filings.toolsItem 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)1.Financial Statements. See Item 8.
| 2. | Financial Statement Schedule. See Item 8. |
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| 3. | Exhibit Index: |
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| ‡ | Management contract or compensatory plan or arrangement |
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| * | Filed herewith |
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| ** | Furnished herewith |
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| (1) | The schedules to the Stock Purchase Agreement have been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K. We will furnish copies of such schedules to the SEC upon its request; provided, however, that we may request confidential treatment pursuant to Rule 24b-2 of the Exchange Act for any schedule so furnished. |
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(2)Submitted electronically with this report in accordance with the provisions of Regulation S-T
| (3) | The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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| (4) | Formatted in Inline XBRL and contained in exhibit 101 |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | TE CONNECTIVITY LTD. | |
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| | By: | /s/ Heath A. Mitts |
| | | Heath A. Mitts |
| | | Executive Vice President |
| | | and Chief Financial Officer |
| | | (Principal Financial Officer) |
Date: November 12, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| Signature | Title | Date | ||||||||
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| /s/ Terrence R. Curtin | | Chief Executive Officer and Director | | November 12, 2019 | ||||||
| Terrence R. Curtin | | (Principal Executive Officer) | | | ||||||
| | | |||||||||
| /s/ Heath A. Mitts | | Executive Vice President and | | | ||||||
| Heath A. Mitts | | Chief Financial Officer | | November 12, 2019 | ||||||
| | (Principal Financial Officer) | | ||||||||
| | | | | | ||||||
| /s/ Robert J. Ott | | Senior Vice President and | | | ||||||
| Robert J. Ott | | Corporate Controller | | November 12, 2019 | ||||||
| | (Principal Accounting Officer) | | ||||||||
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| * | | Director | | November 12, 2019 | ||||||
| Pierre R. Brondeau | | | | | ||||||
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| * | | Director | | November 12, 2019 | ||||||
| Carol A. Davidson | | | ||||||||
| | | | | | ||||||
| * | | Director | | November 12, 2019 | ||||||
| William A. Jeffrey | | | ||||||||
| | | | | | ||||||
| * | | Director | | November 12, 2019 | ||||||
| David M. Kerko | | | | | ||||||
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| * | | Director | | November 12, 2019 | ||||||
| Thomas J. Lynch | | | ||||||||
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| * | | Director | | November 12, 2019 | ||||||
| Yong Nam | | | ||||||||
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| * | | Director | | November 12, 2019 | ||||||
| Daniel J. Phelan | | | ||||||||
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| * | | Director | | November 12, 2019 | ||||||
| Paula A. Sneed | | |
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| * | | Director | | November 12, 2019 |
| Abhijit Y. Talwalkar | | | ||
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| * | | Director | | November 12, 2019 |
| Mark C. Trudeau | | | ||
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| * | | Director | | November 12, 2019 |
| Laura H. Wright | | |
| * | John S. Jenkins, Jr., by signing his name hereto, does sign this document on behalf of the above noted individuals, pursuant to powers of attorney duly executed by such individuals, which have been filed as Exhibit 24.1 to this Report. |
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| | By: | /s/ John S. Jenkins, Jr. |
| | | John S. Jenkins, Jr. |
| | | Attorney-in-fact |
TE CONNECTIVITY LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of TE Connectivity Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of TE Connectivity Ltd. and subsidiaries (the "Company") as of September 27, 2019 and September 28, 2018, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows, for each of the three years in the period ended September 27, 2019, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 27, 2019 and September 28, 2018, and the results of its operations and its cash flows for each of the three years in the period ended September 27, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 27, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 12, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill —Transportation Solutions Reportable Segment — Refer to Notes 2 and 8 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves comparing the carrying amount of each reporting unit to its fair value on the first day of the fourth fiscal quarter or whenever the Company believes a triggering event requiring a more frequent assessment has occurred. The Company uses the income approach based on the present value of future cash flows to estimate fair value. The income approach is supported by guideline analyses (a market approach). These approaches incorporate several assumptions including future growth rates, discount rates, and market activity in assessing fair value and are reporting unit specific. The goodwill balance was $5.7 billion as of September 27, 2019, of which $1.1 billion was allocated to a reporting unit within the Transportation Solutions reportable segment. The fair value of this reporting unit exceeded its carrying amount as of the measurement date and, therefore, no impairment was recognized.
We identified goodwill for this reporting unit as a critical audit matter because of the significant judgments made by management to estimate its fair value, especially considering future growth rates were based on an expectation of an increase in net sales in a product portfolio with limited historical operating results and limited available third-party industry reports. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to forecasts of future revenue and operating margin and the selection of a discount rate.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the forecasts of future revenue and operating margin (the “forecasts”), and the selection of a discount rate for a reporting unit within the Transportation Solutions reportable segment included the following, among others:
| • | We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value, such as controls related to forecasts and management’s selection of the discount rate. |
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| • | We evaluated management’s ability to accurately forecast future revenue and operating margin by comparing actual results to management’s historical forecasts. |
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| • | We evaluated the reasonableness of management’s forecasts by comparing the forecasts to: |
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| − | Historical operating results of the reporting unit. |
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| − | Historical operating results of the Company’s other reporting units. |
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| − | Internal communications to management and the board of directors. |
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| − | External communications made by management to analysts and investors. |
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| − | Third-party industry reports for similar products. |
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| ● | With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rate by: |
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| – | Testing the source information underlying the determination of the discount rate and the mathematical accuracy of the calculation. |
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| − | Developing a range of independent estimates and comparing those to the discount rate selected by management. |
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Income Taxes — Realizability of Deferred Tax Assets — Refer to Notes 2 and 15 to the financial statements
Critical Audit Matter Description
The Company recognizes deferred income taxes for temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. A valuation allowance is provided to offset deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Future realization of deferred tax assets depends on the existence of sufficient taxable income of the appropriate character prior to expiration. Sources of taxable income include future reversals of deferred tax assets and liabilities, expected future taxable income, taxable income in prior carryback years if permitted under the tax law, and tax planning strategies. Management has determined that it is more likely than not that sufficient taxable income will be generated in the future to realize a portion of its deferred tax assets, and therefore, a valuation allowance of $5.0 billion has been recorded to offset the Company’s gross deferred tax assets as of September 27, 2019 of $7.7 billion.
We identified the realizability of deferred tax assets as a critical audit matter because of the Company’s tax structure and the significant judgments and estimates made by management to determine that sufficient taxable income will be generated in the future prior to expiration to realize a portion of its deferred tax assets. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our income tax specialists, when performing audit procedures to evaluate the appropriateness of qualifying tax planning strategies and the reasonableness of management’s estimates of taxable income prior to expiration.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the determination that it is more likely than not that sufficient taxable income will be generated in the future to realize deferred tax assets included the following, among others:
| • | We tested the effectiveness of controls over management’s estimates of the realization of the deferred tax assets, including those over the estimates of taxable income, the approval of tax planning strategies and the determination of whether it is more likely than not that the deferred tax assets will be realized prior to expiration. |
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| • | We evaluated management’s ability to accurately estimate taxable income by comparing actual results to management’s historical estimates and evaluating whether there have been any changes that would impact management’s ability to continue accurately estimating taxable income. |
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| • | We tested the reasonableness of management’s estimates of taxable income by comparing the estimates to: |
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| – | Historical taxable income. |
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| – | Internal communications and the Company’s strategic plan approved by management and the board of directors. |
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| – | Management’s history of carrying out its stated plans and its ability to carry out its plans considering contractual commitments, available financing, or debt covenants. |
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| ● | We evaluated whether the estimates of future taxable income were consistent with evidence obtained in other areas of the audit. |
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| ● | We evaluated whether the taxable income in prior carryback years was of the appropriate character and available under the tax law. |
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| • | With the assistance of our income tax specialists, we evaluated (1) the appropriateness of qualifying tax planning strategies, including that they were prudent, feasible and would more likely than not result in the realization of deferred tax assets and (2) management’s assessment that sufficient taxable income will be generated in the future to realize a portion of the deferred tax assets prior to expiration. |
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/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
November 12, 2019
We have served as the Company’s auditor since 2007.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of TE Connectivity Ltd.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of TE Connectivity Ltd. and subsidiaries (the “Company”) as of September 27, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 27, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the financial statements as of and for the fiscal year ended September 27, 2019, of the Company and our report dated November 12, 2019 expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
November 12, 2019
TE CONNECTIVITY LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended September 27, 2019, September 28, 2018, and September 29, 2017
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|---|---|---|---|---|---|---|---|---|---|---|
| | | | Fiscal | | ||||||
| | 2019 | 2018 | 2017 | |||||||
| | | (in millions, except per share data) | | |||||||
| Net sales | | $ | 13,448 | | $ | 13,988 | | $ | 12,185 | |
| Cost of sales | | 9,054 | | 9,243 | | 8,002 | | |||
| Gross margin | | 4,394 | | 4,745 | | 4,183 | | |||
| Selling, general, and administrative expenses | | | 1,490 | | | 1,594 | | | 1,543 | |
| Research, development, and engineering expenses | | | 644 | | | 680 | | | 611 | |
| Acquisition and integration costs | | | 27 | | | 14 | | | 6 | |
| Restructuring and other charges, net | | | 255 | | | 126 | | | 147 | |
| Operating income | | | 1,978 | | | 2,331 | | | 1,876 | |
| Interest income | | | 19 | | | 15 | | | 16 | |
| Interest expense | | | (68) | | | (107) | | | (130) | |
| Other income (expense), net | | | 2 | | | 1 | | | (42) | |
| Income from continuing operations before income taxes | | 1,931 | | 2,240 | | 1,720 | | |||
| Income tax (expense) benefit | | | 15 | | | 344 | | | (180) | |
| Income from continuing operations | | 1,946 | | 2,584 | | 1,540 | | |||
| Income (loss) from discontinued operations, net of income taxes | | | (102) | | | (19) | | | 143 | |
| Net income | | $ | 1,844 | | $ | 2,565 | | $ | 1,683 | |
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| Basic earnings per share: | | | | | | | | | | |
| Income from continuing operations | | $ | 5.76 | | $ | 7.38 | | $ | 4.34 | |
| Income (loss) from discontinued operations | | (0.30) | | (0.05) | | 0.40 | | |||
| Net income | | 5.46 | | 7.33 | | 4.74 | | |||
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| Diluted earnings per share: | | | | | | | | | | |
| Income from continuing operations | | $ | 5.72 | | $ | 7.32 | | $ | 4.30 | |
| Income (loss) from discontinued operations | | (0.30) | | (0.05) | | 0.40 | | |||
| Net income | | 5.42 | | 7.27 | | 4.70 | | |||
| | | | | | | | | | | |
| Weighted-average number of shares outstanding: | | | | | | | | | | |
| Basic | | | 338 | | | 350 | | | 355 | |
| Diluted | | | 340 | | | 353 | | | 358 | |
See Notes to Consolidated Financial Statements.
TE CONNECTIVITY LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Fiscal Years Ended September 27, 2019, September 28, 2018, and September 29, 2017
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|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal | | |||||||
| | 2019 | 2018 | 2017 | | ||||||
| | | (in millions) | | |||||||
| Net income | | $ | 1,844 | | $ | 2,565 | | $ | 1,683 | |
| Other comprehensive income (loss): | | | | | | | | | | |
| Currency translation | | (48) | | (117) | | 37 | | |||
| Adjustments to unrecognized pension and postretirement benefit costs, net of income taxes | | (195) | | 83 | | 330 | | |||
| Gains (losses) on cash flow hedges, net of income taxes | | 46 | | (74) | | 15 | | |||
| Other comprehensive income (loss) | | (197) | | (108) | | 382 | | |||
| Comprehensive income | | $ | 1,647 | | $ | 2,457 | | $ | 2,065 | |
See Notes to Consolidated Financial Statements.
TE CONNECTIVITY LTD.
CONSOLIDATED BALANCE SHEETS
As of September 27, 2019 and September 28, 2018
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| | | Fiscal Year End | | ||||
| | 2019 | 2018 | |||||
| | | (in millions, except | | ||||
| | | share data) | | ||||
| Assets | | | | | | | |
| Current assets: | | | | | | | |
| Cash and cash equivalents | | $ | 927 | | $ | 848 | |
| Accounts receivable, net of allowance for doubtful accounts of $25 and $22, respectively | | 2,320 | | 2,361 | | ||
| Inventories | | 1,836 | | 1,857 | | ||
| Prepaid expenses and other current assets | | 471 | | 661 | | ||
| Assets held for sale | | | — | | | 472 | |
| Total current assets | | 5,554 | | 6,199 | | ||
| Property, plant, and equipment, net | | 3,574 | | 3,497 | | ||
| Goodwill | | 5,740 | | 5,684 | | ||
| Intangible assets, net | | 1,596 | | 1,704 | | ||
| Deferred income taxes | | 2,776 | | 2,144 | | ||
| Other assets | | 454 | | 1,158 | | ||
| Total assets | | $ | 19,694 | | $ | 20,386 | |
| Liabilities and shareholders’ equity | | | | | | | |
| Current liabilities: | | | | | | | |
| Short-term debt | | $ | 570 | | $ | 963 | |
| Accounts payable | | 1,357 | | 1,548 | | ||
| Accrued and other current liabilities | | 1,613 | | 1,711 | | ||
| Liabilities held for sale | | | — | | | 188 | |
| Total current liabilities | | 3,540 | | 4,410 | | ||
| Long-term debt | | 3,395 | | 3,037 | | ||
| Long-term pension and postretirement liabilities | | 1,367 | | 1,102 | | ||
| Deferred income taxes | | 156 | | 207 | | ||
| Income taxes | | 239 | | 312 | | ||
| Other liabilities | | 427 | | 487 | | ||
| Total liabilities | | 9,124 | | 9,555 | | ||
| Commitments and contingencies (Note 12) | | | | | | | |
| Shareholders’ equity: | | | | | | | |
| Common shares, CHF 0.57 par value, 350,951,381 shares authorized and issued, and 357,069,981 shares authorized and issued, respectively | | 154 | | 157 | | ||
| Accumulated earnings | | 12,256 | | 12,114 | | ||
| Treasury shares, at cost, 15,862,337 and 12,279,603 shares, respectively | | (1,337) | | (1,134) | | ||
| Accumulated other comprehensive loss | | (503) | | (306) | | ||
| Total shareholders’ equity | | 10,570 | | 10,831 | | ||
| Total liabilities and shareholders’ equity | | $ | 19,694 | | $ | 20,386 | |
See Notes to Consolidated Financial Statements.
TE CONNECTIVITY LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Fiscal Years Ended September 27, 2019, September 28, 2018, and September 29, 2017
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | | | | | Accumulated | | | | ||||
| | | | | | | | | | | | | | | | | | Other | | Total | | |||
| | | Common Shares | | Treasury Shares | | Contributed | | Accumulated | | Comprehensive | | Shareholders' | | ||||||||||
| | Shares | Amount | Shares | Amount | Surplus | Earnings | Loss | Equity | |||||||||||||||
| | | (in millions) | | ||||||||||||||||||||
| Balance at fiscal year end 2016 | 383 | | $ | 168 | (28) | | $ | (1,624) | | $ | 1,801 | | $ | 8,682 | | $ | (542) | | $ | 8,485 | | ||
| Adoption of ASU No. 2016-09 | | — | | | — | | — | | | — | | | — | | | 165 | | | — | | | 165 | |
| Net income | — | | — | — | | — | | — | | 1,683 | | — | | 1,683 | | ||||||||
| Other comprehensive income | — | | — | — | | — | | — | | — | | 382 | | 382 | | ||||||||
| Share-based compensation expense | — | | — | — | | — | | 99 | | — | | — | | 99 | | ||||||||
| Dividends | — | | — | — | | — | | (564) | | — | | — | | (564) | | ||||||||
| Exercise of share options | — | | — | 3 | | 117 | | — | | — | | — | | 117 | | ||||||||
| Restricted share award vestings and other activity | — | | — | 2 | | 195 | | (184) | | (6) | | — | | 5 | | ||||||||
| Repurchase of common shares | — | | — | (8) | | (621) | | — | | — | | — | | (621) | | ||||||||
| Cancellation of treasury shares | (26) | | (11) | 26 | | 1,512 | | (1,152) | | (349) | | — | | — | | ||||||||
| Balance at fiscal year end 2017 | 357 | | $ | 157 | (5) | | $ | (421) | | $ | — | | $ | 10,175 | | $ | (160) | | $ | 9,751 | | ||
| Adoption of ASU No. 2018-02 | | — | | | — | | — | | | — | | | — | | | 38 | | | (38) | | | — | |
| Net income | — | | — | — | | — | | — | | 2,565 | | — | | 2,565 | | ||||||||
| Other comprehensive loss | — | | — | — | | — | | — | | — | | (108) | | (108) | | ||||||||
| Share-based compensation expense | — | | — | — | | — | | 98 | | — | | — | | 98 | | ||||||||
| Dividends | — | | — | — | | — | | — | | (610) | | — | | (610) | | ||||||||
| Exercise of share options | — | | — | 1 | | 100 | | — | | — | | — | | 100 | | ||||||||
| Restricted share award vestings and other activity | — | | — | 2 | | 153 | | (98) | | (54) | | — | | 1 | | ||||||||
| Repurchase of common shares | — | | — | (10) | | (966) | | — | | — | | — | | (966) | | ||||||||
| Balance at fiscal year end 2018 | | 357 | | $ | 157 | (12) | | $ | (1,134) | | $ | — | | $ | 12,114 | | $ | (306) | | $ | 10,831 | | |
| Adoption of ASU No. 2016-16 | | — | | | — | | — | | | — | | | — | | | (443) | | | — | | | (443) | |
| Net income | | — | | | — | | — | | | — | | | — | | | 1,844 | | | — | | | 1,844 | |
| Other comprehensive loss | | — | | | — | | — | | | — | | | — | | | — | | | (197) | | | (197) | |
| Share-based compensation expense | | — | | | — | | — | | | — | | | 75 | | | — | | | — | | | 75 | |
| Dividends | | — | | | — | | — | | | — | | | — | | | (613) | | | — | | | (613) | |
| Exercise of share options | | — | | | — | | 1 | | | 85 | | | — | | | — | | | — | | | 85 | |
| Restricted share award vestings and other activity | | — | | | — | | 1 | | | 154 | | | (75) | | | (77) | | | — | | | 2 | |
| Repurchase of common shares | | — | | | — | | (12) | | | (1,014) | | | — | | | — | | | — | | | (1,014) | |
| Cancellation of treasury shares | | (6) | | | (3) | | 6 | | | 572 | | | — | | | (569) | | | — | | | — | |
| Balance at fiscal year end 2019 | 351 | | $ | 154 | (16) | | $ | (1,337) | | $ | — | | $ | 12,256 | | $ | (503) | | $ | 10,570 | |
See Notes to Consolidated Financial Statements.
