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UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
001-33260(Commission File Number)
TE CONNECTIVITY LTD. (Exact name of registrant as specified in its charter)
Rheinstrasse 20CH-8200 Schaffhausen, Switzerland(Address of principal executive offices)
+41 (0)52 633 66 61(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large acceleratedfiler ý
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes o No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The number of common shares outstanding as of April 21, 2017 was 355,027,307.
TE CONNECTIVITY LTD. INDEX TO FORM 10-Q
Part I.
Financial Information
Item 1.
Financial Statements
Condensed Consolidated Statements of Operations for the Quarters and Six Months Ended March 31, 2017 and March 25, 2016 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income for the Quarters and Six Months Ended March 31, 2017 and March 25, 2016 (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2017 and September 30, 2016 (Unaudited)
Condensed Consolidated Statements of Shareholders' Equity for the Six Months Ended March 31, 2017 and March 25, 2016 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2017 and March 25, 2016 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
Part II.
Other Information
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
Signatures
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TE CONNECTIVITY LTD. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Net sales
Cost of sales
Gross margin
Selling, general, and administrative expenses
Research, development, and engineering expenses
Acquisition and integration costs
Restructuring and other charges (credits), net
Operating income
Interest income
Interest expense
Other income (expense), net
Income from continuing operations before income taxes
Income tax expense
Income from continuing operations
Income (loss) from discontinued operations, net of income taxes
Net income
Basic earnings per share:
Income (loss) from discontinued operations
Diluted earnings per share:
Dividends paid per common share
Weighted-average number of shares outstanding:
Basic
Diluted
See Notes to Condensed Consolidated Financial Statements.
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TE CONNECTIVITY LTD. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Net income.
Other comprehensive income (loss):
Currency translation
Adjustments to unrecognized pension and postretirement benefit costs, net of income taxes
Gains on cash flow hedges, net of income taxes
Other comprehensive income (loss)
Comprehensive income.
2
TE CONNECTIVITY LTD. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $18 and $17, respectively
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant, and equipment, net
Goodwill
Intangible assets, net
Deferred income taxes
Other assets
Total Assets
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt
Accounts payable
Accrued and other current liabilities
Deferred revenue
Total current liabilities
Long-term debt
Long-term pension and postretirement liabilities
Income taxes
Other liabilities
Total Liabilities
Commitments and contingencies (Note 7)
Shareholders' equity:
Common shares, CHF 0.57 par value, 382,835,381 shares authorized and issued
Contributed surplus
Accumulated earnings
Treasury shares, at cost, 27,525,920 and 27,554,005 shares, respectively
Accumulated other comprehensive loss
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
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TE CONNECTIVITY LTD. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
Balance at September 30, 2016
Adoption of ASU No. 2016-09
Other comprehensive loss
Share-based compensation expense
Dividends approved
Exercise of share options
Restricted share award vestings and other activity
Repurchase of common shares
Balance at March 31, 2017
Balance at September 25, 2015
Balance at March 25, 2016
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TE CONNECTIVITY LTD. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cash Flows From Operating Activities:
Income from discontinued operations, net of income taxes
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation and amortization
Provision for losses on accounts receivable and inventories
Gain on divestiture
Other
Changes in assets and liabilities, net of the effects of acquisitions and divestitures:
Accounts receivable, net
Net cash provided by continuing operating activities
Net cash used in discontinued operating activities
Net cash provided by operating activities
Cash Flows From Investing Activities:
Capital expenditures
Proceeds from sale of property, plant, and equipment
Acquisition of business, net of cash acquired
Proceeds from divestiture of business, net of cash retained by business sold
Net cash provided by (used in) investing activities
Cash Flows From Financing Activities:
Net increase (decrease) in commercial paper
Proceeds from issuance of debt
Repayment of debt
Proceeds from exercise of share options
Payment of common share dividends to shareholders
Net cash used in continuing financing activities
Net cash provided by discontinued financing activities
Net cash used in financing activities
Effect of currency translation on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
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TE CONNECTIVITY LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation and Accounting Pronouncements
Basis of Presentation
The unaudited Condensed Consolidated Financial Statements of TE Connectivity Ltd. ("TE Connectivity" or the "Company," which may be referred to as "we," "us," or "our") have been prepared in United States ("U.S.") dollars, in accordance with accounting principles generally accepted in the U.S. ("GAAP") and the instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended. In management's opinion, the unaudited Condensed Consolidated Financial Statements contain all normal recurring adjustments necessary for a fair presentation of interim results. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire fiscal year or any subsequent interim period.
The year-end balance sheet data was derived from audited financial statements, but does not include all of the information and disclosures required by GAAP. These financial statements should be read in conjunction with our audited Consolidated Financial Statements contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016.
Unless otherwise indicated, references in the Condensed Consolidated Financial Statements to fiscal 2017 and fiscal 2016 are to our fiscal years ending September 29, 2017 and September 30, 2016, respectively.
Recently Issued Accounting Pronouncement
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09 which created new Accounting Standards Codification ("ASC") topic 606, Revenue from Contracts with Customers. This guidance supersedes ASC 605, Revenue Recognition, and introduces a single, comprehensive, five-step revenue recognition model. ASC 606 also enhances disclosures related to revenue recognition. ASC 606, as amended, is effective for us in the first quarter of fiscal 2019 and allows for either a full retrospective or a modified retrospective approach at adoption. We have not yet selected a transition approach and are continuing to assess the impact of adopting ASC 606. Based on the initial evaluation of our current contracts and revenue streams, we do not expect adoption will have a material impact on our results of operations or financial position. We believe we are following an appropriate timeline to allow for the proper recognition, reporting, and disclosure of revenue upon adoption of ASC 606 at the beginning of fiscal 2019.
Recently Adopted Accounting Pronouncement
In March 2016, the FASB issued ASU No. 2016-09, an update to ASC 718, Compensation—Stock Compensation, to simplify various aspects of accounting for share-based payments to employees. We elected to early adopt this update in the first quarter of fiscal 2017. The provisions of the update addressing the accounting for excess tax benefits and deficiencies were adopted using a modified retrospective transition approach, with a cumulative-effect adjustment to beginning accumulated earnings and a corresponding increase in deferred tax assets of $165 million. The provision of the update addressing the presentation on the statement of cash flows of employee taxes paid via the withholding of shares was applied retrospectively and did not have a material impact on our Condensed Consolidated Financial Statements. Adoption of other provisions, which were applied prospectively, also did not have a material impact on our Condensed Consolidated Financial Statements.
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TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
2. Restructuring and Other Charges (Credits), Net
Net restructuring and other charges (credits) consisted of the following:
Restructuring charges, net
Other charges
Restructuring Charges, Net
Net restructuring charges by segment were as follows:
Transportation Solutions
Industrial Solutions
Communications Solutions
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2. Restructuring and Other Charges (Credits), Net (Continued)
Activity in our restructuring reserves during the six months ended March 31, 2017 is summarized as follows:
Fiscal 2017 Actions:
Employee severance
Property, plant, and equipment
Total
Fiscal 2016 Actions:
Facility and other exit costs
Pre-Fiscal 2016 Actions:
Total Activity
Fiscal 2017 Actions
During fiscal 2017, we initiated a restructuring program associated with headcount reductions impacting all segments and product line closures primarily impacting the Transportation Solutions and Industrial Solutions segments. In connection with this program, during the six months ended March 31, 2017, we recorded restructuring charges of $100 million. We expect to complete all restructuring actions commenced during the six months ended March 31, 2017 by the end of fiscal 2018 and to incur total charges of approximately $120 million with remaining charges primarily related to employee severance.
The following table summarizes expected, incurred, and remaining charges for the fiscal 2017 program by segment:
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Fiscal 2016 Actions
During fiscal 2016, we initiated a restructuring program associated with headcount reductions impacting all segments and product line closures in the Communications Solutions segment. In connection with this program, during the six months ended March 31, 2017 and March 25, 2016, we recorded restructuring charges of $9 million and $60 million, respectively. We expect to complete all restructuring actions commenced during fiscal 2016 by the end of fiscal 2019 and to incur total charges of approximately $168 million with remaining charges related primarily to employee severance.
The following table summarizes expected, incurred, and remaining charges for the fiscal 2016 program by segment:
Pre-Fiscal 2016 Actions
Prior to fiscal 2016, we initiated a restructuring program associated with headcount reductions and product line closures, primarily impacting the Communications Solutions and Industrial Solutions segments. During the six months ended March 31, 2017 and March 25, 2016, we recorded restructuring credits of $4 million and charges of $1 million, respectively, related to pre-fiscal 2016 actions. We do not expect to incur any additional charges related to pre-fiscal 2016 actions.
Total Restructuring Reserves
Restructuring reserves included on the Condensed Consolidated Balance Sheets were as follows:
Restructuring reserves
Gain on Divestiture
During the quarter ended March 25, 2016, we sold our Circuit Protection Devices ("CPD") business for $350 million, subject to working capital adjustments, of which we received $261 million during the quarter ended March 25, 2016. We recognized a pre-tax gain of $146 million on the transaction. The CPD business was reported in our Communications Solutions segment.
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Other Charges, Net
During the six months ended March 25, 2016, we incurred charges of $15 million related to the write-off of certain investments and costs of $11 million associated with the divestiture of certain businesses.
3. Inventories
Inventories consisted of the following:
Raw materials
Work in progress
Finished goods
Inventoried costs on long-term contracts
4. Goodwill
The changes in the carrying amount of goodwill by segment were as follows:
September 30, 2016(1)
Currency translation and other(2)
March 31, 2017(1)
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5. Intangible Assets, Net
Intangible assets consisted of the following:
Customer relationships
Intellectual property
Intangible asset amortization expense was $41 million and $34 million for the quarters ended March 31, 2017 and March 25, 2016, respectively, and $83 million and $68 million for the six months ended March 31, 2017 and March 25, 2016, respectively.
The aggregate amortization expense on intangible assets is expected to be as follows:
Remainder of fiscal 2017
Fiscal 2018
Fiscal 2019
Fiscal 2020
Fiscal 2021
Fiscal 2022
Thereafter
6. Debt
During the six months ended March 31, 2017, we reclassified $708 million of 6.55% senior notes due 2017 from long-term debt to short-term debt on the Condensed Consolidated Balance Sheet.
As of March 31, 2017, Tyco Electronics Group S.A. ("TEGSA"), our 100%-owned subsidiary, had $168 million of commercial paper outstanding at a weighted-average interest rate of 1.18%. TEGSA had $330 million of commercial paper outstanding at a weighted-average interest rate of 0.69% at September 30, 2016.
The fair value of our debt, based on indicative valuations, was approximately $4,187 million and $4,424 million at March 31, 2017 and September 30, 2016, respectively.
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7. Commitments and Contingencies
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.
Environmental Matters
We are involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites. The ultimate cost of site cleanup is difficult to predict given the uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations, and alternative cleanup methods. As of March 31, 2017, we concluded that it was probable that we would incur remedial costs in the range of $16 million to $42 million, and that the best estimate within this range was $19 million. We believe that any potential payment of such estimated amounts will not have a material adverse effect on our results of operations, financial position, or cash flows.
Guarantees
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 March 31, 2017, we had outstanding letters of credit, letters of guarantee, and surety bonds of $269 million.
In the normal course of business, we are liable for contract completion and product performance. In the opinion of management, such obligations will not materially affect our results of operations, financial position, or cash flows.
We generally record estimated product warranty costs when contract revenues are recognized under the percentage-of-completion method for construction related contracts; other warranty reserves are not significant. The estimation is based primarily on historical experience and actual warranty claims. Amounts accrued for warranty claims were $47 million and $48 million at March 31, 2017 and September 30, 2016, respectively.
Tax Sharing Agreement
In fiscal 2007, we became an independent, publicly traded company owning the former electronics businesses of Tyco International plc ("Tyco International"). On June 29, 2007, Tyco International
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7. Commitments and Contingencies (Continued)
distributed all of our shares, as well as its shares of its former healthcare businesses ("Covidien"), to its common shareholders (the "separation"). As a result of subsequent transactions, Tyco International and Covidien now operate as part of Johnson Controls International plc and Medtronic plc, respectively.
Upon separation, we entered into a Tax Sharing Agreement, under which we share responsibility for certain of our, Tyco International's, and Covidien's income tax liabilities based on a sharing formula for periods prior to and including June 29, 2007. We, Tyco International, and Covidien share 31%, 27%, and 42%, respectively, of income tax liabilities that arise from adjustments made by tax authorities to our, Tyco International's, and Covidien's income tax returns. Pursuant to the Tax Sharing Agreement, we entered into certain guarantee commitments and indemnifications with Tyco International and Covidien. We have substantially settled all pre-separation U.S. federal income tax matters with the Internal Revenue Service ("IRS"). Certain shared U.S. state and non-U.S. income tax matters remain open. We do not expect these matters will have a material effect on our results of operations, financial position, or cash flows.
8. Financial Instruments
We hedge our net investment in certain foreign operations using intercompany non-derivative financial instruments denominated in the same currencies. The aggregate notional value of these hedges was $3,258 million and $3,480 million at March 31, 2017 and September 30, 2016, respectively. The impacts of our hedging program were as follows:
Foreign exchange gains (losses)(1)
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9. Retirement Plans
The net periodic pension benefit cost for all U.S. and non-U.S. defined benefit pension plans was as follows:
Service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial loss
Amortization of prior service credit
Net periodic pension benefit cost
During the six months ended March 31, 2017, we contributed $16 million to our non-U.S. pension plans.
10. Income Taxes
We recorded income tax expense of $39 million and $130 million for the quarters ended March 31, 2017 and March 25, 2016, respectively. The income tax expense for the quarter ended March 31, 2017 included a $24 million income tax benefit resulting from lapses of statutes of limitations in the U.S. and certain non-U.S. jurisdictions, and a $22 million income tax benefit associated with the tax impacts of certain intercompany transactions. The income tax expense for the quarter ended March 25, 2016 included a $42 million income tax charge associated with the gain on the sale of our CPD business.
We recorded income tax expense of $93 million and $188 million for the six months ended March 31, 2017 and March 25, 2016, respectively. The tax expense for the six months ended March 31, 2017 included a $52 million income tax benefit associated with the tax impacts of certain intercompany transactions and the corresponding reduction in the valuation allowance for U.S. tax loss carryforwards, as well as a $24 million income tax benefit resulting from lapses of statutes of limitations in the U.S.
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10. Income Taxes (Continued)
and certain non-U.S. jurisdictions. The tax expense for the six months ended March 25, 2016 included a $42 million income tax charge associated with the gain on the sale of our CPD business, partially offset by a $25 million income tax benefit related primarily to deferred tax assets recognized in connection with the sale.
We record accrued interest as well as penalties related to uncertain tax positions as part of income tax expense. As of March 31, 2017 and September 30, 2016, we had $57 million and $54 million, respectively, of accrued interest and penalties related to uncertain tax positions on the Condensed Consolidated Balance Sheets, recorded primarily in income taxes. During the six months ended March 31, 2017, we recognized income tax benefits of $2 million related to interest and penalties on the Condensed Consolidated Statement of Operations.
During the second quarter of fiscal 2016, we made a pre-payment to the IRS of $443 million for tax deficiencies related to pre-separation U.S. tax matters. Concurrent with remitting this payment, we received net reimbursements of $303 million from Tyco International and Covidien pursuant to indemnifications for pre-separation tax matters. As previously reported, we have substantially settled all pre-separation U.S. federal income tax matters with the IRS. See Note 7 for additional for information regarding the Tax Sharing Agreement associated with pre-separation tax matters.
Although it is difficult to predict the timing or results of our worldwide examinations, we estimate that up to approximately $25 million of unrecognized income tax benefits, excluding the impact relating to accrued interest and penalties, could be resolved within the next twelve months.
We are not aware of any other matters that would result in significant changes to the amount of unrecognized income tax benefits reflected on the Condensed Consolidated Balance Sheet as of March 31, 2017.
11. Earnings Per Share
The weighted-average number of shares outstanding used in the computations of basic and diluted earnings per share were as follows:
Dilutive impact of share-based compensation arrangements
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11. Earnings Per Share (Continued)
The following share options were not included in the computation of diluted earnings per share because the instruments' underlying exercise prices were greater than the average market prices of our common shares and inclusion would be antidilutive.
Antidilutive share options
12. Equity
Common Shares Held in Treasury
In March 2017, our shareholders approved the cancellation of 26 million shares purchased under our share repurchase program during the period from December 11, 2015 to September 30, 2016. The capital reduction by cancellation of these shares is subject to a notice period and filing with the commercial register in Switzerland and is not yet reflected on the Condensed Consolidated Balance Sheet.
Dividends
In March 2017, our shareholders approved a dividend payment to shareholders of $1.60 (equivalent to CHF 1.62) per share, payable in four equal quarterly installments of $0.40 per share beginning in the third quarter of fiscal 2017 through the second quarter of fiscal 2018.
Upon shareholders' approval of a dividend payment, we record a liability with a corresponding charge to shareholders' equity. At March 31, 2017 and September 30, 2016, the unpaid portion of the dividends recorded in accrued and other current liabilities on the Condensed Consolidated Balance Sheets totaled $569 million and $263 million, respectively.
Share Repurchase Program
Common shares repurchased under the share repurchase program were as follows:
Number of common shares repurchased
Amount repurchased
At March 31, 2017, we had $897 million of availability remaining under our share repurchase authorization.
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13. Share Plans
Total share-based compensation expense, which was included primarily in selling, general, and administrative expenses on the Condensed Consolidated Statements of Operations, was as follows:
As of March 31, 2017, there was $172 million of unrecognized compensation expense related to share-based awards, which is expected to be recognized over a weighted-average period of 2.2 years.
During the quarter ended December 30, 2016, we granted the following share-based awards as part of our annual incentive plan grant:
Share options
Restricted share awards
Performance share awards
In March 2017, our shareholders approved an increase of 10 million shares in the number of shares available for awards under the TE Connectivity Ltd. 2007 Stock and Incentive Plan, amended and restated as of March 8, 2017 (the "2017 Plan"). As of March 31, 2017, we had 23 million shares available for issuance under our stock and incentive plans, of which the 2017 Plan was the primary plan.
Share-Based Compensation Assumptions
The weighted-average assumptions we used in the Black-Scholes-Merton option pricing model for the options granted as part of our annual incentive plan grant were as follows:
Expected share price volatility
Risk free interest rate
Expected annual dividend per share
Expected life of options (in years)
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14. Segment Data
Net sales by segment were as follows:
Total(1)
Operating income by segment was as follows:
15. Tyco Electronics Group S.A.
Tyco Electronics Group S.A. ("TEGSA"), a Luxembourg company and our 100%-owned subsidiary, is a holding company that owns, directly or indirectly, all of our operating subsidiaries. TEGSA is the obligor under our senior notes, commercial paper, and five-year unsecured senior revolving credit facility, which are fully and unconditionally guaranteed by its parent, TE Connectivity Ltd. The following tables present condensed consolidating financial information for TE Connectivity Ltd., TEGSA, and all other subsidiaries that are not providing a guarantee of debt but which represent assets of TEGSA, using the equity method of accounting.
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15. Tyco Electronics Group S.A. (Continued)
Condensed Consolidating Statement of Operations (UNAUDITED) For the Quarter Ended March 31, 2017
Restructuring and other charges, net
Operating income (loss)
Other expense, net
Equity in net income of subsidiaries
Equity in net income (loss) of subsidiaries of discontinued operations
Intercompany interest income (expense), net
Income (loss) from discontinued operations, net of income taxes(1)
Other comprehensive income
Comprehensive income
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Condensed Consolidating Statement of Operations (UNAUDITED) For the Quarter Ended March 25, 2016
Selling, general, and administrative expenses(1)
Restructuring and other credits, net
Other income, net
Income (loss) from discontinued operations, net of income taxes(2)
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Condensed Consolidating Statement of Operations (UNAUDITED) For the Six Months Ended March 31, 2017
Selling, general, and administrative expenses, net
Equity in net income of subsidiaries of discontinued operations
21
Condensed Consolidating Statement of Operations (UNAUDITED) For the Six Months Ended March 25, 2016
22
Condensed Consolidating Balance Sheet (UNAUDITED) As of March 31, 2017
Intercompany receivables
Investment in subsidiaries
Intercompany loans receivable
Intercompany payables
Intercompany loans payable
23
Condensed Consolidating Balance Sheet (UNAUDITED) As of September 30, 2016
24
Condensed Consolidating Statement of Cash Flows (UNAUDITED) For the Six Months Ended March 31, 2017
Net cash provided by (used in) operating activities
Change in intercompany loans
Net cash used in investing activities
Changes in parent company equity(1)
Net decrease in commercial paper
Loan activity with parent
Net cash provided by (used in) financing activities
Net increase in cash and cash equivalents
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Condensed Consolidating Statement of Cash Flows (UNAUDITED) For the Six Months Ended March 25, 2016
Net cash provided by (used in) continuing operating activities
Other(1)
Changes in parent company equity(2)
Net increase in commercial paper
Net cash provided by (used in) continuing financing activities
Net decrease in cash and cash equivalents
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ITEM 2. 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 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 United States ("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
TE Connectivity Ltd. ("TE Connectivity" or the "Company," which may be referred to as "we," "us," or "our") is a global technology leader. We design and manufacture connectivity and sensor solutions to help build a safer, greener, smarter, and more connected world. Our products are built to work reliably, even in the harshest of environments. Our commitment to innovation enables advancements in transportation, industrial applications, medical technology, energy, data communications, and the home.
Highlights for the second quarter and first six months of fiscal 2017 include the following:
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Outlook
In the third quarter of fiscal 2017, we expect net sales to be between $3.2 billion and $3.3 billion. This reflects sales growth in the Communications Solutions and, to a lesser degree, the Industrial Solutions and Transportation Solutions segments relative to the third quarter of fiscal 2016. Additional information regarding expectations for our reportable segments for the third quarter of fiscal 2017 as compared to the same period of fiscal 2016 is as follows:
We expect diluted earnings per share from continuing operations to be in the range of $1.08 to $1.12 per share in the third quarter of fiscal 2017. This outlook reflects the negative impact of foreign currency exchange rates on net sales and earnings per share of approximately $70 million and $0.04 per share, respectively, in the third quarter of fiscal 2017 as compared to the third quarter of fiscal 2016.
For fiscal 2017, we expect net sales to be between $12.6 billion and $12.8 billion as compared to $12.2 billion in fiscal 2016 which included an additional week. This increase is attributable to sales growth in all segments. Additional information regarding expectations for our reportable segments for fiscal 2017 compared to fiscal 2016 is as follows:
We expect diluted earnings per share from continuing operations to be in the range of $4.39 to $4.47 per share in fiscal 2017. This outlook reflects the negative impact of foreign currency exchange rates on net sales and earnings per share of approximately $200 million and $0.10 per share, respectively, in fiscal 2017 as compared to fiscal 2016.
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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Results of Operations
Net Sales
The following table presents our net sales and the percentage of total net sales by segment:
The following table provides an analysis of the change in our net sales by segment:
Net sales increased $275 million, or 9.3%, in the second quarter of fiscal 2017 as compared to the same period of fiscal 2016. The increase in net sales resulted from organic net sales growth of 8.2% and net sales contributions from acquisitions and a divestiture of 2.7%, partially offset by the negative impact of foreign currency translation of 1.6%. Price erosion adversely affected organic net sales by $59 million in the second quarter of fiscal 2017.
In the first six months of fiscal 2017, net sales increased $505 million, or 8.7%, as compared to the first six months of fiscal 2016 as a result of organic net sales growth of 7.5% and net sales contributions from acquisitions and a divestiture of 2.5%, partially offset by the negative impact of foreign currency translation of 1.3%. Price erosion adversely affected organic net sales by $110 million in the first six months of fiscal 2017.
See further discussion of net sales below under "Segment Results."
Net Sales by Geographic Region. Our business operates in three geographic regions—the Americas, Europe/Middle East/Africa ("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.
Approximately 56% of our net sales were invoiced in currencies other than the U.S. dollar in the first six months of fiscal 2017.
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The following table presents our net sales and the percentage of total net sales by geographic region(1):
Americas
EMEA
Asia–Pacific
The following table provides an analysis of the change in our net sales by geographic region:
Cost of Sales and Gross Margin
The following table presents cost of sales and gross margin information:
As a percentage of net sales
Gross margin increased $146 million and $266 million in the second quarter and first six months of fiscal 2017, respectively, as compared to the same periods of fiscal 2016. The increases were due primarily to higher volume and lower material costs, partially offset by the negative impact of price erosion.
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. We expect to purchase approximately 180 million pounds of copper, 120,000 troy ounces of gold, and 2.5 million troy ounces of silver in fiscal 2017. The following table presents the average prices incurred related to copper, gold, and silver:
Copper
Gold
Silver
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Operating Expenses
The following table presents operating expense information:
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased $45 million and $77 million in the second quarter and first six months of fiscal 2017, respectively, from the same periods in fiscal 2016. The increases resulted primarily from increased selling expenses to support higher sales levels, increased incentive compensation costs, and additional expenses associated with fiscal 2016 acquisitions.
Restructuring and Other Charges (Credits), Net. We are committed to continuous productivity improvements and consistently evaluate opportunities to simplify our global manufacturing footprint, migrate facilities to lower-cost regions, reduce fixed costs, and eliminate excess capacity. These initiatives are designed to help us maintain our competitiveness in the industry, improve our operating leverage, and position us for future growth.
During fiscal 2017, we initiated a restructuring program associated with headcount reductions impacting all segments and product line closures primarily impacting the Transportation Solutions and Industrial Solutions 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.
In connection with these initiatives, we incurred net restructuring charges of $105 million during the first six months of fiscal 2017. Annualized cost savings related to the fiscal 2017 actions are expected to be approximately $130 million and are generally 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 2017, we expect to incur net restructuring charges of approximately $150 million. We expect total spending, which will be funded with cash from operations, to be approximately $110 million in fiscal 2017.
During the second quarter of fiscal 2016, we recognized a pre-tax gain of $146 million on the sale of our CPD business.
See Note 2 to the Condensed Consolidated Financial Statements for additional information regarding net restructuring and other charges (credits).
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Operating Income
The following table presents operating income and operating margin information:
Operating margin
Operating income included the following:
Acquisition related charges:
Charges associated with the amortization of acquisition related fair value adjustments
See further discussion of operating income below under "Segment Results."
Non-Operating Items
The following table presents select non-operating information:
Effective tax rate
Income Taxes. See Note 10 to the Condensed Consolidated Financial Statements for information regarding items impacting income tax expense for the second quarters and first six months of fiscal 2017 and 2016.
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Segment Results
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):
Automotive
Commercial transportation
Sensors
The following table provides an analysis of the change in the Transportation Solutions segment's net sales by primary industry end market:
Net sales in the Transportation Solutions segment increased $147 million, or 9.1%, in the second quarter of fiscal 2017 from the same period of fiscal 2016 due primarily to organic net sales growth of 10.1%. Our organic net sales by primary industry end market were as follows:
In the first six months of fiscal 2017, net sales in the Transportation Solutions segment increased $315 million, or 10.1%, as compared to the first six months of fiscal 2016 primarily as a result of
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organic net sales growth of 10.7%. Our organic net sales by primary industry end market were as follows:
Operating Income. The following table presents the Transportation Solutions segment's operating income and operating margin information:
Operating income in the Transportation Solutions segment increased $11 million and $93 million in the second quarter and first six months of fiscal 2017, respectively, from the same periods of fiscal 2016. The Transportation Solutions segment's operating income included the following:
Excluding these items, operating income increased in the second quarter and first six months of fiscal 2017. The increases were due primarily to higher volume and lower material costs, partially offset by the negative impacts of price erosion.
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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):
Industrial equipment
Aerospace, defense, oil, and gas
Energy
The following table provides an analysis of the change in the Industrial Solutions segment's net sales by primary industry end market:
Net sales in the Industrial Solutions segment increased $115 million, or 15.6%, in the second quarter of fiscal 2017 from the same period of fiscal 2016 primarily as a result of sales contributions from acquisitions of 14.2%. Our organic net sales by primary industry end market were as follows:
In the first six months of fiscal 2017, net sales in the Industrial Solutions segment increased $201 million, or 13.9%, from the first six months of fiscal 2016 due primarily to sales contributions from acquisitions of 13.8%. Our organic net sales by primary industry end market were as follows:
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Operating Income. The following table presents the Industrial Solutions segment's operating income and operating margin information:
Operating income in the Industrial Solutions segment increased $23 million and $24 million in the second quarter and first six months of fiscal 2017, respectively, as compared to the same periods of fiscal 2016. The Industrial Solutions segment's operating income included the following:
Excluding these items, operating income increased in the second quarter and first six months of fiscal 2017. The increases were due primarily to higher volume resulting from acquisitions.
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):
Data and devices
Subsea communications
Appliances
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The following table provides an analysis of the change in the Communications Solutions segment's net sales by primary industry end market:
In the second quarter of fiscal 2017, net sales in the Communications Solutions segment increased $13 million, or 2.1%, from the second quarter of fiscal 2016 due primarily to organic net sales growth of 9.2%, partially offset by sales declines resulting from a divestiture of 5.6%. Our organic net sales by primary industry end market were as follows:
Net sales in the Communications Solutions segment decreased $11 million, or 0.9%, in the first six months of fiscal 2017 as compared to the same period of fiscal 2016 due to sales declines resulting from a divestiture of 5.7% and the negative impact of foreign currency translation of 1.0%, partially offset by organic net sales growth of 5.8%. Our organic net sales by primary industry end market were as follows:
Operating Income. The following table presents the Communications Solutions segment's operating income and operating margin information:
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Operating income in the Communications Solutions segment decreased $96 million and $91 million in the second quarter and first six months of fiscal 2017, respectively, as compared to the same periods of fiscal 2016. The Communications Solutions segment's operating income included the following:
Excluding these items, operating income increased in the second quarter and first six months of fiscal 2017 due primarily to higher volume, improved manufacturing productivity, and lower material costs, partially offset by the negative impact of 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 $708 million of 6.55% senior notes due in October 2017. 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. 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 six months of fiscal 2017, net cash provided by continuing operating activities increased $378 million to $925 million from $547 million in the first six months of fiscal 2016. The increase resulted primarily from higher income levels and a decrease in tax payments, partially offset by the impact of increased sales on accounts receivable levels.
The amount of income taxes paid, net of refunds, during the first six months of fiscal 2017 and 2016 was $177 million and $635 million, respectively. Payments made in the first six months of fiscal 2016 included a $443 million pre-payment to the Internal Revenue Service for tax deficiencies related to pre-separation U.S. tax matters. Also, during the first six months of fiscal 2016, we received net reimbursements of $303 million from Tyco International and Covidien pursuant to indemnifications for pre-separation U.S. tax matters. See Note 7 to the Condensed Consolidated Financial Statements for information regarding the Tax Sharing Agreement associated with pre-separation tax matters.
Cash Flows from Investing Activities
Capital spending was $289 million and $270 million in the first six months of fiscal 2017 and 2016, respectively. We expect fiscal 2017 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.
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During the first six months of fiscal 2016, we received net cash proceeds of $261 million related to the sale of our CPD business.
Cash Flows from Financing Activities and Capitalization
Total debt at March 31, 2017 and September 30, 2016 was $3,952 million and $4,070 million, respectively. See Note 6 to the Condensed Consolidated Financial Statements for additional information regarding debt.
Tyco Electronics Group S.A. ("TEGSA"), our 100%-owned subsidiary, has a five-year unsecured senior revolving credit facility ("Credit Facility") with total commitments of $1,500 million. The Credit Facility expires in December 2020. TEGSA had no borrowings under the Credit Facility at March 31, 2017 and September 30, 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 March 31, 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.
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 $263 million and $245 million in the first six months of fiscal 2017 and 2016, respectively.
We repurchased approximately 3 million of our common shares for $205 million and approximately 40 million of our common shares for $2,415 million under our share repurchase authorization during the first six months of fiscal 2017 and 2016, respectively. At March 31, 2017, we had $897 million of availability remaining under our share repurchase authorization.
Commitments and Contingencies
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
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end dates ranging from fiscal 2017 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 connection with the separation from Tyco International plc in 2007, we entered into a Tax Sharing Agreement that generally governs our, Tyco International plc's, and Covidien plc's respective rights, responsibilities, and obligations with respect to taxes for periods prior to and including June 29, 2007. See Note 7 to the Condensed Consolidated Financial Statements for additional information regarding the Tax Sharing Agreement.
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 benefits 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 30, 2016. There were no significant changes to this information during the first six months of fiscal 2017.
Accounting Pronouncements
See Note 1 to the Condensed Consolidated Financial Statements for information regarding recently issued and 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
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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 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, 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. You should not put undue reliance on any forward-looking statements. We do not have any intention or obligation to update forward-looking statements after we file this report except as required by law.
The following and other risks, which are described in greater detail in "Part I. Item 1A. Risk Factors," in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016, could cause our results to differ materially from those expressed in forward-looking statements:
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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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in our exposures to market risk during the first six months of fiscal 2017. For further discussion of our exposures to market risk, refer to "Part II. Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended), as of March 31, 2017. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2017.
Changes in Internal Control Over Financial Reporting
During the quarter ended March 31, 2017, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in our legal proceedings since we filed our Annual Report on Form 10-K for the fiscal year ended September 30, 2016 except as set forth below. Refer to "Part I. Item 3. Legal Proceedings" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016 for additional information regarding legal proceedings.
During the quarter ended December 30, 2016, we determined that one of our manufacturing sites in France had discharged wastewater exceeding the limits in the site's discharge permits. The site ceased the discharges and voluntarily disclosed the matter to the applicable French authorities at the préfecture and the Grand Evreux inter-municipal body in January 2017. We agreed with the authorities to take corrective action to upgrade our wastewater systems at the plant. We do not expect to face monetary sanctions.
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from those disclosed in "Part I. Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016. The risk factors described in our Annual Report on Form 10-K, in addition to other information in this report, could materially affect our business operations, financial condition, or liquidity. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial may also impair our business operations, financial condition, and liquidity.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
The following table presents information about our purchases of our common shares during the quarter ended March 31, 2017:
December 31, 2016–January 27, 2017
January 28–March 3, 2017
March 4–March 31, 2017
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ITEM 6. EXHIBITS
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 26, 2017
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