Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 27, 2020
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
001-33260
(Commission File Number)
TE CONNECTIVITY LTD.
(Exact name of registrant as specified in its charter)
Switzerland(Jurisdiction of Incorporation)
98-0518048(I.R.S. Employer Identification No.)
Mühlenstrasse 26, CH-8200 Schaffhausen, Switzerland
(Address of principal executive offices)
+41 (0)52 633 66 61
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
Common Shares, Par Value CHF 0.57
TEL
New York Stock Exchange
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
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 accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of common shares outstanding as of April 24, 2020 was 329,847,873.
INDEX TO FORM 10-Q
Page
Part I.
Financial Information
Item 1.
Financial Statements
1
Condensed Consolidated Statements of Operations for the Quarters and Six Months Ended March 27, 2020 and March 29, 2019 (unaudited)
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Quarters and Six Months Ended March 27, 2020 and March 29, 2019 (unaudited)
2
Condensed Consolidated Balance Sheets as of March 27, 2020 and September 27, 2019 (unaudited)
3
Condensed Consolidated Statements of Equity for the Quarters and Six Months Ended March 27, 2020 and March 29, 2019 (unaudited)
4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 27, 2020 and March 29, 2019 (unaudited)
6
Notes to Condensed Consolidated Financial Statements (unaudited)
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
48
Item 4.
Controls and Procedures
Part II.
Other Information
Legal Proceedings
49
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
50
Item 6.
Exhibits
51
Signatures
52
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the
Quarters Ended
Six Months Ended
March 27,
March 29,
2020
2019
(in millions, except per share data)
Net sales
$
3,195
3,412
6,363
6,759
Cost of sales
2,166
2,294
4,304
4,527
Gross margin
1,029
1,118
2,059
2,232
Selling, general, and administrative expenses
352
373
719
762
Research, development, and engineering expenses
158
166
319
327
Acquisition and integration costs
12
19
Restructuring and other charges, net
22
42
46
117
Impairment of goodwill
900
—
Operating income (loss)
(415)
530
56
1,014
Interest income
5
11
9
Interest expense
(11)
(15)
(23)
(42)
Other income, net
16
Income (loss) from continuing operations before income taxes
(410)
520
60
981
Income tax expense
(91)
(489)
(169)
Income (loss) from continuing operations
(452)
429
(429)
812
Income (loss) from discontinued operations, net of income taxes
(4)
10
(1)
(97)
Net income (loss)
(456)
439
(430)
715
Basic earnings (loss) per share:
(1.35)
1.27
(1.28)
2.39
Income (loss) from discontinued operations
(0.01)
0.03
(0.29)
(1.37)
1.30
(1.29)
2.10
Diluted earnings (loss) per share:
1.26
2.37
(0.28)
1.29
2.09
Weighted-average number of shares outstanding:
Basic
334
338
340
Diluted
342
See Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
Other comprehensive income (loss):
Currency translation
(114)
64
(64)
83
Adjustments to unrecognized pension and postretirement benefit costs, net of income taxes
8
Gains (losses) on cash flow hedges, net of income taxes
(53)
27
(22)
Other comprehensive income (loss)
(159)
97
(70)
146
Comprehensive income (loss)
(615)
536
(500)
861
Less: comprehensive loss attributable to noncontrolling interests
Comprehensive income (loss) attributable to TE Connectivity Ltd.
(613)
(498)
CONDENSED CONSOLIDATED BALANCE SHEETS
September 27,
(in millions, except share
data)
Assets
Current assets:
Cash and cash equivalents
796
927
Accounts receivable, net of allowance for doubtful accounts of $32 and $25, respectively
2,461
2,320
Inventories
2,001
1,836
Prepaid expenses and other current assets
457
471
Total current assets
5,715
5,554
Property, plant, and equipment, net
3,558
3,574
Goodwill
5,235
5,740
Intangible assets, net
1,547
1,596
Deferred income taxes
2,382
2,776
Other assets
930
454
Total assets
19,367
19,694
Liabilities and equity
Current liabilities:
Short-term debt
603
570
Accounts payable
1,390
1,357
Accrued and other current liabilities
1,966
1,613
Total current liabilities
3,959
3,540
Long-term debt
3,752
3,395
Long-term pension and postretirement liabilities
1,359
1,367
126
156
Income taxes
228
239
Other liabilities
772
427
Total liabilities
10,196
9,124
Commitments and contingencies (Note 10)
Equity:
TE Connectivity Ltd. shareholders' equity:
Common shares, CHF 0.57 par value, 350,951,381 shares authorized and issued
154
Accumulated earnings
11,122
12,256
Treasury shares, at cost, 19,877,795 and 15,862,337 shares, respectively
(1,639)
(1,337)
Accumulated other comprehensive loss
(571)
(503)
Total TE Connectivity Ltd. shareholders' equity
9,066
10,570
Noncontrolling interests
105
Total equity
9,171
Total liabilities and equity
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the Quarter Ended March 27, 2020
Accumulated
TE Connectivity
Other
Ltd.
Non-
Common Shares
Treasury Shares
Contributed
Comprehensive
Shareholders'
controlling
Total
Shares
Amount
Surplus
Earnings
Loss
Equity
Interests
Balance at December 27, 2019
351
(17)
(1,389)
12,206
(414)
10,557
Acquisition
107
Net loss
Other comprehensive loss
(157)
(2)
Share-based compensation expense
15
Dividends
(635)
Exercise of share options
13
Restricted share award vestings and other activity
17
Repurchase of common shares
(3)
(280)
Balance at March 27, 2020
(20)
For the Six Months Ended March 27, 2020
Balance at September 27, 2019
(16)
(68)
37
94
(37)
(69)
(12)
(5)
(423)
(UNAUDITED) (Continued)
For the Quarter Ended March 29, 2019
Balance at December 28, 2018
357
157
(18)
(1,550)
11,886
(257)
10,236
Net income
Other comprehensive income
(620)
(189)
Balance at March 29, 2019
(1,713)
11,710
(160)
9,994
For the Six Months Ended March 29, 2019
Balance at September 28, 2018
(1,134)
12,114
(306)
10,831
Adoption of ASU No. 2016-16
(443)
39
(616)
88
(39)
(60)
(9)
(684)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Loss from discontinued operations, net of income taxes
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:
Depreciation and amortization
354
341
345
(28)
Non-cash lease cost
Provision for losses on accounts receivable and inventories
18
28
38
Changes in assets and liabilities, net of the effects of acquisitions and divestitures:
Accounts receivable, net
(140)
(107)
(151)
25
91
(44)
(180)
(206)
21
(25)
Net cash provided by continuing operating activities
892
883
Net cash used in discontinued operating activities
(30)
Net cash provided by operating activities
853
Cash flows from investing activities:
Capital expenditures
(309)
(401)
Proceeds from sale of property, plant, and equipment
Acquisition of businesses, net of cash acquired
(359)
Proceeds from divestiture of discontinued operation, net of cash retained by sold operation
297
Net cash used in continuing investing activities
(667)
(83)
Net cash used in discontinued investing activities
Net cash used in investing activities
(85)
Cash flows from financing activities:
Net increase (decrease) in commercial paper
(219)
90
Proceeds from issuance of debt
593
350
Repayment of debt
(441)
Proceeds from exercise of share options
(408)
(739)
Payment of common share dividends to shareholders
(307)
(299)
Transfers to discontinued operations
(32)
(31)
Net cash used in continuing financing activities
(345)
(1,084)
Net cash provided by discontinued financing activities
Net cash used in financing activities
(1,052)
Effect of currency translation on cash
Net decrease in cash, cash equivalents, and restricted cash
(131)
(283)
Cash, cash equivalents, and restricted cash at beginning of period
848
Cash, cash equivalents, and restricted cash at end of period
565
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation and Accounting Policies
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. 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 27, 2019.
Unless otherwise indicated, references in the Condensed Consolidated Financial Statements to fiscal 2020 and fiscal 2019 are to our fiscal years ending September 25, 2020 and ended September 27, 2019, respectively.
Goodwill and Other Intangible Assets
We account for goodwill and other intangible assets in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles–Goodwill and Other, as updated by Accounting Standards Update (“ASU”) No. 2017-04, Simplifying the Test for Goodwill Impairment.
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.
At March 27, 2020, we had five reporting units, all of which contained goodwill. There were two reporting units in both the Transportation Solutions and Industrial Solutions segments and one reporting unit in the Communications Solutions segment. 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.
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 several 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 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, a goodwill impairment charge will be recorded for the amount of the excess, limited to the total amount of goodwill allocated to the reporting unit.
Fair value estimates used in the 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 has been supported by guideline analyses (a market approach). These approaches incorporate several 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
Recently Adopted Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-04, an update to ASC 350, Intangibles–Goodwill and Other. The update simplifies the subsequent measurement of goodwill by eliminating step 2 of the goodwill impairment test. Under the amendments in the update, goodwill impairment should be tested by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments are to be applied on a prospective basis. We elected to early adopt this update and applied it during the quarter ended March 27, 2020. See Note 6 for additional information regarding the interim goodwill impairment test.
In February 2016, the FASB issued ASU No. 2016-02 which codified ASC 842, Leases. This guidance, as subsequently amended, requires lessees to recognize a lease liability and a right-of-use (“ROU”) asset for most leases. We adopted ASC 842, as amended, in the quarter ended December 27, 2019 using the optional transition method permitted by ASU No. 2018-11 which allows for application of the standard at the adoption date and no restatement of comparative periods. We elected to use the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows the carry forward of historical lease classification of existing and expired leases. In addition, we elected to use the hindsight practical expedient in determining the lease term for existing leases. As a result of adoption, we recorded ROU assets and related lease liabilities of approximately $520 million on the Condensed Consolidated Balance Sheet. Adoption did not have a material impact on our results of operations or cash flows. See Note 9 for additional information regarding leases.
2. Restructuring and Other Charges, Net
Net restructuring charges by segment were as follows:
Transportation Solutions
24
45
Industrial Solutions
Communications Solutions
20
Restructuring charges, net
Activity in our restructuring reserves was as follows:
Balance at
Currency
Changes in
Cash
Non-Cash
Translation
Charges
Estimate
Payments
Items
and Other
Fiscal 2020 Actions:
Employee severance
43
Fiscal 2019 Actions:
188
(13)
(51)
130
Facility and other exit costs
(7)
Property, plant, and equipment
189
(58)
(6)
Pre-Fiscal 2019 Actions:
73
(34)
36
75
Total Activity
264
(101)
206
Fiscal 2020 Actions
During fiscal 2020, we initiated a restructuring program associated with footprint consolidation and structural improvements across all segments. In connection with this program, during the six months ended March 27, 2020, we recorded restructuring charges of $43 million. We expect to complete all restructuring actions commenced during the six months ended March 27, 2020 by the end of fiscal 2021 and to incur additional charges of approximately $10 million related primarily to employee severance and facility exit costs in the Transportation Solutions and Industrial Solutions segments.
Fiscal 2019 Actions
During fiscal 2019, we initiated a restructuring program associated with footprint consolidation and structural improvements impacting all segments. In connection with this program, during the six months ended March 27, 2020 and March 29, 2019, we recorded net restructuring charges of $2 million and $107 million, respectively. We expect to complete all restructuring actions commenced during fiscal 2019 by the end of fiscal 2021 and to incur additional charges of approximately $15 million related primarily to employee severance and facility exit costs in the Transportation Solutions and Industrial Solutions segments.
Pre-Fiscal 2019 Actions
Prior to fiscal 2019, we initiated a restructuring program associated with footprint consolidation and structural improvements primarily impacting the Industrial Solutions and Transportation Solutions segments. Also prior to fiscal 2019, we initiated a restructuring program associated with footprint consolidation related to recent acquisitions and structural improvements impacting all segments. During the six months ended March 27, 2020 and March 29, 2019, we recorded net restructuring charges of $1 million and $10 million, respectively, related to pre-fiscal 2019 actions. We expect additional charges related to pre-fiscal 2019 actions to be insignificant.
Total Restructuring Reserves
Restructuring reserves included on the Condensed Consolidated Balance Sheets were as follows:
170
245
Restructuring reserves
3. Discontinued Operations
During the six months ended March 29, 2019, we sold our Subsea Communications (“SubCom”) business for net cash proceeds of $297 million and incurred a pre-tax loss on sale of $86 million, related primarily to the recognition of cumulative translation adjustment losses of $67 million and certain guarantee liabilities. The SubCom business met the held for sale and discontinued operations criteria and was reported as such in all periods presented on the Condensed Consolidated Financial Statements. Prior to reclassification to discontinued operations, the SubCom business was included in the Communications Solutions segment.
In connection with the sale, we contractually agreed to continue to honor performance guarantees and letters of credit related to the SubCom business’ projects that existed as of the date of sale. These guarantees had a combined value of approximately $1.2 billion as of March 27, 2020 and are expected to expire at various dates through fiscal 2025. Also, under the terms of the definitive agreement, we are required to issue up to $300 million of new performance guarantees, subject to certain limitations, for projects entered into by the SubCom business following the sale for a period of up to three years. As of March 27, 2020, there were no such new performance guarantees outstanding. We have contractual recourse against the SubCom business if we are required to perform on any SubCom guarantees; however, based on historical experience, we do not anticipate having to perform.
The following table presents the summarized components of loss from discontinued operations, net of income taxes for the six months ended March 29, 2019:
41
(50)
Operating expenses
Pre-tax loss from discontinued operations
Pre-tax loss on sale of discontinued operations
(86)
Income tax benefit
4. Acquisitions
First Sensor AG
In March 2020, we acquired approximately 72% of the outstanding shares of First Sensor AG (“First Sensor”), a provider of sensing solutions based in Germany, for €209 million in cash (equivalent to $232 million). As a result of the transaction, we recognized a noncontrolling interest with a fair value of €96 million (equivalent to $107 million) as of the acquisition date. The fair value of the noncontrolling interest for First Sensor common shares that were not acquired was determined using the stated price in the Domination and Profit and Loss Transfer Agreement (“DPLTA”) which is considered
to be a level 2 observable input under the fair value hierarchy. The First Sensor business has been reported as part of our Transportation Solutions segment from the date of acquisition.
In April 2020, we and First Sensor entered into a DPLTA which will become effective following consenting resolution of the shareholders’ meeting of First Sensor and subsequent registration in the commercial register of First Sensor. We expect the DPLTA registration to occur in our fourth fiscal quarter. Under the terms of the DPLTA, upon its effectiveness, First Sensor minority shareholders will be offered to elect either (1) to remain First Sensor minority shareholders and receive recurring annual compensation of €0.56 per First Sensor share or (2) to put their First Sensor shares in exchange for compensation of €33.27 per First Sensor share. The ultimate amount and timing of any future cash payments related to the DPLTA is uncertain. The exercise of the put right by First Sensor minority shareholders is not within our control and will result in the First Sensor noncontrolling interest being presented as redeemable noncontrolling interest outside of equity on the Condensed Consolidated Balance Sheet following registration of the DPLTA.
Other Acquisitions
During the six months ended March 27, 2020, we acquired three additional businesses for a combined cash purchase price of $124 million, net of cash acquired. The acquisitions were reported as part of our Transportation Solutions and Industrial Solutions segments from the date of acquisition.
5. Inventories
Inventories consisted of the following:
Raw materials
277
260
Work in progress
838
739
Finished goods
886
837
6. Goodwill
The changes in the carrying amount of goodwill by segment were as follows:
Transportation
Industrial
Communications
Solutions
September 27, 2019(1)
2,124
3,039
577
(900)
Acquisitions
403
413
March 27, 2020(2)
1,622
3,038
575
In March 2020, we completed the acquisition of First Sensor and recognized goodwill in the Transportation Solutions segment. Due to the timing of the transaction, we have preliminarily allocated the purchase price of First Sensor to
goodwill. We are in the process of completing the valuation of identifiable intangible assets, assets acquired, and liabilities assumed; therefore, the current allocation is subject to adjustment upon finalization of those valuations. The amount of these potential adjustments could be significant. In addition, during the six months ended March 27, 2020, we recognized goodwill in the Transportation Solutions and Industrial Solutions segments in connection with other recent acquisitions. See Note 4 for additional information regarding acquisitions.
We test goodwill allocated to reporting units for impairment annually during the fiscal fourth quarter, or more frequently if events occur or circumstances exist that indicate that a reporting unit’s carrying value may exceed its fair value. As a result of current and projected declines in sales and profitability, due in part to the impact of the coronavirus disease COVID-19 and projected reductions in global automotive production, of the Sensors reporting unit of the Transportation Solutions segment during the quarter ended March 27, 2020, we determined that an indicator of impairment had occurred and goodwill impairment testing of this reporting unit was required.
As discussed in Note 1, during the quarter ended March 27, 2020, we adopted ASU No. 2017-04 which simplifies the subsequent measurement of goodwill by eliminating step 2 of the goodwill impairment test. Under the new standard, goodwill impairment is measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. We determined the fair value of the Sensors reporting unit to be $1.0 billion. This valuation was based on a discounted cash flows analysis incorporating our estimate of future operating performance, which we consider to be a level 3 unobservable input in the fair value hierarchy, and was corroborated using a market approach valuation. The goodwill impairment test indicated that the carrying value of the reporting unit exceeded its fair value by $900 million. As a result, we recorded a partial impairment charge of $900 million. The Sensors reporting unit had a remaining goodwill allocation of $626 million as of March 27, 2020.
Should economic conditions deteriorate further or remain depressed for a prolonged period of time, estimates of future cash flows for each of our reporting units may be insufficient to support the carrying value and the goodwill assigned to it, requiring impairment charges, including additional impairment charges for the Sensors reporting unit. Further impairment charges, if any, may be material to our results of operations and financial position.
7. Intangible Assets, Net
Intangible assets consisted of the following:
March 27, 2020
September 27, 2019
Gross
Net
Carrying
Amortization
Customer relationships
1,542
1,044
1,513
(459)
1,054
Intellectual property
1,259
(771)
488
1,260
(734)
526
33
2,833
(1,286)
2,806
(1,210)
Intangible asset amortization expense was $46 million and $45 million for the quarters ended March 27, 2020 and March 29, 2019, respectively, and $91 million and $90 million for the six months ended March 27, 2020 and March 29, 2019, respectively.
At March 27, 2020, the aggregate amortization expense on intangible assets is expected to be as follows:
Remainder of fiscal 2020
Fiscal 2021
179
Fiscal 2022
Fiscal 2023
Fiscal 2024
148
Fiscal 2025
129
Thereafter
643
8. Debt
During the quarter ended March 27, 2020, Tyco Electronics Group S.A. (“TEGSA”), our 100%-owned subsidiary, issued €550 million aggregate principal amount of 0.0% senior notes due February 2025. The notes are TEGSA’s unsecured senior obligations and rank equally in right of payment with all existing and any future senior indebtedness of TEGSA and senior to any subordinated indebtedness that TEGSA may incur. The notes are fully and unconditionally guaranteed as to payment on an unsecured basis by TE Connectivity Ltd.
During the quarter ended March 27, 2020, we reclassified $250 million of 4.875% senior notes due January 2021 from long-term debt to short-term debt on the Condensed Consolidated Balance Sheet.
As of September 27, 2019, TEGSA had $219 million of commercial paper outstanding at a weighted-average interest rate of 2.20%. TEGSA had no commercial paper outstanding at March 27, 2020.
The fair value of our debt, based on indicative valuations, was approximately $4,697 million and $4,278 million at March 27, 2020 and September 27, 2019, respectively.
9. Leases
We have facility, land, vehicle, and equipment leases that expire at various dates. We determine if a contract qualifies as a lease at inception. A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The right to control the use of an asset includes the right to obtain substantially all of the economic benefits of the identified asset and the right to direct the use of the identified asset.
Lease ROU assets and lease liabilities are recognized at the commencement date of the lease based on the present value of remaining lease payments over the lease term. Lease ROU assets represent our right to use the underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. We do not recognize ROU assets or lease liabilities that arise from short-term leases. Since our lease contracts do not contain a readily determinable implicit rate, we determine a fully-collateralized incremental borrowing rate that reflects a similar term to the lease and the economic environment of the applicable country or region in which the asset is leased.
We have elected to account for lease and non-lease components in our real estate leases as a single lease component; other leases generally do not contain non-lease components. The non-lease components in our real estate leases include logistics services, warehousing, and other operational costs. Many of these costs are variable, fluctuating based on services provided, such as pallets shipped in and out of a location or square footage of space occupied. These costs, and any other variable rental costs, are excluded from our ROU assets and lease liabilities, and instead are expensed as incurred. Some of our leases may include options to either renew or early terminate the lease. The exercise of these options is generally at our sole discretion and would only occur if there is an economic, financial, or business reason to do so. Such options are included in the lease term if we determine it is reasonably certain they will be exercised.
The components of lease cost were as follows:
Quarter Ended
Operating lease cost
Variable lease cost
26
Total lease cost
40
78
Amounts recognized on the Condensed Consolidated Balance Sheet were as follows:
($ in millions)
Operating lease ROU assets:
Operating lease liabilities:
115
Total operating lease liabilities
466
Weighted-average remaining lease term (in years)
5.9
Weighted-average discount rate
1.3
%
Cash flow information, including significant non-cash transactions, related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Payments for operating leases(1)
ROU assets obtained in exchange for new operating lease liabilities
14
At March 27, 2020, the maturities of operating lease liabilities were as follows:
67
53
Total lease payments
483
Less: interest
Present value of lease liabilities
The following table, which was included in our Annual Report on Form 10-K for the fiscal year ended September 27, 2019 and presented in accordance with the previous lease accounting standard, presents the future minimum lease payments under non-cancelable operating lease obligations as of September 27, 2019:
Fiscal 2020
102
81
55
118
540
10. 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 27, 2020, we concluded that we would incur investigation and remediation costs at these sites in the reasonably possible range of $14 million to $45 million, and we accrued $17 million as the probable loss, which was the best estimate within this range. 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 27, 2020, we had outstanding letters of credit, letters of guarantee, and surety bonds of $271 million.
We sold our SubCom business during fiscal 2019. In connection with the sale, we contractually agreed to honor certain performance guarantees and letters of credit related to the SubCom business. See Note 3 for additional information regarding these guarantees and the divestiture of the SubCom business.
11. Financial Instruments
Foreign Currency Exchange Rate Risk
During fiscal 2015, we entered into cross-currency swap contracts to reduce our exposure to foreign currency exchange rate risk associated with certain intercompany loans. The aggregate notional value of these contracts was €700 million and €1,000 million at March 27, 2020 and September 27, 2019, respectively. Certain contracts were terminated during the quarter ended March 27, 2020; the remaining contracts mature in fiscal 2022. Under the terms of these contracts, which have been designated as cash flow hedges, we make interest payments in euros at 3.50% per annum and receive interest in U.S. dollars at a weighted-average rate of 5.34% per annum. Upon maturity, we will pay the notional value of the contracts in euros and receive U.S. dollars from our counterparties. In connection with the cross-currency swap contracts, both counterparties to each contract are required to provide cash collateral.
These cross-currency swap contracts were recorded on the Condensed Consolidated Balance Sheets as follows:
At March 27, 2020 and September 27, 2019, collateral received from or paid to our counterparties approximated the net derivative position. Collateral is recorded in accrued and other current liabilities when the contracts are in a net asset position, or prepaid expenses and other current assets when the contracts are in a net liability position on the Condensed Consolidated Balance Sheets. The impacts of these cross-currency swap contracts were as follows:
Gains recorded in other comprehensive income (loss)
Gains (losses) excluded from the hedging relationship(1)
Hedge of Net Investment
We hedge our net investment in certain foreign operations using intercompany loans and external borrowings denominated in the same currencies. The aggregate notional value of these hedges was $3,429 million and $3,374 million at March 27, 2020 and September 27, 2019, respectively.
We also use a cross-currency swap program to hedge our net investment in certain foreign operations. The aggregate notional value of the contracts under this program was $1,889 million and $1,844 million at March 27, 2020 and September 27, 2019, respectively. Under the terms of these contracts, we receive interest in U.S. dollars at a weighted-average rate of 2.62% per annum and pay no interest. Upon the maturity of these contracts at various dates through fiscal 2024, we will pay the notional value of the contracts in the designated foreign currency and receive U.S. dollars from our counterparties. We are not required to provide collateral for these contracts.
23
The impacts of our hedge of net investment programs were as follows:
Foreign currency exchange gains (losses) on intercompany loans and external borrowings(1)
57
(8)
112
Gains on cross-currency swap contracts designated as hedges of net investment(2)
12. Retirement Plans
The net periodic pension benefit cost (credit) for all non-U.S. and U.S. defined benefit pension plans was as follows:
Non-U.S. Plans
U.S. Plans
Operating expense:
Service cost
Other (income) expense:
Interest cost
Expected return on plan assets
(14)
Amortization of net actuarial loss
Amortization of prior service credit
Net periodic pension benefit cost (credit)
(29)
During the six months ended March 27, 2020, we contributed $19 million to our non-U.S. pension plans.
13. Income Taxes
We recorded income tax expense of $42 million and $91 million for the quarters ended March 27, 2020 and March 29, 2019, respectively. The income tax expense for the quarter ended March 27, 2020 included an income tax benefit of $31 million related to pre-separation tax matters and the termination of the Tax Sharing Agreement. See the “Tax Sharing Agreement” section below for additional information. The pre-tax goodwill impairment charge of $900 million recorded during the quarter ended March 27, 2020 resulted in a tax benefit of $4 million as the associated goodwill was primarily not deductible for income tax purposes. See Note 6 for additional information regarding the impairment of goodwill. The income tax expense for the quarter ended March 29, 2019 included $15 million of income tax expense associated with the tax impacts of certain legal entity restructurings and intercompany transactions, partially offset by a $12 million income tax benefit resulting from lapses of statutes of limitations in certain non-U.S. jurisdictions.
We recorded income tax expense of $489 million and $169 million for the six months ended March 27, 2020 and March 29, 2019, respectively. The income tax expense for the six months ended March 27, 2020 included $355 million of income tax expense related to the tax impacts of certain measures of the Switzerland Federal Act on Tax Reform and AHV Financing (“Swiss Tax Reform”), and an income tax benefit of $31 million related to pre-separation tax matters and the termination of the Tax Sharing Agreement. See the “Swiss Tax Reform” and “Tax Sharing Agreement” sections below for additional information. The income tax expense for the six months ended March 29, 2019 included $15 million of income tax expense associated with the tax impacts of certain legal entity restructurings and intercompany transactions.
Although it is difficult to predict the timing or results of our worldwide examinations, we estimate that approximately $100 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 27, 2020.
Swiss Tax Reform
The Federal Act on Tax Reform and AHV Financing eliminates certain preferential tax items and implements new tax rates at both the federal and cantonal levels. During fiscal 2019, Switzerland enacted the federal provisions of Swiss Tax Reform, and the federal tax authority issued guidance abolishing certain interest deductions. The impacts of these measures were reflected in our fiscal 2019 Consolidated Financial Statements.
In October 2019, the canton of Schaffhausen enacted Swiss Tax Reform into law, including reductions in tax rates. During the six months ended March 27, 2020, we recognized $355 million of income tax expense related primarily to cantonal implementation and the resulting write-down of certain deferred tax assets to the lower tax rates.
Tax Sharing Agreement
Upon our separation from Tyco International plc in fiscal 2007, we entered into a Tax Sharing Agreement with Tyco International plc (now part of Johnson Controls International plc) and Covidien plc (now part of Medtronic plc) under which we shared certain income tax liabilities for periods prior to and including June 29, 2007. Pursuant to the Tax Sharing Agreement, we entered into certain guarantee commitments and indemnifications.
In March 2020, we, Johnson Controls International plc, and Medtronic plc entered into an agreement to terminate the Tax Sharing Agreement. We believe that substantially all income tax matters that may be subject to the Tax Sharing Agreement have been settled with tax authorities and we do not expect any remaining tax matters to have a material effect on our results of operations, financial position, or cash flows. Accordingly, during the quarter ended March 27, 2020, we recognized an income tax benefit of $31 million and net other income of $8 million representing settlement of the remaining shared pre-separation income tax matters and indemnification balances.
14. Earnings (Loss) Per Share
The weighted-average number of shares outstanding used in the computations of basic and diluted earnings (loss) per share were as follows:
Dilutive impact of share-based compensation arrangements
For the quarter and six months ended March 27, 2020, there were nonvested share awards and options outstanding with underlying exercise prices less than the average market prices of our common shares; however, these were excluded from the calculation of diluted loss per share as inclusion would be antidilutive as a result of our loss during the period. Such shares not included in the computation of diluted loss per share were one million and two million in the quarter and six months ended March 27, 2020, respectively.
The following share options were not included in the computation of diluted earnings (loss) 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
15. Equity
In March 2020, our shareholders reapproved and extended through March 11, 2022, our board of directors’ authorization to issue additional new shares, subject to certain conditions specified in our articles of association, in aggregate not exceeding 50% of the amount of our authorized shares.
Common Shares Held in Treasury
In March 2020, our shareholders approved the cancellation of approximately 12 million shares purchased under our share repurchase program during the period beginning September 29, 2018 and ending September 27, 2019. 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.
We paid cash dividends to shareholders as follows:
Dividends paid per common share
0.46
0.44
0.92
0.88
In March 2020, our shareholders approved a dividend payment to shareholders of $1.92 per share, payable in four equal quarterly installments of $0.48 per share beginning in the third quarter of fiscal 2020 and ending in the second quarter of fiscal 2021.
Upon shareholders’ approval of a dividend payment, we record a liability with a corresponding charge to shareholders’ equity. At March 27, 2020 and September 27, 2019, the unpaid portion of the dividends recorded in accrued and other current liabilities on the Condensed Consolidated Balance Sheets totaled $636 million and $308 million, respectively.
Share Repurchase Program
Common shares repurchased under the share repurchase program were as follows:
Number of common shares repurchased
Repurchase value
423
684
At March 27, 2020, we had $1.1 billion of availability remaining under our share repurchase authorization.
16. Share Plans
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 27, 2020, there was $150 million of unrecognized compensation expense related to share-based awards, which is expected to be recognized over a weighted-average period of 2.1 years.
During the quarter ended December 27, 2019, we granted the following share-based awards as part of our annual incentive plan grant:
Grant-Date
Fair Value
Share options
1.5
15.52
Restricted share awards
0.5
93.63
Performance share awards
0.2
As of March 27, 2020, we had 15 million shares available for issuance under our stock and incentive plans, of which the TE Connectivity Ltd. 2007 Stock and Incentive Plan, amended and restated as of March 8, 2017, was the primary plan.
Share-Based Compensation Assumptions
The 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
1.8
Expected annual dividend per share
1.84
Expected life of options (in years)
5.1
17. Segment and Geographic Data
Net sales by segment(1) and industry end market(2) were as follows:
Transportation Solutions:
Automotive
1,365
1,425
2,770
2,894
Commercial transportation
294
324
552
621
Sensors
198
222
442
Total Transportation Solutions
1,857
1,971
3,725
3,957
Industrial Solutions:
Aerospace, defense, oil, and gas
318
331
627
616
Industrial equipment
280
326
543
641
Medical(3)
186
176
365
344
Energy
178
174
Total Industrial Solutions
962
1,007
1,889
1,935
Communications Solutions:
Data and devices
218
251
437
508
Appliances
183
312
359
Total Communications Solutions
376
434
749
867
Net sales by geographic region(1) and segment were as follows:
Europe/Middle East/Africa (“EMEA”):
766
824
1,468
1,580
361
382
701
732
61
70
116
135
Total EMEA
1,188
1,276
2,285
2,447
Asia–Pacific:
631
674
1,373
1,438
138
155
283
310
241
448
495
Total Asia–Pacific
991
1,070
2,104
2,243
Americas:
460
473
884
939
463
470
905
893
93
123
185
237
Total Americas
1,016
1,066
1,974
2,069
Operating income (loss) by segment was as follows:
(606)
316
(290)
648
142
137
257
77
89
18. 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.
Condensed Consolidating Statement of Operations (unaudited)
TE
Connectivity
Consolidating
TEGSA
Subsidiaries
Adjustments
Selling, general, and administrative expenses, net(1)
(122)
451
122
(514)
(10)
Equity in net loss of subsidiaries
(403)
(493)
896
Equity in net loss of subsidiaries of discontinued operations
Intercompany interest income (expense), net
(26)
Loss from continuing operations before income taxes
(407)
(451)
904
Loss from continuing operations
(497)
(198)
Less: other comprehensive loss attributable to noncontrolling interests
Comprehensive loss attributable to TE Connectivity Ltd., TEGSA, or Other Subsidiaries
(564)
(693)
1,257
TEGSA selling, general, and administrative expenses include gains of $115 million related to intercompany transactions. These gains are offset by corresponding losses recorded by other subsidiaries.
