

In determining income for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of the recoverability of certain deferred tax assets, which arise from temporary differences between the income tax return and financial statement recognition of revenue and expense.

In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent years, and our forecast of taxable income. In estimating future taxable income, we develop assumptions including the amount of pre-tax operating income in various tax jurisdictions, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.

We currently have recorded significant valuation allowances that we intend to maintain until it is more likely than not the deferred tax assets will be realized. Our income tax expense recorded in the future will be reduced to the extent of decreases in our valuation allowances. The realization of our remaining deferred tax assets is dependent primarily on future taxable income in the appropriate jurisdictions. Any reduction in future taxable income including any future restructuring activities may require that we record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in such period and could have a significant impact on our future earnings.

Changes in tax laws and rates also could affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes that would have a material effect on our results of operations, financial position, or cash flows.

In addition, the calculation of our tax liabilities includes estimates for uncertainties in the application of complex tax regulations across multiple global jurisdictions where we conduct our operations. Under the uncertain tax position provisions of ASC 740, Income Taxes, we recognize liabilities for tax and related interest for issues in tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and related interest will be due. These tax liabilities and related interest are reflected net of the impact of related tax loss carryforwards, as such tax loss carryforwards will be applied against these tax liabilities and will reduce the amount of cash tax payments due upon the eventual settlement with the tax authorities. These estimates may change due to changing facts and circumstances. Due to the complexity of these uncertainties, the ultimate resolution may result in a settlement that differs from our current estimate of the tax liabilities and related interest. These tax liabilities and related interest are recorded in income taxes and accrued and other current liabilities on the Consolidated Balance Sheets.

**Pension Liabilities **

Our defined benefit pension plan expense and obligations are developed from actuarial assumptions. The funded status of our plans is recognized on the Consolidated Balance Sheets and is measured as the difference between the fair value of plan assets and the projected benefit obligation at

the measurement date. The projected benefit obligation represents the actuarial present value of benefits projected to be paid upon retirement factoring in estimated future compensation levels. The fair value of plan assets represents the current market value of cumulative company and participant contributions made to irrevocable trust funds, held for the sole benefit of participants, which are invested by the trustee of the funds. The benefits under our defined benefit pension plans are based on various factors, such as years of service and compensation.

Net periodic pension benefit cost is based on the utilization of the projected unit credit method of calculation and is charged to earnings on a systematic basis over the expected average remaining service lives of current participants.

Two critical assumptions in determining pension expense and obligations are the discount rate and expected long-term return on plan assets. We evaluate these assumptions at least annually. Other assumptions reflect demographic factors such as retirement, mortality, and employee turnover. These assumptions are evaluated periodically and updated to reflect our actual experience. Actual results may differ from actuarial assumptions. The discount rate represents the market rate for high-quality fixed income investments and is used to calculate the present value of the expected future cash flows for benefit obligations to be paid under our pension plans. A decrease in the discount rate increases the present value of pension benefit obligations. At fiscal year end 2017, a 25-basis point decrease in the discount rate would have increased the present value of our pension obligations by $134 million; a 25-basis point increase would have decreased the present value of our pension obligations by $120 million. We consider the current and expected asset allocations of our pension plans, as well as historical and expected long-term rates of return on those types of plan assets, in determining the expected long-term rate of return on plan assets. A 50-basis point decrease or increase in the expected long-term return on plan assets would have increased or decreased, respectively, our fiscal 2017 pension expense by $11 million.

The long-term target asset allocation in our U.S. plans' master trust is 10% equity and 90% fixed income. Asset re-allocation to meet that target is occurring over a multi-year period based on the funded status. We expect to reach our target allocation when the funded status of the plans exceeds 105%. Based on the funded status of the plans as of fiscal year end 2017, our target asset allocation is 45% equity and 55% fixed income.

**Accounting Pronouncements **

See Note 2 to the Consolidated Financial Statements for information regarding recently issued and recently adopted accounting pronouncements.

**Non-GAAP Financial Measure **

**Organic Net Sales Growth **

We present organic net sales growth as we believe it is appropriate for investors to consider this adjusted financial measure in addition to results in accordance with GAAP. Organic net sales growth represents net sales growth (the most comparable GAAP financial measure) excluding the impact of foreign currency exchange rates, and acquisitions and divestitures that occurred in the preceding twelve months, if any. Organic net sales growth is a useful measure of our performance because it excludes items that are not completely under management's control, such as the impact of changes in foreign currency exchange rates, and items that do not reflect the underlying growth of the company, such as acquisition and divestiture activity.

Organic net sales growth provides useful information about our results and the trends of our business. Management uses organic net sales growth to monitor and evaluate performance. Also, management uses organic net sales growth together with GAAP financial measures in its

decision-making processes related to the operations of our reportable segments and our overall company. It is also a significant component in our incentive compensation plans. We believe that investors benefit from having access to the same financial measures that management uses in evaluating operations. The tables presented in "Results of Operations" and "Segment Results" provide reconciliations of organic net sales growth to net sales growth calculated in accordance with GAAP.

Organic net sales growth is a non-GAAP financial measure and should not be considered a replacement for results in accordance with GAAP. This non-GAAP financial measure may not be comparable to similarly-titled measures reported by other companies. The primary limitation of this measure is that it excludes the financial impact of items that would otherwise either increase or decrease our reported results. This limitation is best addressed by using organic net sales growth in combination with net sales growth in order to better understand the amounts, character, and impact of any increase or decrease in reported amounts.

**Forward-Looking Information **

Certain statements in this Annual Report are "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These statements are based on our management's beliefs and assumptions and on information currently available to our management. Forward-looking statements include, among others, the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities, potential operating performance improvements, acquisitions, divestitures, the effects of competition, and the effects of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words "believe," "expect," "plan," "intend," "anticipate," "estimate," "predict," "potential," "continue," "may," "should," or the negative of these terms or similar expressions.

Forward-looking statements involve risks, uncertainties, and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. Investors should not place undue reliance on any forward-looking statements. We do not have any intention or obligation to update forward-looking statements after we file this report except as required by law.

The following and other risks, which are described in greater detail in "Part I. Item 1A. Risk Factors," as well as other risks described in this Annual Report, could cause our results to differ materially from those expressed in forward-looking statements:

conditions in the global or regional economies and global capital markets, and cyclical industry conditions;

conditions affecting demand for products in the industries we serve, particularly the automotive industry;

competition and pricing pressure;

market acceptance of our new product introductions and product innovations and product life cycles;

raw material availability, quality, and cost;

fluctuations in foreign currency exchange rates;

financial condition and consolidation of customers and vendors;

reliance on third-party suppliers;

risks associated with current and future acquisitions and divestitures;

global risks of business interruptions such as natural disasters and political, economic, and military instability;

risks associated with security breaches and other disruptions to our information technology infrastructure;

risks related to compliance with current and future environmental and other laws and regulations;

our ability to protect our intellectual property rights;

risks of litigation;

our ability to operate within the limitations imposed by our debt instruments;

the possible effects on us of various 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;

various risks associated with being a Swiss corporation;

the impact of fluctuations in the market price of our shares; and

the impact of certain provisions of our articles of association on unsolicited takeover proposals.

There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business.