TE CONNECTIVITY LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended September 27, 2019, September 28, 2018, and September 29, 2017
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal | | |||||||
| | 2019 | 2018 | 2017 | |||||||
| | | (in millions) | | |||||||
| Cash flows from operating activities: | | | | | | | | | | |
| Net income | | $ | 1,844 | | $ | 2,565 | | $ | 1,683 | |
| (Income) loss from discontinued operations, net of income taxes | | 102 | | 19 | | (143) | | |||
| Income from continuing operations | | 1,946 | | 2,584 | | 1,540 | | |||
| Adjustments to reconcile income from continuing operations to net cash provided by operating activities: | | | | | | | | | | |
| Depreciation and amortization | | 690 | | 667 | | 611 | | |||
| Deferred income taxes | | (218) | | (791) | | (142) | | |||
| Provision for losses on accounts receivable and inventories | | 43 | | 30 | | 20 | | |||
| Share-based compensation expense | | 75 | | 95 | | 95 | | |||
| Other | | 51 | | 5 | | 25 | | |||
| Changes in assets and liabilities, net of the effects of acquisitions and divestitures: | | | | | | | | | | |
| Accounts receivable, net | | 31 | | (269) | | (204) | | |||
| Inventories | | 64 | | (247) | | (270) | | |||
| Prepaid expenses and other current assets | | 144 | | (63) | | (62) | | |||
| Accounts payable | | (178) | | 201 | | 314 | | |||
| Accrued and other current liabilities | | (15) | | 5 | | 224 | | |||
| Income taxes | | (135) | | 54 | | (1) | | |||
| Other | | (44) | | 30 | | 123 | | |||
| Net cash provided by continuing operating activities | | 2,454 | | 2,301 | | 2,273 | | |||
| Net cash provided by (used in) discontinued operating activities | | (32) | | 150 | | 48 | | |||
| Net cash provided by operating activities | | 2,422 | | 2,451 | | 2,321 | | |||
| Cash flows from investing activities: | | | | | | | | | | |
| Capital expenditures | | (749) | | (935) | | (679) | | |||
| Proceeds from sale of property, plant, and equipment | | 43 | | 23 | | 19 | | |||
| Acquisition of businesses, net of cash acquired | | (283) | | (153) | | (250) | | |||
| Proceeds from divestiture of discontinued operation, net of cash retained by sold operation | | | 297 | | | — | | | — | |
| Other | | 2 | | (8) | | 1 | | |||
| Net cash used in continuing investing activities | | | (690) | | | (1,073) | | | (909) | |
| Net cash used in discontinued investing activities | | | (2) | | | (21) | | | (23) | |
| Net cash used in investing activities | | (692) | | (1,094) | | (932) | | |||
| Cash flows from financing activities: | | | | | | | | | | |
| Net increase (decrease) in commercial paper | | (51) | | 270 | | (330) | | |||
| Proceeds from issuance of debt | | 746 | | 119 | | 589 | | |||
| Repayment of debt | | (691) | | (708) | | — | | |||
| Proceeds from exercise of share options | | 85 | | 100 | | 117 | | |||
| Repurchase of common shares | | (1,091) | | (879) | | (614) | | |||
| Payment of common share dividends to shareholders | | (608) | | (588) | | (546) | | |||
| Transfers (to) from discontinued operations | | | (34) | | | 129 | | | 25 | |
| Other | | (33) | | (36) | | (30) | | |||
| Net cash used in continuing financing activities | | (1,677) | | (1,593) | | (789) | | |||
| Net cash provided by (used in) discontinued financing activities | | 34 | | (129) | | (25) | | |||
| Net cash used in financing activities | | (1,643) | | (1,722) | | (814) | | |||
| Effect of currency translation on cash | | (8) | | (5) | | (4) | | |||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | | 79 | | (370) | | 571 | | |||
| Cash, cash equivalents, and restricted cash at beginning of fiscal year | | 848 | | 1,218 | | 647 | | |||
| Cash, cash equivalents, and restricted cash at end of fiscal year | | $ | 927 | | $ | 848 | | $ | 1,218 | |
| | | | | | | | | | | |
| Supplemental cash flow information: | | | | | | | | | | |
| Interest paid on debt, net | | $ | 75 | | $ | 127 | | $ | 128 | |
| Income taxes paid, net of refunds | | 338 | | 393 | | 323 | |
See Notes to Consolidated Financial Statements.
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The Consolidated Financial Statements reflect the consolidated operations of TE Connectivity Ltd. and its subsidiaries and have been prepared in United States (“U.S.”) dollars in accordance with accounting principles generally accepted in the U.S. (“GAAP”).
Description of the Business
TE Connectivity Ltd. (“TE Connectivity” or the “Company,” which may be referred to as “we,” “us,” or “our”) is a global industrial technology leader creating a safer, sustainable, productive, and connected future. Our broad range of connectivity and sensor solutions, proven in the harshest environments, enable advancements in transportation, industrial applications, medical technology, energy, data communications, and the home.
We operate through three reportable segments:
| ● | Transportation Solutions—The Transportation Solutions segment is a leader in connectivity and sensor technologies. Our products, which must withstand harsh conditions, are used in the automotive, commercial transportation, and sensors markets. |
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| ● | Industrial Solutions—The Industrial Solutions segment is a leading supplier of products that connect and distribute power, data, and signals. Our products are used in the industrial equipment; aerospace, defense, oil, and gas; and energy markets. |
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| ● | Communications Solutions—The Communications Solutions segment is a leading supplier of electronic components for the data and devices and the appliances markets. |
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Use of Estimates
The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from these estimates.
Fiscal Year
We have a 52- or 53-week fiscal year that ends on the last Friday of September. Fiscal 2019, 2018, and 2017 were 52 weeks in length and ended on September 27, 2019, September 28, 2018, and September 29, 2017, respectively. For fiscal years in which there are 53 weeks, the fourth quarter reporting period includes 14 weeks, with the next such occurrence taking place in fiscal 2022.
2. Summary of Significant Accounting Policies
Principles of Consolidation
We consolidate entities in which we own or control more than 50% of the voting shares or otherwise control through similar rights. All intercompany transactions have been eliminated. The results of companies acquired or disposed of are included on the Consolidated Financial Statements from the effective date of acquisition or up to the date of disposal.
Revenue Recognition
We account for revenue in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, which introduced a single, comprehensive, five-step revenue recognition model. Our revenues are generated principally from the sale of our products. Revenue is recognized as performance obligations under the terms of a contract, such as a purchase order with a customer, are satisfied; generally this occurs with the transfer of control. We transfer control and recognize revenue when we ship product to our customers, the customers accept and have legal title for the
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
product, and we have a right to payment for such product. Revenue is measured as the amount of consideration that we expect to receive in exchange for those products and excludes taxes assessed by governmental authorities and collected from customers concurrent with the sale of products. Shipping and handling costs are treated as fulfillment costs and are included in cost of sales. Since we typically invoice our customers when we satisfy our performance obligations, we do not have material contract assets or contract liabilities. Our credit terms are customary and do not contain significant financing components that extend beyond one year of fulfillment of performance obligations. We apply the practical expedient of ASC 606 with respect to financing components and do not evaluate contracts in which payment is due within one year of satisfaction of the related performance obligation. Since our performance obligations to deliver products are part of contracts that generally have original durations of one year or less, we have elected to use the optional exemption to not disclose the aggregate amount of transaction prices associated with unsatisfied or partially satisfied performance obligations as of fiscal year end 2019. See Note 20 for net sales disaggregated by industry end market and geographic region which is summarized by segment and that we consider meaningful to depict the nature, amount, timing, and uncertainty of revenue and cash flows affected by economic factors.
We generally warrant that our products will conform to our, or mutually agreed to, specifications and that our products will be free from material defects in materials and workmanship for a limited time. We limit our warranty to the replacement or repair of defective parts, or a refund or credit of the price of the defective product. We do not account for these warranties as separate performance obligations.
Although products are generally sold at fixed prices, certain distributors and customers receive incentives or awards, such as sales rebates, return allowances, scrap allowances, and other rights, which are accounted for as variable consideration. We estimate these amounts in the same period revenue is recognized based on the expected value to be provided to customers and reduce revenue accordingly. Our estimates of variable consideration and ultimate determination of the estimated amounts to include in the transaction price are based primarily on our assessment of anticipated performance and historical and forecasted information that is reasonably available to us.
Inventories
Inventories are recorded at the lower of cost or net realizable value using the first-in, first-out cost method.
Property, Plant, and Equipment, Net
Property, plant, and equipment is recorded at cost less accumulated depreciation. Maintenance and repair expenditures are charged to expense when incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which are 10 to 20 years for land improvements, 5 to 40 years for buildings and improvements, and 1 to 15 years for machinery and equipment.
We periodically evaluate, when events and circumstances warrant, the net realizable value of property, plant, and equipment and other long-lived assets, relying on several factors including operating results, business plans, economic projections, and anticipated future cash flows. When indicators of potential impairment are present, the carrying values of the asset group are evaluated in relation to the operating performance and estimated future undiscounted cash flows of the underlying asset group. Impairment of the carrying value is recognized whenever anticipated future undiscounted cash flow estimates are less than the carrying value of the asset. Fair value estimates are based on assumptions concerning the amount and timing of estimated future cash flows and discount rates, reflecting varying degrees of perceived risk.
Goodwill and Other Intangible Assets
Intangible assets include both indeterminable-lived residual goodwill and determinable-lived identifiable intangible assets. Intangible assets with determinable lives primarily include intellectual property, consisting of patents, trademarks, and unpatented technology, and customer relationships. Recoverability estimates range from 1 to 50 years and costs are generally amortized on a straight-line basis. Evaluations of the remaining useful lives of determinable-lived intangible assets are performed on a periodic basis and when events and circumstances warrant.
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
At fiscal year end 2019, 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 perform a step I goodwill impairment test to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, goodwill may be impaired and a step II goodwill impairment test is performed to measure the amount of impairment, if any. In the step II goodwill impairment test, we compare the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. The implied fair value of goodwill is determined in a manner consistent with how goodwill is recognized in a business combination. We allocate the fair value of a reporting unit to the assets and liabilities of that unit, including intangible assets, as if the reporting unit had been acquired in a business combination. Any excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.
Fair value estimates used in the step I goodwill impairment tests are calculated using an income approach based on the present value of future cash flows of each reporting unit. The income approach 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.
Research and Development
Research and development expenditures are expensed when incurred and are included in research, development, and engineering expenses on the Consolidated Statements of Operations. Research and development expenses include salaries, direct costs incurred, and building and overhead expenses. The amounts expensed in fiscal 2019, 2018, and 2017 were $572 million, $606 million, and $548 million, respectively.
Income Taxes
Income taxes are computed in accordance with the provisions of ASC 740, Income Taxes. Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been reflected on the Consolidated Financial Statements. Deferred tax liabilities and assets are determined based on the differences between the book and tax bases of particular assets and liabilities and operating loss carryforwards using tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided to offset deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The calculation of our tax liabilities includes estimates for uncertainties in the application of complex tax regulations across multiple global jurisdictions where we conduct our operations. Under the uncertain tax position provisions of ASC 740, we recognize liabilities for tax and related interest for issues in tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and related interest will be due. These tax liabilities and related interest are reflected net of the impact of related tax loss carryforwards, as such tax loss carryforwards will be applied against these tax liabilities and will reduce the amount of cash tax payments due upon the eventual settlement with the tax authorities. These estimates may change due to changing facts and circumstances. Due to the complexity of these uncertainties, the ultimate resolution may result in a settlement that differs from our current estimate of the tax liabilities and related interest.
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Financial Instruments
Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, debt, and derivative financial instruments.
We account for derivative financial instrument contracts on the Consolidated Balance Sheets at fair value. For instruments not designated as hedges under ASC 815, Derivatives and Hedging, the changes in the instruments’ fair value are recognized currently in earnings. For instruments designated as cash flow hedges, the effective portion of changes in the fair value of a derivative is recorded in other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the underlying hedged item affects earnings. Amounts excluded from the hedging relationship are recognized currently in earnings. Changes in the fair value of instruments designated as fair value hedges affect the carrying value of the asset or liability hedged, with changes in both the derivative instrument and the hedged asset or liability being recognized currently in earnings.
We determine the fair value of our financial instruments by using methods and assumptions that are based on market conditions and risks existing at each balance sheet date. Standard market conventions are used to determine the fair value of financial instruments, including derivatives.
The cash flows related to derivative financial instruments are reported in the operating activities section of the Consolidated Statements of Cash Flows.
Our derivative financial instruments present certain market and counterparty risks. Concentration of counterparty risk is mitigated, however, by our use of financial institutions worldwide, substantially all of which have long-term Standard & Poor’s, Moody’s, and/or Fitch credit ratings of A/A2 or higher. In addition, we utilize only conventional derivative financial instruments. We are exposed to potential losses if a counterparty fails to perform according to the terms of its agreement. With respect to counterparty net asset positions recognized at fiscal year end 2019, we have assessed the likelihood of counterparty default as remote. We currently provide guarantees from a wholly-owned subsidiary to the counterparties to our commodity swap derivatives and exchange cash collateral with the counterparties to certain of our cross-currency swap contracts. The likelihood of performance on the guarantees has been assessed as remote. For all other derivative financial instruments, we are not required to provide, nor do we require counterparties to provide, collateral or other security.
Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures, specifies a fair value hierarchy based upon the observable inputs utilized in valuation of certain assets and liabilities. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. Fair value measurements are classified under the following hierarchy:
| ● | _Level 1—_Quoted prices in active markets for identical assets and liabilities. |
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| ● | _Level 2—_Quoted prices in active markets for similar assets and liabilities, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. |
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| ● | _Level 3—_Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flows methodologies, and similar techniques that use significant unobservable inputs. |
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Derivative financial instruments measured at fair value on a recurring basis are generally valued using level 2 inputs.
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Financial instruments other than derivative instruments include cash and cash equivalents, accounts receivable, accounts payable, and debt. These instruments are recorded on the Consolidated Balance Sheets at book value. For cash and cash equivalents, accounts receivable, and accounts payable, we believe book value approximates fair value due to the short-term nature of these instruments. See Note 11 for disclosure of the fair value of debt. The following is a description of the valuation methodologies used for the respective financial instruments:
| ● | _Cash and cash equivalents—_Cash and cash equivalents are valued at book value, which we consider to be equivalent to unadjusted quoted prices (level 1). |
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| ● | _Accounts receivable—_Accounts receivable are valued based on the net value expected to be realized. The net realizable value generally represents an observable contractual agreement (level 2). |
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| ● | _Accounts payable—_Accounts payable are valued based on the net value expected to be paid, generally supported by an observable contractual agreement (level 2). |
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| ● | _Debt—_The fair value of debt, including both current and non-current maturities, is derived from quoted market prices or other pricing determinations based on the results of market approach valuation models using observable market data such as recently reported trades, bid and offer information, and benchmark securities (level 2). |
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Pension
The funded status of our defined benefit pension plans is recognized on the Consolidated Balance Sheets and is measured as the difference between the fair value of plan assets and the projected benefit obligation at the measurement date. The projected benefit obligation represents the actuarial present value of benefits projected to be paid upon retirement factoring in estimated future compensation levels. The fair value of plan assets represents the current market value of cumulative company and participant contributions made to irrevocable trust funds, held for the sole benefit of participants, which are invested by the trustee of the funds. The benefits under our defined benefit pension plans are based on various factors, such as years of service and compensation.
Net periodic pension benefit cost is based on the utilization of the projected unit credit method of calculation and is charged to earnings on a systematic basis over the expected average remaining service lives of current participants, or, for inactive plans, over the remaining life expectancy of participants.
The measurement of benefit obligations and net periodic benefit cost is based on estimates and assumptions determined by our management. These valuations reflect the terms of the plans and use participant-specific information such as compensation, age, and years of service, as well as certain assumptions, including estimates of discount rates, expected return on plan assets, rate of compensation increases, interest crediting rates, and mortality rates.
Share-Based Compensation
We determine the fair value of share awards on the date of grant. Share options are valued using the Black-Scholes-Merton valuation model; restricted share awards and performance awards are valued using our end-of-day share price on the date of grant. The fair value is expensed ratably over the expected service period, with an allowance made for estimated forfeitures based on historical employee activity. Estimates regarding the attainment of performance criteria are reviewed periodically; the cumulative impact of a change in estimate regarding the attainment of performance criteria is recorded in the period in which that change is made.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the basic weighted-average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding adjusted for the potentially dilutive impact of share-based compensation arrangements.
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Currency Translation
For our non-U.S. dollar functional currency subsidiaries, assets and liabilities are translated into U.S. dollars using fiscal year end exchange rates. Sales and expenses are translated at average monthly exchange rates. Foreign currency translation gains and losses are included as a component of accumulated other comprehensive income (loss) within equity. Gains and losses resulting from foreign currency transactions are included in earnings.
Restructuring Charges
Restructuring activities involve employee-related termination costs, facility exit costs, and asset impairments resulting from reductions-in-force, migration of facilities or product lines from higher-cost to lower-cost countries, or consolidation of facilities within countries. We recognize termination costs based on requirements established by severance policy, government law, or previous actions. Facility exit costs generally reflect the cost to terminate a facility lease before the end of its term (measured at fair value at the time we cease using the facility) or costs that will continue to be incurred under the facility lease without future economic benefit to us. Restructuring activities often result in the disposal or abandonment of assets that require an acceleration of depreciation or impairment reflecting the excess of the assets’ carrying values over fair value.
The recognition of restructuring costs require that we make certain judgments and estimates regarding the nature, timing, and amount of costs associated with the planned exit activity. To the extent our actual results differ from our estimates and assumptions, we may be required to revise the estimated liabilities, requiring the recognition of additional restructuring costs or the reduction of liabilities already recognized. At the end of each reporting period, we evaluate the remaining accrued balances to ensure these balances are properly stated and the utilization of the reserves are for their intended purpose in accordance with developed exit plans.
Contingent Liabilities
We record a loss contingency when the available information indicates it is probable that we have incurred a liability and the amount of the loss is reasonably estimable. When a range of possible losses with equal likelihood exists, we record the low end of the range. The likelihood of a loss with respect to a particular contingency is often difficult to predict, and determining a meaningful estimate of the loss or a range of loss may not be practicable based on information available. In addition, it is not uncommon for such matters to be resolved over many years, during which time relevant developments and new information must continuously be evaluated to determine whether a loss is probable and a reasonable estimate of that loss can be made. When a loss is probable but a reasonable estimate cannot be made, or when a loss is at least reasonably possible, disclosure is provided.
Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 asset for most leases and is effective for us in the first quarter of fiscal 2020. In fiscal 2019, we substantially completed the process of updating policies, internal controls, financial statement disclosures, and systems to incorporate the impact of the new standard in our financial reporting processes. In fiscal 2020, we are adopting the standard 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 plan to elect the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows for the carry forward of historical lease classification of existing and expired leases. We expect to record right-of-use assets and related lease liabilities of approximately $530 million on our Consolidated Balance Sheet. Adoption will not have a material impact on our results of operations or cash flows.
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Recently Adopted Accounting Pronouncements
In August 2017, the FASB issued ASU No. 2017-12, an update to ASC 815, Derivatives and Hedging. The update improves and simplifies hedge accounting and related disclosures. We elected to early adopt this update, which did not have a material impact on our Consolidated Financial Statements, in fiscal 2019.
In October 2016, the FASB issued ASU No. 2016-16, an update to ASC 740, Income Taxes. This guidance requires the recognition of the income tax consequences of intra-entity transfers of assets other than inventory in the period in which the transfer occurs. The update was adopted on a modified retrospective basis in fiscal 2019 and resulted in a $443 million cumulative-effect adjustment to beginning accumulated earnings, which represented the net reversal of all balances associated with deferred tax impacts of intra-entity transfers of assets other than inventory. This included a decrease in other assets of $798 million, an increase in deferred tax assets of $418 million, and a decrease in prepaid expenses and other current assets of $63 million on the Consolidated Balance Sheet.
In May 2014, the FASB issued ASU No. 2014-09 which codified ASC 606, Revenue from Contracts with Customers. This guidance supersedes ASC 605, Revenue Recognition, and introduces a single, comprehensive, five-step revenue recognition model. ASC 606 also enhances disclosures related to revenue recognition. We adopted ASC 606, as amended, in fiscal 2019 using a modified retrospective approach. Prior period amounts have not been adjusted and continue to be reported under the accounting standards in effect for those periods. Transition impacts, which relate primarily to incentive compensation arrangements, were not material to our results of operations or financial position. Because the impact of adoption was immaterial, we have not recorded a cumulative-effect adjustment to beginning accumulated earnings.
3. Restructuring and Other Charges, Net
Net restructuring and other charges consisted of the following:
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal | | |||||||
| | 2019 | 2018 | 2017 | |||||||
| | | (in millions) | | |||||||
| Restructuring charges, net | | $ | 255 | | $ | 140 | | $ | 146 | |
| Gain on divestiture | | | — | | | (2) | | | — | |
| Other charges (credits), net | | — | | (12) | | 1 | | |||
| Restructuring and other charges, net | | $ | 255 | | $ | 126 | | $ | 147 | |
Net restructuring charges by segment were as follows:
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal | | |||||||
| | 2019 | 2018 | 2017 | |||||||
| | | (in millions) | | |||||||
| Transportation Solutions | | $ | 144 | | $ | 42 | | $ | 69 | |
| Industrial Solutions | | 63 | | 83 | | 73 | | |||
| Communications Solutions | | 48 | | 15 | | 4 | | |||
| Restructuring charges, net | | $ | 255 | | $ | 140 | | $ | 146 | |
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Activity in our restructuring reserves was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Balance at | | | | | | | | | | | | | | | | | Balance at | |||
| | | Beginning | | | | | | | | | | | | | | | | | End | | ||
| | | of Fiscal | | | | | Changes in | | Cash | | Non-Cash | | Currency | | of Fiscal | | ||||||
| | Year | Charges | Estimate | Payments | Items | Translation | Year | |||||||||||||||
| | | (in millions) | | |||||||||||||||||||
| Fiscal 2019 Activity: | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal 2019 Actions: | | | | | | | | | | | | | | | | | | | | | | |
| Employee severance | | $ | — | | $ | 252 | | $ | (3) | | $ | (55) | | $ | (3) | | $ | (3) | | $ | 188 | |
| Facility and other exit costs | | | — | | | 2 | | | — | | | (1) | | | — | | | — | | | 1 | |
| Property, plant, and equipment | | | — | | | 3 | | | — | | | — | | | (3) | | | — | | | — | |
| Total | | | — | | | 257 | | | (3) | | | (56) | | | (6) | | | (3) | | | 189 | |
| Fiscal 2018 Actions: | | | | | | | | | | | | | | | | | | | | | | |
| Employee severance | | | 114 | | | 3 | | | (5) | | | (57) | | | — | | | (3) | | | 52 | |
| Facility and other exit costs | | | 4 | | | 4 | | | (2) | | | (5) | | | — | | | — | | | 1 | |
| Property, plant, and equipment | | | — | | | 2 | | | (2) | | | — | | | — | | | — | | | — | |
| Total | | | 118 | | | 9 | | | (9) | | | (62) | | | — | | | (3) | | | 53 | |
| Fiscal 2017 Actions: | | | | | | | | | | | | | | | | | | | | | | |
| Employee severance | | | 36 | | | 2 | | | (4) | | | (19) | | | — | | | (1) | | | 14 | |
| Pre-Fiscal 2017 Actions: | | | | | | | | | | | | | | | | | | | | | | |
| Employee severance | | | 13 | | | 4 | | | (3) | | | (6) | | | — | | | (1) | | | 7 | |
| Facility and other exit costs | | | — | | | 4 | | | — | | | (3) | | | — | | | — | | | 1 | |
| Property, plant, and equipment | | | — | | | 1 | | | (3) | | | — | | | 2 | | | — | | | — | |
| Total | | | 13 | | | 9 | | | (6) | | | (9) | | | 2 | | | (1) | | | 8 | |
| Total fiscal 2019 activity | | $ | 167 | | $ | 277 | | $ | (22) | | $ | (146) | | $ | (4) | | $ | (8) | | $ | 264 | |
| Fiscal 2018 Activity: | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal 2018 Actions: | | | | | | | | | | | | | | | | | | | | | | |
| Employee severance | | $ | — | | $ | 130 | | $ | — | | $ | (16) | | $ | — | | $ | — | | $ | 114 | |
| Facility and other exit costs | | | — | | | 6 | | | — | | | (2) | | | — | | | — | | | 4 | |
| Property, plant, and equipment | | | — | | | 6 | | | — | | | — | | | (6) | | | — | | | — | |
| Total | | | — | | | 142 | | | — | | | (18) | | | (6) | | | — | | | 118 | |
| Fiscal 2017 Actions: | | | | | | | | | | | | | | | | | | | | | | |
| Employee severance | | | 102 | | | 5 | | | (10) | | | (60) | | | — | | | (1) | | | 36 | |
| Facility and other exit costs | | | 1 | | | 2 | | | — | | | (3) | | | — | | | — | | | — | |
| Property, plant, and equipment | | | — | | | 1 | | | (2) | | | 2 | | | (1) | | | — | | | — | |
| Total | | | 103 | | | 8 | | | (12) | | | (61) | | | (1) | | | (1) | | | 36 | |
| Pre-Fiscal 2017 Actions: | | | | | | | | | | | | | | | | | | | | | | |
| Employee severance | | | 35 | | | 7 | | | (9) | | | (19) | | | — | | | (1) | | | 13 | |
| Facility and other exit costs | | | — | | | 6 | | | — | | | (5) | | | — | | | (1) | | | — | |
| Property, plant, and equipment | | | — | | | 1 | | | (3) | | | 3 | | | (1) | | | — | | | — | |
| Total | | | 35 | | | 14 | | | (12) | | | (21) | | | (1) | | | (2) | | | 13 | |
| Total fiscal 2018 activity | | $ | 138 | | $ | 164 | | $ | (24) | | $ | (100) | | $ | (8) | | $ | (3) | | $ | 167 | |
| Fiscal 2017 Activity: | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal 2017 Actions: | | | | | | | | | | | | | | | | | | | | | | |
| Employee severance | | $ | — | | $ | 141 | | $ | (5) | | $ | (39) | | $ | — | | $ | 5 | | $ | 102 | |
| Facility and other exit costs | | — | | 2 | | — | | (1) | | — | | — | | 1 | | |||||||
| Property, plant, and equipment | | — | | 9 | | — | | — | | (9) | | — | | — | | |||||||
| Total | | — | | 152 | | (5) | | (40) | | (9) | | 5 | | 103 | | |||||||
| Pre-Fiscal 2017 Actions: | | | | | | | | | | | | | | | | | | | | | | |
| Employee severance | | 76 | | 8 | | (13) | | (33) | | — | | (3) | | 35 | | |||||||
| Facility and other exit costs | | 1 | | 4 | | — | | (5) | | — | | — | | — | | |||||||
| Total | | 77 | | 12 | | (13) | | (38) | | — | | (3) | | 35 | | |||||||
| Total fiscal 2017 activity | | $ | 77 | | $ | 164 | | $ | (18) | | $ | (78) | | $ | (9) | | $ | 2 | | $ | 138 | |
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 fiscal 2019, we recorded net restructuring charges of $254 million. We expect to complete all restructuring actions commenced during fiscal 2019 by the end of fiscal 2021 and to incur additional charges of approximately $35 million related primarily to employee severance and facility exit costs in the Transportation Solutions and Industrial Solutions segments.
The following table summarizes expected, incurred, and remaining charges for the fiscal 2019 program by segment:
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | Total | | Cumulative | | Remaining | ||||
| | | Expected | | Charges | | Expected | ||||
| | Charges | Incurred | Charges | |||||||
| | | (in millions) | ||||||||
| Transportation Solutions | | $ | 160 | | $ | 144 | | $ | 16 | |
| Industrial Solutions | | 80 | | 66 | | 14 | | |||
| Communications Solutions | | 49 | | 44 | | 5 | | |||
| Total | | $ | 289 | | $ | 254 | | $ | 35 | |
Fiscal 2018 Actions
During fiscal 2018, we initiated a restructuring program associated with footprint consolidation and structural improvements primarily impacting the Industrial Solutions and Transportation Solutions segments. In connection with this program, during fiscal 2018, we recorded restructuring charges of $142 million. We expect to complete all restructuring actions commenced during fiscal 2018 by the end of fiscal 2020 and anticipate that any additional charges will be insignificant.
Fiscal 2017 Actions
During fiscal 2017, we initiated a restructuring program associated with footprint consolidation related to recent acquisitions and structural improvements impacting all segments. In connection with this program, during fiscal 2019, 2018, and 2017, we recorded net restructuring credits of $2 million, credits of $4 million, and charges of $147 million, respectively. We anticipate that any additional charges will be insignificant for restructuring actions commenced during fiscal 2017.
Pre-Fiscal 2017 Actions
During fiscal 2019, 2018, and 2017, we recorded net restructuring charges of $3 million, charges of $2 million, and credits of $1 million, respectively. We anticipate that any additional charges will be insignificant for restructuring actions commenced prior to fiscal 2017.
Total Restructuring Reserves
Restructuring reserves included on the Consolidated Balance Sheets were as follows:
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | Fiscal Year End | | ||||
| | 2019 | 2018 | |||||
| | | (in millions) | | ||||
| Accrued and other current liabilities | | $ | 245 | | $ | 141 | |
| Other liabilities | | 19 | | 26 | | ||
| Restructuring reserves | | $ | 264 | | $ | 167 | |
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Discontinued Operations
In fiscal 2019, we sold our Subsea Communications (“SubCom”) business for net cash proceeds of $297 million and incurred a pre-tax loss on sale of $86 million, related primarily to the recognition of cumulative translation adjustment losses of $67 million and the guarantee liabilities discussed below. The definitive agreement provided that, if the purchaser sells the business within two years of the closing date, we will be entitled to 20% of the net proceeds of that future sale, as defined in the agreement, in excess of $325 million. The sale of the SubCom business, which was previously included in our Communications Solutions segment, represents our exit from the telecommunications market and was significant to our sales and profitability, both to the Communications Solutions segment and to the consolidated company. We concluded that the divestiture was a strategic shift that had a major effect on our operations and financial results. As a result, the SubCom business met the held for sale and discontinued operations criteria and has been reported as such in all periods presented on our Consolidated Financial Statements.
Upon entering into the definitive agreement, which we consider a level 2 observable input in the fair value hierarchy, we assessed the carrying value of the SubCom business and determined that it was in excess of its fair value. In fiscal 2018, we recorded a pre-tax impairment charge of $19 million, which was included in income (loss) from discontinued operations on the Consolidated Statement of Operations, to write the carrying value of the business down to its estimated fair value less costs to sell.
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 $1.55 billion as of fiscal year end 2019 and are expected to expire at various dates through fiscal 2025; however, the majority are expected to expire by fiscal year end 2020. At the time of sale, we determined that the fair value of these guarantees was $12 million, which we recognized by a charge to pre-tax loss on sale. 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. At fiscal year end 2019, 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 income (loss) from discontinued operations, net of income taxes, for the SubCom business and prior divestitures:
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal | | |||||||
| | 2019 | 2018 | 2017 | |||||||
| | | (in millions) | ||||||||
| Net sales | | $ | 41 | | $ | 702 | | $ | 928 | |
| Cost of sales | | 50 | | 602 | | 653 | | |||
| Gross margin | | (9) | | 100 | | 275 | | |||
| Selling, general, and administrative expenses | | 11 | | 48 | | 50 | | |||
| Research, development, and engineering expenses | | 3 | | 39 | | 40 | | |||
| Restructuring and other charges (credits), net | | 3 | | 30 | (1) | (3) | | |||
| Operating income (loss) | | (26) | | (17) | | 188 | | |||
| Non-operating income, net | | — | | — | | 22 | (2) | |||
| Pre-tax income (loss) from discontinued operations | | (26) | | (17) | | 210 | | |||
| Pre-tax gain (loss) on sale of discontinued operations | | (86) | | (2) | | 3 | | |||
| Income tax (expense) benefit | | 10 | | — | | (70) | | |||
| Income (loss) from discontinued operations, net of income taxes | | $ | (102) | | $ | (19) | | $ | 143 | |
| (1) | Included a $19 million impairment charge recorded in connection with the sale of our SubCom business. |
|---|
(2)Included a $19 million credit related to the SubCom business’ curtailment of a postretirement benefit plan.
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents balance sheet information for assets and liabilities held for sale at fiscal year end 2018; there were no such balances at fiscal year end 2019:
| | | | | |
|---|---|---|---|---|
| | | Fiscal Year End | | |
| | 2018 | |||
| | | (in millions) | | |
| Accounts receivable, net | | $ | 72 | |
| Inventories | | 130 | | |
| Other current assets | | 32 | | |
| Property, plant, and equipment, net(1) | | 221 | | |
| Other assets | | 17 | | |
| Total assets held for sale | | $ | 472 | |
| | | | | |
| Accounts payable | | $ | 63 | |
| Accrued and other current liabilities | | 26 | | |
| Deferred revenue | | 60 | | |
| Other liabilities | | 39 | | |
| Total liabilities held for sale | | $ | 188 | |
| (1) | Included a reduction of $19 million related to the impairment charge recorded in connection with the sale of our SubCom business. |
|---|
5. Acquisitions
During fiscal 2019, we acquired three businesses for a combined cash purchase price of $296 million, net of cash acquired. The acquisitions were reported as part of our Transportation Solutions segment from the date of acquisition.
We acquired two businesses during fiscal 2018 for a combined cash purchase price of $153 million, net of cash acquired. In fiscal 2019, we received $13 million as a result of a customary net working capital settlement for one of the acquisitions. The acquisitions were reported as part of our Industrial Solutions segment from the date of acquisition.
During fiscal 2017, we acquired two businesses for a combined cash purchase price of $250 million, net of cash acquired. The acquisitions were reported as part of our Transportation Solutions and Industrial Solutions segments from the date of acquisition.
Pending Acquisition
During fiscal 2019, we entered into a business combination agreement and commenced a voluntary public tender offer for all outstanding shares of First Sensor AG (“First Sensor”), a provider of sensing solutions based in Germany. The offer was accepted for approximately 72% of First Sensor’s shares. The transaction, including the assumption of First Sensor’s outstanding net debt and minority interest, is valued at approximately €307 million. Completion of the offer will be subject to customary closing conditions, including regulatory approvals. We expect to complete the transaction in fiscal 2020.
6. Inventories
Inventories consisted of the following:
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | Fiscal Year End | | ||||
| | 2019 | 2018 | |||||
| | | (in millions) | | ||||
| Raw materials | | $ | 260 | | $ | 276 | |
| Work in progress | | 739 | | 656 | | ||
| Finished goods | | 837 | | 925 | | ||
| Inventories | | $ | 1,836 | | $ | 1,857 | |
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Property, Plant, and Equipment, Net
Net property, plant, and equipment consisted of the following:
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | Fiscal Year End | | ||||
| | 2019 | 2018 | |||||
| | | (in millions) | | ||||
| Property, plant, and equipment, gross: | | | | | | | |
| Land and improvements | | $ | 152 | | $ | 171 | |
| Buildings and improvements | | 1,393 | | 1,379 | | ||
| Machinery and equipment | | 7,298 | | 7,124 | | ||
| Construction in process | | 637 | | 724 | | ||
| | | 9,480 | | 9,398 | | ||
| Accumulated depreciation | | (5,906) | | (5,901) | | ||
| Property, plant, and equipment, net | | $ | 3,574 | | $ | 3,497 | |
Depreciation expense was $510 million, $487 million, and $442 million in fiscal 2019, 2018, and 2017, respectively.
8. Goodwill
The changes in the carrying amount of goodwill by segment were as follows:
| | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Transportation | | Industrial | | Communications | | | | | |||
| | Solutions | Solutions | Solutions | Total | |||||||||
| | | (in millions) | | ||||||||||
| Balance at fiscal year end 2017(1) | | $ | 2,011 | | $ | 3,047 | | $ | 593 | | $ | 5,651 | |
| Acquisitions | | | — | | | 80 | | | — | | | 80 | |
| Purchase price adjustments | | | — | | | (2) | | | — | | | (2) | |
| Currency translation | | (18) | | (21) | | (6) | | (45) | | ||||
| Balance at fiscal year end 2018(1) | | | 1,993 | | | 3,104 | | | 587 | | | 5,684 | |
| Acquisitions | | | 167 | | | — | | | — | | | 167 | |
| Purchase price adjustments | | | — | | | (12) | | | — | | | (12) | |
| Currency translation | | | (36) | | | (53) | | | (10) | | | (99) | |
| Balance at fiscal year end 2019(1) | | $ | 2,124 | | $ | 3,039 | | $ | 577 | | $ | 5,740 | |
| (1) | At fiscal year end 2019, 2018, and 2017, accumulated impairment losses for the Transportation Solutions, Industrial Solutions, and Communications Solutions segments were $2,191 million, $669 million, and $489 million, respectively. |
|---|
We recognized goodwill in fiscal 2019 and 2018 in connection with recent acquisitions. See Note 5 for additional information regarding acquisitions.
We completed our annual goodwill impairment test in the fourth quarter of fiscal 2019 and determined that no impairment existed.
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Intangible Assets, Net
Intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal Year End | | ||||||||||||||||
| | | 2019 | | 2018 | | ||||||||||||||
| | | Gross | | | | | Net | | Gross | | | | | Net | | ||||
| | | Carrying | | Accumulated | | Carrying | | Carrying | | Accumulated | | Carrying | | ||||||
| | Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||
| | | (in millions) | | ||||||||||||||||
| Customer relationships | | $ | 1,513 | | $ | (459) | | $ | 1,054 | | $ | 1,468 | | $ | (389) | | $ | 1,079 | |
| Intellectual property | | | 1,260 | | | (734) | | | 526 | | | 1,261 | | | (653) | | | 608 | |
| Other | | 33 | | (17) | | 16 | | 33 | | (16) | | 17 | | ||||||
| Total | | $ | 2,806 | | $ | (1,210) | | $ | 1,596 | | $ | 2,762 | | $ | (1,058) | | $ | 1,704 | |
Intangible asset amortization expense was $180 million, $180 million, and $169 million for fiscal 2019, 2018, and 2017, respectively. At fiscal year end 2019, the aggregate amortization expense on intangible assets is expected to be as follows:
| | | | | |
|---|---|---|---|---|
| | (in millions) | |||
| Fiscal 2020 | | $ | 179 | |
| Fiscal 2021 | | 176 | | |
| Fiscal 2022 | | 176 | | |
| Fiscal 2023 | | 175 | | |
| Fiscal 2024 | | 145 | | |
| Thereafter | | 745 | | |
| Total | | $ | 1,596 | |
10. Accrued and Other Current Liabilities
Accrued and other current liabilities consisted of the following:
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | Fiscal Year End | | ||||
| | 2019 | 2018 | |||||
| | | (in millions) | | ||||
| Accrued payroll and employee benefits | | $ | 455 | | $ | 565 | |
| Dividends payable to shareholders | | 308 | | 303 | | ||
| Restructuring reserves | | 245 | | 141 | | ||
| Income taxes payable | | 94 | | 109 | | ||
| Deferred revenue | | | 36 | | | 27 | |
| Interest payable | | 31 | | 34 | | ||
| Share repurchase program payable | | | 18 | | | 94 | |
| Other | | 426 | | 438 | | ||
| Accrued and other current liabilities | | $ | 1,613 | | $ | 1,711 | |
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Debt
Debt was as follows:
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | Fiscal Year End | | ||||
| | 2019 | 2018 | |||||
| | | (in millions) | | ||||
| Principal debt: | | | | | | | |
| Commercial paper, at a weighted-average interest rate of 2.20% and 2.35%, respectively | | $ | 219 | | $ | 270 | |
| 2.375% senior notes due 2018 | | | — | | | 325 | |
| 2.35% senior notes due 2019 | | | — | | | 250 | |
| Floating rate senior notes due 2020(1) | | | 350 | | | — | |
| 4.875% senior notes due 2021 | | 250 | | 250 | | ||
| Euro-denominated fixed-to-floating rate senior notes due 2021(2) | | | 383 | | | — | |
| 3.50% senior notes due 2022 | | 500 | | 500 | | ||
| 1.10% euro-denominated senior notes due 2023 | | | 602 | | | 639 | |
| 3.45% senior notes due 2024 | | | 350 | | | 350 | |
| 3.70% senior notes due 2026 | | | 350 | | | 350 | |
| 3.125% senior notes due 2027 | | | 400 | | | 400 | |
| 7.125% senior notes due 2037 | | 477 | | 477 | | ||
| Other | | | 94 | | | 210 | |
| | | | 3,975 | | | 4,021 | |
| Unamortized discounts, premiums, and debt issuance costs, net | | | (10) | | | (21) | |
| Total debt | | $ | 3,965 | | $ | 4,000 | |
(1)The floating rate senior notes due 2020 bear interest at a rate of three-month London Interbank Offered Rate (“LIBOR”) plus 0.45% per year.
(2)The euro-denominated fixed-to-floating rate senior notes due 2021 bear interest at a rate of 0% until June 2020 and then at a rate of three-month Euro Interbank Offered Rate (“EURIBOR”) plus 0.30% per year until maturity.
During fiscal 2019, Tyco Electronics Group S.A. (“TEGSA”), our 100%-owned subsidiary, issued €350 million aggregate principal amount of fixed-to-floating rate senior notes due June 2021. In June 2020, we may, at our option, redeem the fixed-to-floating rate senior notes, as a whole, at 100% of the principal amount. Also, during fiscal 2019, TEGSA issued $350 million aggregate principal amount of floating rate senior notes due June 2020. The fixed-to-floating rate senior notes and floating rate senior notes are TEGSA’s unsecured senior obligations and rank equally in right of payment with all existing and any future senior indebtedness of TEGSA and senior to any subordinated indebtedness that TEGSA may incur.
TEGSA has a five-year unsecured senior revolving credit facility (“Credit Facility”) with total commitments of $1.5 billion. The Credit Facility was amended in November 2018 primarily to extend the maturity date from December 2020 to November 2023. The amended Credit Facility contains provisions that allow for incremental commitments of up to $500 million, an option to temporarily increase the financial ratio covenant following a qualified acquisition, and borrowings in designated currencies. TEGSA had no borrowings under the Credit Facility at fiscal year end 2019 or 2018.
Borrowings under the Credit Facility bear interest at a rate per annum equal to, at the option of TEGSA, (1) LIBOR plus an applicable margin based upon the senior, unsecured, long-term debt rating of TEGSA, or (2) an alternate base rate equal to the highest of (i) Bank of America, N.A.’s base rate, (ii) the federal funds effective rate plus 1/2 of 1%, and (iii) one-month LIBOR plus 1%, plus, in each case, an applicable margin based upon the senior, unsecured, long-term debt rating of TEGSA. TEGSA is required to pay an annual facility fee ranging from 5.0 to 12.5 basis points based upon the amount of the lenders’ commitments under the Credit Facility and the applicable credit ratings of TEGSA.
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Credit Facility contains a financial ratio covenant providing that if, as of the last day of each fiscal quarter, our ratio of Consolidated Total Debt to Consolidated EBITDA (as defined in the Credit Facility) for the then most recently concluded period of four consecutive fiscal quarters exceeds 3.75 to 1.0, an Event of Default (as defined in the Credit Facility) is triggered. The Credit Facility and our other debt agreements contain other customary covenants.
Periodically, TEGSA issues commercial paper to U.S. institutional accredited investors and qualified institutional buyers in accordance with available exemptions from the registration requirements of the Securities Act of 1933 as part of our ongoing effort to maintain financial flexibility and to potentially decrease the cost of borrowings. Borrowings under the commercial paper program are backed by the Credit Facility.
TEGSA’s payment obligations under its senior notes, commercial paper, and Credit Facility are fully and unconditionally guaranteed by its parent, TE Connectivity Ltd.
At fiscal year end 2019, principal payments required for debt are as follows:
| | | | | |
|---|---|---|---|---|
| | (in millions) | |||
| Fiscal 2020 | | $ | 571 | |
| Fiscal 2021 | | 633 | | |
| Fiscal 2022 | | 500 | | |
| Fiscal 2023 | | 602 | | |
| Fiscal 2024 | | 350 | | |
| Thereafter | | 1,319 | | |
| Total | | $ | 3,975 | |
The fair value of our debt, based on indicative valuations, was approximately $4,278 million and $4,149 million at fiscal year end 2019 and 2018, respectively.
12. 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 fiscal year end 2019, we concluded that we would incur investigation and remediation costs at these sites in the reasonably possible range of $15 million to $43 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.
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Leases
We have facility, land, vehicle, and equipment leases that expire at various dates. Rental expense under these operating leases was $162 million, $141 million, and $147 million for fiscal 2019, 2018, and 2017, respectively. At fiscal year end 2019, future minimum lease payments under non-cancelable operating lease obligations were as follows:
| | | | | |
|---|---|---|---|---|
| | (in millions) | |||
| Fiscal 2020 | | $ | 117 | |
| Fiscal 2021 | | 102 | | |
| Fiscal 2022 | | 81 | | |
| Fiscal 2023 | | 67 | | |
| Fiscal 2024 | | 55 | | |
| Thereafter | | 118 | | |
| Total | | $ | 540 | |
See “Recently Issued Accounting Pronouncements” in Note 2 for information regarding our adoption of ASC 842, Leases, in fiscal 2020.
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 fiscal year end 2019, we had outstanding letters of credit, letters of guarantee, and surety bonds of $309 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 4 for additional information regarding these guarantees and the divestiture of the SubCom business.
13. Financial Instruments and Fair Value Measurements
We use derivative and non-derivative financial instruments to manage certain exposures to foreign currency, interest rate, investment, and commodity risks.
The effects of derivative instruments on the Consolidated Statements of Operations were immaterial for fiscal 2019, 2018, and 2017.
Foreign Currency Exchange Rate Risk
As part of managing the exposure to changes in foreign currency exchange rates, we utilize cross-currency swap contracts and foreign currency forward contracts, a portion of which are designated as cash flow hedges. The objective of these contracts is to minimize impacts to cash flows and profitability due to changes in foreign currency exchange rates on intercompany and other cash transactions. We expect that significantly all of the balance in accumulated other comprehensive income (loss) associated with the cash flow hedge-designated instruments addressing foreign exchange risks will be reclassified into the Consolidated Statement of Operations within the next twelve months.
During fiscal 2015, we entered into cross-currency swap contracts with an aggregate notional value of €1,000 million to reduce our exposure to foreign currency exchange rate risk associated with certain intercompany loans. 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 5.33% per annum. Upon the maturity of these
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
contracts in fiscal 2022, 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.
At fiscal year end 2019, these cross-currency swap contracts were in an asset position of $19 million and were recorded in other assets on the Consolidated Balance Sheet. The cross-currency swap contracts were in a liability position of $100 million and were recorded in other liabilities on the Consolidated Balance Sheet at fiscal year end 2018. At fiscal year end 2019 and 2018, collateral received from or paid to our counterparties approximated the derivative positions and was recorded in accrued and other current liabilities (when the contracts are in an asset position) or prepaid expenses and other current assets (when the contracts are in a liability position) on the Consolidated Balance Sheets. The impacts of these cross-currency swap contracts were as follows:
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal | | |||||||
| | 2019 | 2018 | 2017 | |||||||
| | | (in millions) | ||||||||
| Gains (losses) recorded in other comprehensive income (loss) | | $ | 53 | $ | (25) | $ | (20) | | ||
| Gains (losses) excluded from the hedging relationship(1) | | 66 | | 21 | | (58) | |
| (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 $3,374 million and $4,064 million at fiscal year end 2019 and 2018, respectively.
During fiscal 2019, we expanded our cross-currency swap program to hedge our net investment in certain foreign operations. The aggregate notional value of the fiscal 2019 contracts was $1,844 million at fiscal year end 2019. Under the terms of these contracts, we receive interest in U.S. dollars at a weighted-average rate of 2.9% per annum and pay no interest. Upon the maturity of these contracts at various dates through fiscal 2023, 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.
The impacts of our hedge of net investment programs were as follows:
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal | | |||||||
| | 2019 | 2018 | 2017 | |||||||
| | | (in millions) | ||||||||
| Foreign currency exchange gains (losses) on intercompany loans and external borrowings(1) | | $ | 162 | | $ | 36 | | $ | (74) | |
| Gain on cross-currency swap contracts designated as hedges of net investment(2) | | 74 | | — | | — | |
| (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. |
|---|
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Interest Rate and Investment Risk Management
We issue debt, as needed, to fund our operations and capital requirements. Such borrowings can result in interest rate exposure. To manage the interest rate exposure, we use interest rate swap contracts to convert a portion of fixed rate debt into variable rate debt. We may use forward starting interest rate swap contracts to manage interest rate exposure in periods prior to the anticipated issuance of fixed rate debt. We also utilize investment swap contracts to manage earnings exposure on certain nonqualified deferred compensation liabilities.
Commodity Hedges
As part of managing the exposure to certain commodity price fluctuations, we utilize commodity swap contracts designated as cash flow hedges. The objective of these contracts is to minimize impacts to cash flows and profitability due to changes in prices of commodities used in production.
At fiscal year end 2019 and 2018, our commodity hedges had notional values of $316 million and $401 million, respectively. We expect that significantly all of the balance in accumulated other comprehensive income (loss) associated with the commodity hedges will be reclassified into the Consolidated Statement of Operations within the next twelve months.
Fair Value Measurements
Financial instruments recorded at fair value on a recurring basis, which consist of derivative instruments and marketable securities, were immaterial at fiscal year end 2019 and 2018.
14. Retirement Plans
Defined Benefit Pension Plans
We have several contributory and noncontributory defined benefit retirement plans covering certain of our non-U.S. and U.S. employees, designed in accordance with local customs and practice.
The net periodic pension benefit cost for all non-U.S. and U.S. defined benefit pension plans was as follows:
| | | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Non-U.S. Plans | | U.S. Plans | | | ||||||||||||||
| | | Fiscal | | Fiscal | | | ||||||||||||||
| | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||
| | | ($ in millions) | | | ||||||||||||||||
| Operating expense: | | | | | | | | | | | | | | | | | | | | |
| Service cost | | $ | 47 | | $ | 46 | | $ | 50 | | $ | 13 | | $ | 14 | | $ | 12 | | |
| Other (income) expense: | | | | | | | | | | | | | | | | | | | | |
| Interest cost | | 42 | | 42 | | 35 | | 46 | | 43 | | 43 | | | ||||||
| Expected return on plan assets | | (64) | | (69) | | (68) | | (58) | | (59) | | (53) | | | ||||||
| Amortization of net actuarial loss | | 24 | | 24 | | 41 | | 17 | | 22 | | 40 | | | ||||||
| Amortization of prior service credit and other | | (8) | | (6) | | (4) | | — | | — | | — | | | ||||||
| Net periodic pension benefit cost | | $ | 41 | | $ | 37 | | $ | 54 | | $ | 18 | | $ | 20 | | $ | 42 | | |
| Weighted-average assumptions used to determine net pension benefit cost during the fiscal year: | | | | | | | | | | | | | | | | | | | | |
| Discount rate | | 1.94 | % | 1.87 | % | 1.44 | % | 4.35 | % | 3.77 | % | 3.58 | % | | ||||||
| Expected return on plan assets | | 4.65 | % | 4.92 | % | 5.21 | % | 6.57 | % | 6.45 | % | 5.93 | % | | ||||||
| Rate of compensation increase | | 2.57 | % | 2.53 | % | 2.52 | % | — | % | — | % | — | % | |
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table represents the changes in benefit obligation and plan assets and the net amount recognized on the Consolidated Balance Sheets for all non-U.S. and U.S. defined benefit pension plans:
| | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Non-U.S. Plans | | U.S. Plans | | | ||||||||
| | | Fiscal | | Fiscal | | | ||||||||
| | 2019 | 2018 | 2019 | 2018 | ||||||||||
| | | ($ in millions) | | | ||||||||||
| Change in benefit obligation: | | | | | | | | | | | | | | |
| Benefit obligation at beginning of fiscal year | | $ | 2,220 | | $ | 2,292 | | $ | 1,093 | | $ | 1,191 | | |
| Service cost | | 47 | | 46 | | 13 | | 14 | | | ||||
| Interest cost | | 42 | | 42 | | 46 | | 43 | | | ||||
| Actuarial (gains) losses | | 347 | | (22) | | 125 | | (69) | | | ||||
| Benefits and administrative expenses paid | | (82) | | (77) | | (82) | | (86) | | | ||||
| Currency translation | | (92) | | (43) | | — | | — | | | ||||
| Other | | 1 | | (18) | | — | | — | | | ||||
| Benefit obligation at end of fiscal year | | 2,483 | | 2,220 | | 1,195 | | 1,093 | | | ||||
| | | | | | | | | | | | | | | |
| Change in plan assets: | | | | | | | | | | | | | | |
| Fair value of plan assets at beginning of fiscal year | | 1,390 | | 1,402 | | 917 | | 963 | | | ||||
| Actual return on plan assets | | 186 | | 51 | | 100 | | 37 | | | ||||
| Employer contributions | | 43 | | 51 | | 2 | | 3 | | | ||||
| Benefits and administrative expenses paid | | (82) | | (77) | | (82) | | (86) | | | ||||
| Currency translation | | (42) | | (30) | | — | | — | | | ||||
| Other | | (6) | | (7) | | — | | — | | | ||||
| Fair value of plan assets at end of fiscal year | | 1,489 | | 1,390 | | 937 | | 917 | | | ||||
| Funded status | | $ | (994) | | $ | (830) | | $ | (258) | | $ | (176) | | |
| | | | | | | | | | | | | | | |
| Amounts recognized on the Consolidated Balance Sheets: | | | | | | | | | | | | | | |
| Other assets | | $ | 128 | | $ | 107 | | $ | — | | $ | — | | |
| Accrued and other current liabilities | | | (25) | | | (23) | | | (5) | | | (5) | | |
| Long-term pension and postretirement liabilities | | (1,097) | | (914) | | (253) | | (171) | | | ||||
| Net amount recognized | | $ | (994) | | $ | (830) | | $ | (258) | | $ | (176) | | |
| | | | | | | | | | | | | | | |
| Pre-tax amounts included in accumulated other comprehensive income (loss) which have not yet been recognized in net periodic pension benefit cost: | | | | | | | | | | | | | | |
| Net actuarial loss | | $ | (656) | | $ | (476) | | $ | (290) | | $ | (224) | | |
| Prior service (cost) credit | | | 43 | | | 58 | | | (2) | | | (2) | | |
| Total | | $ | (613) | | $ | (418) | | $ | (292) | | $ | (226) | | |
| | | | | | | | | | | | | | | |
| Weighted-average assumptions used to determine pension benefit obligation at fiscal year end: | | | | | | | | | | | | | | |
| Discount rate | | 1.01 | % | 1.94 | % | 3.14 | % | 4.35 | % | | ||||
| Rate of compensation increase | | 2.53 | % | 2.57 | % | — | % | — | % | |
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The pre-tax amounts recognized in accumulated other comprehensive income (loss) for all non-U.S. and U.S. defined benefit pension plans were as follows:
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Non-U.S. Plans | | U.S. Plans | ||||||||
| | | Fiscal | | Fiscal | ||||||||
| | 2019 | 2018 | 2019 | 2018 | ||||||||
| | | (in millions) | ||||||||||
| Current year net actuarial (gain) loss recorded in accumulated other comprehensive income (loss) | | $ | (204) | | $ | 13 | | $ | (83) | | $ | 46 |
| Amortization of net actuarial loss | | 24 | | 24 | | 17 | | 22 | ||||
| Current year prior service cost (credit) recorded in accumulated other comprehensive income (loss) | | (8) | | 5 | | — | | — | ||||
| Amortization of prior service cost (credit) | | (7) | | (6) | | — | | — | ||||
| | | $ | (195) | | $ | 36 | | $ | (66) | | $ | 68 |
In fiscal 2019, unrecognized actuarial losses recorded in accumulated other comprehensive income (loss) were primarily the result of lower discount rates, partially offset by favorable asset performance for both non-U.S. and U.S. defined benefit pension plans as compared to fiscal 2018. In fiscal 2018, unrecognized actuarial gains recorded in accumulated other comprehensive income (loss) were primarily the result of higher discount rates and favorable asset performance for both non-U.S. and U.S. defined benefit pension plans as compared to fiscal 2017.
The estimated amortization of actuarial losses from accumulated other comprehensive income (loss) into net periodic pension benefit cost for non-U.S. and U.S. defined benefit pension plans in fiscal 2020 is expected to be $40 million and $9 million, respectively. The estimated amortization of prior service credit from accumulated other comprehensive income (loss) into net periodic pension benefit cost for non-U.S. defined benefit pension plans in fiscal 2020 is expected to be $6 million.
In determining the expected return on plan assets, we consider the relative weighting of plan assets by class and individual asset class performance expectations.
The investment strategies for non-U.S. and U.S. pension plans are governed locally. Our investment strategy for our pension plans is to manage the plans on a going concern basis. Current investment policy is to achieve a reasonable return on assets, subject to a prudent level of portfolio risk, for the purpose of enhancing the security of benefits for participants. Projected returns are based primarily on pro forma asset allocation, expected long-term returns, and forward-looking estimates of active portfolio and investment management.
At fiscal year end 2019, the long-term target asset allocation in our U.S. plans’ master trust is 5% return-seeking assets and 95% liability-hedging assets. Return-seeking assets, including non-U.S. and U.S. equity securities, are assets intended to generate returns in excess of pension liability growth. Liability-hedging assets, including government and corporate bonds, are assets intended to have characteristics similar to pension liabilities and are used to better match asset cash flows with expected obligation cash flows. Asset re-allocation to meet that target is occurring over a multi-year period based on the funded status. We expect to reach our target allocation when the funded status of the plans exceeds 115%. Based on the funded status of the plans as of fiscal year end 2019, our target asset allocation is 67% return-seeking and 33% liability-hedging.
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Target weighted-average asset allocation and weighted-average asset allocation for non-U.S. and U.S. pension plans were as follows:
| | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Non-U.S. Plans | | U.S. Plans | | | ||||||||
| | | | | Fiscal | | Fiscal | | | | Fiscal | | Fiscal | | |
| | | | | Year End | | Year End | | | | Year End | | Year End | | |
| | Target | 2019 | 2018 | Target | 2019 | 2018 | ||||||||
| Asset category: | | | | | | | | | | | | | | |
| Equity securities | 25 | % | 26 | % | 29 | % | 67 | % | 41 | % | 53 | % | | |
| Fixed income | 55 | | 53 | | 49 | | 33 | | 59 | | 47 | | | |
| Insurance contracts and other investments | 17 | | 18 | | 20 | | — | | — | | — | | | |
| Real estate investments | 3 | | 3 | | 2 | | — | | — | | — | | | |
| Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |
Our common shares are not a direct investment of our pension funds; however, the pension funds may indirectly include our shares. The aggregate amount of our common shares would not be considered material relative to the total pension fund assets.
Our funding policy is to make contributions in accordance with the laws and customs of the various countries in which we operate as well as to make discretionary voluntary contributions from time to time. We expect to make the minimum required contributions of $42 million and $26 million to our non-U.S. and U.S. pension plans, respectively, in fiscal 2020. We may also make voluntary contributions at our discretion.
At fiscal year end 2019, benefit payments, which reflect future expected service, as appropriate, are expected to be paid as follows:
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | Non-U.S. Plans | U.S. Plans | |||||
| | | (in millions) | | ||||
| Fiscal 2020 | | $ | 82 | | $ | 77 | |
| Fiscal 2021 | | 77 | | 74 | | ||
| Fiscal 2022 | | 81 | | 74 | | ||
| Fiscal 2023 | | 85 | | 74 | | ||
| Fiscal 2024 | | 86 | | 74 | | ||
| Fiscal 2025-2029 | | 490 | | 361 | |
Presented below is the accumulated benefit obligation for all non-U.S. and U.S. pension plans as well as additional information related to plans with an accumulated benefit obligation in excess of plan assets and plans with a projected benefit obligation in excess of plan assets.
| | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Non-U.S. Plans | | U.S. Plans | | ||||||||
| | | Fiscal Year End | | Fiscal Year End | | ||||||||
| | 2019 | 2018 | 2019 | 2018 | |||||||||
| | | (in millions) | | ||||||||||
| Accumulated benefit obligation | | $ | 2,340 | | $ | 2,099 | | $ | 1,195 | | $ | 1,093 | |
| Pension plans with accumulated benefit obligations in excess of plan assets: | | | | | | | | | | | | | |
| Accumulated benefit obligation | | 1,304 | | 1,400 | | 1,195 | | 1,093 | | ||||
| Fair value of plan assets | | 316 | | 580 | | 937 | | 917 | | ||||
| Pension plans with projected benefit obligations in excess of plan assets: | | | | | | | | | | | | | |
| Projected benefit obligation | | 1,453 | | 1,560 | | 1,195 | | 1,093 | | ||||
| Fair value of plan assets | | 331 | | 623 | | 937 | | 917 | |
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We value our pension assets based on the fair value hierarchy of ASC 820, Fair Value Measurements and Disclosures. Details of the fair value hierarchy are described in Note 2. The following table presents our defined benefit pension plans’ asset categories and their associated fair value within the fair value hierarchy:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal Year End 2019 | | ||||||||||||||||||||||
| | | Non-U.S. Plans | | U.S. Plans | | ||||||||||||||||||||
| | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||
| | | (in millions) | | ||||||||||||||||||||||
| Equity: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commingled equity funds(1) | | $ | — | | $ | 339 | | $ | — | | $ | 339 | $ | — | | $ | 385 | | $ | — | | $ | 385 | | |
| Fixed income: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Government bonds(2) | | — | | 315 | | — | | 315 | | — | | — | | — | | — | | ||||||||
| Corporate bonds(3) | | — | | 137 | | — | | 137 | | — | | — | | — | | — | | ||||||||
| Commingled bond funds(4) | | — | | 359 | | — | | 359 | | — | | 540 | | — | | 540 | | ||||||||
| Other(5) | | — | | 162 | | 157 | | 319 | | — | | 11 | | — | | 11 | | ||||||||
| Subtotal | | $ | — | | $ | 1,312 | | $ | 157 | | 1,469 | | $ | — | | $ | 936 | | $ | — | | 936 | | ||
| Items to reconcile to fair value of plan assets(6) | | | | | | | | | | | 20 | | | | | | | | | | | 1 | | ||
| Fair value of plan assets | | | | | | | | | | | $ | 1,489 | | | | | | | | | | | $ | 937 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal Year End 2018 | | ||||||||||||||||||||||
| | | Non-U.S. Plans | | U.S. Plans | | ||||||||||||||||||||
| | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||
| | | (in millions) | | ||||||||||||||||||||||
| Equity: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-U.S. equity securities(7) | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 220 | | $ | — | | $ | — | | $ | 220 | |
| U.S. equity securities(7) | | — | | — | | — | | — | | 265 | | — | | — | | 265 | | ||||||||
| Commingled equity funds(1) | | — | | 397 | | — | | 397 | | — | | — | | — | | — | | ||||||||
| Fixed income: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Government bonds(2) | | — | | 213 | | — | | 213 | | — | | 45 | | — | | 45 | | ||||||||
| Corporate bonds(3) | | — | | 6 | | — | | 6 | | — | | 283 | | — | | 283 | | ||||||||
| Commingled bond funds(4) | | — | | 464 | | — | | 464 | | — | | 87 | | — | | 87 | | ||||||||
| Other(5) | | — | | 184 | | 120 | | 304 | | — | | 11 | | — | | 11 | | ||||||||
| Subtotal | | $ | — | | $ | 1,264 | | $ | 120 | | 1,384 | | $ | 485 | | $ | 426 | | $ | — | | 911 | | ||
| Items to reconcile to fair value of plan assets(6) | | | | | | | | | | | 6 | | | | | | | | | | | 6 | | ||
| Fair value of plan assets | | | | | | | | | | | $ | 1,390 | | | | | | | | | | | $ | 917 | |
| (1) | Commingled equity funds are pooled investments in multiple equity-type securities. Fair value is calculated as the closing price of the underlying investments, an observable market condition, divided by the number of shares of the fund outstanding. |
|---|
| (2) | Government bonds are marked to fair value based on quoted market prices or market approach valuation models using observable market data such as quotes, spreads, and data points for yield curves. |
|---|
| (3) | Corporate bonds are marked to fair value based on quoted market prices or market approach valuation models using observable market data such as quotes, spreads, and data points for yield curves. |
|---|
| (4) | Commingled bond funds are pooled investments in multiple debt-type securities. Fair value is calculated as the closing price of the underlying investments, an observable market condition, divided by the number of shares of the fund outstanding. |
|---|
| (5) | Other investments are composed of insurance contracts, derivatives, short-term investments, structured products such as collateralized obligations and mortgage- and asset-backed securities, real estate investments, and hedge funds. Insurance contracts are valued using cash surrender value, or face value of the contract if a cash surrender value is unavailable (level 2), as these values represent the amount that the plan would receive on termination of the underlying contract. Derivatives, short-term investments, and structured products are marked to fair value using models that are supported by observable market-based data (level 2). Real estate investments include investments in commingled real estate funds and are valued at net asset value which is calculated using unobservable inputs that are supported by little or no market activity (level 3). Hedge funds are valued at their net asset value which is calculated using unobservable inputs that are supported by little or no market activity (level 3). |
|---|
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| (6) | Items to reconcile to fair value of plan assets include amounts receivable for securities sold, amounts payable for securities purchased, and any cash balances, considered to be carried at book value, that are held in the plans. |
|---|
| (7) | Non-U.S. and U.S. equity securities are valued at the closing price reported on the stock exchange on which the individual securities are traded. |
|---|
Changes in Level 3 assets in non-U.S. plans were primarily the result of purchases in fiscal 2019 and 2018.
Defined Contribution Retirement Plans
We maintain several defined contribution retirement plans, the most significant of which is located in the U.S. These plans include 401(k) matching programs, as well as qualified and nonqualified profit sharing and share bonus retirement plans. Expense for the defined contribution plans is computed as a percentage of participants’ compensation and was $63 million, $62 million, and $60 million for fiscal 2019, 2018, and 2017, respectively.
Deferred Compensation Plans
We maintain nonqualified deferred compensation plans, which permit eligible employees to defer a portion of their compensation. A record keeping account is set up for each participant and the participant chooses from a variety of measurement funds for the deemed investment of their accounts. The measurement funds correspond to several funds in our 401(k) plans and the account balance fluctuates with the investment returns on those funds. At fiscal year end 2019 and 2018, total deferred compensation liabilities were $203 million and $189 million, respectively, and were recorded primarily in other liabilities on the Consolidated Balance Sheets. See Note 13 for additional information regarding our risk management strategy related to deferred compensation liabilities.
Postretirement Benefit Plans
In addition to providing pension and 401(k) benefits, we also provide certain health care coverage continuation for qualifying retirees from the date of retirement to age 65. The accumulated postretirement benefit obligation was $18 million at fiscal year end 2019 and 2018, and the underfunded status of the postretirement benefit plans was included primarily in long-term pension and postretirement liabilities on the Consolidated Balance Sheets. Activity during fiscal 2019, 2018, and 2017 was not significant.
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Income Taxes
Income Tax Expense (Benefit)
Significant components of the income tax expense (benefit) were as follows:
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal | | |||||||
| | 2019 | 2018 | 2017 | |||||||
| | | (in millions) | | |||||||
| Current income tax expense (benefit): | | | | | | | | | | |
| U.S.: | | | | | | | | | | |
| Federal | | $ | (28) | | $ | 20 | | $ | (9) | |
| State | | 2 | | 21 | | 9 | | |||
| Non-U.S. | | 229 | | 406 | | 322 | | |||
| | | | 203 | | | 447 | | | 322 | |
| Deferred income tax expense (benefit): | | | | | | | | | | |
| U.S.: | | | | | | | | | | |
| Federal | | (25) | | 499 | | (119) | | |||
| State | | (8) | | (30) | | (15) | | |||
| Non-U.S. | | (185) | | (1,260) | | (8) | | |||
| | | | (218) | | | (791) | | | (142) | |
| Income tax expense (benefit) | | $ | (15) | | $ | (344) | | $ | 180 | |
The U.S. and non-U.S. components of income from continuing operations before income taxes were as follows:
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal | | |||||||
| | 2019 | 2018 | 2017 | |||||||
| | | (in millions) | | |||||||
| U.S. | | $ | (216) | | $ | (245) | | $ | (273) | |
| Non-U.S. | | 2,147 | | 2,485 | | 1,993 | | |||
| Income from continuing operations before income taxes | | $ | 1,931 | | $ | 2,240 | | $ | 1,720 | |
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The reconciliation between U.S. federal income taxes at the statutory rate and income tax expense (benefit) was as follows:
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal | | |||||||
| | 2019 | 2018 | 2017 | |||||||
| | | (in millions) | | |||||||
| Notional U.S. federal income tax expense at the statutory rate(1) | | $ | 406 | | $ | 551 | | $ | 602 | |
| Adjustments to reconcile to the income tax expense (benefit): | | | | | | | | | | |
| U.S. state income tax benefit, net | | (5) | | (7) | | (4) | | |||
| Tax law changes | | 15 | | 638 | | 7 | | |||
| Tax credits | | (22) | | (8) | | (8) | | |||
| Non-U.S. net earnings(2) | | (166) | | (213) | | (355) | | |||
| Change in accrued income tax liabilities | | (61) | | 13 | | 24 | | |||
| Valuation allowance | | (163) | | 33 | | (1) | | |||
| Legal entity restructuring and intercompany transactions | | | 3 | | | (1,329) | | | (40) | |
| Excess tax benefits from share-based payments | | | (8) | | | (24) | | | (40) | |
| Other | | (14) | | 2 | | (5) | | |||
| Income tax expense (benefit) | | $ | (15) | | $ | (344) | | $ | 180 | |
| (1) | The U.S. federal statutory rate was 21% for fiscal 2019, 24.58% for fiscal 2018, and 35% for fiscal 2017. |
|---|
| (2) | Excludes items which are separately presented. |
|---|
The income tax benefit for fiscal 2019 included a $216 million income tax benefit related to the tax impacts of certain measures of the Switzerland Federal Act on Tax Reform and AHV Financing (“Swiss Tax Reform”), a $90 million income tax benefit related to the effective settlement of a tax audit in a non-U.S. jurisdiction, and $15 million of income tax expense associated with the tax impacts of certain legal entity restructurings and intercompany transactions. See “Swiss Tax Reform” below for additional information regarding Swiss Tax Reform.
The income tax benefit for fiscal 2018 included a $1,222 million net income tax benefit associated with the tax impacts of certain legal entity restructurings and intercompany transactions that occurred in the quarter ended September 28, 2018. The net income tax benefit of $1,222 million related primarily to the recognition of certain non-U.S. loss carryforwards and basis differences in subsidiaries expected to be utilized against future taxable income, partially offset by a $46 million increase in the valuation allowance for certain U.S. federal tax credit carryforwards. The income tax benefit for fiscal 2018 also included $567 million of income tax expense related to the tax impacts of the Tax Cuts and Jobs Act (the “Act”) and a $61 million net income tax benefit related to the tax impacts of certain legal entity restructurings that occurred in the quarter ended December 29, 2017. See “Tax Cuts and Jobs Act” below for additional information regarding the Act.
The income tax expense for fiscal 2017 included a $52 million income tax benefit associated with the tax impacts of certain intercompany transactions and the corresponding reduction in the valuation allowance for U.S. tax loss carryforwards, a $40 million income tax benefit related to share-based payments and the adoption of ASU No. 2016-09, and a $14 million income tax benefit associated with pre-separation tax matters.
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Deferred Tax Assets and Liabilities
Deferred income taxes result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The components of the net deferred income tax asset were as follows:
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | Fiscal Year End | | ||||
| | 2019 | 2018 | |||||
| | | (in millions) | | ||||
| Deferred tax assets: | | | | | | | |
| Accrued liabilities and reserves | | $ | 245 | | $ | 255 | |
| Tax loss and credit carryforwards | | 6,041 | | 3,237 | | ||
| Inventories | | 43 | | 58 | | ||
| Intangible assets | | | 964 | | | — | |
| Pension and postretirement benefits | | 248 | | 179 | | ||
| Deferred revenue | | 4 | | 5 | | ||
| Interest | | 134 | | 30 | | ||
| Unrecognized income tax benefits | | 7 | | 8 | | ||
| Basis difference in subsidiaries | | | — | | | 946 | |
| Other | | 8 | | 13 | | ||
| Gross deferred tax assets | | 7,694 | | 4,731 | | ||
| Valuation allowance | | (4,970) | | (2,191) | | ||
| Deferred tax assets, net of valuation allowance | | | 2,724 | | | 2,540 | |
| | | | | | | | |
| Deferred tax liabilities: | | | | | | | |
| Intangible assets | | — | | (552) | | ||
| Property, plant, and equipment | | (57) | | (13) | | ||
| Other | | (47) | | (38) | | ||
| Total deferred tax liabilities | | (104) | | (603) | | ||
| | | | | | | | |
| Net deferred tax assets | | $ | 2,620 | | $ | 1,937 | |
Our tax loss and credit carryforwards (tax effected) at fiscal year end 2019 were as follows:
| | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Expiration Period | | | | | |||||||
| | | | | Fiscal 2025 | | | | | | ||||
| | | Through | | Through | | No | | | | ||||
| | Fiscal 2024 | Fiscal 2039 | Expiration | Total | |||||||||
| | | (in millions) | | ||||||||||
| U.S. Federal: | | | | | | | | | | | | | |
| Net operating loss carryforwards | | $ | 128 | | $ | 359 | | $ | 41 | | $ | 528 | |
| Tax credit carryforwards | | 42 | | 123 | | — | | | 165 | | |||
| Capital loss carryforwards | | | 1 | | | — | | | — | | | 1 | |
| U.S. State: | | | | | | | | | | | | | |
| Net operating loss carryforwards | | 50 | | 39 | | — | | | 89 | | |||
| Tax credit carryforwards | | 8 | | 13 | | 3 | | | 24 | | |||
| Non-U.S.: | | | | | | | | | | | | | |
| Net operating loss carryforwards | | 12 | | 3,437 | | 1,756 | | | 5,205 | | |||
| Tax credit carryforwards | | | — | | | — | | | 1 | | | 1 | |
| Capital loss carryforwards | | | — | | | 2 | | | 26 | | | 28 | |
| Total tax loss and credit carryforwards | | $ | 241 | | $ | 3,973 | | $ | 1,827 | | $ | 6,041 | |
The valuation allowance for deferred tax assets of $4,970 million and $2,191 million at fiscal year end 2019 and 2018, respectively, related principally to the uncertainty of the utilization of certain deferred tax assets, primarily tax loss, capital loss, and credit carryforwards in various jurisdictions. During fiscal 2019, tax loss and carryforwards increased
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
primarily as a result of a $2,891 million (tax effected) net write-down of investments in subsidiaries in certain jurisdictions, offset by a corresponding increase to the valuation allowance. We believe that we will generate sufficient future taxable income to realize the income tax benefits related to the remaining net deferred tax assets on the Consolidated Balance Sheet.
We have provided income taxes for earnings that are currently distributed as well as the taxes associated with several subsidiaries’ earnings that are expected to be distributed in the future. No additional provision has been made for Swiss or non-Swiss income taxes on the undistributed earnings of subsidiaries or for unrecognized deferred tax liabilities for temporary differences related to basis differences in investments in subsidiaries, as such earnings are expected to be permanently reinvested, the investments are essentially permanent in duration, or we have concluded that no additional tax liability will arise as a result of the distribution of such earnings. As of fiscal year end 2019, certain subsidiaries had approximately $26 billion of cumulative undistributed earnings that have been retained indefinitely and reinvested in our global manufacturing operations, including working capital; property, plant, and equipment; intangible assets; and research and development activities. A liability could arise if our intention to permanently reinvest such earnings were to change and amounts are distributed by such subsidiaries or if such subsidiaries are ultimately disposed. It is not practicable to estimate the additional income taxes related to permanently reinvested earnings or the basis differences related to investments in subsidiaries. As of fiscal year end 2019, we had approximately $9.1 billion of cash, cash equivalents, and intercompany deposits, principally in our subsidiaries, that we have the ability to distribute to TEGSA, our Luxembourg subsidiary, which is the obligor of substantially all of our debt, and to TE Connectivity Ltd., our Swiss parent company, but we consider to be permanently reinvested. We estimate that up to $1.0 billion of tax expense would be recognized on the Consolidated Financial Statements if our intention to permanently reinvest these amounts were to change. Our current plans do not demonstrate a need to repatriate cash, cash equivalents, and intercompany deposits that are designated as permanently reinvested in order to fund our operations, including investing and financing activities.
Uncertain Tax Positions
As of fiscal year end 2019, we had total unrecognized income tax benefits of $542 million. If recognized in future years, $397 million of these currently unrecognized income tax benefits would impact income tax expense (benefit) and the effective tax rate. As of fiscal year end 2018, we had total unrecognized income tax benefits of $566 million. If recognized in future years, $467 million of these currently unrecognized income tax benefits would impact income tax expense (benefit) and the effective tax rate. The following table summarizes the activity related to unrecognized income tax benefits:
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal | | |||||||
| | 2019 | 2018 | 2017 | |||||||
| | | (in millions) | | |||||||
| Balance at beginning of fiscal year | | $ | 566 | | $ | 501 | | $ | 490 | |
| Additions related to prior years tax positions | | 13 | | 14 | | 40 | | |||
| Reductions related to prior years tax positions | | (101) | | (11) | | (9) | | |||
| Additions related to current year tax positions | | 98 | | 105 | | 70 | | |||
| Settlements | | (2) | | (7) | | (4) | | |||
| Reductions due to lapse of applicable statute of limitations | | (32) | | (36) | | (86) | | |||
| Balance at end of fiscal year | | $ | 542 | | $ | 566 | | $ | 501 | |
We record accrued interest and penalties related to uncertain tax positions as part of income tax expense (benefit). As of fiscal year end 2019 and 2018, we had $42 million and $60 million, respectively, of accrued interest and penalties related to uncertain tax positions on the Consolidated Balance Sheets, recorded primarily in income taxes. During fiscal 2019, 2018, and 2017, we recognized income tax benefits of $14 million, expense of $5 million, and benefits of $5 million, respectively, related to interest and penalties on the Consolidated Statements of Operations.
We file income tax returns on a unitary, consolidated, or stand-alone basis in multiple state and local jurisdictions, which generally have statutes of limitations ranging from 3 to 4 years. Various state and local income tax returns are currently in the process of examination or administrative appeal.
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Our non-U.S. subsidiaries file income tax returns in the countries in which they have operations. Generally, these countries have statutes of limitations ranging from 3 to 10 years. Various non-U.S. subsidiary income tax returns are currently in the process of examination by taxing authorities.
As of fiscal year end 2019, under applicable statutes, the following tax years remained subject to examination in the major tax jurisdictions indicated:
| | | | |
|---|---|---|---|
| Jurisdiction | Open Years | ||
| Brazil | | 2014 through 2019 | |
| China | 2009 through 2019 | | |
| Czech Republic | 2016 through 2019 | | |
| France | | 2016 through 2019 | |
| Germany | 2017 through 2019 | | |
| Hong Kong | 2013 through 2019 | | |
| Ireland | | 2014 through 2019 | |
| Italy | 2014 through 2019 | | |
| Japan | 2013 through 2019 | | |
| Luxembourg | 2014 through 2019 | | |
| Mexico | | 2014 through 2019 | |
| Singapore | 2014 through 2019 | | |
| South Korea | | 2014 through 2019 | |
| Spain | 2015 through 2019 | | |
| Switzerland | 2014 through 2019 | | |
| Thailand | | 2017 through 2019 | |
| United Kingdom | 2017 through 2019 | | |
| U.S.—federal | 2016 through 2019 | |
In most jurisdictions, taxing authorities retain the ability to review prior tax years and to adjust any net operating loss and tax credit carryforwards from these years that are utilized in a subsequent period.
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 Consolidated Balance Sheet as of fiscal year end 2019.
Other Income Tax Matters
Swiss Tax Reform
Swiss Parliament approved the Federal Act on Tax Reform and AHV Financing in September 2018, and it was approved by public vote on May 19, 2019. Swiss Tax Reform eliminates certain preferential tax items and implements new tax rates at both the federal and cantonal levels.
Subsequent to the public approval of Swiss Tax Reform, on May 24, 2019, the federal tax authority issued guidance abolishing certain interest deductions effective January 1, 2020. The federal provisions of Swiss Tax Reform were enacted into law in the quarter ended September 27, 2019. Based on our forecast of taxable income and the abolishment of certain interest deductions, we believe it is more likely than not that additional deferred tax assets for tax loss carryforwards in Switzerland will be realized in the future. As a result, during fiscal 2019, we recorded a $216 million income tax benefit related primarily to the reduction to the valuation allowance for deferred tax assets
In October 2019, the canton of Schaffhausen enacted Swiss Tax Reform into law. We are currently assessing the impacts of the cantonal implementation, including reductions in tax rates.
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act, which was enacted in December 2017, included numerous significant changes to existing tax law, including a permanent reduction in the U.S. federal corporate income tax rate to 21%, effective January 1, 2018; further limitations on the deductibility of interest expense and certain executive compensation; repeal of the corporate Alternative Minimum Tax; and imposition of a territorial tax system with a one-time repatriation tax on deemed repatriated earnings of foreign subsidiaries. In the period of enactment, we revalued our U.S. federal deferred tax assets and liabilities at the 21% tax rate and recorded income tax expense of $567 million primarily in connection with the write-down of our U.S. federal deferred tax asset for net operating loss and interest carryforwards to the lower tax rate. Included in the expense of $567 million was an income tax benefit of $34 million related to the reduction in the existing valuation allowance recorded against certain U.S. federal tax credit carryforwards.
Tax Sharing Agreement
Under a Tax Sharing Agreement entered into upon our separation from Tyco International plc (“Tyco International”) in fiscal 2007, we, Tyco International, and Covidien plc (“Covidien”) share 31%, 27%, and 42%, respectively, of income tax liabilities that arise from adjustments made by tax authorities to the collective income tax returns for periods prior to and including June 29, 2007. Pursuant to the Tax Sharing Agreement, we entered into certain guarantee commitments and indemnifications with Tyco International and Covidien. We have substantially settled all U.S. federal income tax matters with the IRS for periods covered under the Tax Sharing Agreement. Certain shared U.S. state and non-U.S. income tax matters remain open. We do not expect these matters will have a material effect on our results of operations, financial position, or cash flows. As a result of subsequent transactions, Tyco International and Covidien now operate as part of Johnson Controls International plc and Medtronic plc, respectively.
16. Earnings Per Share
The weighted-average number of shares outstanding used in the computations of basic and diluted earnings per share were as follows:
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | Fiscal | | ||||
| | 2019 | 2018 | 2017 | ||||
| | | (in millions) | | ||||
| Basic | | 338 | 350 | 355 | | ||
| Dilutive impact of share-based compensation arrangements | | 2 | 3 | 3 | | ||
| Diluted | | 340 | 353 | 358 | |
The following share options were not included in the computation of diluted earnings per share because the instruments’ underlying exercise prices were greater than the average market prices of our common shares and inclusion would be antidilutive:
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | Fiscal | | ||||
| | 2019 | 2018 | 2017 | ||||
| | | (in millions) | | ||||
| Antidilutive share options | | 1 | 1 | | 1 | |
17. Shareholders’ Equity
Common Shares
We are organized under the laws of Switzerland. The rights of holders of our shares are governed by Swiss law, our Swiss articles of association, and our Swiss organizational regulations. Accordingly, the par value of our common shares is stated in Swiss francs (“CHF”). We continue to use the U.S. dollar, however, as our reporting currency on the Consolidated Financial Statements.
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Subject to certain conditions specified in our articles of association, we are authorized to increase our conditional share capital by issuing new shares in aggregate not exceeding 50% of our authorized shares. In March 2018, our shareholders reapproved and extended through March 14, 2020, our board of directors’ authorization to issue additional new shares, subject to certain conditions specified in the articles of association, in aggregate not exceeding 50% of the amount of our authorized shares.
Common Shares Held in Treasury
At fiscal year end 2019, approximately 16 million common shares were held in treasury, of which 4 million were owned by one of our subsidiaries. At fiscal year end 2018, approximately 12 million common shares were held in treasury, of which 6 million were owned by one of our subsidiaries. Shares held both directly by us and by our subsidiary are presented as treasury shares on the Consolidated Balance Sheets.
In fiscal 2019 and 2017, our shareholders approved the cancellation of 6 million and 26 million shares, respectively, purchased under our share repurchase program. These capital reductions by cancellation of shares were subject to a notice period and filing with the commercial register in Switzerland.
Contributed Surplus
During fiscal 2017, cumulative equity transactions, including dividend activity and treasury share cancellations, reduced our contributed surplus balance to zero with residual activity recorded against accumulated earnings as reflected on the Consolidated Statement of Shareholders’ Equity. To the extent that the contributed surplus balance continues to be zero, the impact of future transactions that normally would have been recorded as a reduction of contributed surplus will be recorded in accumulated earnings. Contributed surplus established for Swiss tax and statutory purposes (“Swiss Contributed Surplus”) is not impacted by our GAAP treatment.
Swiss Contributed Surplus, subject to certain conditions, is a freely distributable reserve. As of fiscal year end 2019 and 2018, Swiss Contributed Surplus was CHF 6,107 million and CHF 6,724 million, respectively (equivalent to $5,195 million and $5,809 million, respectively).
Dividends
We paid cash dividends to shareholders of $1.80, $1.68, and $1.54 per share in fiscal 2019, 2018, and 2017, respectively.
Under Swiss law, subject to certain conditions, dividends paid from reserves from capital contributions (equivalent to Swiss Contributed Surplus) are exempt from Swiss withholding tax. Dividends on our shares must be approved by our shareholders.
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Our shareholders approved the following dividends on our common shares:
| | | | | | |
|---|---|---|---|---|---|
| Approval Date | Annual Payment Per Share | Payment Timing | | ||
| March 2016 | | $1.48, payable in four quarterly installments of $0.37 | | Third quarter of fiscal 2016 Fourth quarter of fiscal 2016 First quarter of fiscal 2017 Second quarter of fiscal 2017 | |
| March 2017 | | $1.60, payable in four quarterly installments of $0.40 | | Third quarter of fiscal 2017 Fourth quarter of fiscal 2017 First quarter of fiscal 2018 Second quarter of fiscal 2018 | |
| March 2018 | | $1.76, payable in four quarterly installments of $0.44 | | Third quarter of fiscal 2018 Fourth quarter of fiscal 2018 First quarter of fiscal 2019 Second quarter of fiscal 2019 | |
| March 2019 | | $1.84, payable in four quarterly installments of $0.46 | | Third quarter of fiscal 2019 Fourth quarter of fiscal 2019 First quarter of fiscal 2020 Second quarter of fiscal 2020 | |
Upon shareholders’ approval of a dividend payment, we record a liability with a corresponding charge to shareholders’ equity. At fiscal year end 2019 and 2018, the unpaid portion of the dividends recorded in accrued and other current liabilities on the Consolidated Balance Sheets totaled $308 million and $303 million, respectively.
Share Repurchase Program
In both fiscal 2019 and 2018, our board of directors authorized increases of $1.5 billion in our share repurchase program. Common shares repurchased under the share repurchase program were as follows:
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal | | |||||||
| | 2019 | 2018 | 2017 | | ||||||
| | | (in millions) | | |||||||
| Number of common shares repurchased | | | 12 | | 10 | | 8 | | ||
| Repurchase value | | $ | 1,014 | $ | 966 | $ | 621 | |
At fiscal year end 2019, we had $1.5 billion of availability remaining under our share repurchase authorization.
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. Accumulated Other Comprehensive Income (Loss)
The changes in each component of accumulated other comprehensive income (loss) were as follows:
| | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Foreign | | Unrecognized | | Gains (Losses) | | Accumulated | | ||||
| | | Currency | | Pension and | | on Cash | | Other | | ||||
| | | Translation | | Postretirement | | Flow | | Comprehensive | | ||||
| | Adjustments(1) | Benefit Costs | Hedges | Income (Loss) | |||||||||
| | | (in millions) | | ||||||||||
| Balance at fiscal year end 2016 | | $ | 316 | | $ | (826) | | $ | (32) | | $ | (542) | |
| Other comprehensive income, net of tax: | | | | | | | | | | | | | |
| Other comprehensive income before reclassifications | | 38 | | 378 | | 32 | | 448 | | ||||
| Amounts reclassified from accumulated other comprehensive income (loss) | | (1) | | 74 | | (14) | | 59 | | ||||
| Income tax expense | | | — | | | (122) | | | (3) | | | (125) | |
| Other comprehensive income, net of tax | | | 37 | | | 330 | | | 15 | | | 382 | |
| Balance at fiscal year end 2017 | | | 353 | | | (496) | | | (17) | | | (160) | |
| Adoption of ASU No. 2018-02 | | | — | | | (39) | | | 1 | | | (38) | |
| Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | |
| Other comprehensive income (loss) before reclassifications | | | (117) | | | 64 | | | (60) | | | (113) | |
| Amounts reclassified from accumulated other comprehensive income (loss) | | — | | 40 | | (23) | | 17 | | ||||
| Income tax (expense) benefit | | — | | (21) | | 9 | | (12) | | ||||
| Other comprehensive income (loss), net of tax | | | (117) | | | 83 | | | (74) | | | (108) | |
| Balance at fiscal year end 2018 | | | 236 | | | (452) | | | (90) | | | (306) | |
| Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | |
| Other comprehensive income (loss) before reclassifications | | | (115) | | | (295) | | | 35 | | | (375) | |
| Amounts reclassified from accumulated other comprehensive income (loss) | | | 67 | (2) | | 34 | | | 15 | | | 116 | |
| Income tax (expense) benefit | | | — | | | 66 | | | (4) | | | 62 | |
| Other comprehensive income (loss), net of tax | | | (48) | | | (195) | | | 46 | | | (197) | |
| Balance at fiscal year end 2019 | | $ | 188 | | $ | (647) | | $ | (44) | | $ | (503) | |
| (1) | Includes hedges of net investment foreign currency exchange gains or losses which offset foreign currency exchange losses or gains attributable to the translation of the net investments. |
|---|
| (2) | Represents net foreign currency translation adjustments reclassified as a result of the sale of the SubCom business. This net loss is included in income (loss) from discontinued operations on the Consolidated Statement of Operations. See Note 4 for additional information regarding the divestiture of SubCom. |
|---|
19. Share Plans
Our equity compensation plans, of which the TE Connectivity Ltd. 2007 Stock and Incentive Plan, amended and restated as of March 8, 2017, is the primary plan, provide for the award of annual performance bonuses and long-term performance awards, including share options; restricted, performance, and deferred share units; and other share-based awards (collectively, “Awards”) and allow for the use of unissued shares or treasury shares to be used to satisfy such Awards. As of fiscal year end 2019, our plans provided for a maximum of 77 million shares to be issued as Awards, subject to adjustment as provided under the terms of the plans. A total of 18 million shares remained available for issuance under our plans as of fiscal year end 2019.
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Share-Based Compensation Expense
Share-based compensation expense, which was included primarily in selling, general, and administrative expenses on the Consolidated Statements of Operations, was as follows:
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal | | |||||||
| | 2019 | 2018 | 2017 | |||||||
| | | (in millions) | | |||||||
| Share-based compensation expense | | $ | 75 | $ | 95 | $ | 95 | |
We recognized a related tax benefit associated with our share-based compensation arrangements of $16 million, $20 million, and $31 million in fiscal 2019, 2018, and 2017, respectively.
Restricted Share Awards
Restricted share awards, which are generally in the form of restricted share units, are granted subject to certain restrictions. Conditions of vesting are determined at the time of grant. All restrictions on an award will lapse upon death or disability of the employee. If the employee satisfies retirement requirements, a portion of the award may vest, depending on the terms and conditions of the particular grant. Recipients of restricted share units have no voting rights, but do receive dividend equivalents. For grants that vest through passage of time, the fair value of the award at the time of the grant is amortized to expense over the period of vesting. The fair value of restricted share awards is determined based on the closing value of our shares on the grant date. Restricted share awards generally vest in increments over a period of four years as determined by the management development and compensation committee.
Restricted share award activity was as follows:
| | | | | | | |
|---|---|---|---|---|---|---|
| | | | | Weighted-Average | | |
| | | | | Grant-Date | | |
| | Shares | Fair Value | ||||
| Nonvested at fiscal year end 2018 | 1,631,470 | | $ | 75.39 | | |
| Granted | 692,899 | | 77.77 | | ||
| Vested | (689,040) | | 70.31 | | ||
| Forfeited | (232,910) | | 78.80 | | ||
| Nonvested at fiscal year end 2019 | 1,402,419 | | $ | 78.36 | |
The weighted-average grant-date fair value of restricted share awards granted during fiscal 2019, 2018, and 2017 was $77.77, $93.45, and $67.72, respectively.
The total fair value of restricted share awards that vested during fiscal 2019, 2018, and 2017 was $48 million, $50 million, and $50 million, respectively.
As of fiscal year end 2019, there was $64 million of unrecognized compensation expense related to nonvested restricted share awards, which is expected to be recognized over a weighted-average period of 1.7 years.
Performance Share Awards
Performance share awards, which are generally in the form of performance share units, are granted with pay-out subject to vesting requirements and certain performance conditions that are determined at the time of grant. Based on our performance, the pay-out of performance share units can range from 0% to 200% of the number of units originally granted. The grant-date fair value of performance share awards is expensed over the period of performance once achievement of the performance criteria is deemed probable. Recipients of performance share units have no voting rights but do receive dividend equivalents. Performance share awards generally vest after a period of three years as determined by the management development and compensation committee.
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Performance share award activity was as follows:
| | | | | | | |
|---|---|---|---|---|---|---|
| | | | | Weighted-Average | | |
| | | | | Grant-Date | | |
| | Shares | Fair Value | ||||
| Outstanding at fiscal year end 2018 | 688,903 | | $ | 73.38 | | |
| Granted | 397,716 | | 71.38 | | ||
| Vested | | (448,652) | | | 65.84 | |
| Forfeited | (52,844) | | 74.87 | | ||
| Outstanding at fiscal year end 2019 | 585,123 | | $ | 77.44 | |
The weighted-average grant-date fair value of performance share awards granted during fiscal 2019, 2018, and 2017 was $71.38, $92.96, and $62.88, respectively.
The total fair value of performance share awards that vested during fiscal 2019, 2018, and 2017 was $30 million, $19 million, and $15 million, respectively.
As of fiscal year end 2019, there was $16 million of unrecognized compensation expense related to nonvested performance share awards, which is expected to be recognized over a weighted-average period of 1.0 years.
Share Options
Share options are granted to purchase our common shares at prices which are equal to or greater than the market price of the common shares on the date the option is granted. Conditions of vesting are determined at the time of grant. All restrictions on the award will lapse upon death or disability of the employee. If the employee satisfies retirement requirements, a portion of the award may vest, depending on the terms and conditions of the particular grant. Options generally vest and become exercisable in equal annual installments over a period of four years and expire ten years after the date of grant.
Share option award activity was as follows:
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | Weighted-Average | | | | |
| | | | | Weighted-Average | | Remaining | | Aggregate | | ||
| | | | | Exercise | | Contractual | | Intrinsic | | ||
| | Shares | Price | Term | Value | |||||||
| | | | | | | | (in years) | | (in millions) | | |
| Outstanding at fiscal year end 2018 | 6,759,077 | | $ | 65.85 | | | | | | | |
| Granted | 1,608,300 | | 76.91 | | | | | | | ||
| Exercised | (1,546,377) | | 54.09 | | | | | | | ||
| Expired | (19,099) | | 85.80 | | | | | | | ||
| Forfeited | (456,958) | | 75.95 | | | | | | | ||
| Outstanding at fiscal year end 2019 | 6,344,943 | | $ | 70.72 | 7.0 | | $ | 140 | | ||
| Vested and expected to vest at fiscal year end 2019 | 6,000,393 | | $ | 70.31 | 7.0 | | $ | 135 | | ||
| Exercisable at fiscal year end 2019 | 2,855,129 | | $ | 62.01 | 5.6 | | $ | 88 | |
The weighted-average exercise price of share option awards granted during fiscal 2019, 2018, and 2017 was $76.91, $93.44, and $66.76, respectively.
The total intrinsic value of options exercised during fiscal 2019, 2018, and 2017 was $58 million, $106 million, and $130 million, respectively. We received cash related to the exercise of options of $85 million, $100 million, and $117 million in fiscal 2019, 2018, and 2017, respectively.
As of fiscal year end 2019, there was $30 million of unrecognized compensation expense related to nonvested share options granted under our share option plans, which is expected to be recognized over a weighted-average period of 1.7 years.
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Share-Based Compensation Assumptions
The grant-date fair value of each share option grant was estimated using the Black-Scholes-Merton option pricing model. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. We employ our historical share volatility when calculating the grant-date fair value of our share option grants using the Black-Scholes-Merton option pricing model. Currently, we do not have exchange-traded options of sufficient duration to employ an implied volatility assumption in the calculation and therefore rely solely on the historical volatility calculation. The average expected life was based on the contractual term of the option and expected employee exercise and post-vesting employment termination behavior. The risk-free interest rate was based on U.S. Treasury zero-coupon issues with a remaining term that approximated the expected life assumed at the date of grant. The expected annual dividend per share was based on our expected dividend rate. The recognized share-based compensation expense was net of estimated forfeitures, which are based on voluntary termination behavior as well as an analysis of actual option forfeitures.
The weighted-average grant-date fair value of options granted and the weighted-average assumptions we used in the Black-Scholes-Merton option pricing model were as follows:
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | Fiscal | | | ||||||||
| | | 2019 | 2018 | 2017 | |||||||
| Weighted-average grant-date fair value | | $ | 13.40 | | $ | 16.49 | | $ | 12.80 | | |
| | | | | | | | | | | | |
| Assumptions: | | | | | | | | | | | |
| Expected share price volatility | | 20 | % | 20 | % | 24 | % | | |||
| Risk-free interest rate | | 3.0 | % | 2.2 | % | 1.9 | % | | |||
| Expected annual dividend per share | | $ | 1.76 | | $ | 1.60 | | $ | 1.48 | | |
| Expected life of options (in years) | | 5.2 | | 5.3 | | 5.6 | | |
20. Segment and Geographic Data
We operate through three reportable segments: Transportation Solutions, Industrial Solutions, and Communications Solutions. See Note 1 for a description of the segments in which we operate.
Segment performance is evaluated based on net sales and operating income. Generally, we consider all expenses to be of an operating nature and, accordingly, allocate them to each reportable segment. Costs specific to a segment are charged to the segment. Corporate expenses, such as headquarters administrative costs, are allocated to the segments based on segment operating income. Intersegment sales were not material and were recorded at selling prices that approximated market prices. Corporate assets are allocated to the segments based on segment assets.
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net sales by segment and industry end market(1) were as follows:
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal | | |||||||
| | 2019 | 2018 | 2017 | |||||||
| | | (in millions) | | |||||||
| Transportation Solutions: | | | | | | | | | | |
| Automotive | | $ | 5,686 | | $ | 6,092 | | $ | 5,228 | |
| Commercial transportation | | 1,221 | | 1,280 | | 997 | | |||
| Sensors | | 914 | | 918 | | 814 | | |||
| Total Transportation Solutions | | | 7,821 | | | 8,290 | | | 7,039 | |
| Industrial Solutions: | | | | | | | | | | |
| Industrial equipment | | | 1,949 | | | 1,987 | | | 1,747 | |
| Aerospace, defense, oil, and gas | | | 1,306 | | | 1,157 | | | 1,075 | |
| Energy | | | 699 | | | 712 | | | 685 | |
| Total Industrial Solutions | | | 3,954 | | | 3,856 | | | 3,507 | |
| Communications Solutions: | | | | | | | | | | |
| Data and devices | | | 993 | | | 1,068 | | | 963 | |
| Appliances | | | 680 | | | 774 | | | 676 | |
| Total Communications Solutions | | | 1,673 | | | 1,842 | | | 1,639 | |
| Total | | $ | 13,448 | | $ | 13,988 | | $ | 12,185 | |
| (1) | Industry end market information is presented consistently with our internal management reporting and may be revised periodically as management deems necessary. |
|---|
Net sales by geographic region and segment were as follows:
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal | | |||||||
| | 2019 | 2018 | 2017 | |||||||
| | | (in millions) | | |||||||
| Europe/Middle East/Africa (“EMEA”): | | | | | | | | | | |
| Transportation Solutions | | $ | 3,099 | | $ | 3,417 | | $ | 2,786 | |
| Industrial Solutions | | | 1,466 | | | 1,534 | | | 1,354 | |
| Communications Solutions | | | 258 | | | 304 | | | 259 | |
| Total EMEA | | | 4,823 | | | 5,255 | | | 4,399 | |
| Asia–Pacific: | | | | | | | | | | |
| Transportation Solutions | | | 2,812 | | | 3,025 | | | 2,715 | |
| Industrial Solutions | | | 625 | | | 668 | | | 634 | |
| Communications Solutions | | | 964 | | | 1,069 | | | 963 | |
| Total Asia–Pacific | | | 4,401 | | | 4,762 | | | 4,312 | |
| Americas: | | | | | | | | | | |
| Transportation Solutions | | | 1,910 | | | 1,848 | | | 1,538 | |
| Industrial Solutions | | | 1,863 | | | 1,654 | | | 1,519 | |
| Communications Solutions | | | 451 | | | 469 | | | 417 | |
| Total Americas | | | 4,224 | | | 3,971 | | | 3,474 | |
| Total | | $ | 13,448 | | $ | 13,988 | | $ | 12,185 | |
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Operating income by segment was as follows:
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | | Fiscal | | ||||||
| | 2019 | 2018 | 2017 | |||||||
| | | (in millions) | | |||||||
| Transportation Solutions | | $ | 1,226 | | $ | 1,578 | | $ | 1,294 | |
| Industrial Solutions | | | 543 | | | 465 | | | 364 | |
| Communications Solutions | | | 209 | | | 288 | | | 218 | |
| Total | | $ | 1,978 | | $ | 2,331 | | $ | 1,876 | |
No single customer accounted for a significant amount of our net sales in fiscal 2019, 2018, or 2017.
As we are not organized by product or service, it is not practicable to disclose net sales by product or service.
Depreciation and amortization and capital expenditures were as follows:
| | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Depreciation and | | | | | | | | | | | |||||||
| | | Amortization | | Capital Expenditures | | ||||||||||||||
| | | Fiscal | | Fiscal | | ||||||||||||||
| | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | | ||||||||||||
| | | (in millions) | | ||||||||||||||||
| Transportation Solutions | | $ | 442 | | $ | 416 | | $ | 362 | | $ | 530 | | $ | 711 | | $ | 473 | |
| Industrial Solutions | | 181 | | 178 | | 165 | | 145 | | 145 | | 123 | | ||||||
| Communications Solutions | | 67 | | 73 | | 84 | | 74 | | 79 | | 83 | | ||||||
| Total | | $ | 690 | | $ | 667 | | $ | 611 | | $ | 749 | | $ | 935 | | $ | 679 | |
Segment assets and a reconciliation of segment assets to total assets were as follows:
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | Segment Assets | | |||||||
| | | Fiscal Year End | | |||||||
| | 2019 | 2018 | 2017 | |||||||
| | | (in millions) | | |||||||
| Transportation Solutions | | $ | 4,781 | | $ | 4,707 | | $ | 4,084 | |
| Industrial Solutions | | 2,100 | | 2,049 | | 1,909 | | |||
| Communications Solutions | | 849 | | 959 | | 951 | | |||
| Total segment assets(1) | | 7,730 | | 7,715 | | 6,944 | | |||
| Other current assets | | 1,398 | | 1,981 | | 2,141 | | |||
| Other non-current assets | | 10,566 | | 10,690 | | 10,318 | | |||
| Total assets | | $ | 19,694 | | $ | 20,386 | | $ | 19,403 | |
| (1) | Segment assets are composed of accounts receivable, inventories, and net property, plant, and equipment. |
|---|
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net sales and net property, plant, and equipment by geographic region were as follows:
| | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | Property, Plant, and | | |||||||
| | | Net Sales(1) | | Equipment, Net | | ||||||||||||||
| | | Fiscal | | Fiscal Year End | | ||||||||||||||
| | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |||||||||||||
| | | (in millions) | | ||||||||||||||||
| EMEA: | | | | | | | | | | | | | | | | | | | |
| Switzerland | | $ | 3,251 | | $ | 3,478 | | $ | 3,016 | | $ | 92 | | $ | 94 | | $ | 80 | |
| Germany | | 404 | | 443 | | 235 | | 443 | | 448 | | 413 | | ||||||
| Other EMEA | | 1,168 | | 1,334 | | 1,148 | | 851 | | 829 | | 741 | | ||||||
| Total EMEA | | 4,823 | | 5,255 | | 4,399 | | 1,386 | | 1,371 | | 1,234 | | ||||||
| Asia–Pacific: | | | | | | | | | | | | | | | | | | | |
| China | | 2,443 | | 2,739 | | 2,414 | | 642 | | 627 | | 555 | | ||||||
| Other Asia–Pacific | | 1,958 | | 2,023 | | 1,898 | | 449 | | 436 | | 390 | | ||||||
| Total Asia–Pacific | | 4,401 | | 4,762 | | 4,312 | | 1,091 | | 1,063 | | 945 | | ||||||
| Americas: | | | | | | | | | | | | | | | | | | | |
| U.S. | | | 3,794 | | | 3,583 | | | 3,136 | | | 991 | | | 964 | | | 880 | |
| Other Americas | | 430 | | 388 | | 338 | | 106 | | 99 | | 100 | | ||||||
| Total Americas | | 4,224 | | 3,971 | | 3,474 | | 1,097 | | 1,063 | | 980 | | ||||||
| Total | | $ | 13,448 | | $ | 13,988 | | $ | 12,185 | | $ | 3,574 | | $ | 3,497 | | $ | 3,159 | |
| (1) | Net sales to external customers are attributed to individual countries based on the legal entity that records the sale. |
|---|
21. Quarterly Financial Data (unaudited)
Summarized quarterly financial data was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal | | ||||||||||||||||||||||
| | | 2019 | | 2018 | | ||||||||||||||||||||
| | | First | | Second | | Third | | Fourth | | First | | Second | | Third | | Fourth | | ||||||||
| | Quarter(1) | Quarter | Quarter(2) | Quarter | Quarter(3) | Quarter | Quarter | Quarter(4) | |||||||||||||||||
| | | (in millions, except per share data) | | ||||||||||||||||||||||
| Net sales | | $ | 3,347 | | $ | 3,412 | | $ | 3,389 | | $ | 3,300 | | $ | 3,336 | | $ | 3,562 | | $ | 3,581 | | $ | 3,509 | |
| Gross margin | | 1,114 | | 1,118 | | 1,110 | | 1,052 | | 1,164 | | 1,212 | | 1,187 | | 1,182 | | ||||||||
| Acquisition and integration costs | | 5 | | 7 | | 9 | | 6 | | 2 | | 3 | | 4 | | 5 | | ||||||||
| Restructuring and other charges, net | | 75 | | 42 | | 67 | | 71 | | 34 | | 6 | | 64 | | 22 | | ||||||||
| Income (loss) from continuing operations | | 383 | | 429 | | 758 | | 376 | | (33) | | 490 | | 453 | | 1,674 | | ||||||||
| Income (loss) from discontinued operations, net of income taxes | | (107) | | 10 | | (1) | | (4) | | (7) | | — | | 1 | | (13) | | ||||||||
| Net income (loss) | | | 276 | | | 439 | | | 757 | | | 372 | | | (40) | | | 490 | | | 454 | | | 1,661 | |
| Basic earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income (loss) from continuing operations | | $ | 1.12 | | $ | 1.27 | | $ | 2.25 | | $ | 1.12 | | $ | (0.09) | | $ | 1.40 | | $ | 1.30 | | $ | 4.82 | |
| Net income (loss) | | 0.81 | | 1.30 | | 2.25 | | 1.11 | | (0.11) | | 1.40 | | 1.30 | | 4.79 | | ||||||||
| Diluted earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income (loss) from continuing operations | | $ | 1.11 | | $ | 1.26 | | $ | 2.24 | | $ | 1.11 | | $ | (0.09) | | $ | 1.38 | | $ | 1.29 | | $ | 4.78 | |
| Net income (loss) | | 0.80 | | 1.29 | | 2.23 | | 1.10 | | (0.11) | | 1.38 | | 1.29 | | 4.75 | |
| (1) | Results for the quarter ended December 28, 2018 included a pre-tax loss of $86 million on the sale of our SubCom business which was reported as a discontinued operation on our Consolidated Financial Statements. See Note 4 for additional information regarding discontinued operations. |
|---|
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| (2) | Results for the quarter ended June 28, 2019 included a $214 million income tax benefit related to the tax impacts of certain measures of Swiss Tax Reform and a $93 million income tax benefit related to the effective settlement of a tax audit in a non-U.S. jurisdiction. See Note 15 for additional information regarding income taxes. |
|---|
| (3) | Results for the quarter ended December 29, 2017 included $567 million of income tax expense related to the tax impacts of the Tax Cuts and Jobs Act. See Note 15 for additional information regarding income taxes. |
|---|
| (4) | Results for the quarter ended September 28, 2018 included a $1,222 million net income tax benefit associated with the tax impacts of certain legal entity restructurings and intercompany transactions. See Note 15 for additional information regarding income taxes. |
|---|
22. Tyco Electronics Group S.A.
Tyco Electronics Group S.A. (“TEGSA”), a Luxembourg company and our 100%-owned subsidiary, is a holding company that owns, directly or indirectly, all of our operating subsidiaries. TEGSA is the obligor under our senior notes, commercial paper, and Credit Facility, which are fully and unconditionally guaranteed by its parent, TE Connectivity Ltd. The following tables present condensed consolidating financial information for TE Connectivity Ltd., TEGSA, and all other subsidiaries that are not providing a guarantee of debt but which represent assets of TEGSA, using the equity method of accounting.
Condensed Consolidating Statement of Operations
For the Fiscal Year Ended September 27, 2019
| | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | TE | | | | | | | | | | | | | | |
| | | Connectivity | | | | | Other | | Consolidating | | | | | |||
| | Ltd. | TEGSA | Subsidiaries | Adjustments | Total | |||||||||||
| | | (in millions) | | |||||||||||||
| Net sales | | $ | — | | $ | — | | $ | 13,448 | | $ | — | | $ | 13,448 | |
| Cost of sales | | — | | — | | 9,054 | | — | | 9,054 | | |||||
| Gross margin | | — | | — | | 4,394 | | — | | 4,394 | | |||||
| Selling, general, and administrative expenses, net(1) | | 128 | | (155) | | 1,517 | | — | | 1,490 | | |||||
| Research, development, and engineering expenses | | — | | — | | 644 | | — | | 644 | | |||||
| Acquisition and integration costs | | — | | — | | 27 | | — | | 27 | | |||||
| Restructuring and other charges, net | | — | | — | | 255 | | — | | 255 | | |||||
| Operating income (loss) | | (128) | | 155 | | 1,951 | | — | | 1,978 | | |||||
| Interest income | | — | | 1 | | 18 | | — | | 19 | | |||||
| Interest expense | | — | | (64) | | (4) | | — | | (68) | | |||||
| Other income, net | | — | | 1 | | 1 | | — | | 2 | | |||||
| Equity in net income of subsidiaries | | 2,194 | | 2,287 | | — | | (4,481) | | — | | |||||
| Equity in net loss of subsidiaries of discontinued operations | | | (102) | | | (52) | | | — | | | 154 | | | — | |
| Intercompany interest income (expense), net | | (120) | | (186) | | 306 | | — | | — | | |||||
| Income from continuing operations before income taxes | | 1,844 | | 2,142 | | 2,272 | | (4,327) | | 1,931 | | |||||
| Income tax benefit | | — | | — | | 15 | | — | | 15 | | |||||
| Income from continuing operations | | 1,844 | | 2,142 | | 2,287 | | (4,327) | | 1,946 | | |||||
| Loss from discontinued operations, net of income taxes | | — | | (50) | | (52) | | — | | (102) | | |||||
| Net income | | 1,844 | | 2,092 | | 2,235 | | (4,327) | | 1,844 | | |||||
| Other comprehensive loss | | (197) | | (197) | | (290) | | 487 | | (197) | | |||||
| Comprehensive income | | $ | 1,647 | | $ | 1,895 | | $ | 1,945 | | $ | (3,840) | | $ | 1,647 | |
| (1) | TEGSA selling, general, and administrative expenses include gains of $194 million related to intercompany transactions. These gains are offset by corresponding losses recorded by other subsidiaries. |
|---|
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Condensed Consolidating Statement of Operations
For the Fiscal Year Ended September 28, 2018
| | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | TE | | | | | | | | | | | | | | |
| | | Connectivity | | | | | Other | | Consolidating | | | | | |||
| | Ltd. | TEGSA | Subsidiaries | Adjustments | Total | |||||||||||
| | | (in millions) | | |||||||||||||
| Net sales | | $ | — | | $ | — | | $ | 13,988 | | $ | — | | $ | 13,988 | |
| Cost of sales | | — | | — | | 9,243 | | — | | 9,243 | | |||||
| Gross margin | | — | | — | | 4,745 | | — | | 4,745 | | |||||
| Selling, general, and administrative expenses, net | | 154 | | 6 | | 1,434 | | — | | 1,594 | | |||||
| Research, development, and engineering expenses | | — | | — | | 680 | | — | | 680 | | |||||
| Acquisition and integration costs | | — | | — | | 14 | | — | | 14 | | |||||
| Restructuring and other charges, net | | — | | — | | 126 | | — | | 126 | | |||||
| Operating income (loss) | | (154) | | (6) | | 2,491 | | — | | 2,331 | | |||||
| Interest income | | — | | 2 | | 13 | | — | | 15 | | |||||
| Interest expense | | — | | (105) | | (2) | | — | | (107) | | |||||
| Other income, net | | — | | — | | 1 | | — | | 1 | | |||||
| Equity in net income of subsidiaries | | | 2,808 | | | 2,841 | | | — | | | (5,649) | | | — | |
| Equity in net loss of subsidiaries of discontinued operations | | (19) | | (19) | | — | | 38 | | — | | |||||
| Intercompany interest income (expense), net | | | (70) | | | 76 | | | (6) | | | — | | | — | |
| Income from continuing operations before income taxes | | 2,565 | | 2,789 | | 2,497 | | (5,611) | | 2,240 | | |||||
| Income tax benefit | | — | | — | | 344 | | — | | 344 | | |||||
| Income from continuing operations | | 2,565 | | 2,789 | | 2,841 | | (5,611) | | 2,584 | | |||||
| Loss from discontinued operations, net of income taxes | | — | | — | | (19) | | — | | (19) | | |||||
| Net income | | 2,565 | | 2,789 | | 2,822 | | (5,611) | | 2,565 | | |||||
| Other comprehensive loss | | (108) | | (108) | | (82) | | 190 | | (108) | | |||||
| Comprehensive income | | $ | 2,457 | | $ | 2,681 | | $ | 2,740 | | $ | (5,421) | | $ | 2,457 | |
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Condensed Consolidating Statement of Operations
For the Fiscal Year Ended September 29, 2017
| | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | TE | | | | | | | | | | | | | | |
| | | Connectivity | | | | | Other | | Consolidating | | | | | |||
| | Ltd. | TEGSA | Subsidiaries | Adjustments | Total | |||||||||||
| | | (in millions) | | |||||||||||||
| Net sales | | $ | — | | $ | — | | $ | 12,185 | | $ | — | | $ | 12,185 | |
| Cost of sales | | — | | — | | 8,002 | | — | | 8,002 | | |||||
| Gross margin | | — | | — | | | 4,183 | | | — | | | 4,183 | | ||
| Selling, general, and administrative expenses, net(1) | | 184 | | 1,911 | | (552) | | — | | 1,543 | | |||||
| Research, development, and engineering expenses | | — | | — | | 611 | | — | | 611 | | |||||
| Acquisition and integration costs | | — | | — | | 6 | | — | | 6 | | |||||
| Restructuring and other charges, net | | — | | — | | 147 | | — | | 147 | | |||||
| Operating income (loss) | | (184) | | (1,911) | | 3,971 | | — | | 1,876 | | |||||
| Interest income | | — | | — | | 16 | | — | | 16 | | |||||
| Interest expense | | — | | (129) | | (1) | | — | | (130) | | |||||
| Other expense, net | | — | | — | | (42) | | — | | (42) | | |||||
| Equity in net income of subsidiaries | | 1,756 | | 3,686 | | — | | (5,442) | | — | | |||||
| Equity in net income of subsidiaries of discontinued operations | | 143 | | 156 | | — | | (299) | | — | | |||||
| Intercompany interest income (expense), net | | (32) | | 110 | | (78) | | — | | — | | |||||
| Income from continuing operations before income taxes | | 1,683 | | 1,912 | | 3,866 | | (5,741) | | 1,720 | | |||||
| Income tax expense | | — | | — | | (180) | | — | | (180) | | |||||
| Income from continuing operations | | 1,683 | | 1,912 | | 3,686 | | (5,741) | | 1,540 | | |||||
| Income (loss) from discontinued operations, net of income taxes(2) | | — | | (13) | | 156 | | — | | 143 | | |||||
| Net income | | | 1,683 | | | 1,899 | | | 3,842 | | | (5,741) | | | 1,683 | |
| Other comprehensive income | | 382 | | 382 | | 375 | | (757) | | 382 | | |||||
| Comprehensive income | | $ | 2,065 | | $ | 2,281 | | $ | 4,217 | | $ | (6,498) | | $ | 2,065 | |
| (1) | TEGSA selling, general and administrative expenses include losses of $1,965 million related to intercompany transactions. These losses are offset by corresponding gains recorded by other subsidiaries. |
|---|
| (2) | Includes the internal allocation of gains and losses associated with the divestiture of our Broadband Network Solutions business. |
|---|
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Condensed Consolidating Balance Sheet
As of September 27, 2019
| | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | TE | | | | | | | | | | | | | | |
| | | Connectivity | | | | | Other | | Consolidating | | | | | |||
| | Ltd. | TEGSA | Subsidiaries | Adjustments | Total | |||||||||||
| | | (in millions) | | |||||||||||||
| Assets | | | | | | | | | | | | | | | | |
| Current assets: | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | — | | $ | — | | $ | 927 | | $ | — | | $ | 927 | |
| Accounts receivable, net | | — | | — | | 2,320 | | — | | 2,320 | | |||||
| Inventories | | — | | — | | 1,836 | | — | | 1,836 | | |||||
| Intercompany receivables | | 49 | | 2,959 | | 60 | | (3,068) | | — | | |||||
| Prepaid expenses and other current assets | | 4 | | 36 | | 431 | | — | | 471 | | |||||
| Total current assets | | 53 | | 2,995 | | 5,574 | | (3,068) | | 5,554 | | |||||
| Property, plant, and equipment, net | | — | | — | | 3,574 | | — | | 3,574 | | |||||
| Goodwill | | — | | — | | 5,740 | | — | | 5,740 | | |||||
| Intangible assets, net | | — | | — | | 1,596 | | — | | 1,596 | | |||||
| Deferred income taxes | | — | | — | | 2,776 | | — | | 2,776 | | |||||
| Investment in subsidiaries | | 13,865 | | 28,336 | | — | | (42,201) | | — | | |||||
| Intercompany loans receivable | | — | | 2,562 | | 16,033 | | (18,595) | | — | | |||||
| Other assets | | — | | 72 | | 382 | | — | | 454 | | |||||
| Total assets | | $ | 13,918 | | $ | 33,965 | | $ | 35,675 | | $ | (63,864) | | $ | 19,694 | |
| Liabilities and shareholders’ equity | | | | | | | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | | | | | | | |
| Short-term debt | | $ | — | | $ | 568 | | $ | 2 | | $ | — | | $ | 570 | |
| Accounts payable | | 1 | | — | | 1,356 | | — | | 1,357 | | |||||
| Accrued and other current liabilities | | 328 | | 57 | | 1,228 | | — | | 1,613 | | |||||
| Intercompany payables | | | 3,019 | | | — | | | 49 | | | (3,068) | | | — | |
| Total current liabilities | | 3,348 | | 625 | | 2,635 | | (3,068) | | 3,540 | | |||||
| Long-term debt | | — | | 3,395 | | — | | — | | 3,395 | | |||||
| Intercompany loans payable | | — | | 16,033 | | 2,562 | | (18,595) | | — | | |||||
| Long-term pension and postretirement liabilities | | — | | — | | 1,367 | | — | | 1,367 | | |||||
| Deferred income taxes | | — | | — | | 156 | | — | | 156 | | |||||
| Income taxes | | — | | — | | 239 | | — | | 239 | | |||||
| Other liabilities | | — | | 47 | | 380 | | — | | 427 | | |||||
| Total liabilities | | 3,348 | | 20,100 | | 7,339 | | (21,663) | | 9,124 | | |||||
| Total shareholders’ equity | | 10,570 | | 13,865 | | 28,336 | | (42,201) | | 10,570 | | |||||
| Total liabilities and shareholders’ equity | | $ | 13,918 | | $ | 33,965 | | $ | 35,675 | | $ | (63,864) | | $ | 19,694 | |
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Condensed Consolidating Balance Sheet
As of September 28, 2018
| | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | TE | | | | | | | | | | | | | | |
| | | Connectivity | | | | | Other | | Consolidating | | | | | |||
| | Ltd. | TEGSA | Subsidiaries | Adjustments | Total | |||||||||||
| | | (in millions) | | |||||||||||||
| Assets | | | | | | | | | | | | | | | | |
| Current assets: | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | — | | $ | — | | $ | 848 | | $ | — | | $ | 848 | |
| Accounts receivable, net | | — | | — | | 2,361 | | — | | 2,361 | | |||||
| Inventories | | — | | — | | 1,857 | | — | | 1,857 | | |||||
| Intercompany receivables | | 37 | | 2,391 | | 48 | | (2,476) | | — | | |||||
| Prepaid expenses and other current assets | | 5 | | 112 | | 544 | | — | | 661 | | |||||
| Assets held for sale | | | — | | — | | 472 | | — | | 472 | | ||||
| Total current assets | | 42 | | 2,503 | | 6,130 | | (2,476) | | 6,199 | | |||||
| Property, plant, and equipment, net | | — | | — | | 3,497 | | — | | 3,497 | | |||||
| Goodwill | | — | | — | | 5,684 | | — | | 5,684 | | |||||
| Intangible assets, net | | — | | — | | 1,704 | | — | | 1,704 | | |||||
| Deferred income taxes | | — | | — | | 2,144 | | — | | 2,144 | | |||||
| Investment in subsidiaries | | 13,626 | | 26,613 | | — | | (40,239) | | — | | |||||
| Intercompany loans receivable | | | 2 | | 6,535 | | 17,887 | | (24,424) | | — | | ||||
| Other assets | | — | | — | | 1,158 | | — | | 1,158 | | |||||
| Total assets | | $ | 13,670 | | $ | 35,651 | | $ | 38,204 | | $ | (67,139) | | $ | 20,386 | |
| Liabilities and shareholders’ equity | | | | | | | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | | | | | | | |
| Short-term debt | | $ | — | | $ | 961 | | $ | 2 | | $ | — | | $ | 963 | |
| Accounts payable | | 2 | | — | | 1,546 | | — | | 1,548 | | |||||
| Accrued and other current liabilities | | 400 | | 36 | | 1,275 | | — | | 1,711 | | |||||
| Intercompany payables | | 2,437 | | — | | 39 | | (2,476) | | — | | |||||
| Liabilities held for sale | | | — | | — | | 188 | | — | | 188 | | ||||
| Total current liabilities | | 2,839 | | 997 | | 3,050 | | (2,476) | | 4,410 | | |||||
| Long-term debt | | — | | 3,033 | | 4 | | — | | 3,037 | | |||||
| Intercompany loans payable | | — | | 17,888 | | 6,536 | | (24,424) | | — | | |||||
| Long-term pension and postretirement liabilities | | — | | — | | 1,102 | | — | | 1,102 | | |||||
| Deferred income taxes | | — | | — | | 207 | | — | | 207 | | |||||
| Income taxes | | — | | — | | 312 | | — | | 312 | | |||||
| Other liabilities | | — | | 107 | | 380 | | — | | 487 | | |||||
| Total liabilities | | 2,839 | | 22,025 | | 11,591 | | (26,900) | | 9,555 | | |||||
| Total shareholders’ equity | | 10,831 | | | 13,626 | | | 26,613 | | | (40,239) | | | 10,831 | | |
| Total liabilities and shareholders’ equity | | $ | 13,670 | | $ | 35,651 | | $ | 38,204 | | $ | (67,139) | | $ | 20,386 | |
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
C****ondensed Consolidating Statement of Cash Flows
For the Fiscal Year Ended September 27, 2019
| | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | TE | | | | | | | | | | | | | | |
| | | Connectivity | | | | | Other | | Consolidating | | | | | |||
| | Ltd. | TEGSA | Subsidiaries | Adjustments | Total | |||||||||||
| | | (in millions) | | |||||||||||||
| Cash flows from operating activities: | | | | | | | | | | | | | | | | |
| Net cash provided by continuing operating activities(1) | | $ | 998 | | $ | 4,107 | | $ | 2,920 | | $ | (5,571) | | $ | 2,454 | |
| Net cash used in discontinued operating activities | | — | | — | | (32) | | — | | (32) | | |||||
| Net cash provided by operating activities | | 998 | | 4,107 | | 2,888 | | (5,571) | | 2,422 | | |||||
| Cash flows from investing activities: | | | | | | | | | | | | | | | | |
| Capital expenditures | | — | | — | | (749) | | — | | (749) | | |||||
| Proceeds from sale of property, plant, and equipment | | — | | — | | 43 | | — | | 43 | | |||||
| Acquisition of businesses, net of cash acquired | | | — | | | — | | | (283) | | | — | | | (283) | |
| Proceeds from divestiture of discontinued operation, net of cash retained by sold operation | | — | | 312 | | (15) | | — | | 297 | | |||||
| Change in intercompany loans | | — | | 1,483 | | — | | (1,483) | | — | | |||||
| Other | | — | | — | | 2 | | — | | 2 | | |||||
| Net cash provided by (used in) continuing investing activities | | | — | | | 1,795 | | | (1,002) | | | (1,483) | | | (690) | |
| Net cash used in discontinued investing activities | | | — | | | — | | | (2) | | | — | | | (2) | |
| Net cash provided by (used in) investing activities | | | — | | | 1,795 | | | (1,004) | | | (1,483) | | | (692) | |
| Cash flows from financing activities: | | | | | | | | | | | | | | | | |
| Changes in parent company equity(2) | | 78 | | (4,642) | | 4,564 | | — | | — | | |||||
| Net decrease in commercial paper | | — | | (51) | | — | | — | | (51) | | |||||
| Proceeds from issuance of debt | | | — | | | 746 | | | — | | | — | | | 746 | |
| Repayment of debt | | — | | (691) | | — | | — | | (691) | | |||||
| Proceeds from exercise of share options | | — | | — | | 85 | | — | | 85 | | |||||
| Repurchase of common shares | | (1,052) | | — | | (39) | | — | | (1,091) | | |||||
| Payment of common share dividends to shareholders | | (608) | | — | | — | | — | | (608) | | |||||
| Intercompany distributions(1) | | — | | (1,260) | | (4,311) | | 5,571 | | — | | |||||
| Loan activity with parent | | 584 | | — | | (2,067) | | 1,483 | | — | | |||||
| Transfers to discontinued operations | | — | | — | | (34) | | — | | (34) | | |||||
| Other | | — | | (4) | | (29) | | — | | (33) | | |||||
| Net cash used in continuing financing activities | | (998) | | (5,902) | | (1,831) | | 7,054 | | (1,677) | | |||||
| Net cash provided by discontinued financing activities | | — | | — | | 34 | | — | | 34 | | |||||
| Net cash used in financing activities | | (998) | | (5,902) | | (1,797) | | 7,054 | | (1,643) | | |||||
| Effect of currency translation on cash | | — | | — | | (8) | | — | | (8) | | |||||
| Net increase in cash, cash equivalents, and restricted cash | | — | | — | | 79 | | — | | 79 | | |||||
| Cash, cash equivalents, and restricted cash at beginning of fiscal year | | — | | — | | 848 | | — | | 848 | | |||||
| Cash, cash equivalents, and restricted cash at end of fiscal year | | $ | — | | $ | — | | $ | 927 | | $ | — | | $ | 927 | |
| (1) | During fiscal 2019, other subsidiaries made distributions to TEGSA in the amount of $4,311 million and TEGSA made distributions to TE Connectivity Ltd. In the amount of $1,260 million. Cash flows are presented based upon the nature of the distributions. |
|---|
| (2) | Changes in parent company equity includes cash flows related to certain intercompany equity and funding transactions, and other intercompany activity. |
|---|
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Condensed Consolidating Statement of Cash Flows
For the Fiscal Year Ended September 28, 2018
| | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | TE | | | | | | | | | | | | | | |
| | | Connectivity | | | | | Other | | Consolidating | | | | | |||
| | Ltd. | TEGSA | Subsidiaries | Adjustments | Total | |||||||||||
| | | (in millions) | | |||||||||||||
| Cash flows from operating activities: | | | | | | | | | | | | | | | | |
| Net cash provided by continuing operating activities(1) | | $ | 486 | | $ | 343 | | $ | 2,625 | | $ | (1,153) | | $ | 2,301 | |
| Net cash provided by discontinued operating activities | | — | | — | | 150 | | — | | 150 | | |||||
| Net cash provided by operating activities | | 486 | | 343 | | 2,775 | | (1,153) | | 2,451 | | |||||
| Cash flows from investing activities: | | | | | | | | | | | | | | | | |
| Capital expenditures | | — | | — | | (935) | | — | | (935) | | |||||
| Proceeds from sale of property, plant, and equipment | | — | | — | | 23 | | — | | 23 | | |||||
| Acquisition of businesses, net of cash acquired | | — | | — | | (153) | | — | | (153) | | |||||
| Intercompany distribution receipts(1) | | | — | | | 794 | | | — | | | (794) | | | — | |
| Change in intercompany loans | | — | | 62 | | — | | (62) | | — | | |||||
| Other | | — | | — | | (8) | | — | | (8) | | |||||
| Net cash provided by (used in) continuing investing activities | | | — | | | 856 | | | (1,073) | | | (856) | | | (1,073) | |
| Net cash used in discontinued investing activities | | | — | | | — | | | (21) | | | — | | | (21) | |
| Net cash provided by (used in) investing activities | | | — | | | 856 | | | (1,094) | | | (856) | | | (1,094) | |
| Cash flows from financing activities: | | | | | | | | | | | | | | | | |
| Changes in parent company equity(2) | | 112 | | (170) | | 58 | | — | | — | | |||||
| Net increase in commercial paper | | — | | 270 | | — | | — | | 270 | | |||||
| Proceeds from issuance of debt | | | — | | | 119 | | | — | | | — | | | 119 | |
| Repayment of debt | | | — | | | (708) | | | — | | | — | | | (708) | |
| Proceeds from exercise of share options | | — | | — | | 100 | | — | | 100 | | |||||
| Repurchase of common shares | | (478) | | — | | (401) | | — | | (879) | | |||||
| Payment of common share dividends to shareholders | | (594) | | — | | 6 | | — | | (588) | | |||||
| Intercompany distributions(1) | | — | | (710) | | (505) | | 1,215 | | — | | |||||
| Loan activity with parent | | 474 | | — | | (1,268) | | 794 | | — | | |||||
| Transfers from discontinued operations | | | — | | | — | | | 129 | | | — | | | 129 | |
| Other | | — | | — | | (36) | | — | | (36) | | |||||
| Net cash used in continuing financing activities | | (486) | | (1,199) | | (1,917) | | 2,009 | | (1,593) | | |||||
| Net cash used in discontinued financing activities | | — | | — | | (129) | | — | | (129) | | |||||
| Net cash used in financing activities | | (486) | | (1,199) | | (2,046) | | 2,009 | | (1,722) | | |||||
| Effect of currency translation on cash | | — | | — | | (5) | | — | | (5) | | |||||
| Net decrease in cash, cash equivalents, and restricted cash | | — | | — | | (370) | | — | | (370) | | |||||
| Cash, cash equivalents, and restricted cash at beginning of fiscal year | | — | | — | | 1,218 | | — | | 1,218 | | |||||
| Cash, cash equivalents, and restricted cash at end of fiscal year | | $ | — | | $ | — | | $ | 848 | | $ | — | | $ | 848 | |
| (1) | During fiscal 2018, other subsidiaries made distributions to TEGSA in the amount of $505 million and TEGSA made distributions to TE Connectivity Ltd. in the amount of $710 million. Cash flows are presented based upon the nature of the distributions. |
|---|
| (2) | Changes in parent company equity includes cash flows related to certain intercompany equity and funding transactions, and other intercompany activity. |
|---|
TE CONNECTIVITY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Condensed Consolidating Statement of Cash Flows
For the Fiscal Year Ended September 29, 2017
| | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | TE | | | | | | | | | | | | | | |
| | | Connectivity | | | | | Other | | Consolidating | | | | | |||
| | Ltd. | TEGSA | Subsidiaries | Adjustments | Total | |||||||||||
| | | (in millions) | | |||||||||||||
| Cash flows from operating activities: | | | | | | | | | | | | | | | | |
| Net cash provided by (used in) continuing operating activities(1) | | $ | (180) | | $ | 102 | | $ | 2,581 | | $ | (230) | | $ | 2,273 | |
| Net cash provided by discontinued operating activities | | — | | — | | 48 | | — | | 48 | | |||||
| Net cash provided by (used in) operating activities | | (180) | | 102 | | 2,629 | | (230) | | 2,321 | | |||||
| Cash flows from investing activities: | | | | | | | | | | | | | | | | |
| Capital expenditures | | — | | — | | (679) | | — | | (679) | | |||||
| Proceeds from sale of property, plant, and equipment | | — | | — | | 19 | | — | | 19 | | |||||
| Acquisition of businesses, net of cash acquired | | — | | — | | (250) | | — | | (250) | | |||||
| Intercompany distribution receipts(1) | | | — | | | 516 | | | — | | | (516) | | | — | |
| Change in intercompany loans | | — | | (1,369) | | — | | 1,369 | | — | | |||||
| Other | | — | | (12) | | 13 | | — | | 1 | | |||||
| Net cash used in continuing investing activities | | | — | | | (865) | | | (897) | | | 853 | | | (909) | |
| Net cash used in discontinued investing activities | | | — | | | — | | | (23) | | | — | | | (23) | |
| Net cash used in investing activities | | — | | (865) | | (920) | | 853 | | (932) | | |||||
| Cash flows from financing activities: | | | | | | | | | | | | | | | | |
| Changes in parent company equity(2) | | 97 | | 559 | | (656) | | — | | — | | |||||
| Net decrease in commercial paper | | — | | (330) | | — | | — | | (330) | | |||||
| Proceeds from issuance of debt | | | — | | | 589 | | | — | | | — | | | 589 | |
| Proceeds from exercise of share options | | — | | — | | 117 | | — | | 117 | | |||||
| Repurchase of common shares | | — | | — | | (614) | | — | | (614) | | |||||
| Payment of common share dividends to shareholders | | (550) | | — | | 4 | | — | | (546) | | |||||
| Intercompany distributions(1) | | — | | (50) | | (696) | | 746 | | — | | |||||
| Loan activity with parent | | 633 | | — | | 736 | | (1,369) | | — | | |||||
| Transfers from discontinued operations | | | — | | | — | | | 25 | | | — | | | 25 | |
| Other | | — | | (5) | | (25) | | — | | (30) | | |||||
| Net cash provided by (used in) continuing financing activities | | 180 | | 763 | | (1,109) | | (623) | | (789) | | |||||
| Net cash used in discontinued financing activities | | — | | — | | (25) | | — | | (25) | | |||||
| Net cash provided by (used in) financing activities | | 180 | | 763 | | (1,134) | | (623) | | (814) | | |||||
| Effect of currency translation on cash | | — | | — | | (4) | | — | | (4) | | |||||
| Net increase in cash, cash equivalents, and restricted cash | | — | | — | | 571 | | — | | 571 | | |||||
| Cash, cash equivalents, and restricted cash at beginning of fiscal year | | — | | — | | 647 | | — | | 647 | | |||||
| Cash, cash equivalents, and restricted cash at end of fiscal year | | $ | — | | $ | — | | $ | 1,218 | | $ | — | | $ | 1,218 | |
| (1) | During fiscal 2017, other subsidiaries made distributions to TEGSA in the amount of $696 million and TEGSA made distributions to TE Connectivity Ltd. in the amount of $50 million. Cash flows are presented based upon the nature of the distributions. |
|---|
| (2) | Changes in parent company equity includes cash flows related to certain intercompany equity and funding transactions, and other intercompany activity. |
|---|
TE CONNECTIVITY LTD.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
Fiscal Years Ended September 27, 2019, September 28, 2018, and September 29, 2017
| | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | Additions | | | | | | | | | | | |
| | | Balance at | | Charged to | | Acquisitions, | | | | | Balance at | | ||||
| | | Beginning of | | Costs and | | Divestitures, | | | | | End of | | ||||
| Description | Fiscal Year | Expenses | and Other | Deductions | Fiscal Year | |||||||||||
| | | (in millions) | | |||||||||||||
| Fiscal 2019: | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts receivable | | $ | 22 | | $ | 9 | | $ | — | | $ | (6) | | $ | 25 | |
| Valuation allowance on deferred tax assets | | 2,191 | | 3,248 | | — | | (469) | | 4,970 | | |||||
| | | | | | | | | | | | | | | | | |
| Fiscal 2018: | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts receivable | | $ | 18 | | $ | 7 | | $ | (1) | | $ | (2) | | $ | 22 | |
| Valuation allowance on deferred tax assets | | 3,627 | | 261 | | — | | (1,697) | | 2,191 | | |||||
| | | | | | | | | | | | | | | | | |
| Fiscal 2017: | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts receivable | | $ | 17 | | $ | 5 | | $ | — | | $ | (4) | | $ | 18 | |
| Valuation allowance on deferred tax assets | | 3,096 | | 1,072 | | — | | (541) | | 3,627 | |
Previous: Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES