TE CONNECTIVITY LTD., 10-Q filed on 7/30/2020
Quarterly Report
v3.20.2
Document and Entity Information - shares
9 Months Ended
Jun. 26, 2020
Jul. 24, 2020
Document and Entity Information    
Entity Registrant Name TE CONNECTIVITY LTD.  
Entity Central Index Key 0001385157  
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Jun. 26, 2020  
Document Transition Report false  
Entity File Number 001-33260  
Entity Incorporation, State or Country Code V8  
Entity Tax Identification Number 98-0518048  
Entity Address, Address Line One Mühlenstrasse 26  
Entity Address, City or Town Schaffhausen  
Entity Address, Country CH  
Entity Address, Postal Zip Code CH-8200  
Country Region +41  
City Area Code (0)52  
Local Phone Number 633 66 61  
Title of 12(b) Security Common Shares, Par Value CHF 0.57  
Trading Symbol TEL  
Security Exchange Name NYSE  
Amendment Flag false  
Current Fiscal Year End Date --09-25  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Shell Company false  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Common Stock, Shares Outstanding   330,038,478
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q3  
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
shares in Millions, $ in Millions
3 Months Ended 9 Months Ended
Jun. 26, 2020
Jun. 28, 2019
Jun. 26, 2020
Jun. 28, 2019
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS        
Net sales $ 2,548 $ 3,389 $ 8,911 $ 10,148
Cost of sales 1,841 2,279 6,145 6,806
Gross margin 707 1,110 2,766 3,342
Selling, general, and administrative expenses 321 356 1,040 1,118
Research, development, and engineering expenses 146 158 465 485
Acquisition and integration costs 8 9 27 21
Restructuring and other charges, net 98 67 144 184
Impairment of goodwill     900  
Operating income 134 520 190 1,534
Interest income 2 4 13 13
Interest expense (13) (13) (36) (55)
Other income, net 4 2 20 2
Income from continuing operations before income taxes 127 513 187 1,494
Income tax (expense) benefit (185) 245 (674) 76
Income (loss) from continuing operations (58) 758 (487) 1,570
Income (loss) from discontinued operations, net of income taxes 17 (1) 16 (98)
Net income (loss) $ (41) $ 757 $ (471) $ 1,472
Basic earnings (loss) per share:        
Income (loss) from continuing operations (in dollars per share) $ (0.18) $ 2.25 $ (1.46) $ 4.63
Income (loss) from discontinued operations (in dollars per share) 0.05   0.05 (0.29)
Net income (loss) (in dollars per share) (0.12) 2.25 (1.41) 4.34
Diluted earnings (loss) per share:        
Income (loss) from continuing operations (in dollars per share) (0.18) 2.24 (1.46) 4.60
Income (loss) from discontinued operations (in dollars per share) 0.05   0.05 (0.29)
Net income (loss) (in dollars per share) $ (0.12) $ 2.23 $ (1.41) $ 4.32
Weighted-average number of shares outstanding:        
Basic (in shares) 330 337 333 339
Diluted (in shares) 330 339 333 341
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - USD ($)
$ in Millions
3 Months Ended 9 Months Ended
Jun. 26, 2020
Jun. 28, 2019
Jun. 26, 2020
Jun. 28, 2019
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)        
Net income (loss) $ (41) $ 757 $ (471) $ 1,472
Other comprehensive income (loss):        
Currency translation 21 (48) (43) 35
Adjustments to unrecognized pension and postretirement benefit costs, net of income taxes 7 7 23 19
Gains on cash flow hedges, net of income taxes 37   15 51
Other comprehensive income (loss) 65 (41) (5) 105
Comprehensive income (loss) 24 716 (476) 1,577
Less: comprehensive income attributable to noncontrolling interests (3)   (1)  
Comprehensive income (loss) attributable to TE Connectivity Ltd. $ 21 $ 716 $ (477) $ 1,577
v3.20.2
CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Millions
Jun. 26, 2020
Sep. 27, 2019
Current assets:    
Cash and cash equivalents $ 474 $ 927
Accounts receivable, net of allowance for doubtful accounts of $34 and $25, respectively 2,146 2,320
Inventories 2,227 1,836
Prepaid expenses and other current assets 472 471
Total current assets 5,319 5,554
Property, plant, and equipment, net 3,598 3,574
