UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) |
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ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the Quarterly Period Ended December 28, 2018 |
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Or |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
001-33260
(Commission File Number)
TE CONNECTIVITY LTD.
(Exact name of registrant as specified in its charter)
Switzerland
(Jurisdiction of Incorporation) |
98-0518048
(I.R.S. Employer Identification No.) |
Rheinstrasse 20
CH-8200 Schaffhausen, Switzerland
(Address of principal executive offices)
+41 (0)52 633 66 61
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The number of common shares outstanding as of January 18, 2019 was 338,854,434.
TE CONNECTIVITY LTD.
INDEX TO FORM 10-Q
i
TE CONNECTIVITY LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
See Notes to Condensed Consolidated Financial Statements.
1
TE CONNECTIVITY LTD.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
|
For the
Quarters Ended |
||||||
---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
|||||
|
(in millions)
|
||||||
Net income (loss) . |
$ | 276 | $ | (40 | ) | ||
Other comprehensive income: |
|||||||
Currency translation |
19 | 67 | |||||
Adjustments to unrecognized pension and postretirement benefit costs, net of income taxes |
6 | 7 | |||||
Gains on cash flow hedges, net of income taxes |
24 | 2 | |||||
| | | | | | | |
Other comprehensive income |
49 | 76 | |||||
| | | | | | | |
Comprehensive income . |
$ | 325 | $ | 36 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
See Notes to Condensed Consolidated Financial Statements.
2
TE CONNECTIVITY LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
December 28,
2018 |
September 28,
2018 |
|||||
---|---|---|---|---|---|---|---|
|
(in millions, except share
data) |
||||||
Assets |
|||||||
Current assets: |
|||||||
Cash and cash equivalents |
$ | 505 | $ | 848 | |||
Accounts receivable, net of allowance for doubtful accounts of $26 and $22, respectively |
2,380 | 2,361 | |||||
Inventories |
1,986 | 1,857 | |||||
Prepaid expenses and other current assets |
507 | 661 | |||||
Current assets held for sale |
| 472 | |||||
| | | | | | | |
Total current assets |
5,378 | 6,199 | |||||
Property, plant, and equipment, net |
3,550 | 3,497 | |||||
Goodwill |
5,648 | 5,684 | |||||
Intangible assets, net |
1,648 | 1,704 | |||||
Deferred income taxes |
2,580 | 2,144 | |||||
Other assets |
384 | 1,158 | |||||
| | | | | | | |
Total Assets |
$ | 19,188 | $ | 20,386 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Liabilities and Shareholders' Equity |
|
|
|||||
Current liabilities: |
|||||||
Short-term debt |
$ | 585 | $ | 963 | |||
Accounts payable |
1,538 | 1,548 | |||||
Accrued and other current liabilities |
1,348 | 1,711 | |||||
Current liabilities held for sale |
| 188 | |||||
| | | | | | | |
Total current liabilities |
3,471 | 4,410 | |||||
Long-term debt |
3,382 | 3,037 | |||||
Long-term pension and postretirement liabilities |
1,101 | 1,102 | |||||
Deferred income taxes |
207 | 207 | |||||
Income taxes |
335 | 312 | |||||
Other liabilities |
456 | 487 | |||||
| | | | | | | |
Total Liabilities |
8,952 | 9,555 | |||||
| | | | | | | |
Commitments and contingencies (Note 8) |
|||||||
Shareholders' equity: |
|||||||
Common shares, CHF 0.57 par value, 357,069,981 shares authorized and issued |
157 | 157 | |||||
Accumulated earnings |
11,886 | 12,114 | |||||
Treasury shares, at cost, 17,727,608 and 12,279,603 shares, respectively |
(1,550 | ) | (1,134 | ) | |||
Accumulated other comprehensive loss |
(257 | ) | (306 | ) | |||
| | | | | | | |
Total Shareholders' Equity |
10,236 | 10,831 | |||||
| | | | | | | |
Total Liabilities and Shareholders' Equity |
$ | 19,188 | $ | 20,386 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
See Notes to Condensed Consolidated Financial Statements.
3
TE CONNECTIVITY LTD.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
|
Common
Shares |
Treasury
Shares |
|
|
|
|
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
Accumulated
Other Comprehensive Loss |
|
|||||||||||||||||||||
|
Contributed
Surplus |
Accumulated
Earnings |
Total
Shareholders' Equity |
||||||||||||||||||||||
|
Shares | Amount | Shares | Amount | |||||||||||||||||||||
|
(in millions)
|
||||||||||||||||||||||||
Balance at September 28, 2018 |
357 | $ | 157 | (12 | ) | $ | (1,134 | ) | $ | | $ | 12,114 | $ | (306 | ) | $ | 10,831 | ||||||||
Adoption of ASU No. 2016-16 |
| | | | | (443 | ) | | (443 | ) | |||||||||||||||
Net income |
| | | | | 276 | | 276 | |||||||||||||||||
Other comprehensive income |
| | | | | | 49 | 49 | |||||||||||||||||
Share-based compensation expense |
| | | | 23 | | | 23 | |||||||||||||||||
Exercise of share options |
| | | 7 | | | | 7 | |||||||||||||||||
Restricted share award vestings and other activity |
| | | 72 | (23 | ) | (61 | ) | | (12 | ) | ||||||||||||||
Repurchase of common shares |
| | (6 | ) | (495 | ) | | | | (495 | ) | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 28, 2018 |
357 | $ | 157 | (18 | ) | $ | (1,550 | ) | $ | | $ | 11,886 | $ | (257 | ) | $ | 10,236 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at September 29, 2017 |
357 |
$ |
157 |
(5 |
) |
$ |
(421 |
) |
$ |
|
$ |
10,175 |
$ |
(160 |
) |
$ |
9,751 |
||||||||
Net loss |
| | | | | (40 | ) | | (40 | ) | |||||||||||||||
Other comprehensive income |
| | | | | | 76 | 76 | |||||||||||||||||
Share-based compensation expense |
| | | | 29 | | | 29 | |||||||||||||||||
Exercise of share options |
| | 1 | 54 | | | | 54 | |||||||||||||||||
Restricted share award vestings and other activity |
| | | 92 | (29 | ) | (88 | ) | | (25 | ) | ||||||||||||||
Repurchase of common shares |
| | (2 | ) | (214 | ) | | | | (214 | ) | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 29, 2017 |
357 | $ | 157 | (6 | ) | $ | (489 | ) | $ | | $ | 10,047 | $ | (84 | ) | $ | 9,631 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
See Notes to Condensed Consolidated Financial Statements.
4
TE CONNECTIVITY LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
For the
Quarters Ended |
||||||
---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
|||||
|
(in millions)
|
||||||
Cash Flows From Operating Activities: |
|||||||
Net income (loss) |
$ | 276 | $ | (40 | ) | ||
Loss from discontinued operations, net of income taxes |
107 | 7 | |||||
| | | | | | | |
Income (loss) from continuing operations |
383 | (33 | ) | ||||
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities: |
|||||||
Depreciation and amortization |
168 | 162 | |||||
Deferred income taxes |
(11 | ) | 510 | ||||
Provision for losses on accounts receivable and inventories |
23 | 17 | |||||
Share-based compensation expense |
23 | 28 | |||||
Other |
18 | (6 | ) | ||||
Changes in assets and liabilities, net of the effects of acquisitions and divestitures: |
|||||||
Accounts receivable, net |
(26 | ) | (139 | ) | |||
Inventories |
(119 | ) | (177 | ) | |||
Prepaid expenses and other current assets |
67 | (45 | ) | ||||
Accounts payable |
(9 | ) | 161 | ||||
Accrued and other current liabilities |
(190 | ) | (239 | ) | |||
Income taxes |
15 | 7 | |||||
Other |
(14 | ) | 37 | ||||
| | | | | | | |
Net cash provided by continuing operating activities |
328 | 283 | |||||
Net cash provided by (used in) discontinued operating activities |
(31 | ) | 67 | ||||
| | | | | | | |
Net cash provided by operating activities |
297 | 350 | |||||
| | | | | | | |
Cash Flows From Investing Activities: |
|||||||
Capital expenditures |
(210 | ) | (237 | ) | |||
Proceeds from divestiture of discontinued operation, net of cash retained by sold operation |
288 | | |||||
Other |
4 | | |||||
| | | | | | | |
Net cash provided by (used in) continued investing activities |
82 | (237 | ) | ||||
Net cash used in discontinued investing activities |
(2 | ) | (4 | ) | |||
| | | | | | | |
Net cash provided by (used in) investing activities |
80 | (241 | ) | ||||
| | | | | | | |
Cash Flows From Financing Activities: |
|||||||
Net increase in commercial paper |
63 | 241 | |||||
Proceeds from issuance of debt |
350 | 119 | |||||
Repayment of debt |
(441 | ) | (708 | ) | |||
Proceeds from exercise of share options |
7 | 54 | |||||
Repurchase of common shares |
(519 | ) | (167 | ) | |||
Payment of common share dividends to shareholders |
(150 | ) | (141 | ) | |||
Transfers (to) from discontinued operations |
(33 | ) | 63 | ||||
Other |
(29 | ) | (32 | ) | |||
| | | | | | | |
Net cash used in continuing financing activities |
(752 | ) | (571 | ) | |||
Net cash provided by (used in) discontinued financing activities |
33 | (63 | ) | ||||
| | | | | | | |
Net cash used in financing activities |
(719 | ) | (634 | ) | |||
| | | | | | | |
Effect of currency translation on cash |
(1 | ) | 11 | ||||
Net decrease in cash, cash equivalents, and restricted cash |
(343 | ) | (514 | ) | |||
Cash, cash equivalents, and restricted cash at beginning of period |
848 | 1,218 | |||||
| | | | | | | |
Cash, cash equivalents, and restricted cash at end of period |
$ | 505 | $ | 704 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
See Notes to Condensed Consolidated Financial Statements.
5
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation and Accounting Policies
Basis of Presentation
The unaudited Condensed Consolidated Financial Statements of TE Connectivity Ltd. ("TE Connectivity" or the "Company," which may be referred to as "we," "us," or "our") have been prepared in United States ("U.S.") dollars, in accordance with accounting principles generally accepted in the U.S. ("GAAP") and the instructions to Form 10-Q under the Securities Exchange Act of 1934. In management's opinion, the unaudited Condensed Consolidated Financial Statements contain all normal recurring adjustments necessary for a fair presentation of interim results. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire fiscal year or any subsequent interim period.
The year-end balance sheet data was derived from audited financial statements, but does not include all of the information and disclosures required by GAAP. These financial statements should be read in conjunction with our audited Consolidated Financial Statements contained in our Annual Report on Form 10-K for the fiscal year ended September 28, 2018.
Unless otherwise indicated, references in the Condensed Consolidated Financial Statements to fiscal 2019 and fiscal 2018 are to our fiscal years ending September 27, 2019 and ended September 28, 2018, respectively.
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 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 December 28, 2018. See Note 15 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
6
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
1. Basis of Presentation and Accounting Policies (Continued)
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.
Recently Adopted Accounting Pronouncements
In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 Condensed Consolidated Financial Statements, in the quarter ended December 28, 2018.
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 the quarter ended December 28, 2018 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 Condensed 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 the quarter ended December 28, 2018 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.
7
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
2. Restructuring and Other Charges, Net
Net restructuring charges by segment were as follows:
|
For the
Quarters Ended |
||||||
---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
|||||
|
(in millions)
|
||||||
Transportation Solutions |
$ | 21 | $ | 4 | |||
Industrial Solutions |
35 | 22 | |||||
Communications Solutions |
19 | 8 | |||||
| | | | | | | |
Restructuring charges, net |
$ | 75 | $ | 34 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Activity in our restructuring reserves was as follows:
|
Balance at
September 28, 2018 |
Charges |
Changes
in Estimate |
Cash
Payments |
Non-Cash
Items |
Currency
Translation |
Balance at
December 28, 2018 |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in millions)
|
|||||||||||||||||||||
Fiscal 2019 Actions: |
||||||||||||||||||||||
Employee severance |
$ | | $ | 67 | $ | | $ | (4 | ) | $ | | $ | | $ | 63 | |||||||
| | | | | | | | | | | | | | | | | | | | | | |
Fiscal 2018 Actions: |
||||||||||||||||||||||
Employee severance |
114 | 1 | | (16 | ) | | (2 | ) | 97 | |||||||||||||
Facility and other exit costs |
4 | 1 | | (1 | ) | | | 4 | ||||||||||||||
Property, plant and equipment |
| 1 | | | (1 | ) | | | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total |
118 | 3 | | (17 | ) | (1 | ) | (2 | ) | 101 | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Pre-Fiscal 2018 Actions: |
||||||||||||||||||||||
Employee severance |
49 | 4 | (1 | ) | (8 | ) | | (1 | ) | 43 | ||||||||||||
Facility and other exit costs |
| 1 | | (1 | ) | | | | ||||||||||||||
Property, plant and equipment |
| 1 | | | (1 | ) | | | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total |
49 | 6 | (1 | ) | (9 | ) | (1 | ) | (1 | ) | 43 | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total Activity |
$ | 167 | $ | 76 | $ | (1 | ) | $ | (30 | ) | $ | (2 | ) | $ | (3 | ) | $ | 207 | ||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Fiscal 2019 Actions
During fiscal 2019, we initiated a restructuring program associated with footprint consolidation and structural improvements impacting all segments. In connection with this program, during the quarter ended December 28, 2018, we recorded restructuring charges of $67 million. We expect to complete all restructuring actions commenced during the quarter ended December 28, 2018 by the end of fiscal 2020 and to incur additional charges of approximately $10 million primarily in the Industrial Solutions segment.
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
8
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
2. Restructuring and Other Charges, Net (Continued)
segments. In connection with this program, during the quarters ended December 28, 2018 and December 29, 2017, we recorded restructuring charges of $3 million and $22 million, respectively. We expect to complete all restructuring actions commenced during fiscal 2018 by the end of fiscal 2020 and to incur additional charges of approximately $10 million primarily in the Industrial Solutions segment.
Pre-Fiscal 2018 Actions
Prior to fiscal 2018, we initiated a restructuring program associated with footprint consolidation related to recent acquisitions and structural improvements impacting all segments. Also prior to fiscal 2018, we initiated a restructuring program associated with headcount reductions impacting all segments and product line closures in the Communications Solutions segment. During the quarters ended December 28, 2018 and December 29, 2017, we recorded net restructuring charges of $5 million and $12 million, respectively, related to pre-fiscal 2018 actions. We expect additional charges related to pre-fiscal 2018 actions to be insignificant.
Total Restructuring Reserves
Restructuring reserves included on the Condensed Consolidated Balance Sheets were as follows:
|
December 28,
2018 |
September 28,
2018 |
|||||
---|---|---|---|---|---|---|---|
|
(in millions)
|
||||||
Accrued and other current liabilities |
$ | 183 | $ | 141 | |||
Other liabilities |
24 | 26 | |||||
| | | | | | | |
Restructuring reserves |
$ | 207 | $ | 167 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
3. Discontinued Operations
During the quarter ended December 28, 2018, we sold our Subsea Communications ("SubCom") business for net cash proceeds of $288 million and incurred a pre-tax loss on sale of $96 million, related primarily to the recognition of cumulative translation adjustment losses of $67 million. The transaction is subject to a final working capital adjustment. The SubCom business met the held for sale and discontinued operations criteria and was reported as such in all periods presented on the Condensed Consolidated Financial Statements. Prior to reclassification to discontinued operations, the SubCom business was included in the Communications Solutions segment.
In connection with the sale, we contractually agreed to continue to honor performance guarantees and letters of credit related to the SubCom business' projects that existed as of the date of sale. These guarantees have a combined value of approximately $1.7 billion and are expected to expire at various dates through fiscal 2025; however, the majority are expected to expire within two years. 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. During the quarter ended December 28, 2018, we issued a guarantee of $70 million for a new project. We have
9
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
3. Discontinued Operations (Continued)
contractual recourse against the SubCom business if we are required to perform on any SubCom guarantees; however, based on historical experience, we do not anticipate having to perform.
The following table presents the summarized components of loss from discontinued operations, net of income taxes, for the SubCom business and prior divestitures:
|
For the
Quarters Ended |
||||||
---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
|||||
|
(in millions)
|
||||||
Net sales |
$ | 41 | $ | 143 | |||
Cost of sales |
(50 | ) | (132 | ) | |||
Selling, general, and administrative expenses |
(4 | ) | (7 | ) | |||
Research, development, and engineering expenses |
(3 | ) | (10 | ) | |||
Restructuring and other charges, net |
(3 | ) | | ||||
| | | | | | | |
Pre-tax loss from discontinued operations |
(19 | ) | (6 | ) | |||
Pre-tax loss on sale of discontinued operations |
(96 | ) | | ||||
Income tax (expense) benefit |
8 | (1 | ) | ||||
| | | | | | | |
Loss from discontinued operations, net of income taxes |
$ | (107 | ) | $ | (7 | ) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The following table presents balance sheet information for assets and liabilities held for sale at September 28, 2018; there were no such balances at December 28, 2018:
|
September 28,
2018 |
|||
---|---|---|---|---|
|
(in millions)
|
|||
Accounts receivable, net |
$ | 72 | ||
Inventories |
130 | |||
Other current assets |
32 | |||
Property, plant, and equipment, net |
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 | ||
| | | | |
| | | | |
| | | | |
10
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
4. Inventories
Inventories consisted of the following:
|
December 28,
2018 |
September 28,
2018 |
|||||
---|---|---|---|---|---|---|---|
|
(in millions)
|
||||||
Raw materials |
$ | 306 | $ | 276 | |||
Work in progress |
735 | 656 | |||||
Finished goods |
945 | 925 | |||||
| | | | | | | |
Inventories |
$ | 1,986 | $ | 1,857 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
5. Goodwill
The changes in the carrying amount of goodwill by segment were as follows:
|
Transportation
Solutions |
Industrial
Solutions |
Communications
Solutions |
Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in millions)
|
||||||||||||
September 28, 2018 (1) |
$ | 1,993 | $ | 3,104 | $ | 587 | $ | 5,684 | |||||
Currency translation and other |
(13 | ) | (19 | ) | (4 | ) | (36 | ) | |||||
| | | | | | | | | | | | | |
December 28, 2018 (1) |
$ | 1,980 | $ | 3,085 | $ | 583 | $ | 5,648 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
6. Intangible Assets, Net
Intangible assets consisted of the following:
|
December 28, 2018 | September 28, 2018 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Gross
Carrying Amount |
Accumulated
Amortization |
Net
Carrying Amount |
Gross
Carrying Amount |
Accumulated
Amortization |
Net
Carrying Amount |
|||||||||||||
|
(in millions)
|
||||||||||||||||||
Customer relationships |
$ | 1,457 | $ | (410 | ) | $ | 1,047 | $ | 1,468 | $ | (389 | ) | $ | 1,079 | |||||
Intellectual property |
1,257 | (673 | ) | 584 | 1,261 | (653 | ) | 608 | |||||||||||
Other |
34 | (17 | ) | 17 | 33 | (16 | ) | 17 | |||||||||||
| | | | | | | | | | | | | | | | | | | |
Total |
$ | 2,748 | $ | (1,100 | ) | $ | 1,648 | $ | 2,762 | $ | (1,058 | ) | $ | 1,704 | |||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Intangible asset amortization expense was $45 million for the quarters ended December 28, 2018 and December 29, 2017.
11
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
6. Intangible Assets, Net (Continued)
At December 28, 2018, the aggregate amortization expense on intangible assets is expected to be as follows:
|
(in millions) | |||
---|---|---|---|---|
Remainder of fiscal 2019 |
$ | 136 | ||
Fiscal 2020 |
175 | |||
Fiscal 2021 |
172 | |||
Fiscal 2022 |
172 | |||
Fiscal 2023 |
171 | |||
Fiscal 2024 |
140 | |||
Thereafter |
682 | |||
| | | | |
Total |
$ | 1,648 | ||
| | | | |
| | | | |
| | | | |
7. Debt
During November 2018, Tyco Electronics Group S.A. ("TEGSA"), our 100%-owned subsidiary, issued $350 million aggregate principal amount of senior floating rate notes due June 2020. The notes bear interest at a rate of three-month London Interbank Offered Rate ("LIBOR") plus 0.45% per year. The notes are TEGSA's unsecured senior obligations and rank equally in right of payment with all existing and any future senior indebtedness of TEGSA and senior to any subordinated indebtedness that TEGSA may incur.
During December 2018, TEGSA repaid, at maturity, $325 million 2.375% senior notes due 2018.
TEGSA has a five-year unsecured senior revolving credit facility ("Credit Facility") with total commitments of $1,500 million. 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 December 28, 2018 or September 28, 2018.
As of December 28, 2018, TEGSA had $333 million of commercial paper outstanding at a weighted-average interest rate of 2.94%. TEGSA had $270 million of commercial paper outstanding at a weighted-average interest rate of 2.35% at September 28, 2018.
The fair value of our debt, based on indicative valuations, was approximately $4,091 million and $4,149 million at December 28, 2018 and September 28, 2018, respectively.
12
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
8. 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 December 28, 2018, we concluded that we would incur investigation and remediation costs at these sites in the reasonably possible range of $15 million to $44 million, and we accrued $17 million as the probable loss, which was the best estimate within this range. We believe that any potential payment of such estimated amounts will not have a material adverse effect on our results of operations, financial position, or cash flows.
Guarantees
In disposing of assets or businesses, we often provide representations, warranties, and/or indemnities to cover various risks including unknown damage to assets, environmental risks involved in the sale of real estate, liability for investigation and remediation of environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not expect that these uncertainties will have a material adverse effect on our results of operations, financial position, or cash flows.
At December 28, 2018, we had outstanding letters of credit, letters of guarantee, and surety bonds of $286 million.
We sold our SubCom business during the quarter ended December 28, 2018. In connection with the sale, we contractually agreed to honor certain performance guarantees and letters of credit related to the SubCom business. See Note 3 for additional information regarding these guarantees and the divestiture of the SubCom business.
13
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
9. Financial Instruments
Foreign Currency Exchange Rate Risk
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 maturity of these 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, we are required to post cash collateral with our counterparties.
At December 28, 2018 and September 28, 2018, our cross-currency swap contracts were in liability positions of $64 million and $100 million, respectively, and were recorded in other liabilities on the Condensed Consolidated Balance Sheets. At December 28, 2018 and September 28, 2018, collateral paid to our counterparties approximated the derivative positions and was recorded in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. The impacts of our cross-currency swap contracts were as follows:
|
For the
Quarters Ended |
||||||
---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
|||||
|
(in millions)
|
||||||
Gains (losses) recorded in other comprehensive income (loss) |
$ | 19 | $ | (10 | ) | ||
Gains (losses) excluded from the hedging relationship (1) |
17 | (19 | ) |
Hedge of Net Investment
During fiscal 2019, we expanded our cross-currency swap program to hedge our net investment in certain foreign operations. The aggregate notional value of this program was $952 million at December 28, 2018. Under the terms of these contracts, we receive interest in U.S. dollars at a weighted-average rate of 3.06% per annum and pay no interest. Upon maturity of these contracts at various dates through fiscal 2022, we will pay the notional value of the contracts in the designated foreign currency and receive U.S. dollars from our counterparties.
In addition to the cross-currency swap program, 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 $3,189 million and $4,064 million at December 28, 2018 and September 28, 2018, respectively.
14
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
9. Financial Instruments (Continued)
The impacts of our hedging programs were as follows:
|
For the
Quarters Ended |
||||||
---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
|||||
|
(in millions)
|
||||||
Foreign currency exchange gains (losses) on intercompany loans and external borrowings (1) |
$ | 76 | $ | (66 | ) | ||
Losses on cross-currency swaps designated as hedge of net investment (2) |
(5 | ) | |
10. Retirement Plans
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 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
For the
Quarters Ended |
For the
Quarters Ended |
|||||||||||
|
December 28,
2018 |
December 29,
2017 |
December 28,
2018 |
December 29,
2017 |
|||||||||
|
(in millions)
|
||||||||||||
Service cost |
$ | 12 | $ | 12 | $ | 3 | $ | 3 | |||||
Interest cost |
11 | 10 | 12 | 11 | |||||||||
Expected return on plan assets |
(16 | ) | (17 | ) | (14 | ) | (15 | ) | |||||
Amortization of net actuarial loss |
6 | 6 | 4 | 6 | |||||||||
Amortization of prior service credit |
(2 | ) | (2 | ) | | | |||||||
| | | | | | | | | | | | | |
Net periodic pension benefit cost |
$ | 11 | $ | 9 | $ | 5 | $ | 5 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
The components of net periodic pension benefit cost other than service cost are included in net other income (expense) on the Condensed Consolidated Statements of Operations.
15
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
11. Income Taxes
We recorded income tax expense of $78 million and $599 million for the quarters ended December 28, 2018 and December 29, 2017, respectively. The income tax expense 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 (the "Act") and a $61 million net income tax benefit related to certain legal entity restructurings. During the quarter ended December 29, 2017, the period of enactment of the Act, we were required to revalue our U.S. federal deferred tax assets and liabilities at a U.S. federal corporate tax rate of 21% and we 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. 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.
We record accrued interest and penalties related to uncertain tax positions as part of income tax expense. As of December 28, 2018 and September 28, 2018, we had $63 million and $60 million, respectively, of accrued interest and penalties related to uncertain tax positions on the Condensed Consolidated Balance Sheets, recorded primarily in income taxes.
Although it is difficult to predict the timing or results of our worldwide examinations, we estimate that up to approximately $125 million of unrecognized income tax benefits, excluding the impact relating to accrued interest and penalties, could be resolved within the next twelve months.
We are not aware of any other matters that would result in significant changes to the amount of unrecognized income tax benefits reflected on the Condensed Consolidated Balance Sheet as of December 28, 2018.
Tax Sharing Agreement
Under a Tax Sharing Agreement, we, Tyco International plc ("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
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
12. Earnings (Loss) Per Share
The weighted-average number of shares outstanding used in the computations of basic and diluted earnings (loss) per share were as follows:
|
For the
Quarters Ended |
||||||
---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
|||||
|
(in millions)
|
||||||
Basic |
342 | 352 | |||||
Dilutive impact of share-based compensation arrangements |
2 | | |||||
| | | | | | | |
Diluted |
344 | 352 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
There were one million share options that were not included in the computation of diluted earnings (loss) per share for the quarters ended December 28, 2018 and December 29, 2017 because the instruments' underlying exercise prices were greater than the average market prices of our common shares and inclusion would be antidilutive.
For the quarter ended December 29, 2017, there were three million nonvested share awards and options outstanding with underlying exercise prices less than the average market prices of our common shares; however, these were excluded from the calculation of diluted loss per share as inclusion would be antidilutive as a result of our loss during the period.
13. Shareholders' Equity
Dividends
We paid cash dividends to shareholders of $0.44 and $0.40 per share during the quarters ended December 28, 2018 and December 29, 2017, respectively.
Upon shareholders' approval of a dividend payment, we record a liability with a corresponding charge to shareholders' equity. At December 28, 2018 and September 28, 2018, the unpaid portion of the dividends recorded in accrued and other current liabilities on the Condensed Consolidated Balance Sheets totaled $149 million and $303 million, respectively.
Share Repurchase Program
During the quarter ended December 28, 2018, our board of directors authorized an increase of $1.5 billion in the share repurchase program. Common shares repurchased under the share repurchase program were as follows:
|
For the
Quarters Ended |
||||||
---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
|||||
|
(in millions)
|
||||||
Number of common shares repurchased |
6 | 2 | |||||
Repurchase value |
$ | 495 | $ | 214 |
17
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
13. Shareholders' Equity (Continued)
At December 28, 2018, we had $2.0 billion of availability remaining under our share repurchase authorization.
14. Share Plans
Share-based compensation expense, which was included in selling, general, and administrative expenses on the Condensed Consolidated Statements of Operations, was as follows:
|
For the
Quarters Ended |
||||||
---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
|||||
|
(in millions)
|
||||||
Share-based compensation expense |
$ | 23 | $ | 28 |
As of December 28, 2018, there was $179 million of unrecognized compensation expense related to share-based awards, which is expected to be recognized over a weighted-average period of 2.3 years.
During the quarter ended December 28, 2018, we granted the following share-based awards as part of our annual incentive plan grant:
|
Shares |
Grant-Date
Fair Value |
|||||
---|---|---|---|---|---|---|---|
|
(in millions)
|
|
|||||
Share options |
1.6 | $ | 13.36 | ||||
Restricted share awards |
0.6 | 76.66 | |||||
Performance share awards |
0.2 | 76.66 |
As of December 28, 2018, we had 17 million shares available for issuance under our stock and incentive plans, of which the TE Connectivity Ltd. 2007 Stock and Incentive Plan, amended and restated as of March 8, 2017, was the primary plan.
Share-Based Compensation Assumptions
The assumptions we used in the Black-Scholes-Merton option pricing model for the options granted as part of our annual incentive plan grant were as follows:
Expected share price volatility |
20 | % | ||
Risk free interest rate |
3.0 | % | ||
Expected annual dividend per share |
$ | 1.76 | ||
Expected life of options (in years) |
5.2 |
18
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
15. Segment and Geographic Data
Net sales by segment (1) and industry end market (2) were as follows:
|
For the
Quarters Ended |
||||||
---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
|||||
|
(in millions)
|
||||||
Transportation Solutions: |
|||||||
Automotive |
$ | 1,469 | $ | 1,517 | |||
Commercial transportation |
297 | 300 | |||||
Sensors |
220 | 215 | |||||
| | | | | | | |
Total Transportation Solutions |
1,986 | 2,032 | |||||
| | | | | | | |
Industrial Solutions: |
|||||||
Industrial equipment |
483 | 471 | |||||
Aerospace, defense, oil, and gas |
285 | 254 | |||||
Energy |
160 | 157 | |||||
| | | | | | | |
Total Industrial Solutions |
928 | 882 | |||||
| | | | | | | |
Communications Solutions: |
|||||||
Data and devices |
257 | 238 | |||||
Appliances |
176 | 184 | |||||
| | | | | | | |
Total Communications Solutions |
433 | 422 | |||||
| | | | | | | |
Total |
$ | 3,347 | $ | 3,336 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
19
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
15. Segment and Geographic Data (Continued)
Net sales by geographic region (1) and segment were as follows:
|
For the
Quarters Ended |
||||||
---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
|||||
|
(in millions)
|
||||||
Europe/Middle East/Africa ("EMEA"): |
|||||||
Transportation Solutions |
$ | 756 | $ | 808 | |||
Industrial Solutions |
350 | 344 | |||||
Communications Solutions |
65 | 66 | |||||
| | | | | | | |
Total EMEA |
1,171 | 1,218 | |||||
| | | | | | | |
AsiaPacific: |
|||||||
Transportation Solutions |
764 | 805 | |||||
Industrial Solutions |
155 | 163 | |||||
Communications Solutions |
254 | 252 | |||||
| | | | | | | |
Total AsiaPacific |
1,173 | 1,220 | |||||
| | | | | | | |
Americas: |
|||||||
Transportation Solutions |
466 | 419 | |||||
Industrial Solutions |
423 | 375 | |||||
Communications Solutions |
114 | 104 | |||||
| | | | | | | |
Total Americas |
1,003 | 898 | |||||
| | | | | | | |
Total |
$ | 3,347 | $ | 3,336 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Operating income by segment was as follows:
|
For the
Quarters Ended |
||||||
---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
|||||
|
(in millions)
|
||||||
Transportation Solutions |
$ | 332 | $ | 417 | |||
Industrial Solutions |
100 | 102 | |||||
Communications Solutions |
52 | 67 | |||||
| | | | | | | |
Total |
$ | 484 | $ | 586 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
20
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
16. 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 (unaudited)
For the Quarter Ended December 28, 2018
|
TE
Connectivity Ltd. |
TEGSA |
Other
Subsidiaries |
Consolidating
Adjustments |
Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in millions)
|
|||||||||||||||
Net sales |
$ | | $ | | $ | 3,347 | $ | | $ | 3,347 | ||||||
Cost of sales |
| | 2,233 | | 2,233 | |||||||||||
| | | | | | | | | | | | | | | | |
Gross margin |
| | 1,114 | | 1,114 | |||||||||||
Selling, general, and administrative expenses, net (1) |
35 | (107 | ) | 461 | | 389 | ||||||||||
Research, development, and engineering expenses |
| | 161 | | 161 | |||||||||||
Acquisition and integration costs |
| | 5 | | 5 | |||||||||||
Restructuring and other charges, net |
| | 75 | | 75 | |||||||||||
| | | | | | | | | | | | | | | | |
Operating income (loss) |
(35 | ) | 107 | 412 | | 484 | ||||||||||
Interest income |
| | 5 | | 5 | |||||||||||
Interest expense |
| (27 | ) | | | (27 | ) | |||||||||
Other expense, net |
| | (1 | ) | | (1 | ) | |||||||||
Equity in net income of subsidiaries |
441 | 389 | | (830 | ) | | ||||||||||
Equity in net loss of subsidiaries of discontinued operations |
(107 | ) | (49 | ) | | 156 | | |||||||||
Intercompany interest income (expense), net |
(23 | ) | (28 | ) | 51 | | | |||||||||
| | | | | | | | | | | | | | | | |
Income from continuing operations before income taxes |
276 | 392 | 467 | (674 | ) | 461 | ||||||||||
Income tax expense |
| | (78 | ) | | (78 | ) | |||||||||
| | | | | | | | | | | | | | | | |
Income from continuing operations |
276 | 392 | 389 | (674 | ) | 383 | ||||||||||
Loss from discontinued operations, net of income taxes |
| (58 | ) | (49 | ) | | (107 | ) | ||||||||
| | | | | | | | | | | | | | | | |
Net income |
276 | 334 | 340 | (674 | ) | 276 | ||||||||||
Other comprehensive income |
49 | 49 | 35 | (84 | ) | 49 | ||||||||||
| | | | | | | | | | | | | | | | |
Comprehensive income |
$ | 325 | $ | 383 | $ | 375 | $ | (758 | ) | $ | 325 | |||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
21
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
16. Tyco Electronics Group S.A. (Continued)
Condensed Consolidating Statement of Operations (unaudited)
For the Quarter Ended December 29, 2017
|
TE
Connectivity Ltd. |
TEGSA |
Other
Subsidiaries |
Consolidating
Adjustments |
Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in millions)
|
|||||||||||||||
Net sales |
$ | | $ | | $ | 3,336 | $ | | $ | 3,336 | ||||||
Cost of sales |
| | 2,172 | | 2,172 | |||||||||||
| | | | | | | | | | | | | | | | |
Gross margin |
| | 1,164 | | 1,164 | |||||||||||
Selling, general, and administrative expenses, net |
47 | (3 | ) | 333 | | 377 | ||||||||||
Research, development, and engineering expenses |
| | 165 | | 165 | |||||||||||
Acquisition and integration costs |
| | 2 | | 2 | |||||||||||
Restructuring and other charges, net |
| | 34 | | 34 | |||||||||||
| | | | | | | | | | | | | | | | |
Operating income (loss) |
(47 | ) | 3 | 630 | | 586 | ||||||||||
Interest income |
| | 4 | | 4 | |||||||||||
Interest expense |
| (26 | ) | | | (26 | ) | |||||||||
Other income, net |
| | 2 | | 2 | |||||||||||
Equity in net income of subsidiaries |
27 | 22 | | (49 | ) | | ||||||||||
Equity in net loss of subsidiaries of discontinued operations |
(7 | ) | (7 | ) | | 14 | | |||||||||
Intercompany interest income (expense), net |
(13 | ) | 28 | (15 | ) | | | |||||||||
| | | | | | | | | | | | | | | | |
Income (loss) from continuing operations before income taxes |
(40 | ) | 20 | 621 | (35 | ) | 566 | |||||||||
Income tax expense |
| | (599 | ) | | (599 | ) | |||||||||
| | | | | | | | | | | | | | | | |
Income (loss) from continuing operations |
(40 | ) | 20 | 22 | (35 | ) | (33 | ) | ||||||||
Loss from discontinued operations, net of income taxes |
| | (7 | ) | | (7 | ) | |||||||||
| | | | | | | | | | | | | | | | |
Net income (loss) |
(40 | ) | 20 | 15 | (35 | ) | (40 | ) | ||||||||
Other comprehensive income |
76 | 76 | 87 | (163 | ) | 76 | ||||||||||
| | | | | | | | | | | | | | | | |
Comprehensive income |
$ | 36 | $ | 96 | $ | 102 | $ | (198 | ) | $ | 36 | |||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
22
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
16. Tyco Electronics Group S.A. (Continued)
Condensed Consolidating Balance Sheet (unaudited)
As of December 28, 2018
|
TE
Connectivity Ltd. |
TEGSA |
Other
Subsidiaries |
Consolidating
Adjustments |
Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in millions)
|
|||||||||||||||
Assets |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | | $ | | $ | 505 | $ | | $ | 505 | ||||||
Accounts receivable, net |
| | 2,380 | | 2,380 | |||||||||||
Inventories |
| | 1,986 | | 1,986 | |||||||||||
Intercompany receivables |
51 | 3,096 | 60 | (3,207 | ) | | ||||||||||
Prepaid expenses and other current assets |
4 | 68 | 435 | | 507 | |||||||||||
| | | | | | | | | | | | | | | | |
Total current assets |
55 | 3,164 | 5,366 | (3,207 | ) | 5,378 | ||||||||||
Property, plant, and equipment, net |
| | 3,550 | | 3,550 | |||||||||||
Goodwill |
| | 5,648 | | 5,648 | |||||||||||
Intangible assets, net |
| | 1,648 | | 1,648 | |||||||||||
Deferred income taxes |
| | 2,580 | | 2,580 | |||||||||||
Investment in subsidiaries |
13,557 | 26,537 | | (40,094 | ) | | ||||||||||
Intercompany loans receivable |
2 | 1,598 | 13,646 | (15,246 | ) | | ||||||||||
Other assets |
| 1 | 383 | | 384 | |||||||||||
| | | | | | | | | | | | | | | | |
Total Assets |
$ | 13,614 | $ | 31,300 | $ | 32,821 | $ | (58,547 | ) | $ | 19,188 | |||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Liabilities and Shareholders' Equity |
|
|
|
|
|
|||||||||||
Current liabilities: |
||||||||||||||||
Short-term debt |
$ | | $ | 583 | $ | 2 | $ | | $ | 585 | ||||||
Accounts payable |
2 | | 1,536 | | 1,538 | |||||||||||
Accrued and other current liabilities |
220 | 53 | 1,075 | | 1,348 | |||||||||||
Intercompany payables |
3,156 | | 51 | (3,207 | ) | | ||||||||||
| | | | | | | | | | | | | | | | |
Total current liabilities |
3,378 | 636 | 2,664 | (3,207 | ) | 3,471 | ||||||||||
Long-term debt |
| 3,379 | 3 | | 3,382 | |||||||||||
Intercompany loans payable |
| 13,648 | 1,598 | (15,246 | ) | | ||||||||||
Long-term pension and postretirement liabilities |
| | 1,101 | | 1,101 | |||||||||||
Deferred income taxes |
| | 207 | | 207 | |||||||||||
Income taxes |
| | 335 | | 335 | |||||||||||
Other liabilities |
| 80 | 376 | | 456 | |||||||||||
| | | | | | | | | | | | | | | | |
Total Liabilities |
3,378 | 17,743 | 6,284 | (18,453 | ) | 8,952 | ||||||||||
| | | | | | | | | | | | | | | | |
Total Shareholders' Equity |
10,236 | 13,557 | 26,537 | (40,094 | ) | 10,236 | ||||||||||
| | | | | | | | | | | | | | | | |
Total Liabilities and Shareholders' Equity |
$ | 13,614 | $ | 31,300 | $ | 32,821 | $ | (58,547 | ) | $ | 19,188 | |||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
23
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
16. Tyco Electronics Group S.A. (Continued)
Condensed Consolidating Balance Sheet (unaudited)
As of September 28, 2018
|
TE
Connectivity Ltd. |
TEGSA |
Other
Subsidiaries |
Consolidating
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 | |||||||||||
Current 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 | ) | | ||||||||||
Current 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 | |||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
24
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
16. Tyco Electronics Group S.A. (Continued)
Condensed Consolidating Statement of Cash Flows (unaudited)
For the Quarter Ended December 28, 2018
|
TE
Connectivity Ltd. |
TEGSA |
Other
Subsidiaries |
Consolidating
Adjustments |
Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in millions)
|
|||||||||||||||
Cash Flows From Operating Activities: |
||||||||||||||||
Net cash provided by (used in) continuing operating activities |
$ | (73 | ) | $ | (9 | ) | $ | 410 | $ | | $ | 328 | ||||
Net cash used in discontinued operating activities |
| | (31 | ) | | (31 | ) | |||||||||
| | | | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities |
(73 | ) | (9 | ) | 379 | | 297 | |||||||||
| | | | | | | | | | | | | | | | |
Cash Flows From Investing Activities: |
||||||||||||||||
Capital expenditures |
| | (210 | ) | | (210 | ) | |||||||||
Proceeds from divestiture of discontinued operation, net of cash retained by sold operation |
| 303 | (15 | ) | | 288 | ||||||||||
Change in intercompany loans |
| (25 | ) | | 25 | | ||||||||||
Other |
| | 4 | | 4 | |||||||||||
| | | | | | | | | | | | | | | | |
Net cash provided by (used in) continuing investing activities |
| 278 | (221 | ) | 25 | 82 | ||||||||||
Net cash used in discontinued investing activities |
| | (2 | ) | | (2 | ) | |||||||||
| | | | | | | | | | | | | | | | |
Net cash provided by (used in) investing activities |
| 278 | (223 | ) | 25 | 80 | ||||||||||
| | | | | | | | | | | | | | | | |
Cash Flows From Financing Activities: |
||||||||||||||||
Changes in parent company equity (1) |
23 | (240 | ) | 217 | | | ||||||||||
Net increase in commercial paper |
| 63 | | | 63 | |||||||||||
Proceeds from issuance of debt |
| 350 | | | 350 | |||||||||||
Repayment of debt |
| (441 | ) | | | (441 | ) | |||||||||
Proceeds from exercise of share options |
| | 7 | | 7 | |||||||||||
Repurchase of common shares |
(519 | ) | | | | (519 | ) | |||||||||
Payment of common share dividends to shareholders |
(150 | ) | | | | (150 | ) | |||||||||
Transfer to discontinued operations |
| | (33 | ) | | (33 | ) | |||||||||
Loan activity with parent |
719 | | (694 | ) | (25 | ) | | |||||||||
Other |
| (1 | ) | (28 | ) | | (29 | ) | ||||||||
| | | | | | | | | | | | | | | | |
Net cash provided by (used in) continuing financing activities |
73 | (269 | ) | (531 | ) | (25 | ) | (752 | ) | |||||||
Net cash provided by discontinued financing activities |
| | 33 | | 33 | |||||||||||
| | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities |
73 | (269 | ) | (498 | ) | (25 | ) | (719 | ) | |||||||
| | | | | | | | | | | | | | | | |
Effect of currency translation on cash |
| | (1 | ) | | (1 | ) | |||||||||
Net decrease in cash, cash equivalents, and restricted cash |
| | (343 | ) | | (343 | ) | |||||||||
Cash, cash equivalents, and restricted cash at beginning of period |
| | 848 | | 848 | |||||||||||
| | | | | | | | | | | | | | | | |
Cash, cash equivalents, and restricted cash at end of period |
$ | | $ | | $ | 505 | $ | | $ | 505 | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
25
TE CONNECTIVITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
16. Tyco Electronics Group S.A. (Continued)
Condensed Consolidating Statement of Cash Flows (unaudited)
For the Quarter Ended December 29, 2017
|
TE
Connectivity Ltd. |
TEGSA |
Other
Subsidiaries |
Consolidating
Adjustments |
Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in millions)
|
|||||||||||||||
Cash Flows From Operating Activities: |
||||||||||||||||
Net cash provided by (used in) continuing operating activities (1) |
$ | (51 | ) | $ | (10 | ) | $ | 351 | $ | (7 | ) | $ | 283 | |||
Net cash provided by discontinued operating activities |
| | 67 | | 67 | |||||||||||
| | | | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities |
(51 | ) | (10 | ) | 418 | (7 | ) | 350 | ||||||||
| | | | | | | | | | | | | | | | |
Cash Flows From Investing Activities: |
||||||||||||||||
Capital expenditures |
| | (237 | ) | | (237 | ) | |||||||||
Change in intercompany loans |
| 335 | | (335 | ) | | ||||||||||
Intercompany distribution receipts (1) |
| 23 | | (23 | ) | | ||||||||||
| | | | | | | | | | | | | | | | |
Net cash provided by (used in) continuing investing activities |
| 358 | (237 | ) | (358 | ) | (237 | ) | ||||||||
Net cash used in discontinued investing activities |
| | (4 | ) | | (4 | ) | |||||||||
| | | | | | | | | | | | | | | | |
Net cash provided by (used in) investing activities |
| 358 | (241 | ) | (358 | ) | (241 | ) | ||||||||
| | | | | | | | | | | | | | | | |
Cash Flows From Financing Activities: |
||||||||||||||||
Changes in parent company equity (2) |
30 | | (30 | ) | | | ||||||||||
Net increase in commercial paper |
| 241 | | | 241 | |||||||||||
Proceeds from issuance of debt |
| 119 | | | 119 | |||||||||||
Repayment of debt |
| (708 | ) | | | (708 | ) | |||||||||
Proceeds from exercise of share options |
| | 54 | | 54 | |||||||||||
Repurchase of common shares |
(108 | ) | | (59 | ) | | (167 | ) | ||||||||
Payment of common share dividends to shareholders |
(143 | ) | | 2 | | (141 | ) | |||||||||
Transfer from discontinued operations |
| | 63 | | 63 | |||||||||||
Intercompany distributions (1) |
| | (30 | ) | 30 | | ||||||||||
Loan activity with parent |
272 | | (607 | ) | 335 | | ||||||||||
Other |
| | (32 | ) | | (32 | ) | |||||||||
| | | | | | | | | | | | | | | | |
Net cash provided by (used in) continuing financing activities |
51 | (348 | ) | (639 | ) | 365 | (571 | ) | ||||||||
Net cash used in discontinued financing activities |
| | (63 | ) | | (63 | ) | |||||||||
| | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities |
51 | (348 | ) | (702 | ) | 365 | (634 | ) | ||||||||
| | | | | | | | | | | | | | | | |
Effect of currency translation on cash |
| | 11 | | 11 | |||||||||||
Net decrease in cash, cash equivalents, and restricted cash |
| | (514 | ) | | (514 | ) | |||||||||
Cash, cash equivalents, and restricted cash at beginning of period |
| | 1,218 | | 1,218 | |||||||||||
| | | | | | | | | | | | | | | | |
Cash, cash equivalents, and restricted cash at end of period |
$ | | $ | | $ | 704 | $ | | $ | 704 | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion may contain forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements as a result of many factors, including but not limited to those under the heading "Forward-Looking Information" and "Part II. Item 1A. Risk Factors."
Our Condensed Consolidated Financial Statements have been prepared in United States ("U.S.") dollars, in accordance with accounting principles generally accepted in the U.S. ("GAAP").
The following discussion includes organic net sales growth which is a non-GAAP financial measure. See "Non-GAAP Financial Measure" for additional information regarding this measure.
TE Connectivity Ltd. ("TE Connectivity" or the "Company," which may be referred to as "we," "us," or "our") is a global technology and manufacturing leader creating a safer, sustainable, productive, and connected future. For more than 75 years, our connectivity and sensor solutions, proven in the harshest environments, have enabled advancements in transportation, industrial applications, medical technology, energy, data communications, and the home.
Highlights for the first quarter of fiscal 2019 include the following:
Outlook
In the second quarter of fiscal 2019, we expect our net sales to be between $3.3 billion and $3.4 billion as compared to $3.6 billion in the second quarter of fiscal 2018. This decrease reflects sales declines in the Transportation Solutions and, to a lesser degree, the Communications Solutions segments relative to the second quarter of fiscal 2018. Additional information regarding expectations
27
for our reportable segments for the second quarter of fiscal 2019 as compared to the same period of fiscal 2018 is as follows:
We expect diluted earnings per share from continuing operations to be in the range of $1.13 to $1.17 per share in the second quarter of fiscal 2019. This outlook reflects the negative impact of foreign currency exchange rates on net sales and earnings per share of approximately $155 million and $0.05 per share, respectively, in the second quarter of fiscal 2019 as compared to the second quarter of fiscal 2018.
For fiscal 2019, we expect our net sales to be between $13.45 billion and $13.85 billion as compared to $14.0 billion in fiscal 2018. This decrease is driven by sales declines in the Transportation Solutions and Communications Solutions segments relative to fiscal 2018. Additional information regarding expectations for our reportable segments for fiscal 2019 compared to fiscal 2018 is as follows:
We expect diluted earnings per share from continuing operations to be in the range of $4.94 to $5.14 per share in fiscal 2019. This outlook reflects the negative impact of foreign currency exchange rates on net sales and earnings per share of approximately $375 million and $0.16 per share, respectively, in fiscal 2019 as compared to fiscal 2018.
The above outlook is based on foreign currency exchange rates and commodity prices that are consistent with current levels.
We are monitoring the current macroeconomic environment and its potential effects on our customers and the end markets we serve. We continue to closely manage our costs in line with economic conditions. Additionally, we are managing our capital resources and monitoring capital availability to ensure that we have sufficient resources to fund future capital needs. See further discussion in "Liquidity and Capital Resources."
Discontinued Operations
During the first quarter of fiscal 2019, we sold our Subsea Communications ("SubCom") business for net cash proceeds of $288 million and incurred a pre-tax loss on sale of $96 million. The SubCom business met the held for sale and discontinued operations criteria and was reported as such in all periods presented on the Condensed Consolidated Financial Statements. Prior to reclassification to
28
discontinued operations, the SubCom business was included in the Communications Solutions segment. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding discontinued operations.
Net Sales
The following table presents our net sales and the percentage of total net sales by segment:
|
For the
Quarters Ended |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
|||||||||||
|
($ in millions)
|
||||||||||||
Transportation Solutions |
$ | 1,986 | 59 | % | $ | 2,032 | 61 | % | |||||
Industrial Solutions |
928 | 28 | 882 | 26 | |||||||||
Communications Solutions |
433 | 13 | 422 | 13 | |||||||||
| | | | | | | | | | | | | |
Total |
$ | 3,347 | 100 | % | $ | 3,336 | 100 | % | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
The following table provides an analysis of the change in our net sales by segment:
|
Change in Net Sales for the Quarter Ended December 28, 2018
versus Net Sales for the Quarter Ended December 29, 2017 |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Net
Sales Growth |
Organic Net
Sales Growth |
Translation | Acquisition | |||||||||||||||
|
($ in millions)
|
||||||||||||||||||
Transportation Solutions |
$ | (46 | ) | (2.3 | )% | $ | 4 | 0.2 | % | $ | (50 | ) | $ | | |||||
Industrial Solutions |
46 | 5.2 | 40 | 4.5 | (15 | ) | 21 | ||||||||||||
Communications Solutions |
11 | 2.6 | 19 | 4.6 | (8 | ) | | ||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total |
$ | 11 | 0.3 | % | $ | 63 | 1.9 | % | $ | (73 | ) | $ | 21 | ||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Net sales increased slightly in the first quarter of fiscal 2019 as compared to the first quarter of fiscal 2018. The increase in net sales resulting from organic net sales growth of 1.9% and sales contributions from an acquisition of 0.6% was offset by the negative impact of foreign currency translation of 2.2% due to the weakening of certain foreign currencies. Price erosion adversely affected organic net sales by $28 million in the first quarter of fiscal 2019.
See further discussion of net sales below under "Segment Results."
Net Sales by Geographic Region. Our business operates in three geographic regionsEMEA, AsiaPacific and the Americasand our results of operations are influenced by changes in foreign currency exchange rates. Increases or decreases in the value of the U.S. dollar, compared to other currencies, will directly affect our reported results as we translate those currencies into U.S. dollars at the end of each fiscal period.
Approximately 60% of our net sales were invoiced in currencies other than the U.S. dollar in the first quarter of fiscal 2019.
29
The following table presents our net sales and the percentage of total net sales by geographic region (1) :
|
For the
Quarters Ended |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
|||||||||||
|
($ in millions)
|
||||||||||||
EMEA |
$ | 1,171 | 35 | % | $ | 1,218 | 36 | % | |||||
AsiaPacific |
1,173 | 35 | 1,220 | 37 | |||||||||
Americas |
1,003 | 30 | 898 | 27 | |||||||||
| | | | | | | | | | | | | |
Total |
$ | 3,347 | 100 | % | $ | 3,336 | 100 | % | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
The following table provides an analysis of the change in our net sales by geographic region:
|
Change in Net Sales for the Quarter Ended December 28, 2018
versus Net Sales for the Quarter Ended December 29, 2017 |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Net
Sales Growth |
Organic Net
Sales Growth |
Translation | Acquisition | |||||||||||||||
|
($ in millions)
|
||||||||||||||||||
EMEA |
$ | (47 | ) | (3.9 | )% | $ | (24 | ) | (2.0 | )% | $ | (36 | ) | $ | 13 | ||||
AsiaPacific |
(47 | ) | (3.9 | ) | (22 | ) | (1.8 | ) | (27 | ) | 2 | ||||||||
Americas |
105 | 11.7 | 109 | 12.2 | (10 | ) | 6 | ||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total |
$ | 11 | 0.3 | % | $ | 63 | 1.9 | % | $ | (73 | ) | $ | 21 | ||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Cost of Sales and Gross Margin
The following table presents cost of sales and gross margin information:
|
For the
Quarters Ended |
|
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
Change | |||||||
|
($ in millions)
|
|||||||||
Cost of sales |
$ | 2,233 | $ | 2,172 | $ | 61 | ||||
As a percentage of net sales |
66.7 | % | 65.1 | % | ||||||
Gross margin |
$ |
1,114 |
$ |
1,164 |
$ |
(50 |
) |
|||
As a percentage of net sales |
33.3 | % | 34.9 | % |
Gross margin decreased $50 million in the first quarter of fiscal 2019 as compared to the first quarter of fiscal 2018. The decrease in gross margin was due primarily to price erosion, the negative impact of foreign currency translation, and lower manufacturing productivity, partially offset by lower material costs. Gross margin as a percentage of net sales decreased to 33.3% in the first quarter of 2019 from 34.9% in the first quarter of fiscal 2018.
Cost of sales and gross margin are subject to variability in raw material prices which continue to fluctuate for many of the raw materials used in the manufacture of our products. We expect to purchase approximately 190 million pounds of copper, 145,000 troy ounces of gold, and 2.7 million troy
30
ounces of silver in fiscal 2019. The following table presents the average prices incurred related to copper, gold, and silver:
|
|
For the
Quarters Ended |
|||||||
---|---|---|---|---|---|---|---|---|---|
|
Measure |
December 28,
2018 |
December 29,
2017 |
||||||
Copper |
Lb. | $ | 2.88 | $ | 2.79 | ||||
Gold |
Troy oz. | 1,293 | 1,265 | ||||||
Silver |
Troy oz. | 16.60 | 17.09 |
Operating Expenses
The following table presents operating expense information:
|
For the
Quarters Ended |
|
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
Change | |||||||
|
($ in millions)
|
|||||||||
Selling, general, and administrative expenses |
$ | 389 | $ | 377 | $ | 12 | ||||
As a percentage of net sales |
11.6 | % | 11.3 | % | ||||||
Restructuring and other charges, net |
$ |
75 |
$ |
34 |
$ |
41 |
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased $12 million in the first quarter of fiscal 2019 from the first quarter of fiscal 2018. The increase resulted primarily from a gain on the sale of certain assets in the first quarter of fiscal 2018. Selling, general, and administrative expenses as a percentage of net sales increased to 11.6% in the first quarter of fiscal 2019 from 11.3% in the first quarter of fiscal 2018.
Restructuring and Other Charges, Net. We are committed to continuous productivity improvements and consistently evaluate opportunities to simplify our global manufacturing footprint, migrate facilities to lower-cost regions, reduce fixed costs, and eliminate excess capacity. These initiatives are designed to help us maintain our competitiveness in the industry, improve our operating leverage, and position us for future growth.
During fiscal 2019, we initiated a restructuring program associated with footprint consolidation and structural improvements impacting all segments. 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 these initiatives, we incurred net restructuring charges of $75 million during the first quarter of fiscal 2019, of which $67 million related to the fiscal 2019 restructuring program. Annualized cost savings related to fiscal 2019 actions commenced during the first quarter of fiscal 2019 are expected to be approximately $60 million and are expected to be realized by the end of fiscal 2020. Cost savings will be reflected primarily in cost of sales and selling, general, and administrative expenses. Currently, we expect fiscal 2019 net restructuring charges to be at least at fiscal 2018 levels, and we expect total spending, which will be funded with cash from operations, to be approximately $160 million. However, as a result of market conditions, we are considering restructuring options and may broaden the scope of our cost initiatives and accelerate cost reduction and footprint consolidation activities.
See Note 2 to the Condensed Consolidated Financial Statements for additional information regarding net restructuring and other charges.
31
Operating Income
The following table presents operating income and operating margin information:
|
For the
Quarters Ended |
|
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
Change | |||||||
|
($ in millions)
|
|||||||||
Operating income |
$ | 484 | $ | 586 | $ | (102 | ) | |||
Operating margin |
14.5 | % | 17.6 | % |
Operating income included the following:
|
For the
Quarters Ended |
||||||
---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
|||||
|
(in millions)
|
||||||
Acquisition related charges: |
|||||||
Acquisition and integration costs |
$ | 5 | $ | 2 | |||
Charges associated with the amortization of acquisition related fair value adjustments |
1 | 5 | |||||
| | | | | | | |
|
6 | 7 | |||||
Restructuring and other charges, net |
75 | 34 | |||||
| | | | | | | |
Total |
$ | 81 | $ | 41 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
See discussion of operating income below under "Segment Results."
Non-Operating Items
The following table presents select non-operating information:
|
For the
Quarters Ended |
|
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
Change | |||||||
|
($ in millions)
|
|||||||||
Income tax expense |
$ | 78 | $ | 599 | $ | (521 | ) | |||
Effective tax rate |
16.9 | % | 105.8 | % | ||||||
Loss from discontinued operations, net of income taxes |
$ |
(107 |
) |
$ |
(7 |
) |
$ |
(100 |
) |
Income Taxes. See Note 11 to the Condensed Consolidated Financial Statements for discussion of items impacting income tax expense for the first quarters of fiscal 2019 and 2018.
Loss from Discontinued Operations, Net of Income Taxes. During the first quarter of fiscal 2019, we sold our SubCom business for net cash proceeds of $288 million and incurred a pre-tax loss on sale of $96 million. The transaction is subject to a final working capital adjustment. The net sales of the business were $41 million and $143 million in the first quarters of fiscal 2019 and 2018, respectively. The results for the first quarter of fiscal 2019 represent one month of activity. In the first quarter of fiscal 2018, net sales and operating income were negatively impacted by production delays on a program. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding discontinued operations.
32
Transportation Solutions
Net Sales. The following table presents the Transportation Solutions segment's net sales and the percentage of total net sales by primary industry end market (1) :
|
For the
Quarters Ended |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
|||||||||||
|
($ in millions)
|
||||||||||||
Automotive |
$ | 1,469 | 74 | % | $ | 1,517 | 74 | % | |||||
Commercial transportation |
297 | 15 | 300 | 15 | |||||||||
Sensors |
220 | 11 | 215 | 11 | |||||||||
| | | | | | | | | | | | | |
Total |
$ | 1,986 | 100 | % | $ | 2,032 | 100 | % | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
The following table provides an analysis of the change in the Transportation Solutions segment's net sales by primary industry end market:
|
Change in Net Sales for the Quarter Ended December 28, 2018
versus Net Sales for the Quarter Ended December 29, 2017 |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Net
Sales Growth |
Organic Net
Sales Growth |
Translation | |||||||||||||
|
($ in millions)
|
|||||||||||||||
Automotive |
$ | (48 | ) | (3.2 | )% | $ | (9 | ) | (0.6 | )% | $ | (39 | ) | |||
Commercial transportation |
(3 | ) | (1.0 | ) | 5 | 1.7 | (8 | ) | ||||||||
Sensors |
5 | 2.3 | 8 | 3.8 | (3 | ) | ||||||||||
| | | | | | | | | | | | | | | | |
Total |
$ | (46 | ) | (2.3 | )% | $ | 4 | 0.2 | % | $ | (50 | ) | ||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net sales in the Transportation Solutions segment decreased $46 million, or 2.3%, in the first quarter of fiscal 2019 from the first quarter of fiscal 2018 due primarily to the negative impact of foreign currency translation of 2.5%. Our organic net sales by primary industry end market were as follows:
33
Operating Income. The following table presents the Transportation Solutions segment's operating income and operating margin information:
|
For the
Quarters Ended |
|
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
Change | |||||||
|
($ in millions)
|
|||||||||
Operating income |
$ | 332 | $ | 417 | $ | (85 | ) | |||
Operating margin |
16.7 | % | 20.5 | % |
In the first quarter of fiscal 2019, operating income in the Transportation Solutions segment decreased $85 million as compared to the first quarter of fiscal 2018. The Transportation Solutions segment's operating income included the following:
|
For the
Quarters Ended |
||||||
---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
|||||
|
(in millions)
|
||||||
Acquisition related charges: |
|||||||
Acquisition and integration costs |
$ | 3 | $ | 1 | |||
Charges associated with the amortization of acquisition related fair value adjustments |
| 4 | |||||
| | | | | | | |
|
3 | 5 | |||||
Restructuring and other charges, net |
21 | 4 | |||||
| | | | | | | |
Total |
$ | 24 | $ | 9 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Excluding these items, operating income decreased in the first quarter of fiscal 2019 due primarily to lower manufacturing productivity, price erosion, and the negative impact of foreign currency translation.
Industrial Solutions
Net Sales. The following table presents the Industrial Solutions segment's net sales and the percentage of total net sales by primary industry end market (1) :
|
For the
Quarters Ended |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
|||||||||||
|
($ in millions)
|
||||||||||||
Industrial equipment |
$ | 483 | 52 | % | $ | 471 | 53 | % | |||||
Aerospace, defense, oil, and gas |
285 | 31 | 254 | 29 | |||||||||
Energy |
160 | 17 | 157 | 18 | |||||||||
| | | | | | | | | | | | | |
Total |
$ | 928 | 100 | % | $ | 882 | 100 | % | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
34
The following table provides an analysis of the change in the Industrial Solutions segment's net sales by primary industry end market:
|
Change in Net Sales for the Quarter Ended December 28, 2018
versus Net Sales for the Quarter Ended December 29, 2017 |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Net
Sales Growth |
Organic Net
Sales Growth |
Translation | Acquisition | |||||||||||||||
|
($ in millions)
|
||||||||||||||||||
Industrial equipment |
$ | 12 | 2.5 | % | $ | (2 | ) | (0.5 | )% | $ | (7 | ) | $ | 21 | |||||
Aerospace, defense, oil, and gas |
31 | 12.2 | 33 | 12.7 | (2 | ) | | ||||||||||||
Energy |
3 | 1.9 | 9 | 5.8 | (6 | ) | | ||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total |
$ | 46 | 5.2 | % | $ | 40 | 4.5 | % | $ | (15 | ) | $ | 21 | ||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
In the first quarter of fiscal 2019, net sales in the Industrial Solutions segment increased $46 million, or 5.2%, from the first quarter of fiscal 2018 as a result of organic net sales growth of 4.5% and sales contributions from an acquisition of 2.4%, partially offset by the negative impact of foreign currency translation of 1.7%. Our organic net sales by primary industry end market were as follows:
Operating Income. The following table presents the Industrial Solutions segment's operating income and operating margin information:
|
For the
Quarters Ended |
|
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
Change | |||||||
|
($ in millions)
|
|||||||||
Operating income |
$ | 100 | $ | 102 | $ | (2 | ) | |||
Operating margin |
10.8 | % | 11.6 | % |
35
Operating income in the Industrial Solutions segment decreased $2 million in the first quarter of fiscal 2019 as compared to the first quarter of fiscal 2018. The Industrial Solutions segment's operating income included the following:
|
For the
Quarters Ended |
||||||
---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
|||||
|
(in millions)
|
||||||
Acquisition related charges: |
|||||||
Acquisition and integration costs |
$ | 2 | $ | 1 | |||
Charges associated with the amortization of acquisition related fair value adjustments |
1 | 1 | |||||
| | | | | | | |
|
3 | 2 | |||||
Restructuring and other charges, net |
35 | 22 | |||||
| | | | | | | |
Total |
$ | 38 | $ | 24 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Excluding these items, operating income increased in the first quarter of fiscal 2019 primarily as a result of higher volume.
Communications Solutions
Net Sales. The following table presents the Communications Solutions segment's net sales and the percentage of total net sales by primary industry end market (1) :
|
For the
Quarters Ended |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
|||||||||||
|
($ in millions)
|
||||||||||||
Data and devices |
$ | 257 | 59 | % | $ | 238 | 56 | % | |||||
Appliances |
176 | 41 | 184 | 44 | |||||||||
| | | | | | | | | | | | | |
Total |
$ | 433 | 100 | % | $ | 422 | 100 | % | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
The following table provides an analysis of the change in the Communications Solutions segment's net sales by primary industry end market:
|
Change in Net Sales for the Quarter Ended December 28, 2018
versus Net Sales for the Quarter Ended December 29, 2017 |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Net
Sales Growth |
Organic Net
Sales Growth |
Translation | |||||||||||||
|
($ in millions)
|
|||||||||||||||
Data and devices |
$ | 19 | 8.0 | % | $ | 22 | 9.3 | % | $ | (3 | ) | |||||
Appliances |
(8 | ) | (4.3 | ) | (3 | ) | (1.7 | ) | (5 | ) | ||||||
| | | | | | | | | | | | | | | | |
Total |
$ | 11 | 2.6 | % | $ | 19 | 4.6 | % | $ | (8 | ) | |||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net sales in the Communications Solutions segment increased $11 million, or 2.6%, in the first quarter of fiscal 2019 as compared to the first quarter of fiscal 2018 due to organic net sales growth of
36
4.6%, partially offset by the negative impact of foreign currency translation of 2.0%. Our organic net sales by primary industry end market were as follows:
Operating Income. The following table presents the Communications Solutions segment's operating income and operating margin information:
|
For the
Quarters Ended |
|
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
Change | |||||||
|
($ in millions)
|
|||||||||
Operating income |
$ | 52 | $ | 67 | $ | (15 | ) | |||
Operating margin |
12.0 | % | 15.9 | % |
Operating income in the Communications Solutions segment decreased $15 million in the first quarter of fiscal 2019 as compared to the first quarter of fiscal 2018. The Communications Solutions segment's operating income included the following:
|
For the
Quarters Ended |
||||||
---|---|---|---|---|---|---|---|
|
December 28,
2018 |
December 29,
2017 |
|||||
|
(in millions)
|
||||||
Restructuring and other charges, net |
$ | 19 | $ | 8 |
Excluding these items, operating income decreased slightly in the first quarter of fiscal 2019 as compared to the first quarter of fiscal 2018.
Liquidity and Capital Resources
Our ability to fund our future capital needs will be affected by our ability to continue to generate cash from operations and may be affected by our ability to access the capital markets, money markets, or other sources of funding, as well as the capacity and terms of our financing arrangements. We believe that cash generated from operations and, to the extent necessary, these other sources of potential funding will be sufficient to meet our anticipated capital needs for the foreseeable future, including the payment of $250 million of 2.35% senior notes due in 2019. We may use excess cash to purchase a portion of our common shares pursuant to our authorized share repurchase program, to acquire strategic businesses or product lines, to pay dividends on our common shares, or to reduce our outstanding debt. The cost or availability of future funding may be impacted by financial market conditions. We will continue to monitor financial markets and respond as necessary to changing conditions.
Cash Flows from Operating Activities
In the first quarter of fiscal 2019, net cash provided by continuing operating activities increased $45 million to $328 million from $283 million in the first quarter of fiscal 2018. The increase resulted primarily from higher collections of accounts receivable, partially offset by a decrease in pre-tax income levels.
37
The amount of income taxes paid, net of refunds, during the first quarters of fiscal 2019 and 2018 was $75 million and $82 million, respectively.
Cash Flows from Investing Activities
Capital expenditures were $210 million and $237 million in the first quarters of fiscal 2019 and 2018, respectively. We expect fiscal 2019 capital spending levels to be approximately 5-6% of net sales. We believe our capital funding levels are adequate to support new programs, and we continue to invest in our manufacturing infrastructure to further enhance productivity and manufacturing capabilities.
During the first quarter of fiscal 2019, we received net cash proceeds of $288 million related to the sale of our SubCom business. See additional information in Note 3 to the Condensed Consolidated Financial Statements.
Cash Flows from Financing Activities and Capitalization
Total debt at December 28, 2018 and September 28, 2018 was $3,967 million and $4,000 million, respectively. See Note 7 to the Condensed Consolidated Financial Statements for additional information regarding debt.
During November 2018, Tyco Electronics Group S.A. ("TEGSA"), our 100%-owned subsidiary, issued $350 million aggregate principal amount of senior floating rate notes due June 2020. The notes bear interest at a rate of three-month London Interbank Offered Rate ("LIBOR") plus 0.45% per year. The notes are TEGSA's unsecured senior obligations and rank equally in right of payment with all existing and any future senior indebtedness of TEGSA and senior to any subordinated indebtedness that TEGSA may incur.
During December 2018, TEGSA repaid, at maturity, $325 million 2.375% senior notes due 2018.
TEGSA has a five-year unsecured senior revolving credit facility ("Credit Facility") with total commitments of $1,500 million. 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 December 28, 2018 or September 28, 2018.
The Credit Facility contains a financial ratio covenant providing that if, as of the last day of each fiscal quarter, our ratio of Consolidated Total Debt to Consolidated EBITDA (as defined in the Credit Facility) for the then most recently concluded period of four consecutive fiscal quarters exceeds 3.75 to 1.0, an Event of Default (as defined in the Credit Facility) is triggered. The Credit Facility and our other debt agreements contain other customary covenants. None of our covenants are presently considered restrictive to our operations. As of December 28, 2018, we were in compliance with all of our debt covenants and believe that we will continue to be in compliance with our existing covenants for the foreseeable future.
In addition to the Credit Facility, TEGSA is the borrower under our senior notes and commercial paper. TEGSA's payment obligations under its senior notes, commercial paper, and Credit Facility are fully and unconditionally guaranteed by its parent, TE Connectivity Ltd.
Payments of common share dividends to shareholders were $150 million and $141 million in the first quarters of fiscal 2019 and 2018, respectively.
During the first quarter of fiscal 2019, our board of directors authorized an increase of $1.5 billion in the share repurchase program. We repurchased approximately 6 million of our common shares for $495 million and approximately 2 million of our common shares for $214 million under our share
38
repurchase program during the first quarters of fiscal 2019 and 2018, respectively. At December 28, 2018, we had $2.0 billion of availability remaining under our share repurchase authorization.
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.
Guarantees
In certain instances, we have guaranteed the performance of third parties and provided financial guarantees for uncompleted work and financial commitments. The terms of these guarantees vary with end dates ranging from fiscal 2019 through the completion of such transactions. The guarantees would be triggered in the event of nonperformance, and the potential exposure for nonperformance under the guarantees would not have a material effect on our results of operations, financial position, or cash flows.
In disposing of assets or businesses, we often provide representations, warranties, and/or indemnities to cover various risks including unknown damage to assets, environmental risks involved in the sale of real estate, liability for investigation and remediation of environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not expect that these uncertainties will have a material adverse effect on our results of operations, financial position, or cash flows.
At December 28, 2018, we had outstanding letters of credit, letters of guarantee, and surety bonds of $286 million.
As discussed above, in the first quarter of fiscal 2019, we sold our SubCom business. In connection with the sale, we contractually agreed to continue to honor performance guarantees and letters of credit related to the SubCom business' projects that existed as of the date of sale. These guarantees have a combined value of approximately $1.7 billion and are expected to expire at various dates through fiscal 2025; however, the majority are expected to expire within two years. 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. During the quarter ended December 28, 2018, we issued a guarantee of $70 million for a new project. We have contractual recourse against the SubCom business if we are required to perform on any SubCom guarantees; however, based on historical experience, we do not anticipate having to perform. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding the divestiture of the SubCom business.
39
Critical Accounting Policies and Estimates
The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses.
Our accounting policies for revenue recognition, goodwill and other intangible assets, income taxes, and pension liabilities are based on, among other things, judgments and assumptions made by management. For additional information regarding these policies and the underlying accounting assumptions and estimates used in these policies, refer to the Consolidated Financial Statements and accompanying notes contained in our Annual Report on Form 10-K for the fiscal year ended September 28, 2018. Except as set forth below, there were no significant changes to this information during the first quarter of fiscal 2019.
Revenue Recognition
We adopted ASC 606, Revenue from Contracts with Customers , in the first quarter of fiscal 2019. See Note 1 to the Condensed Consolidated Financial Statements for additional information regarding our revenue recognition policy and the adoption of ASC 606.
See Note 1 to the Condensed Consolidated Financial Statements for information regarding recently adopted accounting pronouncements.
Organic Net Sales Growth
We present organic net sales growth as we believe it is appropriate for investors to consider this adjusted financial measure in addition to results in accordance with GAAP. Organic net sales growth represents net sales growth (the most comparable GAAP financial measure) excluding the impact of foreign currency exchange rates, and acquisitions and divestitures that occurred in the preceding twelve months, if any. Organic net sales growth is a useful measure of our performance because it excludes items that are not completely under management's control, such as the impact of changes in foreign currency exchange rates, and items that do not reflect the underlying growth of the company, such as acquisition and divestiture activity.
Organic net sales growth provides useful information about our results and the trends of our business. Management uses organic net sales growth to monitor and evaluate performance. Also, management uses organic net sales growth together with GAAP financial measures in its decision-making processes related to the operations of our reportable segments and our overall company. It is also a significant component in our incentive compensation plans. We believe that investors benefit from having access to the same financial measures that management uses in evaluating operations. The tables presented in "Results of Operations" and "Segment Results" provide reconciliations of organic net sales growth to net sales growth calculated in accordance with GAAP.
Organic net sales growth is a non-GAAP financial measure and should not be considered a replacement for results in accordance with GAAP. This non-GAAP financial measure may not be comparable to similarly-titled measures reported by other companies. The primary limitation of this measure is that it excludes the financial impact of items that would otherwise either increase or decrease our reported results. This limitation is best addressed by using organic net sales growth in combination with net sales growth in order to better understand the amounts, character, and impact of any increase or decrease in reported amounts.
40
Certain statements in this Quarterly Report on Form 10-Q are "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These statements are based on our management's beliefs and assumptions and on information currently available to our management. Forward-looking statements include, among others, the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities, potential operating performance improvements, acquisitions, divestitures, the effects of competition, and the effects of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words "believe," "expect," "plan," "intend," "anticipate," "estimate," "predict," "potential," "continue," "may," "should," or the negative of these terms or similar expressions.
Forward-looking statements involve risks, uncertainties, and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. Investors should not place undue reliance on any forward-looking statements. We do not have any intention or obligation to update forward-looking statements after we file this report except as required by law.
The following and other risks, which are described in greater detail in "Part I. Item 1A. Risk Factors," in our Annual Report on Form 10-K for the fiscal year ended September 28, 2018, could cause our results to differ materially from those expressed in forward-looking statements:
41
There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the first quarter of fiscal 2019, we expanded our cross-currency swap program to hedge our net investment in certain foreign operations. The aggregate notional value of this program was $952 million at December 28, 2018. See Note 9 to the Condensed Consolidated Financial Statements for further information regarding our exposures to market risk.
There have been no significant changes in our exposures to market risk during the first quarter of fiscal 2019, except for the item noted above. For further discussion of our exposures to market risk, refer to "Part II. Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the fiscal year ended September 28, 2018.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934), as of December 28, 2018. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 28, 2018.
Changes in Internal Control Over Financial Reporting
During the quarter ended December 28, 2018, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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There have been no material developments in our legal proceedings since we filed our Annual Report on Form 10-K for the fiscal year ended September 28, 2018, except as set forth below. Refer to "Part I. Item 3. Legal Proceedings" in our Annual Report on Form 10-K for the fiscal year ended September 28, 2018 for additional information regarding legal proceedings.
During the fourth quarter of fiscal 2018, one of our manufacturing sites in China was found to have failed to complete the environmental impact assessment inspection for certain of its production lines and assets within the mandatory timeframe as defined within applicable environmental regulation. At the request of the Shanghai Xuhui Environmental Protection Bureau, we are taking remedial actions to cure the deficiencies, and we paid an administrative penalty in the amount of 700,000 Chinese renminbi (approximately $0.1 million using an exchange rate of $0.15 per renminbi). We do not anticipate that any monetary sanctions or remedial actions we take will have a material adverse effect on our results of operations, financial position, or cash flows.
There have been no material changes in our risk factors from those disclosed in "Part I. Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended September 28, 2018. The risk factors described in our Annual Report on Form 10-K, in addition to other information in this report, could materially affect our business operations, financial condition, or liquidity. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial may also impair our business operations, financial condition, and liquidity.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table presents information about our purchases of our common shares during the quarter ended December 28, 2018:
Period
|
Total Number
of Shares Purchased (1) |
Average
Price Paid Per Share (1) |
Total Number of
Shares Purchased as Part of Publicly Announced Plans or Programs (2) |
Maximum
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
September 29October 26, 2018 |
814,408 | $ | 80.63 | 813,900 | $ | 949,322,872 | |||||||
October 27November 30, 2018 |
4,093,846 | 77.52 | 3,950,000 | 643,196,637 | |||||||||
December 1December 28, 2018 |
1,859,712 | 73.70 | 1,670,000 | 2,020,396,779 | |||||||||
| | | | | | | | | | | | | |
Total |
6,767,966 | $ | 76.85 | 6,433,900 | |||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TE CONNECTIVITY LTD. | ||||
|
|
By: |
|
/s/ HEATH A. MITTS Heath A. Mitts Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
Date: January 24, 2019
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EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT , dated as of December 15, 2015, by and between Tyco Electronics Corporation, a Pennsylvania corporation (the Company ), and Kevin N. Rock (the Executive ).
W I T N E S S E T H :
WHEREAS, the Executive currently serves as President, Industrial Solutions of the Company; and
WHEREAS, the Executive and the Company mutually desire to provide for the continued services and employment of the Executive by the Company under the terms and conditions hereinafter set forth in this agreement (the 2015 Agreement).
NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein and for good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto, each intending to be legally bound hereby, agree as follows:
1. Employment . On the terms and subject to the conditions set forth herein, the Company hereby agrees to continue the employment of the Executive, and the Executive hereby agrees to continue his employment with the Company, for the Employment Term (as defined below). During the Employment Term, the Executive shall serve as the President, Industrial Solutions of the Company and shall report to the President, TE Connectivity or such person or persons as from time to time may be designated by the Company (the Reporting Officer ), performing such duties and responsibilities as are customarily attendant to such position with respect to the business of the Company and such other duties and responsibilities as may from time to time be assigned to the Executive by the Reporting Officer consistent with such position. Upon notice from the Company, the Executives title, Reporting Officer and duties and responsibilities may be changed as is deemed necessary and appropriate by the Company.
2. Performance . The Executive shall serve the Company and its subsidiaries and affiliates faithfully and to the best of Executives ability and shall devote full business time, energy, experience and talents to the business of the Company and its subsidiaries and affiliates, as applicable, and will not engage in any other employment activities for any direct or indirect remuneration without the written approval of the Board; provided , however , that it shall not be a violation of this Agreement for the Executive to (i) continue to serve as a non-employee director of the business entities set forth on Exhibit A attached hereto on which Executive currently serves, if any, or (ii) manage personal investments or to engage in or serve such civic, community, charitable, educational, or religious organizations as Executive may select, so long as such service described in clauses (i) and (ii) of this sentence does not create a conflict of interest with, or interfere with the performance of, the Executives duties hereunder or conflict with the Executives covenants under Section 6 of this Agreement, or result in a violation of any applicable laws, regulations or articles of association (including the articles of association of TE Connectivity Ltd.), in each case as determined in the sole judgment of the Board.
3. Employment Term . This Agreement shall be effective commencing on the date hereof (the Commencement Date ) until terminated by either party providing appropriate notice to the other party (such period, the Employment Term ). The Executives employment with the Company shall be on an at-will basis, which means that the Executives employment is terminable by either the Company or the Executive at any time for any reason or no reason, with or without cause or notice (other than any notice required under Section 7 hereof).
4. Principal Location . The Executives principal place of employment shall be the Companys offices located in Harrisburg, Pennsylvania or such other location as is mutually agreed between the parties, subject to required travel.
5. Compensation and Benefits .
(a) Base Salary . As compensation for the Executives services hereunder and in consideration of the Executives other agreements hereunder, during the Employment Term, the Company shall pay the Executive a base salary, payable in equal installments in accordance with Company payroll procedures, in an amount equal to Executives current base salary , subject to annual review by the Management Development and Compensation Committee (the MDCC) of the Companys Board of Directors.
(b) Annual Cash Bonus . During the Employment Term, the Executive shall be entitled to participate in the Companys Annual Incentive Plan or Annual Performance Bonus Plan, as applicable (the Bonus Plan), with a bonus target equal to Executives current bonus target, subject to annual review by the MDCC.
(c) Annual Equity Incentive Awards . During the Employment Term, the Executive shall be entitled to participate in the Companys 2007 Stock and Incentive Plan (the SIP), or such other equity incentive plan as is deemed appropriate by the MDCC, and to receive annual long-term equity incentive awards in a form and amount determined by the MDCC. The Companys award cycle under the SIP currently takes place in the November timeframe each year.
(d) Benefits . During the Employment Term, the Executive shall, subject to and in accordance with the terms and conditions of the applicable plan documents and all applicable laws, be entitled to participate in all of the employee benefit, fringe and perquisite plans, practices, policies and arrangements that the Company makes available from time to time to its employees generally, under terms consistent with other similarly-situated executives. Such employee benefit plans and programs currently include, but are not limited to, the Tyco Electronics Retirement Savings and Investment Plan, the Tyco Electronics Supplemental Savings and Retirement Plan, the TE Connectivity Health and Welfare Plan (including medical, dental, vision, flexible spending accounts for healthcare and dependent care, life insurance, accidental death and dismemberment insurance, long-term disability and short term disability), Business Travel Medical Insurance, Business Travel Accident Insurance, and the TE Employee Stock Purchase Plan. The Company may amend or terminate the employee benefit plans and programs at any time.
(e) Severance Benefits . During the Employment Term, the Executive shall not be entitled to participate in the Companys Severance Plan for U.S. Officers and Executives or any other severance pay plan, program, or policy of the Company or its subsidiaries.
(f) Change in Control Severance Plan . During the Employment Term, the Executive shall not be entitled to participate in the Companys Change in Control Severance Plan for Certain U.S. Officers and Executives or any other change of control plan, program, or policy of the Company or its subsidiaries.
(g) Vacation and Paid Time Off . The Executive shall be entitled to vacation and paid time off in accordance with the standard policies of the Company for executives as in effect from time to time.
(h) Business Expenses . The Executive shall be reimbursed by the Company for all reasonable and necessary business expenses actually incurred by the Executive in performing his duties hereunder. All payments under this paragraph (h) of this Section 5 will be made in accordance with policies established by the Company from time to time and subject to receipt by the Company of appropriate documentation.
(i) Required Stock Ownership . The Executive acknowledges and agrees to adhere to the Companys executive stock ownership guidelines as set forth in the Companys Stock Ownership Policy, as may be amended from time to time in the Companys sole discretion, which currently requires, among other things, that the Executive shall acquire and hold three times his annual base salary in Company stock.
6. Covenants of the Executive . The Executive is party to a TE Connectivity Confidentiality and Invention Assignment Agreement (executed upon Executives employment with the Company) and a Limited Non-Competition Agreement (executed upon Executives initial acceptance of the terms and conditions of the Annual Incentive Plan). Executive acknowledges that the terms and conditions of those agreements remain in full force and effect as described in the agreements.
7. Termination .
(a) Termination of Employment . The employment of the Executive hereunder and the Employment Term may be terminated at any time (i) by the Company without Cause (as defined herein) on twelve months written notice to the Executive, (ii) by the Company with Cause or due to the Executives Disability (as defined herein) on written notice to the Executive, (iii) by the Executive for any reason upon thirty (30) days written notice (which notice period may be waived by the Company in its discretion, in which case, such termination shall be effective on any date prior to the end of such thirty (30) day period as selected by the Company), (iv) by the Executive with Good Reason following a Change in Control (as defined in the Companys Change in Control Severance Plan for Certain U.S. Officers and Executives (CIC Plan)) on twelve months written notice to the Company, provided that such termination occurs during the period beginning 60 days prior to the date of a Change in Control and ending two years after the date of such Change in Control, or (v) without action by the Company, the Executive or any other person or entity, immediately upon the Executives death. If the Executives employment is terminated for any reason under this Section 7(a), the Company shall be obligated to pay or provide to the Executive (or his estate, as applicable): (A) any base salary payable to the Executive pursuant to this Agreement, accrued up to and including the date on which the Executives employment terminates, (B) any employee benefits to which the Executive is entitled upon termination of his employment with the Company in accordance with the terms and conditions of the applicable plans of the Company, (C) reimbursement for any unreimbursed business expenses incurred by the
Executive prior to his date of termination pursuant to Section 5(f), and (D) payment for accrued but unused vacation and/or paid time off as of the date of his termination, in accordance with Company policy ((A)-(D) collectively, the Accrued Amounts ).
Compensation and Benefits during the Notice Period . Except as otherwise provided in this Section 7, Executive shall continue to be paid his base salary and continue to participate in the Companys incentive compensation and benefit plans (in accordance with the applicable plan terms), as more fully described in Section 5, except that Executive will not be granted any additional long-term equity incentive awards) during the applicable notice period, if any, as described in Section 7 above (such notice period or any part thereof referred to herein as the Notice Period), through the Executives termination date. For avoidance of doubt, during the Notice Period, Executive will continue to participate in the Annual Incentive Plan or Annual Performance Bonus Plan, as applicable, at the same bonus target award level in effect prior to the Notice Period and under the applicable Plan terms and conditions through Executives date of termination.
Duties and Responsibilities during Notice Period. At any time after the Executive or the Company has given notice to the other party to terminate the Executives employment in accordance with the terms of this Section 7(a), provided that the Company continues to pay the Executives salary and to provide all benefits (or pay a sum in lieu of the value of one or more such benefits) to which the Executive is contractually entitled until the termination of the Executives employment, the Company shall be entitled in its discretion, during the Notice Period: (i) to require the Executive not to enter or attend his place of work or any other premises of the Company or any affiliates thereof; (ii) to require the Executive not to carry out his duties or responsibilities under this Agreement; (iii) to require the Executive to return to the Company all property belonging to the Company or any affiliates thereof or to its/their clients or customers (including summaries, extracts or copies); (iv) to require the Executive to undertake work from his home and/or to carry out exceptional duties or special projects outside the normal scope of his duties and responsibilities for the Company or any affiliates thereof; (v) to appoint one or more persons to undertake the Executives duties and/or responsibilities and/or assume his position; (vi) to instruct the Executive not to communicate with clients, customers, suppliers, investors, employees, directors, consultants, agents or representatives of the Company or any affiliates thereof; (vii) to require the Executive to keep the Company informed of his whereabouts so that the Executive can be contacted should the need arise for the Executive to perform any duties or responsibilities under this Agreement or exceptional duties or special projects outside of the normal scope of his duties; and/or (viii) to remove Executive as a Section 16 officer or member of executive management for purposes of Swiss law.
Paid Time Off. Any paid time off which has accrued to the Executive at the start of his Notice Period and any paid time off entitlement which continues to accrue during his Notice Period shall be deemed to be taken by the Executive during the Notice Period.
Employment Status during Notice Period/Prohibition against Work for a Third Party. For the avoidance of doubt, during any Notice Period, the Executive shall remain an employee of the Company and continue to receive his normal rate of pay and all contractual benefits in accordance with this Agreement and be bound by all his express and implied duties
save as varied in accordance with the provisions of this Section 7(a). During the Notice Period, the Executive shall not undertake any work for any third party (as an employee or otherwise) whether paid or unpaid without written permission from the Company. If the Company grants such permission, the Companys obligation to continue to treat the Executive as an employee of the Company and to continue to provide the normal rate of pay and all contractual benefits as an employee of the Company for the remainder of the Notice Period shall immediately cease, and the Company shall have the right to terminate the Notice Period as it deems appropriate in its discretion in light of the circumstances of third party work at issue. This paragraph shall not apply to any unpaid volunteer work performed by Executive for a civic, community, charitable, educational, or religious organization, provided that such work does not interfere with Executives ability to make himself available for full-time work with the Company as deemed necessary by the Company in its discretion during the Notice Period. In addition, Executive may accept a compensated role as a member of a board of directors of a for-profit entity, provided that the Executive provides written notice to the Company of the role and the Company consents to executives acceptance of the role. Such consent will not be unreasonably withheld as long as the Company determines, in its sole discretion, that the role will not interfere with Executives ability to make himself available for full-time work with the Company during the Notice Period.
(b) Payment in Consideration of Release and Restrictive Covenants . If the Executives employment is terminated for the reasons described in Sections 7(a)(i) or 7(a)(ii), the Company shall provide the Executive with cash consideration in exchange for the Executives execution, and compliance with the terms, of the restrictive covenants and release of claims set forth in the separation agreement described in Section 7(c). The amount of such cash consideration shall be equal to the sum of the Executives annual base salary (as described in Section 5(a)) and the current target annual bonus (as described in Section 5(b)), in each case, as in effect immediately prior to the date of the Executives termination of employment, and subject to a maximum aggregate amount not exceeding the total amount of compensation (including base salary, Bonus Plan awards and the value of annual equity incentive awards granted) of the Executive during the last full fiscal year when the Executive was employed. Such consideration shall be payable in equal installments over a twelve month period following the date of such termination in accordance with the Companys payroll practices, subject to reduction for any applicable tax withholding and/or pursuant to any terms of the separation agreement described in Section 7(c).
(c) Separation Agreement and Release of Claims . As a condition of receiving any consideration for which the Executive otherwise qualifies under Section 7(b), the Executive agrees (i) to execute, deliver and not revoke, within thirty (30) days following the date of the Executives termination of employment, a separation agreement containing restrictive covenants running in favor of the Company and its affiliates, and a general release of the Company and its subsidiaries and their respective affiliates and their respective employees, officers, directors, owners and members from any and all claims, obligations and liabilities of any kind whatsoever, including, without limitation, those arising from or in connection with the Executives employment or termination of employment with the Company or any of its subsidiaries or affiliates or this Agreement (including, without limitation, civil rights claims), in such form as is requested by the Company, such separation agreement and general release to be delivered, and to have become fully irrevocable, on or before the end of such thirty (30)-day period, and (ii) not to apply for unemployment compensation chargeable to the Company during the period with respect to which the Executive is receiving such consideration. If such a general release described in clause (i) of
the immediately preceding sentence has not been executed and delivered and become irrevocable on or before the end of such thirty (30)-day period, no amounts or benefits under Section 7(b) shall be or become payable. To the extent that any payments or benefits to the Executive under Section 7(b) are subject to Section 409A of the Code and the Executives employment is terminated within 60 days of the end of a calendar year, payments of such amounts shall not be made until the calendar year following the year in which the Executives employment is terminated (but with the first payment being a lump sum payment covering all payment periods from the date of termination through the date of such first payment).
(d) No Additional Rights . The Executive acknowledges and agrees that, except as specifically described in this Section 7, all of the Executives rights to any compensation, benefits, bonuses or other payments from the Company and its subsidiaries and affiliates after termination of the Employment Term shall cease upon such termination.
(e) Offset . To the extent permitted by Section 409A of the Internal Revenue Code of 1986, as amended (the Code ), any consideration to which the Executive is otherwise entitled pursuant to this Section 7 shall be (i) reduced by amounts outstanding under any indebtedness, obligations or liabilities owed by the Executive to the Company; (ii) reduced and offset by any severance pay or benefits, or similar amounts, payable to the Executive due to his termination of employment under any labor, social or other governmental plan, program, law or policy, and should such other payments or benefits described in this clause be payable, payments under this Agreement shall be reduced accordingly or, alternatively, payments previously paid or provided under this Agreement will be treated as having been paid or provided to satisfy such other obligations.
(f) Resignation as Officer or Director . Upon a termination of employment, unless requested otherwise by the Company, the Executive shall resign each position (if any) that the Executive then holds as a director or officer of the Company or of any affiliates of the Company. The Executives execution of this Agreement shall be deemed the grant by the Executive to the officers of the Company of a limited power of attorney to sign in the Executives name and on the Executives behalf any such documentation as may be required to be executed solely for the limited purposes of effectuating such resignations.
(g) Definitions of Certain Terms . For purposes of this Agreement:
(i) Cause shall have the meaning given that term in the Companys Severance Plan for U.S. Officers and Executives, as such plan may be amended from time to time.
(ii) Disability shall mean a Permanent Disability as that term is defined in the Companys Severance Plan for U.S. Officers and Executives, as such plan may be amended from time to time.
(iii) Good Reason shall have the meaning given that term in the CIC Plan, as such plan may be amended from time to time and will only apply after the occurrence of a Change in Control, as defined in the CIC Plan.
(h) Equity Awards . The treatment of Executives outstanding equity awards will be governed by the applicable equity award agreements and other governing award and plan documents.
8. Notices . All notices, requests, demands, claims, consents and other communications which are required, permitted or otherwise delivered hereunder shall in every case be in writing and shall be deemed properly served if: (a) delivered personally, (b) sent by registered or certified mail, in all such cases with first class postage prepaid, return receipt requested, or (c) delivered by a recognized overnight courier service, to the parties at the addresses as set forth below:
If to the Company: Tyco Electronics Corporation
1050 Westlakes Drive
Berwyn, Pennsylvania 19312
Attention: Senior Vice President, Global Human Resources
If to the Executive: At the Executives residence address as maintained by the Company in the regular course of its business for payroll purposes.
or to such other address as shall be furnished in writing by either party to the other party; provided that such notice or change in address shall be effective only when actually received by the other party. Date of service of any such notices or other communications shall be: (a) the date such notice is personally delivered, (b) three days after the date of mailing if sent by certified or registered mail, or (c) one business day after date of delivery to the overnight courier if sent by overnight courier.
9. Section 409A.
(a) The intent of the parties is that payments and benefits under this Agreement comply with or be exempt from Section 409A of the Code and the regulations and guidance promulgated thereunder (collectively Code Section 409A ), and the Company shall have complete discretion to interpret and construe this Agreement and any associated documents in any manner that establishes an exemption from (or compliance with) the requirements of Code Section 409A. If for any reason, such as imprecision in drafting, any provision of this Agreement (or of any award of compensation, including, without limitation, equity compensation or benefits) does not accurately reflect its intended establishment of an exemption from (or compliance with) Code Section 409A, as demonstrated by consistent interpretations or other evidence of intent, such provision shall be considered ambiguous as to its exemption from (or compliance with) Code Section 409A and shall be interpreted by the Company in a manner consistent with such intent, as determined in the discretion of the Company.
(b) A termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of any amounts or benefits that are considered nonqualified deferred compensation under Code Section 409A upon or following a termination of employment unless such termination is also a separation from service within the meaning of Code Section 409A, and, for purposes of any such provision of this
Agreement, references to a termination, termination of employment or like terms shall mean such a separation from service. The determination of whether and when a separation from service has occurred for purposes of this Agreement shall be made in accordance with the presumptions set forth in Section 1.409A-1(h) of the Treasury Regulations.
(c) Any provision of this Agreement to the contrary notwithstanding, if at the time of the Executives separation from service, the Company determines that the Executive is a specified employee, within the meaning of Code Section 409A, then to the extent any payment or benefit that the Executive becomes entitled to under this Agreement on account of such separation from service would be considered nonqualified deferred compensation under Code Section 409A, such payment or benefit shall be paid or provided at the date which is the earlier of (i) six (6) months and one day after such separation from service, and (ii) the date of the Executives death (the Delay Period ). Upon the expiration of the Delay Period, all payments and benefits delayed pursuant to this Section 9(c) (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or provided to the Executive in a lump-sum with interest at the prime rate as published by The Wall Street Journal on the first business day of the Delay Period, and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein.
(d) Any reimbursements and in-kind benefits provided under this Agreement that constitute deferred compensation within the meaning of Code Section 409A shall be made or provided in accordance with the requirements of Code Section 409A, including, without limitation, that (i) in no event shall any fees, expenses or other amounts eligible to be reimbursed by the Company under this Agreement be paid later than the last day of the calendar year next following the calendar year in which the applicable fees, expenses or other amounts were incurred; (ii) the amount of expenses eligible for reimbursement, or in-kind benefits that the Company is obligated to pay or provide, in any given calendar year shall not affect the expenses that the Company is obligated to reimburse, or the in-kind benefits that the Company is obligated to pay or provide, in any other calendar year, provided that the foregoing clause (ii) shall not be violated with regard to expenses reimbursed under any arrangement covered by Code Section 105(b) solely because such expenses are subject to a limit related to the period the arrangement is in effect; (iii) the Executives right to have the Company pay or provide such reimbursements and in-kind benefits may not be liquidated or exchanged for any other benefit; and (iv) in no event shall the Companys obligations to make such reimbursements or to provide such in-kind benefits apply later than the Executives remaining lifetime (or if longer, through the sixth (6th) anniversary of the Commencement Date).
(e) For purposes of Code Section 409A, the Executives right to receive any installment payments shall be treated as a right to receive a series of separate and distinct payments. Whenever a payment under this Agreement specifies a payment period with reference to a number of days (for example, payment shall be made within thirty (30) days following the date of termination), the actual date of payment within the specified period shall be within the sole discretion of the Company. In no event may the Executive, directly or indirectly, designate the calendar year of any payment to be made under this Agreement, to the extent such payment is subject to Code Section 409A.
(f) The Company makes no representation or warranty and shall have no liability to the Executive or any other person if any provisions of this Agreement are determined
to constitute deferred compensation subject to Code Section 409A but do not satisfy an exemption from, or the conditions of, Code Section 409A.
10. Say on Pay Limitations.
(a) Say on Pay Requirements. Under Swiss say and pay law, the maximum aggregate amount of compensation of the executive management must be approved by the General Meeting of Shareholders of TE Connectivity Ltd. (the GM ) as a public Swiss company. At each GM, the Company presents to the Companys shareholders for approval the maximum aggregate amount of compensation that can be paid to the executive management in the next succeeding fiscal year. If the GM does not approve the maximum aggregate amount of compensation of the executive management, the Company will determine whether and to what extent the Executives compensation in that fiscal year will be affected. If the Executives compensation is affected, this 2015 Agreement continues to be effective subject to paragraph (b) below.
(b) Non-Approval by GM. If the GM refuses to approve the proposed maximum aggregate compensation of the executive management, and Executives compensation is subject to the approval of the GM, the Executive by signing this 2015 Agreement (i) agrees to accept a modification - as determined by the Company - of the compensation and benefits under this 2015 Agreement, and (ii) if the Company decides to pay compensation on a provisional basis in view of what a following GM may approve, the Executive will have to repay any amount of compensation received but subsequently not approved by any following GM.
11. General.
(a) Governing Law . This Agreement and the legal relations thus created between the parties hereto shall be governed by, and construed in accordance with, the internal laws of the Commonwealth of Pennsylvania, without giving effect to any choice of law or conflict of law provision or rule (whether of the Commonwealth of Pennsylvania or any other jurisdiction) that would cause the application of the law of any jurisdiction other than the Commonwealth of Pennsylvania. The parties hereto acknowledge and agree that this Agreement was executed and delivered in the Commonwealth of Pennsylvania.
(b) Construction and Severability . Whenever possible, each provision of this Agreement shall be construed and interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by, or invalid, illegal or unenforceable in any respect under, any applicable law or rule in any jurisdiction, such prohibition, invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any other jurisdiction, and the parties undertake to implement all efforts which are necessary, desirable and sufficient to amend, supplement or substitute all and any such prohibited, invalid, illegal or unenforceable provisions with enforceable and valid provisions in such jurisdiction which would produce as nearly as may be possible the result previously intended by the parties without renegotiation of any material terms and conditions stipulated herein.
(c) Cooperation . During the Employment Term and thereafter, the Executive shall cooperate with the Company and be reasonably available to the Company with respect to continuing and/or future matters related to the Executives employment period with the Company and/or its subsidiaries or affiliates, whether such matters are business-related, legal, regulatory or otherwise (including, without limitation, the Executive appearing at the Companys request to give testimony without requiring service of a subpoena or other legal process, volunteering to the
Company all pertinent information and turning over to the Company all relevant documents which are or may come into the Executives possession). Following the Employment Term, the Company shall reimburse the Executive for all reasonable out of pocket expenses incurred by the Executive in rendering such services that are approved by the Company. In addition, if more than an incidental cooperation is required at any time after the termination of the Executives employment, the Executive shall be paid (other than for the time of actual testimony) a per day fee based on his base salary described in Section 5(a) at the time of such termination divided by 225.
(d) Successors and Assigns . This Agreement shall bind and inure to the benefit of and be enforceable by the Company and its successors and assigns and the Executive and the Executives heirs, executors, administrators, and successors; provided that the services provided by the Executive under this Agreement are of a personal nature, and rights and obligations of the Executive under this Agreement shall not be assignable or delegable, except for any death payments otherwise due the Executive, which shall be payable to the estate of the Executive; provided further the Company may assign this Agreement to, and all rights hereunder shall inure to the benefit of, any subsidiary or affiliate of the Company or any person, firm or corporation resulting from the reorganization of the Company or succeeding to the business or assets of the Company by purchase, merger, consolidation or otherwise; and provided further that in the event of the Executives death, any unpaid amount due to the Executive under this Agreement shall be paid to his estate.
(e) Executives Representations . The Executive hereby represents and warrants to the Company that: (i) the execution, delivery and performance of this Agreement by the Executive do not and shall not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which the Executive is a party or by which the Executive is bound; (ii) the Executive is not a party to or bound by any employment agreement, noncompetition or nonsolicitation agreement or confidentiality agreement with any other person or entity besides the Company and (iii) upon the execution and delivery of this Agreement by the Company, this Agreement shall be the valid and binding obligation of the Executive, enforceable in accordance with its terms. THE EXECUTIVE HEREBY ACKNOWLEDGES AND REPRESENTS THAT THE EXECUTIVE HAS CONSULTED WITH INDEPENDENT LEGAL COUNSEL REGARDING THE EXECUTIVES RIGHTS AND OBLIGATIONS UNDER THIS AGREEMENT, TO THE EXTENT DETERMINED NECESSARY OR APPROPRIATE BY THE EXECUTIVE, AND THAT THE EXECUTIVE FULLY UNDERSTANDS THE TERMS AND CONDITIONS CONTAINED HEREIN.
(f) Compliance with Rules and Policies . The Executive shall perform all services in accordance with the policies, procedures and rules established by the Company and the Board, including, but not limited to, the Companys Guide to Ethical Conduct. In addition, the Executive shall comply with all laws, rules and regulations that are generally applicable to the Company or its subsidiaries or affiliates and their respective employees, directors and officers.
(g) Withholding Taxes . All amounts payable hereunder shall be subject to the withholding of all applicable taxes and deductions required by any applicable law.
(h) Entire Agreement . This Agreement constitutes the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and terminates
and supersedes any and all prior agreements, understandings and representations, whether written or oral, by or between the parties hereto or their affiliates which may have related to the subject matter hereof in any way, including, without limitation, and any other existing employment agreement or change of control agreement, which is hereby terminated and cancelled and of no further force or effect as of the Commencement Date, without the payment of any additional consideration by or to either of the parties hereto; provided, however, that the agreements referenced in Section 6, any agreement between the parties addressing the terms and conditions of Executives expatriate assignment or relocation, as applicable, and any agreement issued under the terms of any compensation or employee benefit plan described herein or in which the Executive is otherwise a participant shall not be affected by this Section 10(h). Notwithstanding any provision of this Agreement to the contrary, neither the assignment of the Executive to a different Reporting Officer due to a reorganization or an internal restructuring of the Company or its subsidiaries or affiliates nor a change in the Reporting Officers title shall constitute a modification or a breach of this Agreement.
(i) Duration . Notwithstanding the Employment Term hereunder, this Agreement shall continue for so long as any obligations remain under this Agreement.
(j) Survival . The covenants set forth in the agreements referenced in Section 6 and the covenants set forth in Section 10(c) of this Agreement shall survive and shall continue to be binding upon the Executive notwithstanding the termination of this Agreement for any reason whatsoever.
(k) Amendment and Waiver . The provisions of this Agreement may be amended or waived only with the prior written consent of the Company and the Executive, and no course of conduct or course of dealing or failure or delay by any party hereto in enforcing or exercising any of the provisions of this Agreement (including, without limitation, the Companys right to terminate the Employment Term for Cause) shall affect the validity, binding effect or enforceability of this Agreement or be deemed to be an implied waiver of any similar or dissimilar requirement, provision or condition of this Agreement at the same or any prior or subsequent time. Pursuit by either party of any available remedy, either in law or equity, or any action of any kind, does not constitute waiver of any other remedy or action. Such remedies and actions are cumulative and not exclusive.
(l) Counterparts . This Agreement may be executed in two or more counterparts, all of which taken together shall constitute one instrument.
(m) Section References . Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. The words Section and paragraph herein shall refer to provisions of this Agreement unless expressly indicated otherwise.
(n) No Strict Construction . The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring either party hereto by virtue of the authorship of any of the provisions of this Agreement.
(o) Time of the Essence; Computation of Time . Time is of the essence for each and every provision of this Agreement. Whenever the last day for the exercise of any privilege or the discharge or any duty hereunder shall fall upon a Saturday, Sunday, or any date on which banks in Berwyn, Pennsylvania are authorized to be closed, the party having such privilege or duty may exercise such privilege or discharge such duty on the next succeeding day which is a regular business day.
(p) No Third Party Beneficiaries . Nothing in this Agreement, express or implied, is intended or shall be construed to give any person other than the parties to this Agreement and their respective heirs, executors, administrators, successors or permitted assigns any legal or equitable right, remedy or claim under or in respect of any agreement or any provision contained herein.
(q) Forfeiture and Clawback . The Executive acknowledges and agrees that, notwithstanding anything in this Agreement to the contrary, this Agreement and all amounts payable hereunder shall be subject to any applicable compensation, clawback and recoupment policies implemented by the Board, as may be in effect from time to time.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have hereunto executed this Agreement as of the day and year first written above.
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TYCO ELECTRONICS CORPORATION |
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Date: |
By: |
/s/ Harold G. Barksdale |
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Name: |
Harold G. Barksdale |
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Title: |
Corporate Secretary |
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Kevin N. Rock |
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Date: 12/15/2015 |
/s/ Kevin N. Rock |
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Terrence R. Curtin, certify that:
Date:
January 24, 2019
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/s/ TERRENCE R. CURTIN
Terrence R. Curtin Chief Executive Officer |
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Heath A. Mitts, certify that:
Date:
January 24, 2019
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/s/ HEATH A. MITTS
Heath A. Mitts Executive Vice President and Chief Financial Officer |
TE CONNECTIVITY LTD.
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned officers of TE Connectivity Ltd. (the "Company") hereby certify to their knowledge that the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 28, 2018 (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ TERRENCE R. CURTIN
Terrence R. Curtin Chief Executive Officer |
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January 24, 2019 |
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/s/ HEATH A. MITTS Heath A. Mitts Executive Vice President and Chief Financial Officer |
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January 24, 2019 |
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