TE CONNECTIVITY LTD., 10-Q filed on 5/4/2020
Quarterly Report
v3.20.1
Document and Entity Information - shares
6 Months Ended
Mar. 27, 2020
Apr. 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 Mar. 27, 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   329,847,873
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q2  
v3.20.1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
shares in Millions, $ in Millions
3 Months Ended 6 Months Ended
Mar. 27, 2020
Mar. 29, 2019
Mar. 27, 2020
Mar. 29, 2019
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS        
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 7 19 12
Restructuring and other charges, net 22 42 46 117
Impairment of goodwill 900   900  
Operating income (loss) (415) 530 56 1,014
Interest income 5 4 11 9
Interest expense (11) (15) (23) (42)
Other income, net 11 1 16  
Income (loss) from continuing operations before income taxes (410) 520 60 981
Income tax expense (42) (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:        
Income (loss) from continuing operations (in dollars per share) $ (1.35) $ 1.27 $ (1.28) $ 2.39
Income (loss) from discontinued operations (in dollars per share) (0.01) 0.03   (0.29)
Net income (loss) (in dollars per share) (1.37) 1.30 (1.29) 2.10
Diluted earnings (loss) per share:        
Income (loss) from continuing operations (in dollars per share) (1.35) 1.26 (1.28) 2.37
Income (loss) from discontinued operations (in dollars per share) (0.01) 0.03   (0.28)
Net income (loss) (in dollars per share) $ (1.37) $ 1.29 $ (1.29) $ 2.09
Weighted-average number of shares outstanding:        
Basic (in shares) 334 338 334 340
Diluted (in shares) 334 340 334 342
v3.20.1
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - USD ($)
$ in Millions
3 Months Ended 6 Months Ended
Mar. 27, 2020
Mar. 29, 2019
Mar. 27, 2020
Mar. 29, 2019
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)        
Net income (loss) $ (456) $ 439 $ (430) $ 715
Other comprehensive income (loss):        
Currency translation (114) 64 (64) 83
Adjustments to unrecognized pension and postretirement benefit costs, net of income taxes 8 6 16 12
Gains (losses) on cash flow hedges, net of income taxes (53) 27 (22) 51
Other comprehensive income (loss) (159) 97 (70) 146
Comprehensive income (loss) (615) 536 (500) 861
Less: comprehensive loss attributable to noncontrolling interests 2   2  
Comprehensive income (loss) attributable to TE Connectivity Ltd. $ (613) $ 536 $ (498) $ 861
v3.20.1
CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Millions
Mar. 27, 2020
Sep. 27, 2019
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
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
Deferred income taxes 126 156
Income taxes 228 239
Other liabilities 772 427
Total liabilities 10,196 9,124
Commitments and contingencies (Note 10)
TE Connectivity Ltd. shareholders' equity    
Common shares, CHF 0.57 par value, 350,951,381 shares authorized and issued 154 154
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 10,570
Total liabilities and equity $ 19,367 $ 19,694
v3.20.1
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical)
$ in Millions
Mar. 27, 2020
SFr / shares
Mar. 27, 2020
USD ($)
shares
Sep. 27, 2019
SFr / shares
Sep. 27, 2019
USD ($)
shares
CONDENSED CONSOLIDATED BALANCE SHEETS        
Accounts receivable, allowance for doubtful accounts (in dollars) | $   $ 32   $ 25
Common shares, par value (in currency per share) | SFr / shares SFr 0.57   SFr 0.57  
Common shares, shares authorized   350,951,381   350,951,381
Common shares, shares issued   350,951,381   350,951,381
Treasury shares   19,877,795   15,862,337
v3.20.1
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)       715   715   715
Other comprehensive income (loss)         146 146   146
Share-based compensation expense     $ 39     39   39
Dividends       (616)   (616)   (616)
Exercise of share options   $ 17       17   17
Restricted share award vestings and other activity   $ 88 (39) (60)   (11)   (11)
Restricted share award vestings and other activity (in shares)   1            
Repurchase of common shares   $ (684)       (684)   $ (684)
Repurchase of common shares (in shares)   (9)           (9)
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)            
Balance at at Dec. 28, 2018 $ 157 $ (1,550)   11,886 (257) 10,236   10,236
Balance (in shares) at at Dec. 28, 2018 357 (18)            
Increase (Decrease) in Equity:                
Net income (loss)       439   439   439
Other comprehensive income (loss)         97 97   97
Share-based compensation expense     16     16   16
Dividends       (620)   (620)   (620)
Exercise of share options   $ 10       10   10
Restricted share award vestings and other activity   $ 16 (16) 5   5   5
Restricted share award vestings and other activity (in shares)   1            
Repurchase of common shares   $ (189)       (189)   (189)
Repurchase of common shares (in shares)   (3)            
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)            
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)       (430)   (430)   (430)
Other comprehensive income (loss)         (68) (68) (2) (70)
Share-based compensation expense     37     37   37
Dividends       (635)   (635)   (635)
Exercise of share options   $ 27       27   27
Restricted share award vestings and other activity   $ 94 (37) (69)   (12)   (12)
Restricted share award vestings and other activity (in shares)   1            
Repurchase of common shares   $ (423)       (423)   $ (423)
Repurchase of common shares (in shares)   (5)           (5)
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)            
Balance at at Dec. 27, 2019 $ 154 $ (1,389)   12,206 (414) 10,557   10,557
Balance (in shares) at at Dec. 27, 2019 351 (17)            
Increase (Decrease) in Equity:                
Acquisition             107 107
Net income (loss)       (456)   (456)   (456)
Other comprehensive income (loss)         (157) (157) (2) (159)
Share-based compensation expense     15     15   15
Dividends       (635)   (635)   (635)
Exercise of share options   $ 13       13   13
Restricted share award vestings and other activity   17 $ (15) 7   9   9
Repurchase of common shares   $ (280)       (280)   (280)
Repurchase of common shares (in shares)   (3)            
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)            
v3.20.1
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Millions
6 Months Ended
Mar. 27, 2020
Mar. 29, 2019
Cash flows from operating activities:    
Net income (loss) $ (430) $ 715
Loss from discontinued operations, net of income taxes 1 97
Income (loss) from continuing operations (429) 812
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:    
Impairment of goodwill 900  
Depreciation and amortization 354 341
Deferred income taxes 345 (28)
Non-cash lease cost 52  
Provision for losses on accounts receivable and inventories 18 28
Share-based compensation expense 37 38
Other 11 32
Changes in assets and liabilities, net of the effects of acquisitions and divestitures:    
Accounts receivable, net (140) (107)
Inventories (151) (70)
Prepaid expenses and other current assets 25 91
Accounts payable 49 (44)
Accrued and other current liabilities (180) (206)
Income taxes 1 21
Other   (25)
Net cash provided by continuing operating activities 892 883
Net cash used in discontinued operating activities   (30)
Net cash provided by operating activities 892 853
Cash flows from investing activities:    
Capital expenditures (309) (401)
Proceeds from sale of property, plant, and equipment 3 13
Acquisition of businesses, net of cash acquired (359) 8
Proceeds from divestiture of discontinued operation, net of cash retained by sold operation   297
Other (2)  
Net cash used in continuing investing activities (667) (83)
Net cash used in discontinued investing activities   (2)
Net cash used in investing activities (667) (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 27 17
Repurchase of common shares (408) (739)
Payment of common share dividends to shareholders (307) (299)
Transfers to discontinued operations   (32)
Other (31) (30)
Net cash used in continuing financing activities (345) (1,084)
Net cash provided by discontinued financing activities   32
Net cash used in financing activities (345) (1,052)
Effect of currency translation on cash (11) 1
Net decrease in cash, cash equivalents, and restricted cash (131) (283)
Cash, cash equivalents, and restricted cash at beginning of period 927 848
Cash, cash equivalents, and restricted cash at end of period $ 796 $ 565
v3.20.1
Basis of Presentation and Accounting Policies
6 Months Ended
Mar. 27, 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 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.

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.

v3.20.1
Restructuring and Other Charges, Net
6 Months Ended
Mar. 27, 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

Six Months Ended

March 27,

March 29,

March 27,

March 29,

    

2020

    

2019

    

2020

    

2019

    

(in millions)

Transportation Solutions

$

18

$

24

$

22

$

45

Industrial Solutions

 

1

 

17

 

16

 

52

Communications Solutions

 

3

 

1

 

8

 

20

Restructuring charges, net

$

22

$

42

$

46

$

117

Activity in our restructuring reserves was as follows:

Balance at

Currency

Balance at

  

September 27,

Changes in

Cash

Non-Cash

Translation

March 27,

    

2019

    

Charges

    

Estimate

    

Payments

    

Items

    

and Other

    

2020

    

(in millions)

Fiscal 2020 Actions:

Employee severance

$

$

43

$

$

(4)

$

$

$

39

Fiscal 2019 Actions:

Employee severance

188

6

(13)

(51)

(1)

1

130

Facility and other exit costs

1

4

(7)

2

Property, plant, and equipment

5

(5)

Total

189

15

(13)

(58)

(6)

3

130

Pre-Fiscal 2019 Actions:

Employee severance

73

1

(5)

(34)

1

36

Facility and other exit costs

2

4

(5)

1

Property, plant, and equipment

1

(1)

Total

75

6

(5)

(39)

(1)

1

37

Total Activity

$

264

$

64

$

(18)

$

(101)

$

(7)

$

4

$

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:

March 27,

September 27,

    

2020

    

2019

(in millions)

Accrued and other current liabilities

$

170

$

245

Other liabilities

 

36

 

19

Restructuring reserves

$

206

$

264

v3.20.1
Acquisitions
6 Months Ended
Mar. 27, 2020
Acquisitions  
Acquisitions

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.

v3.20.1
Inventories
6 Months Ended
Mar. 27, 2020
Inventories  
Inventories

5. Inventories

Inventories consisted of the following:

March 27,

September 27,

    

2020

    

2019

    

(in millions)

Raw materials

$

277

$

260

Work in progress

 

838

 

739

Finished goods

 

886

 

837

Inventories

$

2,001

$

1,836

v3.20.1
Goodwill
6 Months Ended
Mar. 27, 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

403

10

413

Currency translation

 

(5)

 

(11)

 

(2)

 

(18)

March 27, 2020(2)

$

1,622

$

3,038

$

575

$

5,235

(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 March 27, 2020, accumulated impairment losses for the Transportation Solutions, Industrial Solutions, and Communications Solutions segments were $3,091 million, $669 million, and $489 million, respectively.

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.

v3.20.1
Intangible Assets, Net
6 Months Ended
Mar. 27, 2020
Intangible Assets, Net  
Intangible Assets, Net

7. Intangible Assets, Net

Intangible assets consisted of the following:

March 27, 2020

September 27, 2019

    

Gross

    

    

Net

    

Gross

    

    

Net

Carrying

Accumulated

Carrying

Carrying

Accumulated

Carrying

Amount

Amortization

Amount

Amount

Amortization

Amount

    

(in millions)

Customer relationships

$

1,542

$

(498)

$

1,044

$

1,513

$

(459)

$

1,054

Intellectual property

1,259

(771)

488

1,260

(734)

526

Other

 

32

 

(17)

 

15

 

33

 

(17)

 

16

Total

$

2,833

$

(1,286)

$

1,547

$

2,806

$

(1,210)

$

1,596

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:

    

(in millions)

  

Remainder of fiscal 2020

$

90

Fiscal 2021

179

Fiscal 2022

 

179

Fiscal 2023

 

179

Fiscal 2024

 

148

Fiscal 2025

 

129

Thereafter

 

643

Total

$

1,547

v3.20.1
Debt
6 Months Ended
Mar. 27, 2020
Debt  
Debt

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.

v3.20.1
Leases
6 Months Ended
Mar. 27, 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

    

Six Months Ended

March 27,

March 27,

2020

2020

    

(in millions)

    

Operating lease cost

$

25

$

52

Variable lease cost

15

26

Total lease cost

$

40

$

78

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

March 27,

2020

    

($ in millions)

Operating lease ROU assets:

Other assets

$

454

Operating lease liabilities:

Accrued and other current liabilities

$

115

Other liabilities

351

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:

For the

Six Months Ended

March 27,

2020

    

(in millions)

    

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

Payments for operating leases(1)

$

51

ROU assets obtained in exchange for new operating lease liabilities

12

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

At March 27, 2020, the maturities of operating lease liabilities were as follows:

    

(in millions)

    

Remainder of fiscal 2020

$

60

Fiscal 2021

 

105

Fiscal 2022

83

Fiscal 2023

67

Fiscal 2024

53

Thereafter

115

Total lease payments

483

Less: interest

(17)

Present value of lease liabilities

$

466

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

v3.20.1
Commitments and Contingencies
6 Months Ended
Mar. 27, 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 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.

v3.20.1
Financial Instruments
6 Months Ended
Mar. 27, 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 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:

March 27,

September 27,

    

2020

    

2019

    

(in millions)

Other assets

$

39

$

19

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:

For the

For the

Quarters Ended

Six Months Ended

March 27,

March 29,

March 27,

March 29,

    

2020

    

2019

    

2020

    

2019

    

(in millions)

Gains recorded in other comprehensive income (loss)

$

28

$

13

$

32

    

$

32

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

 

17

 

21

 

(5)

 

38

(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 $3,429 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.

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

March 27,

September 27,

    

2020

    

2019

    

(in millions)

Prepaid expenses and other current assets

$

23

$

27

Other assets

 

50

 

46

Accrued and other current liabilities

2

2

Other liabilities

1

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

For the

For the

Quarters Ended

Six Months Ended

March 27,

March 29,

March 27,

March 29,

    

2020

    

2019

    

2020

    

2019

    

(in millions)

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

$

57

$

36

$

(8)

$

112

Gains on cross-currency swap contracts designated as hedges of net investment(2)

 

55

 

42

 

22

 

37

(1)Foreign currency exchange gains and losses on intercompany loans and external borrowings are recorded as currency translation, a component of accumulated other comprehensive income (loss), and are offset by changes attributable to the translation of the net investment.
(2)Gains and losses on cross-currency swap contracts designated as hedges of net investment are recorded as currency translation.
v3.20.1
Retirement Plans
6 Months Ended
Mar. 27, 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

March 27,

March 29,

March 27,

March 29,

    

2020

    

2019

    

2020

    

2019

    

(in millions)

Operating expense:

Service cost

$

12

$

12

$

2

$

3

Other (income) expense:

Interest cost

 

6

 

10

 

9

 

11

Expected return on plan assets

 

(15)

 

(16)

 

(14)

 

(15)

Amortization of net actuarial loss

 

10

 

6

 

2

 

5

Amortization of prior service credit

 

(1)

 

(2)

 

 

Net periodic pension benefit cost (credit)

$

12

$

10

$

(1)

$

4

Non-U.S. Plans

U.S. Plans

For the

For the

Six Months Ended

Six Months Ended

March 27,

March 29,

March 27,

March 29,

    

2020

    

2019

    

2020

    

2019

    

(in millions)

Operating expense:

Service cost

$

25

$

24

$

5

$

6

Other (income) expense:

Interest cost

 

12

 

21

 

18

 

23

Expected return on plan assets

 

(30)

 

(32)

 

(29)

 

(29)

Amortization of net actuarial loss

 

20

 

12

 

4

 

9

Amortization of prior service credit

 

(3)

 

(4)

 

 

Net periodic pension benefit cost (credit)

$

24

$

21

$

(2)

$

9

During the six months ended March 27, 2020, we contributed $19 million to our non-U.S. pension plans.

v3.20.1
Income Taxes
6 Months Ended
Mar. 27, 2020
Income Taxes  
Income Taxes

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.

v3.20.1
Earnings (Loss) Per Share
6 Months Ended
Mar. 27, 2020
Earnings (Loss) Per Share  
Earnings (Loss) Per Share

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:

For the

For the

Quarters Ended

Six Months Ended

March 27,

March 29,

March 27,

March 29,

    

2020

    

2019

    

2020

    

2019

    

(in millions)

Basic

 

334

338

334

340

Dilutive impact of share-based compensation arrangements

 

2

2

Diluted

 

334

 

340

334

 

342

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:

For the

For the

Quarters Ended

Six Months Ended

March 27,

March 29,

March 27,

March 29,

    

2020

    

2019

    

2020

    

2019

    

(in millions)

Antidilutive share options

 

3

1

3

1

v3.20.1
Equity
6 Months Ended
Mar. 27, 2020
Equity  
Equity

15. Equity

Common Shares

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.

Dividends

We paid cash dividends to shareholders as follows:

For the

For the

 

Quarters Ended

Six Months Ended

 

    

March 27,

    

March 29,

    

March 27,

    

March 29,

 

    

2020

    

2019

    

2020

    

2019

    

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:

For the

Six Months Ended

<