Goodwill 5,143 5,740
Intangible assets, net 1,612 1,596
Deferred income taxes 2,286 2,776
Other assets 882 454
Total assets 18,840 19,694
Current liabilities:    
Short-term debt 691 570
Accounts payable 1,271 1,357
Accrued and other current liabilities 1,765 1,613
Total current liabilities 3,727 3,540
Long-term debt 3,395 3,395
Long-term pension and postretirement liabilities 1,366 1,367
Deferred income taxes 161 156
Income taxes 244 239
Other liabilities 803 427
Total liabilities 9,696 9,124
Commitments and contingencies (Note 10)
TE Connectivity Ltd. shareholders' equity    
Common shares, CHF 0.57 par value, 338,953,381 shares authorized and issued, and 350,951,381 shares authorized and issued, respectively 149 154
Accumulated earnings 10,125 12,256
Treasury shares, at cost, 8,961,449 and 15,862,337 shares, respectively (729) (1,337)
Accumulated other comprehensive loss (509) (503)
Total TE Connectivity Ltd. shareholders' equity 9,036 10,570
Noncontrolling interests 108  
Total equity 9,144 10,570
Total liabilities and equity $ 18,840 $ 19,694
v3.20.2
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical)
$ in Millions
Jun. 26, 2020
USD ($)
shares
Jun. 26, 2020
SFr / shares
Sep. 27, 2019
USD ($)
shares
Sep. 27, 2019
SFr / shares
CONDENSED CONSOLIDATED BALANCE SHEETS        
Accounts receivable, allowance for doubtful accounts (in dollars) | $ $ 34   $ 25  
Common shares, par value (in currency per share) | SFr / shares   SFr 0.57   SFr 0.57
Common shares, shares authorized 338,953,381   350,951,381  
Common shares, shares issued 338,953,381   350,951,381  
Treasury shares 8,961,449   15,862,337  
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY - USD ($)
shares in Millions, $ in Millions
Common Shares
Treasury Shares
Contributed Surplus
Accumulated Earnings
Accumulated Other Comprehensive Loss
TE Connectivity Ltd. Shareholders' Equity
Noncontrolling Interests
Total
Balance at at Sep. 28, 2018 $ 157 $ (1,134)   $ 12,114 $ (306) $ 10,831   $ 10,831
Balance (in shares) at at Sep. 28, 2018 357 (12)            
Increase (Decrease) in Equity:                
Adoption of ASU No. 2016-16 | ASU 2016-16       (443)   (443)   (443)
Net income (loss)       1,472   1,472   1,472
Other comprehensive income (loss)         105 105   105
Share-based compensation expense     $ 57     57   57
Dividends       (615)   (615)   (615)
Exercise of share options   $ 55       55   55
Restricted share award vestings and other activity   $ 118 (57) (65)   (4)   (4)
Restricted share award vestings and other activity (in shares)   1            
Repurchase of common shares   $ (836)       (836)   $ (836)
Repurchase of common shares (in shares)   (10)           (10)
Cancellation of treasury shares $ (3) $ 573   (570)        
Cancellation of treasury shares (in shares) (6) 6            
Balance at at Jun. 28, 2019 $ 154 $ (1,224)   11,893 (201) 10,622   $ 10,622
Balance (in shares) at at Jun. 28, 2019 351 (15)            
Balance at at Mar. 29, 2019 $ 157 $ (1,713)   11,710 (160) 9,994   9,994
Balance (in shares) at at Mar. 29, 2019 357 (20)            
Increase (Decrease) in Equity:                
Net income (loss)       757   757   757
Other comprehensive income (loss)         (41) (41)   (41)
Share-based compensation expense     18     18   18
Dividends       1   1   1
Exercise of share options   $ 38       38   38
Restricted share award vestings and other activity   30 (18) (5)   7   7
Repurchase of common shares   $ (152)       (152)   (152)
Repurchase of common shares (in shares)   (1)            
Cancellation of treasury shares $ (3) $ 573   (570)        
Cancellation of treasury shares (in shares) (6) 6            
Balance at at Jun. 28, 2019 $ 154 $ (1,224)   11,893 (201) 10,622   10,622
Balance (in shares) at at Jun. 28, 2019 351 (15)            
Balance at at Sep. 27, 2019 $ 154 $ (1,337)   12,256 (503) 10,570   10,570
Balance (in shares) at at Sep. 27, 2019 351 (16)            
Increase (Decrease) in Equity:                
Acquisition             $ 107 107
Net income (loss)       (471)   (471)   (471)
Other comprehensive income (loss)         (6) (6) 1 (5)