Selling, general, and administrative expenses, net
336
567
Equity in net income of subsidiaries
489
560
(1,049)
Equity in net income of subsidiaries of discontinued operations
82
Income from continuing operations before income taxes
492
651
(1,062)
Income from continuing operations
Income from discontinued operations, net of income taxes
499
563
47
(144)
Comprehensive income
596
610
(1,206)
(106)
776
106
(329)
(392)
721
(333)
726
(330)
(396)
(90)
160
(398)
(484)
882
TE Connectivity Ltd. and TEGSA selling, general, and administrative expenses include gains of $14 million and $101 million, respectively, related to intercompany transactions. These gains are offset by corresponding losses recorded by other subsidiaries.
63
(98)
797
(63)
98
979
(41)
Other income (expense), net
949
(1,879)
(46)
143
(55)
(78)
133
(1,736)
833
903
(228)
985
(1,964)
TEGSA selling, general, and administrative expenses include gains of $110 million related to intercompany transactions. These gains are offset by corresponding losses recorded by other subsidiaries.
Condensed Consolidating Balance Sheet (unaudited)
As of March 27, 2020
Intercompany receivables
3,590
59
(3,695)
419
3,622
5,736
Investment in subsidiaries
13,418
27,701
(41,119)
Intercompany loans receivable
2,568
16,040
(18,608)
100
830
13,470
33,991
35,328
(63,422)
602
1,389
655
1,209
Intercompany payables
3,643
4,299
704
2,651
Intercompany loans payable
695
20,573
7,627
(22,303)
As of September 27, 2019
2,959
(3,068)
431
2,995
5,574
13,865
28,336
(42,201)
2,562
16,033
(18,595)
72
13,918
33,965
35,675
(63,864)
568
1,356
328
1,228
3,019
3,348
625
2,635
380
20,100
7,339
(21,663)
29
Condensed Consolidating Statement of Cash Flows (unaudited)
Net cash provided by (used in) operating activities(1)
493
971
(458)
Change in intercompany loans
(625)
Changes in parent company equity(2)
(105)
Net decrease in commercial paper
(262)
(146)
Intercompany distributions(1)
458
Loan activity with parent
624
(27)
Net cash provided by (used in) financing activities
114
132
(424)
(167)
30
Net cash provided by (used in) continuing operating activities
(121)
(79)
1,083
Net cash provided by (used in) operating activities
1,053
5,475
(5,475)
Net cash provided by (used in) continuing investing activities
5,787
(395)
Net cash provided by (used in) investing activities
(397)
Changes in parent company equity(1)
(5,704)
5,666
Net increase in commercial paper
1,121
(6,596)
Net cash provided by (used in) continuing financing activities
121
(5,708)
(972)
(940)
31
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 (decline) which is a non-GAAP financial measure. See “Non-GAAP Financial Measure” for additional information regarding this measure.
Overview
TE Connectivity Ltd. (“TE Connectivity” or the “Company,” which may be referred to as “we,” “us,” or “our”) is a global industrial technology leader creating a safer, sustainable, productive, and connected future. Our broad range of connectivity and sensor solutions, proven in the harshest environments, enable advancements in transportation, industrial applications, medical technology, energy, data communications, and the home.
The second quarter and first six months of fiscal 2020 included the following:
COVID-19 Pandemic and Economic Conditions
A novel strain of coronavirus (“COVID-19”) was first identified in China in December 2019 and subsequently declared a pandemic by the World Health Organization. To date, COVID-19 has surfaced in nearly all regions around the world and resulted in travel restrictions and business slowdowns or shutdowns in affected areas. The COVID-19 pandemic negatively affected our sales and operating results during the second quarter of fiscal 2020, and we expect that COVID-19 will have a material impact on our financial condition and results of operations in the near term and may have a material impact on our financial condition, liquidity, and results of operations in future periods.
COVID-19 is currently impacting, and we expect that COVID-19 will continue to impact, our business operations globally, causing disruption in our suppliers’ and customers’ supply chains, some of our business locations to reduce or suspend operations, and a reduction in demand for certain products from direct customers or end markets. Accordingly, while a number of our businesses are operating as essential businesses, some of our business locations have adjusted, reduced, or suspended operating activities at certain of their locations. In addition, COVID-19 may have far-reaching impacts on many additional aspects of our operations, directly and indirectly, including with respect to its impacts on customer behaviors, business and manufacturing operations, inventory, our employees, and the market generally, and the scope and nature of these impacts continue to evolve each day. We expect to continue to assess the evolving impact of the COVID-19 pandemic and intend to adjust our operations accordingly. For example, throughout our operations we have enacted additional health and safety measures for the protection of our employees, including providing personal protective equipment, enhanced cleaning and sanitizing of our facilities, and remote working arrangements.
We expect that COVID-19 will negatively impact several of the markets we serve, in particular the automotive and commercial aerospace markets. We are expecting reduced sales in these markets in the near term and may experience reduced sales in these markets in future periods. As a result, we have taken actions to manage costs. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, suppliers, and shareholders.
As a result of current and projected declines in sales and profitability, due in part to the impact of COVID-19 and projected reductions in global automotive production, of the Sensors reporting unit of the Transportation Solutions segment during the second quarter of fiscal 2020, we determined that an indicator of impairment had occurred and goodwill impairment testing of this reporting unit was required.
As discussed in Note 1 to the Condensed Consolidated Financial Statements, during the second quarter of fiscal 2020, we adopted Accounting Standards Update (“ASU”) No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating step 2 of the goodwill impairment test. Under the new standard, goodwill impairment is measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. We determined the fair value of the Sensors reporting unit to be $1.0 billion. This valuation was based on a discounted cash flows analysis incorporating our estimate of future operating performance, which we consider to be a level 3 unobservable input in the fair value hierarchy, and was corroborated using a market approach valuation. The goodwill impairment test indicated that the carrying value of the reporting unit exceeded its fair value by $900 million. As a result, we recorded a partial impairment charge of $900 million. The Sensors reporting unit had a remaining goodwill allocation of $626 million as of March 27, 2020.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act provides certain relief to companies, including provisions relating to payroll tax credits, deferral of employer side social security taxes, net operating loss carryback periods, acceleration of alternative minimum tax credit refunds, modifications to the net interest deduction rules, and delayed minimum contributions with respect to defined benefit plans. We do not expect the CARES Act to have a material effect on our results of operations, financial position, or liquidity.
For a further discussion of the risks and uncertainties relating to the COVID-19 pandemic for our results of operations and business condition, see “Part II. Item 1A. Risk Factors” below.
Outlook
We expect our net sales to decline approximately 25% in the third quarter of fiscal 2020 as compared to $3.2 billion in the second quarter of fiscal 2020. This decline is driven primarily by weakness in the automotive and commercial aerospace markets as well as supply chain adjustments. Partially offsetting the decline, we expect our net sales to benefit from strength in the defense and the data and devices markets.
We expect our net sales to decrease in the automotive end market in the third quarter of fiscal 2020 due primarily to an approximate 33% decline in global automotive production as compared to the second quarter of fiscal 2020. Additionally, in the third quarter of fiscal 2020, we expect our net sales in the automotive end market to reflect a negative impact of approximately $200 million from reduced demand due to customer inventory builds in the second quarter of fiscal 2020 in response to an uncertain manufacturing environment.
We expect our net sales in the commercial aerospace market to be negatively impacted by reduced production in the second half of fiscal 2020 as compared to the first half of fiscal 2020. We expect an approximate 33% decline in production in the commercial aerospace market in the third quarter of fiscal 2020 as compared to the second quarter of fiscal 2020 due primarily to the impacts of COVID-19.
We expect our net sales to be negatively impacted by approximately $100 million in the third quarter of fiscal 2020 due to supply chain disruptions resulting from the COVID-19 pandemic.
For fiscal 2020, we are withdrawing our full year guidance due to limited visibility of the impact of the COVID-19 pandemic on future demand.
We are monitoring the current macroeconomic environment and its potential effects on our customers and the end markets we serve, including developments related to the COVID-19 pandemic. We have taken actions to manage costs and will 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.”
In March 2020, we acquired approximately 72% of the outstanding shares of First Sensor for €209 million in cash (equivalent to $232 million). This business has been reported as part of our Transportation Solutions segment from the date of acquisition.
During the first six months of fiscal 2020, we acquired three additional businesses for a combined cash purchase price of $124 million, net of cash acquired. The acquisitions were reported as part of our Transportation Solutions and Industrial Solutions segments from the date of acquisition.
See Note 4 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions.
34
Results of Operations
Net Sales
The following table presents our net sales and the percentage of total net sales by segment:
58
The following table provides an analysis of the change in our net sales by segment:
Change in Net Sales for the Quarter Ended March 27, 2020
Change in Net Sales for the Six Months Ended March 27, 2020
versus Net Sales for the Quarter Ended March 29, 2019
versus Net Sales for the Six Months Ended March 29, 2019
Organic Net Sales
Growth (Decline)
(5.8)
(5.0)
(232)
(5.9)
(211)
(5.3)
(72)
(45)
(4.5)
(3.0)
(2.4)
(19)
(1.0)
(13.4)
(12.6)
(118)
(13.6)
(13.1)
(217)
(6.4)
(183)
(5.4)
(344)
(5.1)
(103)
Net sales decreased $217 million, or 6.4%, in the second quarter of fiscal 2020 as compared to the second quarter of fiscal 2019. The decrease in net sales resulted from organic net sales declines of 5.4% and the negative impact of foreign currency translation of 1.8% due to the weakening of certain foreign currencies, partially offset by sales contributions from acquisitions of 0.8%. In the second quarter of fiscal 2020, our net sales declines included significant unfavorable impacts from the COVID-19 pandemic. Price erosion adversely affected organic net sales by $53 million in the second quarter of fiscal 2020.
In the first six months of fiscal 2020, net sales decreased $396 million, or 5.9%, as compared to the first six months of fiscal 2019 due to organic net sales declines of 5.1% and the negative impact of foreign currency translation of 1.5% due to the weakening of certain foreign currencies, partially offset by sales contributions from acquisitions of 0.7%. The unfavorable impacts of the COVID-19 pandemic were included in our net sales declines in the first six months of fiscal 2020. Price erosion adversely affected organic net sales by $94 million in the first six months of fiscal 2020.
See further discussion of net sales below under “Segment Results.”
Net Sales by Geographic Region. Our business operates in three geographic regions—EMEA, Asia–Pacific, and the Americas—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 60% of our net sales were invoiced in currencies other than the U.S. dollar in the first six months of fiscal 2020.
35
The following table presents our net sales and the percentage of total net sales by geographic region(1):
EMEA
Asia–Pacific
Americas
The following table provides an analysis of the change in our net sales by geographic region:
(88)
(6.9)
(162)
(6.6)
(4.9)
(7.4)
(61)
(5.7)
(139)
(6.2)
(4.7)
(54)
(95)
(4.6)
(108)
(5.2)
Cost of Sales and Gross Margin
The following table presents cost of sales and gross margin information:
Change
(128)
(223)
As a percentage of net sales
67.8
67.2
67.6
67.0
(89)
(173)
32.2
32.8
32.4
33.0
Gross margin decreased $89 million and $173 million in the second quarter and first six months of fiscal 2020, respectively, as compared to the same periods of fiscal 2019. The decreases were primarily as a result of lower volume and price erosion, partially offset by lower material costs. Gross margin as a percentage of net sales decreased to 32.2% in the second quarter of fiscal 2020 from 32.8% in the second quarter of fiscal 2019 and decreased to 32.4% in the first six months of fiscal 2020 from 33.0% in the same period of fiscal 2019.
We use a wide variety of raw materials in the manufacture of our products. Cost of sales and gross margin are subject to variability in raw material prices which continue to fluctuate for many of the raw materials we use, including copper, gold, and silver. We expect to purchase approximately 175 million pounds of copper, 120,000 troy ounces of gold, and 2.4 million troy ounces of silver in fiscal 2020. The following table presents the average prices incurred related to copper, gold, and silver:
Measure
Copper
Lb.
2.78
3.01
2.81
2.92
Gold
Troy oz.
1,376
1,312
1,303
Silver
16.17
16.60
16.21
Operating Expenses
The following table presents operating expense information:
(21)
(43)
11.0
10.9
11.3
(71)
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses decreased $21 million in the second quarter of fiscal 2020 from the second quarter of fiscal 2019 due primarily to receipt of a lease termination incentive. In the first six months of fiscal 2020, selling, general, and administrative expenses decreased $43 million from the same period of fiscal 2019 due primarily to receipt of a lease termination incentive, reduced selling expenses, and cost control measures and savings attributable to restructuring actions. Selling, general, and administrative expenses as a percentage of net sales were 11.0% and 10.9% in the second quarters of fiscal 2020 and 2019, respectively, and 11.3% in both the first six months of fiscal 2020 and 2019.
Restructuring and Other Charges, Net. We are committed to continuous productivity improvements, and we evaluate opportunities to simplify our global manufacturing footprint, migrate facilities to lower-cost regions, reduce fixed costs, and eliminate excess capacity. These initiatives are designed to help us maintain our competitiveness in the industry, improve our operating leverage, and position us for future growth.
During fiscal 2020 and 2019, we initiated restructuring programs associated with footprint consolidation and structural improvements across all segments. In connection with these initiatives, we incurred net restructuring charges of $46 million during the first six months of fiscal 2020, of which $43 million related to the fiscal 2020 restructuring program. Annualized cost savings related to the fiscal 2020 actions commenced during the first six months of fiscal 2020 are expected to be approximately $45 million and are expected to be realized by the end of fiscal 2022. Cost savings will be reflected primarily in cost of sales and selling, general, and administrative expenses. For fiscal 2020, we expect total restructuring charges to be approximately $200 million to $250 million and total spending, which will be funded with cash from operations, to be approximately $220 million.
See Note 2 to the Condensed Consolidated Financial Statements for additional information regarding net restructuring and other charges.
Impairment of Goodwill. During the second quarter of fiscal 2020, we recorded a goodwill impairment charge of $900 million related to the Sensors reporting unit in our Transportation Solutions segment. See Note 6 to the Condensed Consolidated Financial Statements for additional information regarding the impairment of goodwill.
Operating Income (Loss)
The following table presents operating income (loss) and operating margin information:
(945)
(958)
Operating margin
(13.0)
15.5
0.9
15.0
Operating income (loss) included the following:
Acquisition-related charges:
Charges associated with the amortization of acquisition-related fair value adjustments
934
965
See discussion of operating income (loss) below under “Segment Results.”
Non-Operating Items
The following table presents select non-operating information:
(49)
169
320
Effective tax rate
(10.2)
17.5
815.0
17.2
96
Interest Expense. Interest expense decreased $19 million in the first six months of fiscal 2020 as compared to the same period of fiscal 2019 due primarily to the cross-currency swap program that hedges our net investment in certain foreign operations. Under the terms of these contracts, we receive interest in U.S. dollars at a weighted-average rate of 2.62% per annum and pay no interest. See Note 11 to the Condensed Consolidated Financial Statements for additional information regarding our cross-currency swap program.
Income Taxes. See Note 13 to the Condensed Consolidated Financial Statements for discussion of items impacting income tax expense and the effective tax rate for the second quarters and first six months of fiscal 2020 and 2019, including termination of the Tax Sharing Agreement and the Switzerland Federal Act on Tax Reform and AHV Financing.
Income (Loss) from Discontinued Operations, Net of Income Taxes. During the first six months of fiscal 2019, we sold our Subsea Communications (“SubCom”) business for net cash proceeds of $297 million and incurred a pre-tax loss on sale of $86 million. The SubCom business met the held for sale and discontinued operations criteria and was reported as such in all periods presented on the Condensed Consolidated Financial Statements. Prior to reclassification to discontinued operations, the SubCom business was included in the Communications Solutions segment. The net sales of the business were $41 million in the first six months of fiscal 2019 which represented one month of activity. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding discontinued operations.
Segment Results
Net Sales. The following table presents the Transportation Solutions segment’s net sales and the percentage of total net sales by industry end market(1):
74
The following table provides an analysis of the change in the Transportation Solutions segment’s net sales by industry end market:
(4.2)
(2.1)
(124)
(4.3)
(2.5)
(52)
(9.3)
(36)
(11.1)
(81)
(13.2)
(24)
(10.8)
(33)
(14.9)
(8.8)
Net sales in the Transportation Solutions segment decreased $114 million, or 5.8%, in the second quarter of fiscal 2020 from the second quarter of fiscal 2019 due to organic net sales declines of 5.0% and the negative impact of foreign currency translation of 2.1%, partially offset by sales contributions from acquisitions of 1.3%. In the second quarter of fiscal 2020, our net sales declines included significant unfavorable impacts from the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
In the first six months of fiscal 2020, net sales in the Transportation Solutions segment decreased $232 million, or 5.9%, as compared to the first six months of fiscal 2019 as a result of organic net sales declines of 5.3% and the negative impact of foreign currency translation of 1.9%, partially offset by sales from acquisitions of 1.3%. Net sales declines in the
first six months of fiscal 2020 included the unfavorable impacts of the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
Operating Income (Loss). The following table presents the Transportation Solutions segment’s operating income (loss) and operating margin information:
(922)
(938)
(32.6)
16.0
(7.8)
16.4
Operating income (loss) in the Transportation Solutions segment decreased $922 million and $938 million in the second quarter and first six months of fiscal 2020, respectively, as compared to the same periods of fiscal 2019. The Transportation Solutions segment’s operating income (loss) included the following:
928
937
Excluding these items, operating income decreased in the second quarter and first six months of fiscal 2020 as compared to the same periods of fiscal 2019 primarily as a result of lower volume and price erosion, partially offset by lower material costs and improved manufacturing productivity.
Net Sales. The following table presents the Industrial Solutions segment’s net sales and the percentage of total net sales by industry end market(1):
Medical
The following table provides an analysis of the change in the Industrial Solutions segment’s net sales by industry end market:
(3.9)
(2.9)
2.8
(14.1)
(40)
(12.5)
(15.3)
(87)
(13.7)
5.7
6.1
6.3
2.3
5.6
6.0
8.7
In the Industrial Solutions segment, net sales decreased $45 million, or 4.5%, in the second quarter of fiscal 2020 as compared to the second quarter of fiscal 2019 due to organic net sales declines of 3.0% and the negative impact of foreign currency translation of 1.5%. Net sales declines in the second quarter of fiscal 2020 included significant unfavorable impacts from the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
In the first six months of fiscal 2020, net sales in the Industrial Solutions segment decreased $46 million, or 2.4%, as compared to the same period of fiscal 2019 as a result of the negative impact of foreign currency translation of 1.4% and organic net sales declines of 1.0%. The unfavorable impacts of the COVID-19 pandemic were included in net sales declines in the first six months of fiscal 2020. Our organic net sales by industry end market were as follows:
Operating Income. The following table presents the Industrial Solutions segment’s operating income and operating margin information:
Operating income
14.8
13.6
12.2
Operating income in the Industrial Solutions segment increased $5 million and $20 million in the second quarter and first six months of fiscal 2020, respectively, as compared to the same periods of fiscal 2019. The Industrial Solutions segment’s operating income included the following:
Excluding these items, operating income decreased in the second quarter and first six months of fiscal 2020 as compared to the same periods of fiscal 2019 primarily as a result of lower volume and price erosion, partially offset by lower material costs.
Net Sales. The following table presents the Communications Solutions segment’s net sales and the percentage of total net sales by industry end market(1):
The following table provides an analysis of the change in the Communications Solutions segment’s net sales by industry end market:
(14.0)
(11.9)
(47)
(11.7)
Net sales in the Communications Solutions segment decreased $58 million, or 13.4%, in the second quarter of fiscal 2020 as compared to the second quarter of fiscal 2019 due primarily to organic net sales declines of 12.6%. In the second quarter of fiscal 2020, the unfavorable impacts of the COVID-19 pandemic were included in our net sales declines. Our organic net sales by industry end market were as follows:
In the first six months of fiscal 2020, net sales in the Communications Solutions segment decreased $118 million, or 13.6%, as compared to the first six months of fiscal 2019 primarily as a result of organic net sales declines of 13.1%. Net sales declines in the first six months of fiscal 2020 included the unfavorable impacts of the COVID-19 pandemic. Our organic net sales by industry end market were as follows:
Operating Income. The following table presents the Communications Solutions segment’s operating income and operating margin information:
13.0
17.7
11.9
14.9
Operating income in the Communications Solutions segment decreased $28 million and $40 million in the second quarter and first six months of fiscal 2020, respectively, as compared to the same periods of fiscal 2019. The Communications Solutions segment’s operating income included the following:
Excluding these items, operating income decreased in the second quarter and first six months of fiscal 2020 due primarily to lower volume and price erosion.
Liquidity and Capital Resources
Our ability to fund our future capital needs will be affected by our ability to continue to generate cash from operations and may be affected by our ability to access the capital markets, money markets, or other sources of funding, as well as the capacity and terms of our financing arrangements. We believe that cash generated from operations and, to the extent necessary, these other sources of potential funding will be sufficient to meet our anticipated capital needs for the foreseeable future, including the payments of $350 million of floating rate senior notes due in fiscal 2020 and $250 million of 4.875% senior notes due in fiscal 2021, and anticipated compensation payments to First Sensor minority shareholders. We may use excess cash to purchase a portion of our common shares pursuant to our authorized share repurchase program, to acquire strategic businesses or product lines, to pay dividends on our common shares, or to reduce our outstanding debt. The cost or availability of future funding may be impacted by financial market conditions. We will continue to monitor financial markets and respond as necessary to changing conditions, including future developments related to the COVID-19 pandemic. There is uncertainty surrounding the duration and scope of the COVID-19 pandemic and it may have a material impact on our liquidity and financial conditions. We believe that we have sufficient financial resources and liquidity which, along with managing expenses and capital structure flexibility, will enable us to meet our ongoing working capital and other cash flow needs during the COVID-19 pandemic and resulting period of economic uncertainty which will include reduced sales and net income levels for us. For further information regarding the impact of COVID-19 on our liquidity and capital resources, please see “Part II. Item 1A. Risk Factors” in this report.
Cash Flows from Operating Activities
In the first six months of fiscal 2020, net cash provided by continuing operating activities increased slightly to $892 million from $883 million in the first six months of fiscal 2019. The amount of income taxes paid, net of refunds, during the first six months of fiscal 2020 and 2019 was $144 million and $177 million, respectively.
Cash Flows from Investing Activities
Capital expenditures were $309 million and $401 million in the first six months of fiscal 2020 and 2019, respectively. We expect fiscal 2020 capital spending to be approximately $575 million. 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.
44
During the first six months of fiscal 2020, we acquired four businesses, including First Sensor, for a combined cash purchase price of $356 million, net of cash acquired. See Note 4 to the Condensed Consolidated Financial Statements for additional information.
During the first six months of fiscal 2019, we received net cash proceeds of $297 million related to the sale of our SubCom business. See additional information in Note 3 to the Condensed Consolidated Financial Statements.
Cash Flows from Financing Activities and Capitalization
Total debt at March 27, 2020 and September 27, 2019 was $4,355 million and $3,965 million, respectively. See Note 8 to the Condensed Consolidated Financial Statements for additional information regarding debt.
In the second quarter of fiscal 2020, Tyco Electronics Group S.A. (“TEGSA”), our 100%-owned subsidiary, issued €550 million aggregate principal amount of 0.0% senior notes due February 2025. 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 November 2023 and total commitments of $1.5 billion. TEGSA had no borrowings under the Credit Facility at March 27, 2020 or September 27, 2019.
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 27, 2020, 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 on an unsecured basis by its parent, TE Connectivity Ltd.
Payments of common share dividends to shareholders were $307 million and $299 million in the first six months of fiscal 2020 and 2019, respectively.
We repurchased approximately 5 million of our common shares for $423 million and approximately 9 million of our common shares for $684 million under the share repurchase program during the first six months of fiscal 2020 and 2019, respectively. At March 27, 2020, we had $1.1 billion 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 end dates ranging from fiscal 2020 through the completion of such transactions. The guarantees would be triggered in the event of nonperformance, and the
potential exposure for nonperformance under the guarantees would not have a material effect on our results of operations, financial position, or cash flows.
In disposing of assets or businesses, we often provide representations, warranties, and/or indemnities to cover various risks including unknown damage to assets, environmental risks involved in the sale of real estate, liability for investigation and remediation of environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not expect that these uncertainties will have a material adverse effect on our results of operations, financial position, or cash flows.
As discussed above, in the first six months of fiscal 2019, we sold our SubCom business. In connection with the sale, we contractually agreed to continue to honor performance guarantees and letters of credit related to the SubCom business’ projects that existed as of the date of sale. These guarantees had a combined value of approximately $1.2 billion as of March 27, 2020 and are expected to expire at various dates through fiscal 2025. Also, under the terms of the definitive agreement, we are required to issue up to $300 million of new performance guarantees, subject to certain limitations, for projects entered into by the SubCom business following the sale for a period of up to three years. As of March 27, 2020, there were no such new performance guarantees outstanding. We have contractual recourse against the SubCom business if we are required to perform on any SubCom guarantees; however, based on historical experience, we do not anticipate having to perform. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding the divestiture of the SubCom business.
Critical Accounting Policies and Estimates
The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses.
Our accounting policies for revenue recognition, goodwill and other intangible assets, income taxes, and pension are based on, among other things, judgments and assumptions made by management. For additional information regarding these policies and the underlying accounting assumptions and estimates used in these policies, refer to the Consolidated Financial Statements and accompanying notes contained in our Annual Report on Form 10-K for the fiscal year ended September 27, 2019. Except as set forth below, there were no significant changes to this information during the first six months of fiscal 2020.
We adopted ASU No. 2017-04, an update to Accounting Standards Codification 350, Intangibles–Goodwill and Other, in the second quarter of fiscal 2020. See Note 1 to the Condensed Consolidated Financial Statements for information regarding our goodwill and other intangible assets policy and the adoption of ASU No. 2017-04.
Accounting Pronouncements
See Note 1 to the Condensed Consolidated Financial Statements for information regarding recently adopted accounting pronouncements.
Non-GAAP Financial Measure
Organic Net Sales Growth (Decline)
We present organic net sales growth (decline) as we believe it is appropriate for investors to consider this adjusted financial measure in addition to results in accordance with GAAP. Organic net sales growth (decline) represents net sales growth (decline) (the most comparable GAAP financial measure) excluding the impact of foreign currency exchange rates, and acquisitions and divestitures that occurred in the preceding twelve months, if any. Organic net sales growth (decline) is a useful measure of our performance because it excludes items that are not completely under management’s control, such as the
impact of changes in foreign currency exchange rates, and items that do not reflect the underlying growth of the company, such as acquisition and divestiture activity.
Organic net sales growth (decline) provides useful information about our results and the trends of our business. Management uses this measure to monitor and evaluate performance. Also, management uses this measure together with GAAP financial measures in its decision-making processes related to the operations of our reportable segments and our overall company. It is also a significant component in our incentive compensation plans. We believe that investors benefit from having access to the same financial measures that management uses in evaluating operations. The tables presented in “Results of Operations” and “Segment Results” provide reconciliations of organic net sales growth (decline) to net sales growth (decline) calculated in accordance with GAAP.
Organic net sales growth (decline) is a non-GAAP financial measure and should not be considered a replacement for results in accordance with GAAP. This non-GAAP financial measure may not be comparable to similarly-titled measures reported by other companies. The primary limitation of this measure is that it excludes the financial impact of items that would otherwise either increase or decrease our reported results. This limitation is best addressed by using organic net sales growth (decline) in combination with net sales growth (decline) to better understand the amounts, character, and impact of any increase or decrease in reported amounts.
Forward-Looking Information
Certain statements in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These statements are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include, among others, the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities, potential operating performance improvements, acquisitions, divestitures, the effects of competition, and the effects of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believe,” “expect,” “plan,” “intend,” “anticipate,” “estimate,” “predict,” “potential,” “continue,” “may,” and “should,” or the negative of these terms or similar expressions.
Forward-looking statements involve risks, uncertainties, and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. Investors should not place undue reliance on any forward-looking statements. We do not have any intention or obligation to update forward-looking statements after we file this report except as required by law.
The following and other risks, which are described in greater detail in “Part I. Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended September 27, 2019, and in this report, could cause our results to differ materially from those expressed in forward-looking statements:
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 2020. 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 27, 2019.
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 of March 27, 2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 27, 2020.
Changes in Internal Control Over Financial Reporting
During the quarter ended March 27, 2020, 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.
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 27, 2019. Refer to “Part I. Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended September 27, 2019 for additional information regarding legal proceedings.
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 27, 2019 except as described below. The risk factors described in our Annual Report on Form 10-K, in addition to other information set forth below and 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.
We have suffered and could continue to suffer significant business interruptions, including as a result of COVID-19.
Our operations and those of our suppliers and customers, and the supply chains that support their operations, may be vulnerable to interruption by natural disasters such as earthquakes, tsunamis, typhoons, or floods; or other disasters such as fires, explosions, acts of terrorism or war, disease or other adverse health developments, including as a result of COVID-19, or failures of management information or other systems due to internal or external causes. These effects could include disruptions or restrictions on our employees’ ability to travel, as well as temporary closures of our facilities or the facilities of our customers, suppliers, or other vendors in our supply chain. In addition, such interruptions could result in a widespread crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our end customers’ products. If a business interruption occurs and we are unsuccessful in our continuing efforts to minimize the impact of these events, our business, results of operations, financial position, and cash flows could be materially adversely affected. COVID-19 is currently impacting countries, communities, workforces, supply chains, and markets around the world, and as a result we have experienced disruptions and restrictions on our employees’ ability to travel, as well as temporary closures of our facilities and the facilities of our customers, suppliers, and other vendors in our supply chain. We expect that COVID-19 will have a material impact on our financial condition and results of operations in the near term and may have a material impact on our financial condition, liquidity, and results of operations in future periods. The extent to which COVID-19 will further impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted. Such developments may include the geographic spread of the virus, the severity of the virus, the duration of the pandemic, the impact on our suppliers’ and customers’ supply chains and financial positions, including their ability to pay us, the actions that may be taken by various governmental authorities in response to the outbreak in jurisdictions in which we operate, and the possible impact on the global economy and local economies in which we operate.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table presents information about our purchases of our common shares during the quarter ended March 27, 2020:
Maximum
Total Number of
Approximate
Shares Purchased
Dollar Value
as Part of
of Shares that May
Total Number
Average Price
Publicly Announced
Yet Be Purchased
of Shares
Paid Per
Plans or
Under the Plans
Period
Purchased(1)
Share(1)
Programs(2)
or Programs(2)
December 28, 2019–January 24, 2020
447,879
97.85
447,600
1,314,299,381
January 25–February 28, 2020
941,185
91.45
937,100
1,228,626,234
February 29–March 27, 2020
2,297,143
65.58
2,296,000
1,078,053,521
3,686,207
76.11
3,680,700
ITEM 6. EXHIBITS
Exhibit Number
Exhibit
3.1
Articles of Association of TE Connectivity Ltd., as amended and restated (incorporated by reference to Exhibit 3.1 to TE Connectivity's Current Report on Form 8-K, filed March 13, 2020)
4.1
Sixteenth Supplemental Indenture among Tyco Electronics Group S.A., as issuer, TE Connectivity Ltd., as guarantor, and Deutsche Bank Trust Company Americas, as trustee, dated February 14, 2020 (incorporated by reference to Exhibit 4.1 to TE Connectivity’s Current Report on Form 8-K, filed February 14, 2020)
10.1
‡*
TE Connectivity Ltd. Employee Stock Purchase Plan (amended and restated as of April 8, 2020)
31.1
*
Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002
31.2
Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002
32.1
**
Certification by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002
101.INS
XBRL Instance Document(1)(2)
101.SCH
XBRL Taxonomy Extension Schema Document(2)
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document(2)
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document(2)
101.LAB
XBRL Taxonomy Extension Label Linkbase Document(2)
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document(2)
104
Cover Page Interactive Data File(3)
‡
Management contract or compensatory plan or arrangement
*Filed herewith
Furnished herewith
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.
By:
/s/ Heath A. Mitts
Heath A. MittsExecutive Vice President and Chief FinancialOfficer (Principal Financial Officer)
Date: May 4, 2020