Share-based compensation expense     54     54   54
Dividends       (633)   (633)   (633)
Exercise of share options   $ 29       29   29
Restricted share award vestings and other activity   $ 109 (54) (57)   (2)   (2)
Restricted share award vestings and other activity (in shares)   1            
Repurchase of common shares   $ (505)       (505)   $ (505)
Repurchase of common shares (in shares)   (6)           (6)
Cancellation of treasury shares $ (5) $ 975   (970)        
Cancellation of treasury shares (in shares) (12) 12            
Balance at at Jun. 26, 2020 $ 149 $ (729)   10,125 (509) 9,036 108 $ 9,144
Balance (in shares) at at Jun. 26, 2020 339 (9)            
Balance at at Mar. 27, 2020 $ 154 $ (1,639)   11,122 (571) 9,066 105 9,171
Balance (in shares) at at Mar. 27, 2020 351 (20)            
Increase (Decrease) in Equity:                
Net income (loss)       (41)   (41)   (41)
Other comprehensive income (loss)         62 62 3 65
Share-based compensation expense     17     17   17
Dividends       2   2   2
Exercise of share options   $ 2       2   2
Restricted share award vestings and other activity   15 $ (17) 12   10   10
Repurchase of common shares   $ (82)       (82)   (82)
Repurchase of common shares (in shares)   (1)            
Cancellation of treasury shares $ (5) $ 975   (970)        
Cancellation of treasury shares (in shares) (12) 12            
Balance at at Jun. 26, 2020 $ 149 $ (729)   $ 10,125 $ (509) $ 9,036 $ 108 $ 9,144
Balance (in shares) at at Jun. 26, 2020 339 (9)            
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Millions
9 Months Ended
Jun. 26, 2020
Jun. 28, 2019
Cash flows from operating activities:    
Net income (loss) $ (471) $ 1,472
(Income) loss from discontinued operations, net of income taxes (16) 98
Income (loss) from continuing operations (487) 1,570
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:    
Impairment of goodwill 900  
Depreciation and amortization 530 515
Deferred income taxes 459 (290)
Non-cash lease cost 79  
Provision for losses on accounts receivable and inventories 28 36
Share-based compensation expense 54 56
Other 40 26
Changes in assets and liabilities, net of the effects of acquisitions and divestitures:    
Accounts receivable, net 182 (105)
Inventories (342) (59)
Prepaid expenses and other current assets 27 109
Accounts payable (81) (86)
Accrued and other current liabilities (204) (147)
Income taxes 20 (63)
Other 67 13
Net cash provided by continuing operating activities 1,272 1,575
Net cash used in discontinued operating activities   (31)
Net cash provided by operating activities 1,272 1,544
Cash flows from investing activities:    
Capital expenditures (439) (570)
Proceeds from sale of property, plant, and equipment 6 16
Acquisition of businesses, net of cash acquired (328) (283)
Proceeds from divestiture of discontinued operation, net of cash retained by sold operation   297
Other 13 3
Net cash used in continuing investing activities (748) (537)
Net cash used in discontinued investing activities   (2)
Net cash used in investing activities (748) (539)
Cash flows from financing activities:    
Net decrease in commercial paper (219) (270)
Proceeds from issuance of debt 593 746
Repayment of debt (352) (441)
Proceeds from exercise of share options 29 55
Repurchase of common shares (523) (913)
Payment of common share dividends to shareholders (466) (454)
Transfers to discontinued operations   (33)
Other (32) (32)
Net cash used in continuing financing activities (970) (1,342)
Net cash provided by discontinued financing activities   33
Net cash used in financing activities (970) (1,309)
Effect of currency translation on cash (7) 2
Net decrease in cash, cash equivalents, and restricted cash (453) (302)
Cash, cash equivalents, and restricted cash at beginning of period 927 848
Cash, cash equivalents, and restricted cash at end of period $ 474 $ 546
v3.20.2
Basis of Presentation and Accounting Policies
9 Months Ended
Jun. 26, 2020
Basis of Presentation and Accounting Policies  
Basis of Presentation and Accounting Policies

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 June 26, 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 marketplace 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.

Recently Adopted Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-04, an update to ASC 350. 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.

v3.20.2
Restructuring and Other Charges, Net
9 Months Ended
Jun. 26, 2020
Restructuring and Other Charges, Net  
Restructuring and Other Charges, Net

2. Restructuring and Other Charges, Net

Net restructuring charges by segment were as follows:

For the

For the

Quarters Ended

Nine Months Ended

June 26,

June 28,

June 26,

June 28,

    

2020

    

2019

    

2020

    

2019

    

(in millions)

Transportation Solutions

$

55

$

53

$

77

$

98

Industrial Solutions

 

40

 

8

 

56

 

60

Communications Solutions

 

3

 

6

 

11

 

26

Restructuring charges, net

$

98

$

67

$

144

$

184

Activity in our restructuring reserves was as follows:

Balance at

Currency

Balance at

  

September 27,

Changes in

Cash

Non-Cash

Translation

June 26,

    

2019

    

Charges

    

Estimate

    

Payments

    

Items

    

and Other

    

2020

    

(in millions)

Fiscal 2020 Actions:

Employee severance

$

$

120

$

$

(10)

$

$

$

110

Property, plant, and equipment

18

(18)

Total

138

(10)

(18)

110

Fiscal 2019 Actions:

Employee severance

188

7

(19)

(83)

2

95

Facility and other exit costs

1

9

(10)

2

2

Property, plant, and equipment

6

(6)

Total

189

22

(19)

(93)

(6)

4

97

Pre-Fiscal 2019 Actions:

Employee severance

73

(5)

(40)

28

Facility and other exit costs

2

6

(6)

2

Property, plant, and equipment

2

(2)

Total

75

8

(5)

(46)

(2)

30

Total Activity

$

264

$

168

$

(24)

$

(149)

$

(26)

$

4

$

237

Fiscal 2020 Actions

During fiscal 2020, we initiated a restructuring program associated with footprint consolidation and structural improvements, due in part to the coronavirus disease COVID-19, across all segments. In connection with this program, during the nine months ended June 26, 2020, we recorded restructuring charges of $138 million. We expect to complete all restructuring actions commenced during the nine months ended June 26, 2020 by the end of fiscal 2022 and to incur additional charges of approximately $30 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 nine months ended June 26, 2020 and June 28, 2019, we recorded net restructuring charges of $3 million and $179 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 $10 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 nine months ended June 26, 2020 and June 28, 2019, we recorded net restructuring charges of $3 million and $5 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:

June 26,

September 27,

    

2020

    

2019

    

(in millions)

Accrued and other current liabilities

$

211

$

245

Other liabilities

 

26

 

19

Restructuring reserves

$

237

$

264

v3.20.2
Discontinued Operations
9 Months Ended
Jun. 26, 2020
Discontinued Operations  
Discontinued Operations

3. Discontinued Operations

During the nine months ended June 28, 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 June 26, 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 June 26, 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 nine months ended June 28, 2019:

(in millions)

Net sales

$

41

Cost of sales

 

(50)

Operating expenses

(12)

Pre-tax loss from discontinued operations

 

(21)

Pre-tax loss on sale of discontinued operations

 

(86)

Income tax benefit

 

9

Loss from discontinued operations, net of income taxes

$

(98)

v3.20.2
Acquisitions
9 Months Ended
Jun. 26, 2020
Acquisitions  
Acquisitions

4. Acquisitions

First Sensor AG

During the nine months ended June 26, 2020, we acquired approximately 72% of the outstanding shares of First Sensor AG (“First Sensor”), a provider of sensing solutions based in Germany, for €181 million in cash (equivalent to $201 million), net of cash acquired. 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.

We and First Sensor entered into a DPLTA which was approved by First Sensor shareholders in May 2020 and became effective in the fourth quarter of fiscal 2020 following registration in the commercial register in Germany. Under the terms of the DPLTA, upon its effectiveness, First Sensor minority shareholders can 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. Following the registration of the DPLTA in July 2020, the First Sensor noncontrolling interest balance of $108 million was reclassified and will be presented as redeemable noncontrolling interest outside of equity on the Condensed Consolidated Balance Sheet in future periods as the exercise of the put right by First Sensor minority shareholders is not within our control.

Other Acquisitions

During the nine months ended June 26, 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.

v3.20.2
Inventories
9 Months Ended
Jun. 26, 2020
Inventories  
Inventories

5. Inventories

Inventories consisted of the following:

June 26,

September 27,

    

2020

    

2019

    

(in millions)

Raw materials

$

281

$

260

Work in progress

 

934

 

739

Finished goods

 

1,012

 

837

Inventories

$

2,227

$

1,836

v3.20.2
Goodwill
9 Months Ended
Jun. 26, 2020
Goodwill  
Goodwill

6. Goodwill

The changes in the carrying amount of goodwill by segment were as follows:

    

Transportation

    

Industrial

    

Communications

    

    

Solutions

Solutions

Solutions

Total

(in millions)

September 27, 2019(1)

$

2,124

$

3,039

$

577

$

5,740

Impairment of goodwill

(900)

(900)

Acquisitions

273

10

283

Currency translation

 

7

 

11

 

2

 

20

June 26, 2020(2)

$

1,504

$

3,060

$

579

$

5,143

(1)At September 27, 2019, accumulated impairment losses for the Transportation Solutions, Industrial Solutions, and Communications Solutions segments were $2,191 million, $669 million, and $489 million, respectively.
(2)At June 26, 2020, accumulated impairment losses for the Transportation Solutions, Industrial Solutions, and Communications Solutions segments were $3,091 million, $669 million, and $489 million, respectively.

During the nine months ended June 26, 2020, we completed the acquisition of First Sensor and recognized goodwill of $213 million in the Transportation Solutions segment. During the quarter ended March 27, 2020, we preliminarily

allocated the purchase price of First Sensor to goodwill due to the timing of the transaction. Adjustments to the allocation were made during the quarter ended June 26, 2020 to recognize the identifiable intangible assets, assets acquired, and liabilities assumed. Further adjustments to the purchase price allocation may be needed in future periods. In addition, during the nine months ended June 26, 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 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 as of March 27, 2020. 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 in the quarter ended March 27, 2020. The Sensors reporting unit had a remaining goodwill allocation of $626 million as of March 27, 2020. There were no triggering events identified in the quarter ended June 26, 2020 and therefore no goodwill impairment testing was required.

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.

v3.20.2
Intangible Assets, Net
9 Months Ended
Jun. 26, 2020
Intangible Assets, Net  
Intangible Assets, Net

7. Intangible Assets, Net

Intangible assets consisted of the following:

June 26, 2020

September 27, 2019

    

Gross

    

    

Net

    

Gross

    

    

Net

Carrying

Accumulated

Carrying

Carrying

Accumulated

Carrying

Amount

Amortization

Amount

Amount

Amortization

Amount

    

(in millions)

Customer relationships

$

1,623

$

(524)

$

1,099

$

1,513

$

(459)

$

1,054

Intellectual property

1,212

(714)

498

1,260

(734)

526

Other

 

23

 

(8)

 

15

 

33

 

(17)

 

16

Total

$

2,858

$

(1,246)

$

1,612

$

2,806

$

(1,210)

$

1,596

Intangible asset amortization expense was $46 million and $45 million for the quarters ended June 26, 2020 and June 28, 2019, respectively, and $137 million and $135 million for the nine months ended June 26, 2020 and June 28, 2019, respectively.

At June 26, 2020, the aggregate amortization expense on intangible assets is expected to be as follows:

    

(in millions)

  

Remainder of fiscal 2020

$

47

Fiscal 2021

188

Fiscal 2022

 

187

Fiscal 2023

 

186

Fiscal 2024

 

155

Fiscal 2025

 

137

Thereafter

 

712

Total

$

1,612

v3.20.2
Debt
9 Months Ended
Jun. 26, 2020
Debt  
Debt

8. Debt

During the quarter ended June 26, 2020, Tyco Electronics Group S.A. (“TEGSA”), our wholly-owned subsidiary, repaid, at maturity, $350 million of floating rate senior notes due in June 2020.

During the nine months ended June 26, 2020, TEGSA issued €550 million aggregate principal amount of 0.0% senior notes due in 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 nine months ended June 26, 2020, we reclassified $250 million of 4.875% senior notes due in January 2021 and €350 million of fixed-to-floating rate senior notes due in June 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 June 26, 2020.

The fair value of our debt, based on indicative valuations, was approximately $4,484 million and $4,278 million at June 26, 2020 and September 27, 2019, respectively.

v3.20.2
Leases
9 Months Ended
Jun. 26, 2020
Leases  
Leases

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:

For the

For the

Quarter Ended

    

Nine Months Ended

June 26,

June 26,

2020

2020

    

(in millions)

    

Operating lease cost

$

27

$

79

Variable lease cost

12

38

Total lease cost

$

39

$

117

Amounts recognized on the Condensed Consolidated Balance Sheet were as follows:

June 26,

2020

    

($ in millions)

Operating lease ROU assets:

Other assets

$

451

Operating lease liabilities:

Accrued and other current liabilities

$

115

Other liabilities

346

Total operating lease liabilities

$

461

Weighted-average remaining lease term (in years)

5.7

Weighted-average discount rate

1.8

%

Cash flow information, including significant non-cash transactions, related to leases was as follows:

For the

Nine Months Ended

June 26,

2020

    

(in millions)

    

Cash paid for amounts included in the measurement of lease liabilities:

Payments for operating leases(1)

$

78

ROU assets obtained in exchange for new operating lease liabilities

17

(1)These payments are included in cash flows from continuing operating activities, primarily in changes in other liabilities.

At June 26, 2020, the maturities of operating lease liabilities were as follows:

    

(in millions)

    

Remainder of fiscal 2020

$

30

Fiscal 2021

 

114

Fiscal 2022

90

Fiscal 2023

72

Fiscal 2024

57

Thereafter

121

Total lease payments

484

Less: interest

(23)

Present value of lease liabilities

$

461

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:

    

(in millions)

  

Fiscal 2020

$

117

Fiscal 2021

 

102

Fiscal 2022

 

81

Fiscal 2023

 

67

Fiscal 2024

 

55

Thereafter

 

118

Total

$

540

v3.20.2
Commitments and Contingencies
9 Months Ended
Jun. 26, 2020
Commitments and Contingencies  
Commitments and Contingencies

10. Commitments and Contingencies

Legal Proceedings

In the normal course of business, we are subject to various legal proceedings and claims, including patent infringement claims, product liability matters, employment disputes, disputes on agreements, other commercial disputes, environmental matters, antitrust claims, and tax matters, including non-income tax matters such as value added tax, sales and use tax, real estate tax, and transfer tax. Although it is not feasible to predict the outcome of these proceedings, based upon our experience, current information, and applicable law, we do not expect that the outcome of these proceedings, either individually or in the aggregate, will have a material effect on our results of operations, financial position, or cash flows.

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 June 26, 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 $18 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 June 26, 2020, we had outstanding letters of credit, letters of guarantee, and surety bonds of $273 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.

v3.20.2
Financial Instruments
9 Months Ended
Jun. 26, 2020
Financial Instruments  
Financial Instruments

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 June 26, 2020 and September 27, 2019, respectively. Certain contracts were terminated during the nine months ended June 26, 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:

June 26,

September 27,

    

2020

    

2019

    

(in millions)

Other assets

$

25

$

19

At June 26, 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:

For the

For the

Quarters Ended

Nine Months Ended

June 26,

June 28,

June 26,

June 28,

    

2020

    

2019

    

2020

    

2019

    

(in millions)

Gains recorded in other comprehensive income (loss)

$

$

10

$

32

    

$

42

Gains (losses) excluded from the hedging relationship(1)

 

(14)

 

(16)

 

(19)

 

22

(1)Gains and losses excluded from the hedging relationship are recognized prospectively in selling, general, and administrative expenses and are offset by losses and gains generated as a result of re-measuring certain intercompany loans to the U.S. dollar.

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 $3,320 million and $3,374 million at June 26, 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 $1,776 million and $1,844 million at June 26, 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 2.56% 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.

These cross-currency swap contracts were recorded on the Condensed Consolidated Balance Sheets as follows:

June 26,

September 27,

    

2020

    

2019

    

(in millions)

Prepaid expenses and other current assets

$

16

$

27

Other assets

 

30

 

46

Accrued and other current liabilities

3

2

Other liabilities

2

1

The impacts of our hedge of net investment programs were as follows:

For the

For the

Quarters Ended

Nine Months Ended

June 26,

June 28,

June 26,

June 28,

    

2020

    

2019

    

2020

    

2019

    

(in millions)

Foreign currency exchange gains (losses) on intercompany loans and external borrowings(1)

$

(52)

$

(58)

$

(60)

$

54

Gains (losses) on cross-currency swap contracts designated as hedges of net investment(1)

 

(25)

 

(20)

 

(3)

 

17

(1)Recorded as currency translation, a component of accumulated other comprehensive income (loss).

Interest Rate Risk Management

During the nine months ended June 26, 2020 and June 28, 2019, we entered into forward starting interest rate swap contracts to manage interest rate exposure prior to the anticipated issuance of fixed rate debt. These contracts had an aggregate notional value of $450 million and $350 million at June 26, 2020 and September 27, 2019, respectively, and were designated as cash flow hedges. These forward starting interest rate swap contracts were recorded on the Condensed Consolidated Balance Sheets as follows:

June 26,

September 27,

    

2020

    

2019

    

(in millions)

Other liabilities

$

66

$

34

The impacts of these forward starting interest rate swap contracts were as follows:

For the

For the

Quarters Ended

Nine Months Ended

June 26,

June 28,

June 26,

June 28,

    

2020

    

2019

    

2020

    

2019

    

(in millions)

Losses recorded in other comprehensive income (loss)

$

$

(12)

$

(32)

    

$

(18)

v3.20.2
Retirement Plans
9 Months Ended
Jun. 26, 2020
Retirement Plans  
Retirement Plans

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

For the

For the

Quarters Ended

Quarters Ended

June 26,

June 28,

June 26,

June 28,

    

2020

    

2019

    

2020

    

2019

    

(in millions)

Operating expense:

Service cost

$

13

$

12

$

2

$

4

Other (income) expense:

Interest cost

 

6

 

11

 

9

 

11

Expected return on plan assets

 

(15)

 

(16)

 

(15)

 

(14)

Amortization of net actuarial loss

 

10

 

6

 

3

 

4

Amortization of prior service credit

 

(1)

 

(2)

 

 

Net periodic pension benefit cost (credit)

$

13

$

11

$

(1)

$

5

Non-U.S. Plans

U.S. Plans

For the

For the

Nine Months Ended

Nine Months Ended

June 26,

June 28,

June 26,

June 28,

    

2020

    

2019

    

2020

    

2019

    

(in millions)

Operating expense: