TE Connectivity Ltd. - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 28, 2019
or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

001-33260

(Commission File Number)

TE CONNECTIVITY LTD.

(Exact name of registrant as specified in its charter)

Switzerland
(Jurisdiction of Incorporation)

98-0518048
(I.R.S. Employer Identification No.)

Rheinstrasse 20, CH-8200 Schaffhausen, Switzerland

(Address of principal executive offices)

+41 (0)52 633 66 61

(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol	Name of each exchange on which registered
Common Shares, Par Value CHF 0.57	TEL	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of common shares outstanding as of July 19, 2019 was 335,935,258.

Table of Contents

TE CONNECTIVITY LTD.

INDEX TO FORM 10-Q


		Page
Part I.	Financial Information
Item 1.	Financial Statements	1
	Condensed Consolidated Statements of Operations for the Quarters and Nine Months Ended June 28, 2019 and June 29, 2018 (unaudited)	1
	Condensed Consolidated Statements of Comprehensive Income for the Quarters and Nine Months Ended June 28, 2019 and June 29, 2018 (unaudited)	2
	Condensed Consolidated Balance Sheets as of June 28, 2019 and September 28, 2018 (unaudited)	3
	Condensed Consolidated Statements of Shareholders’ Equity for the Quarters and Nine Months Ended June 28, 2019 and June 29, 2018 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 28, 2019 and June 29, 2018 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	46

Part II.	Other Information
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 6.	Exhibits	48
Signatures		49

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TE CONNECTIVITY LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


	For the				For the
	Quarters Ended				Nine Months Ended
	June 28,		June 29,		June 28,		June 29,
	2019		2018		2019		2018
	(in millions, except per share data)
Net sales	$	3,389	$	3,581	$	10,148	$	10,479
Cost of sales		2,279		2,394		6,806		6,916
Gross margin		1,110		1,187		3,342		3,563
Selling, general, and administrative expenses		356		394		1,118		1,180
Research, development, and engineering expenses		158		171		485		509
Acquisition and integration costs		9		4		21		9
Restructuring and other charges, net		67		64		184		104
Operating income		520		554		1,534		1,761
Interest income		4		3		13		11
Interest expense		(13)		(26)		(55)		(80)
Other income (expense), net		2		(1)		2		2
Income from continuing operations before income taxes		513		530		1,494		1,694
Income tax (expense) benefit		245		(77)		76		(784)
Income from continuing operations		758		453		1,570		910
Income (loss) from discontinued operations, net of income taxes		(1)		1		(98)		(6)
Net income	$	757	$	454	$	1,472	$	904

Basic earnings per share:
Income from continuing operations	$	2.25	$	1.30	$	4.63	$	2.59
Income (loss) from discontinued operations		—		—		(0.29)		(0.02)
Net income		2.25		1.30		4.34		2.58

Diluted earnings per share:
Income from continuing operations	$	2.24	$	1.29	$	4.60	$	2.57
Income (loss) from discontinued operations		—		—		(0.29)		(0.02)
Net income		2.23		1.29		4.32		2.55

Weighted-average number of shares outstanding:
Basic		337		349		339		351
Diluted		339		352		341		354

See Notes to Condensed Consolidated Financial Statements.

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TE CONNECTIVITY LTD.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	For the				For the
	Quarters Ended				Nine Months Ended
	June 28,		June 29,		June 28,		June 29,
	2019		2018		2019		2018
	(in millions)
Net income	$	757	$	454	$	1,472	$	904
Other comprehensive income (loss):
Currency translation		(48)		(244)		35		(63)
Adjustments to unrecognized pension and postretirement benefit costs, net of income taxes		7		8		19		23
Gains (losses) on cash flow hedges, net of income taxes		—		(14)		51		(61)
Other comprehensive income (loss)		(41)		(250)		105		(101)
Comprehensive income	$	716	$	204	$	1,577	$	803

See Notes to Condensed Consolidated Financial Statements.

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TE CONNECTIVITY LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	June 28,		September 28,
	2019		2018
	(in millions, except share
	data)
Assets
Current assets:
Cash and cash equivalents	$	546	$	848
Accounts receivable, net of allowance for doubtful accounts of $25 and $22, respectively		2,463		2,361
Inventories		1,961		1,857
Prepaid expenses and other current assets		452		661
Assets held for sale		—		472
Total current assets		5,422		6,199
Property, plant, and equipment, net		3,636		3,497
Goodwill		5,800		5,684
Intangible assets, net		1,664		1,704
Deferred income taxes		2,845		2,144
Other assets		381		1,158
Total assets	$	19,748	$	20,386
Liabilities and shareholders' equity
Current liabilities:
Short-term debt	$	602	$	963
Accounts payable		1,438		1,548
Accrued and other current liabilities		1,654		1,711
Liabilities held for sale		—		188
Total current liabilities		3,694		4,410
Long-term debt		3,434		3,037
Long-term pension and postretirement liabilities		1,094		1,102
Deferred income taxes		203		207
Income taxes		240		312
Other liabilities		461		487
Total liabilities		9,126		9,555
Commitments and contingencies (Note 9)
Shareholders' equity:
Common shares, CHF 0.57 par value, 350,951,381 shares authorized and issued,
and 357,069,981 shares authorized and issued, respectively		154		157
Accumulated earnings		11,893		12,114
Treasury shares, at cost, 14,541,059 and 12,279,603 shares, respectively		(1,224)		(1,134)
Accumulated other comprehensive loss		(201)		(306)
Total shareholders’ equity		10,622		10,831
Total liabilities and shareholders’ equity	$	19,748	$	20,386

See Notes to Condensed Consolidated Financial Statements.

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TE CONNECTIVITY LTD.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)


	For the Quarter Ended June 28, 2019
											Accumulated
											Other		Total
	Common Shares			Treasury Shares			Contributed		Accumulated		Comprehensive		Shareholders'
	Shares	Amount		Shares	Amount		Surplus		Earnings		Loss		Equity
	(in millions)
Balance at March 29, 2019	357	$	157	(20)	$	(1,713)	$	—	$	11,710	$	(160)	$	9,994
Net income	—		—	—		—		—		757		—		757
Other comprehensive loss	—		—	—		—		—		—		(41)		(41)
Share-based compensation expense	—		—	—		—		18		—		—		18
Dividends	—		—	—		—		—		1		—		1
Exercise of share options	—		—	—		38		—		—		—		38
Restricted share award vestings and other activity	—		—	—		30		(18)		(5)		—		7
Repurchase of common shares	—		—	(1)		(152)		—		—		—		(152)
Cancellation of treasury shares	(6)		(3)	6		573		—		(570)		—		—
Balance at June 28, 2019	351	$	154	(15)	$	(1,224)	$	—	$	11,893	$	(201)	$	10,622


	For the Nine Months Ended June 28, 2019
											Accumulated
											Other		Total
	Common Shares			Treasury Shares			Contributed		Accumulated		Comprehensive		Shareholders'
	Shares	Amount		Shares	Amount		Surplus		Earnings		Loss		Equity
	(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	—		—	—		—		—		1,472		—		1,472
Other comprehensive income	—		—	—		—		—		—		105		105
Share-based compensation expense	—		—	—		—		57		—		—		57
Dividends	—		—	—		—		—		(615)		—		(615)
Exercise of share options	—		—	—		55		—		—		—		55
Restricted share award vestings and other activity	—		—	1		118		(57)		(65)		—		(4)
Repurchase of common shares	—		—	(10)		(836)		—		—		—		(836)
Cancellation of treasury shares	(6)		(3)	6		573		—		(570)		—		—
Balance at June 28, 2019	351	$	154	(15)	$	(1,224)	$	—	$	11,893	$	(201)	$	10,622

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TE CONNECTIVITY LTD.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(Continued)


	For the Quarter Ended June 29, 2018
											Accumulated
											Other		Total
	Common Shares			Treasury Shares			Contributed		Accumulated		Comprehensive		Shareholders'
	Shares	Amount		Shares	Amount		Surplus		Earnings		Loss		Equity
	(in millions)
Balance at March 30, 2018	357	$	157	(6)	$	(585)	$	—	$	9,957	$	(49)	$	9,480
Net income	—		—	—		—		—		454		—		454
Other comprehensive loss	—		—	—		—		—		—		(250)		(250)
Share-based compensation expense	—		—	—		—		22		—		—		22
Dividends	—		—	—		—		—		4		—		4
Exercise of share options	—		—	—		2		—		—		—		2
Restricted share award vestings and other activity	—		—	(1)		14		(22)		17		—		9
Repurchase of common shares	—		—	(2)		(229)		—		—		—		(229)
Balance at June 29, 2018	357	$	157	(9)	$	(798)	$	—	$	10,432	$	(299)	$	9,492


	For the Nine Months Ended June 29, 2018
											Accumulated
											Other		Total
	Common Shares			Treasury Shares			Contributed		Accumulated		Comprehensive		Shareholders'
	Shares	Amount		Shares	Amount		Surplus		Earnings		Loss		Equity
	(in millions)
Balance at September 29, 2017	357	$	157	(5)	$	(421)	$	—	$	10,175	$	(160)	$	9,751
Adoption of ASU No. 2018-02	—		—	—		—		—		38		(38)		—
Net income	—		—	—		—		—		904		—		904
Other comprehensive loss	—		—	—		—		—		—		(101)		(101)
Share-based compensation expense	—		—	—		—		74		—		—		74
Dividends	—		—	—		—		—		(613)		—		(613)
Exercise of share options	—		—	2		96		—		—		—		96
Restricted share award vestings and other activity	—		—	—		139		(74)		(72)		—		(7)
Repurchase of common shares	—		—	(6)		(612)		—		—		—		(612)
Balance at June 29, 2018	357	$	157	(9)	$	(798)	$	—	$	10,432	$	(299)	$	9,492

See Notes to Condensed Consolidated Financial Statements.

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TE CONNECTIVITY LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	For the
	Nine Months Ended
	June 28,		June 29,
	2019		2018
	(in millions)
Cash flows from operating activities:
Net income	$	1,472	$	904
Loss from discontinued operations, net of income taxes		98		6
Income from continuing operations		1,570		910
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation and amortization		515		496
Deferred income taxes		(290)		442
Provision for losses on accounts receivable and inventories		36		29
Share-based compensation expense		56		71
Other		26		(12)
Changes in assets and liabilities, net of the effects of acquisitions and divestitures:
Accounts receivable, net		(105)		(379)
Inventories		(59)		(217)
Prepaid expenses and other current assets		109		(50)
Accounts payable		(86)		177
Accrued and other current liabilities		(147)		(143)
Income taxes		(63)		24
Other		13		31
Net cash provided by continuing operating activities		1,575		1,379
Net cash provided by (used in) discontinued operating activities		(31)		148
Net cash provided by operating activities		1,544		1,527
Cash flows from investing activities:
Capital expenditures		(570)		(673)
Proceeds from sale of property, plant, and equipment		16		19
Acquisition of businesses, net of cash acquired		(283)		—
Proceeds from divestiture of discontinued operation, net of cash retained by sold operation		297		—
Other		3		(8)
Net cash used in continuing investing activities		(537)		(662)
Net cash used in discontinued investing activities		(2)		(13)
Net cash used in investing activities		(539)		(675)
Cash flows from financing activities:
Net increase (decrease) in commercial paper		(270)		271
Proceeds from issuance of debt		746		119
Repayment of debt		(441)		(708)
Proceeds from exercise of share options		55		96
Repurchase of common shares		(913)		(611)
Payment of common share dividends to shareholders		(454)		(435)
Transfers (to) from discontinued operations		(33)		135
Other		(32)		(34)
Net cash used in continuing financing activities		(1,342)		(1,167)
Net cash provided by (used in) discontinued financing activities		33		(135)
Net cash used in financing activities		(1,309)		(1,302)
Effect of currency translation on cash		2		2
Net decrease in cash, cash equivalents, and restricted cash		(302)		(448)
Cash, cash equivalents, and restricted cash at beginning of period		848		1,218
Cash, cash equivalents, and restricted cash at end of period	$	546	$	770

See Notes to Condensed Consolidated Financial Statements.

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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 June 28, 2019. See Note 16 for net sales disaggregated by industry end market and geographic region which is summarized by segment and that we consider meaningful to depict the nature, amount, timing, and uncertainty of revenue and cash flows affected by economic factors.

We generally warrant that our products will conform to our, or mutually agreed to, specifications and that our products will be free from material defects in materials and workmanship for a limited time. We limit our warranty to the replacement or repair of defective parts, or a refund or credit of the price of the defective product. We do not account for these warranties as separate performance obligations.

Although products are generally sold at fixed prices, certain distributors and customers receive incentives or awards, such as sales rebates, return allowances, scrap allowances, and other rights, which are accounted for as variable consideration. We estimate these amounts in the same period revenue is recognized based on the expected value to be provided to customers and reduce revenue accordingly. Our estimates of variable consideration and ultimate determination of

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TE CONNECTIVITY LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

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 Issued Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02 which codified ASC 842, Leases. This guidance, as subsequently amended, requires lessees to recognize a lease liability and a right-of-use asset for most leases and is effective for us in the first quarter of fiscal 2020. We are currently in the process of updating policies, internal controls, financial statement disclosures, and systems to incorporate the impact of the new standard in our financial reporting processes. We intend to adopt the standard using the optional transition method permitted by ASU No. 2018-11, which allows for application of the standard at the adoption date and no restatement of comparative periods. We expect that adoption will likely have a material impact on our Condensed Consolidated Balance Sheet; however, we currently do not expect adoption to have a material impact on our results of operations or cash flows. We believe that we are following an appropriate timeline to allow for the proper recognition, reporting, and disclosure of leases upon adoption of ASC 842 at the beginning of fiscal 2020.

Recently Adopted Accounting Pronouncements

In August 2017, the FASB issued ASU No. 2017-12, an update to ASC 815, Derivatives and Hedging. The update improves and simplifies hedge accounting and related disclosures. We elected to early adopt this update, which did not have a material impact on our 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.

2. Restructuring and Other Charges, Net

Net restructuring and other charges consisted of the following:


	For the				For the
	Quarters Ended				Nine Months Ended
	June 28,		June 29,		June 28,		June 29,
	2019		2018		2019		2018
	(in millions)
Restructuring charges, net	$	67	$	74	$	184	$	118
Other charges (credits), net		—		(10)		—		(14)
Restructuring and other charges, net	$	67	$	64	$	184	$	104

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TE CONNECTIVITY LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

Net restructuring charges by segment were as follows:


	For the				For the
	Quarters Ended				Nine Months Ended
	June 28,		June 29,		June 28,		June 29,
	2019		2018		2019		2018
	(in millions)
Transportation Solutions	$	53	$	18	$	98	$	23
Industrial Solutions		8		49		60		79
Communications Solutions		6		7		26		16
Restructuring charges, net	$	67	$	74	$	184	$	118

Activity in our restructuring reserves was as follows:


	Balance at												Balance at
	September 28,				Changes in		Cash		Non-Cash		Currency		June 28,
	2018		Charges		Estimate		Payments		Items		Translation		2019
	(in millions)
Fiscal 2019 Actions:
Employee severance	$	—	$	177	$	—	$	(33)	$	(2)	$	1	$	143
Facility and other exit costs		—		1		—		(1)		—		—		—
Property, plant, and equipment		—		1		—		—		(1)		—		—
Total		—		179		—		(34)		(3)		1		143
Fiscal 2018 Actions:
Employee severance		114		2		—		(45)		—		(2)		69
Facility and other exit costs		4		3		—		(3)		—		—		4
Property, plant, and equipment		—		2		(2)		—		—		—		—
Total		118		7		(2)		(48)		—		(2)		73
Pre-Fiscal 2018 Actions:
Employee severance		49		7		(7)		(20)		—		(2)		27
Facility and other exit costs		—		2		—		(2)		—		—		—
Property, plant, and equipment		—		1		(3)		—		2		—		—
Total		49		10		(10)		(22)		2		(2)		27
Total Activity	$	167	$	196	$	(12)	$	(104)	$	(1)	$	(3)	$	243

Fiscal 2019 Actions

During fiscal 2019, we initiated a restructuring program associated with footprint consolidation and structural improvements impacting all segments. In connection with this program, during the nine months ended June 28, 2019, we recorded restructuring charges of $179 million. We expect to complete all restructuring actions commenced during the nine months ended June 28, 2019 by the end of fiscal 2021 and to incur additional charges of approximately $25 million related primarily to employee severance in the Transportation Solutions and Industrial Solutions segments.

Fiscal 2018 Actions

During fiscal 2018, we initiated a restructuring program associated with footprint consolidation and structural improvements primarily impacting the Industrial Solutions and Transportation Solutions segments. In connection with this program, during the nine months ended June 28, 2019 and June 29, 2018, we recorded net restructuring charges of $5 million and $109 million, respectively. We expect to complete all restructuring actions commenced during fiscal 2018 by the end of fiscal 2020 and anticipate that any additional charges will be insignificant.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

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 nine months ended June 29, 2018, we recorded net restructuring charges of $9 million 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:


	June 28,		September 28,
	2019		2018
	(in millions)
Accrued and other current liabilities	$	214	$	141
Other liabilities		29		26
Restructuring reserves	$	243	$	167

3. Discontinued Operations

During the nine months ended June 28, 2019, we sold our Subsea Communications (“SubCom”) business for net cash proceeds of $297 million and incurred a pre-tax loss on sale of $86 million, related primarily to the recognition of cumulative translation adjustment losses of $67 million and the guarantee liabilities discussed below. The SubCom business met the held for sale and discontinued operations criteria and was reported as such in all periods presented on the Condensed Consolidated Financial Statements. Prior to reclassification to discontinued operations, the SubCom business was included in the Communications Solutions segment.

In connection with the sale, we contractually agreed to continue to honor performance guarantees and letters of credit related to the SubCom business’ projects that existed as of the date of sale. These guarantees had a combined value of approximately $1.7 billion as of June 28, 2019 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. As of June 28, 2019, there were no such new performance guarantees outstanding. We have contractual recourse against the SubCom business if we are required to perform on any SubCom guarantees; however, based on historical experience, we do not anticipate having to perform.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

The following table presents the summarized components of income (loss) from discontinued operations, net of income taxes, for the SubCom business and prior divestitures:


		For the			For the
		Quarters Ended			Nine Months Ended
	June 28,		June 29,		June 28,		June 29,
	2019		2018		2019		2018
	(in millions)
Net sales	$	—	$	184	$	41	$	510
Cost of sales		—		(155)		(50)		(438)
Selling, general, and administrative expenses		(1)		(13)		(6)		(36)
Research, development, and engineering expenses		—		(10)		(3)		(30)
Restructuring and other charges, net		—		(1)		(3)		(5)
Pre-tax income (loss) from discontinued operations		(1)		5		(21)		1
Pre-tax loss on sale of discontinued operations		—		(1)		(86)		(2)
Income tax (expense) benefit		—		(3)		9		(5)
Income (loss) from discontinued operations, net of income taxes	$	(1)	$	1	$	(98)	$	(6)

The following table presents balance sheet information for assets and liabilities held for sale at September 28, 2018; there were no such balances at June 28, 2019:


	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

4. Acquisitions

During the nine months ended June 28, 2019, we acquired three businesses for a combined cash purchase price of $296 million, net of cash acquired. The acquisitions were reported as part of our Transportation Solutions segment from the date of acquisition.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

5. Inventories

Inventories consisted of the following:


	June 28,		September 28,
	2019		2018
	(in millions)
Raw materials	$	285	$	276
Work in progress		785		656
Finished goods		891		925
Inventories	$	1,961	$	1,857

6. Goodwill

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


	Transportation		Industrial		Communications
	Solutions		Solutions		Solutions		Total
	(in millions)
September 28, 2018⁽¹⁾	$	1,993	$	3,104	$	587	$	5,684
Acquisitions		162		(13)		—		149
Currency translation		(12)		(18)		(3)		(33)
June 28, 2019⁽¹⁾	$	2,143	$	3,073	$	584	$	5,800

(1)	At June 28, 2019 and September 28, 2018, accumulated impairment losses for the Transportation Solutions, Industrial Solutions, and Communications Solutions segments were $2,191 million, $669 million, and $489 million, respectively.

During the nine months ended June 28, 2019, we recognized goodwill in the Transportation Solutions segment in connection with recent acquisitions. See Note 4 for additional information regarding acquisitions.

7. Intangible Assets, Net

Intangible assets consisted of the following:


	June 28, 2019						September 28, 2018
	Gross				Net		Gross				Net
	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
	Amount		Amortization		Amount		Amount		Amortization		Amount
	(in millions)
Customer relationships	$	1,536	$	(441)	$	1,095	$	1,468	$	(389)	$	1,079
Intellectual property		1,268		(715)		553		1,261		(653)		608
Other		34		(18)		16		33		(16)		17
Total	$	2,838	$	(1,174)	$	1,664	$	2,762	$	(1,058)	$	1,704

Intangible asset amortization expense was $45 million for the quarters ended June 28, 2019 and June 29, 2018 and $135 million for the nine months ended June 28, 2019 and June 29, 2018.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

At June 28, 2019, the aggregate amortization expense on intangible assets is expected to be as follows:


	(in millions)
Remainder of fiscal 2019	$	46
Fiscal 2020		181
Fiscal 2021		179
Fiscal 2022		178
Fiscal 2023		178
Fiscal 2024		147
Thereafter		755
Total	$	1,664

8. Debt

During the quarter ended June 28, 2019, Tyco Electronics Group S.A. (“TEGSA”), our 100%-owned subsidiary, issued €350 million aggregate principal amount of fixed-to-floating rate senior notes due June 2021. The fixed-to-floating rate senior notes bear interest at a rate of 0% until June 2020 and then at a rate of three-month Euro Interbank Offered Rate (“EURIBOR”) plus 0.30% per year until maturity. In June 2020, we may, at our option, redeem the fixed-to-floating rate senior notes, as a whole, at 100% of the principal amount. Also, during the nine months ended June 28, 2019, TEGSA issued $350 million aggregate principal amount of floating rate senior notes due June 2020. The floating rate senior notes bear interest at a rate of three-month London Interbank Offered Rate (“LIBOR”) plus 0.45% per year. The fixed-to-floating rate senior notes and floating rate senior notes are TEGSA’s unsecured senior obligations and rank equally in right of payment with all existing and any future senior indebtedness of TEGSA and senior to any subordinated indebtedness that TEGSA may incur.

During the nine months ended June 28, 2019, 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 June 28, 2019 or September 28, 2018.

As of September 28, 2018, TEGSA had $270 million of commercial paper outstanding at a weighted-average interest rate of 2.35%. TEGSA had no commercial paper outstanding at June 28, 2019.

The fair value of our debt, based on indicative valuations, was approximately $4,295 million and $4,149 million at June 28, 2019 and September 28, 2018, respectively.

9. 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

Environmental Matters

We are involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites. The ultimate cost of site cleanup is difficult to predict given the uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations, and alternative cleanup methods. As of June 28, 2019, 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 $18 million as the probable loss, which was the best estimate within this range. We believe that any potential payment of such estimated amounts will not have a material adverse effect on our results of operations, financial position, or cash flows.

Guarantees

In disposing of assets or businesses, we often provide representations, warranties, and/or indemnities to cover various risks including unknown damage to assets, environmental risks involved in the sale of real estate, liability for investigation and remediation of environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not expect that these uncertainties will have a material adverse effect on our results of operations, financial position, or cash flows.

At June 28, 2019, we had outstanding letters of credit, letters of guarantee, and surety bonds of $316 million.

We sold our SubCom business during the nine months ended June 28, 2019. In connection with the sale, we contractually agreed to honor certain performance guarantees and letters of credit related to the SubCom business. See Note 3 for additional information regarding these guarantees and the divestiture of the SubCom business.

10. 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 the 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, both counterparties to each contract are required to post cash collateral.

At June 28, 2019 and September 28, 2018, these cross-currency swap contracts were in liability positions of $36 million and $100 million, respectively, and were recorded in other liabilities on the Condensed Consolidated Balance Sheets. At June 28, 2019 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 these cross-currency swap contracts were as follows:


	For the				For the
	Quarters Ended				Nine Months Ended
	June 28,		June 29,		June 28,		June 29,
	2019		2018		2019		2018
	(in millions)
Gains (losses) recorded in other comprehensive income (loss)	$	10	$	7	$	42	$	(25)
Gains (losses) excluded from the hedging relationship⁽¹⁾		(16)		64		22		14

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

Hedge of Net Investment

We hedge our net investment in certain foreign operations using intercompany loans and external borrowings denominated in the same currencies. The aggregate notional value of these hedges was $3,202 million and $4,064 million at June 28, 2019 and September 28, 2018, respectively.

During fiscal 2019, we expanded our cross-currency swap program to hedge our net investment in certain foreign operations. The aggregate notional value of the fiscal 2019 contracts was $1,901 million at June 28, 2019. Under the terms of these contracts, we receive interest in U.S. dollars at a weighted-average rate of 2.96% per annum and pay no interest. Upon the maturity of these contracts at various dates through fiscal 2023, we will pay the notional value of the contracts in the designated foreign currencies and receive U.S. dollars from our counterparties.

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


		For the			For the
		Quarters Ended			Nine Months Ended
	June 28,		June 29,		June 28,		June 29,
	2019		2018		2019		2018
	(in millions)
Foreign currency exchange gains (losses) on intercompany loans and external borrowings⁽¹⁾	$	(58)	$	153	$	54	$	8
Gains (losses) on cross-currency swap contracts designated as hedges of net investment⁽²⁾		(20)		—		17		—

(1)	Foreign currency exchange gains and losses on intercompany loans and external borrowings are recorded as currency translation, a component of accumulated other comprehensive income (loss), and are offset by changes attributable to the translation of the net investment.

(2)	Gains and losses on cross-currency swap contracts designated as hedges of net investment are recorded as currency translation.

11. 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				For the
	Quarters Ended				Quarters Ended
	June 28,		June 29,		June 28,		June 29,
	2019		2018		2019		2018
	(in millions)
Service cost	$	12	$	12	$	4	$	3
Interest cost		11		10		11		11
Expected return on plan assets		(16)		(18)		(14)		(15)
Amortization of net actuarial loss		6		7		4		6
Amortization of prior service credit		(2)		(2)		—		—
Net periodic pension benefit cost	$	11	$	9	$	5	$	5

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)


	Non-U.S. Plans				U.S. Plans
	For the				For the
	Nine Months Ended				Nine Months Ended
	June 28,		June 29,		June 28,		June 29,
	2019		2018		2019		2018
	(in millions)
Service cost	$	36	$	35	$	10	$	10
Interest cost		32		31		34		33
Expected return on plan assets		(48)		(52)		(43)		(45)
Amortization of net actuarial loss		18		18		13		17
Amortization of prior service credit		(6)		(5)		—		—
Net periodic pension benefit cost	$	32	$	27	$	14	$	15

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.

During the nine months ended June 28, 2019, we contributed $29 million to our non-U.S. pension plans.

12. Income Taxes

We recorded an income tax benefit of $245 million and income tax expense of $77 million for the quarters ended June 28, 2019 and June 29, 2018, respectively. The income tax benefit for the quarter ended June 28, 2019 included a $214 million income tax benefit related to the tax impacts of certain measures of the Switzerland Federal Act on Tax Reform and AHV Financing (“Swiss Tax Reform”) and a $93 million income tax benefit related to the effective settlement of a tax audit in a non-U.S. jurisdiction. See “Swiss Tax Reform” below for additional information. The income tax expense for the quarter ended June 29, 2018 included a $17 million income tax benefit resulting from lapses of statutes of limitations in the U.S. and certain non-U.S. jurisdictions.

We recorded an income tax benefit of $76 million and income tax expense of $784 million for the nine months ended June 28, 2019 and June 29, 2018, respectively. The income tax benefit for the nine months ended June 28, 2019 included a $214 million income tax benefit related to the tax impacts of certain measures of Swiss Tax Reform, a $93 million income tax benefit related to the effective settlement of a tax audit in a non-U.S. jurisdiction, and $15 million of income tax expense associated with the tax impacts of certain legal entity restructurings and intercompany transactions. The income tax expense for the nine months ended June 29, 2018 included $567 million of income tax expense related to the tax impacts of the Tax Cuts and Jobs Act (the “Act”), a $61 million net income tax benefit related to certain legal entity restructurings, and a $34 million income tax benefit resulting from lapses of statutes of limitations in the U.S. and certain non-U.S. jurisdictions. 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 income 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 June 28, 2019 and September 28, 2018, we had $40 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. During the nine months ended June 28, 2019, we recognized $17 million of income tax benefit related to interest and penalties on the Condensed Consolidated Statement of Operations.

Although it is difficult to predict the timing or results of our worldwide examinations, we estimate that approximately $100 million of unrecognized income tax benefits, excluding the impact relating to accrued interest and penalties, could be resolved within the next twelve months.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

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 June 28, 2019.

Swiss Tax Reform

Swiss Parliament approved the Federal Act on Tax Reform and AHV Financing in September 2018, and it was approved by public vote on May 19, 2019. Swiss Tax Reform eliminates certain preferential tax items at both the federal and cantonal levels. In addition, the cantons will implement new tax rates. The federal provisions of Swiss Tax Reform are expected to be enacted into law in the quarter ending September 27, 2019 and the cantons will implement thereafter.

In reaction to the public approval of Swiss Tax Reform, on May 24, 2019 the federal tax authority issued guidance abolishing certain interest deductions effective January 1, 2020. As a result of this measure, during the quarter ended June 28, 2019, we recorded a $214 million income tax benefit related primarily to the reduction to the valuation allowance for deferred tax assets. Based on our forecast of taxable income, reflecting the abolishment of certain interest deductions, we believe it is more likely than not that additional deferred tax assets for tax loss carryforwards in Switzerland will be realized in the future.

We are currently assessing the impacts of the federal provisions and subsequent cantonal implementation, including reductions in tax rates. We will reflect the impacts of the remaining measures on our Condensed Consolidated Financial Statements when enacted. Upon enactment at the cantonal level, which is expected to occur in the quarter ending December 27, 2019, we expect to recognize approximately $300 million of income tax expense related to the write-down of certain deferred tax assets to the expected lower tax rates.

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. As a result of subsequent transactions, Tyco International and Covidien now operate as part of Johnson Controls International plc and Medtronic plc, respectively. We have substantially settled all U.S. federal income tax matters with the Internal Revenue Service 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.

13. Earnings Per Share

The weighted-average number of shares outstanding used in the computations of basic and diluted earnings per share were as follows:


	For the		For the
	Quarters Ended		Nine Months Ended
	June 28,	June 29,	June 28,	June 29,
	2019	2018	2019	2018
	(in millions)
Basic	337	349	339	351
Dilutive impact of share-based compensation arrangements	2	3	2	3
Diluted	339	352	341	354

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

The following share options were not included in the computation of diluted earnings per share because the instruments’ underlying exercise prices were greater than the average market prices of our common shares and inclusion would be antidilutive:


	For the		For the
	Quarters Ended		Nine Months Ended
	June 28,	June 29,	June 28,	June 29,
	2019	2018	2019	2018
	(in millions)
Antidilutive share options	1	—	1	—

14. Shareholders’ Equity

Common Shares Held in Treasury

In March 2019, our shareholders approved the cancellation of 6 million shares purchased under our share repurchase program during the period beginning September 30, 2017 and ending September 28, 2018. The capital reduction by cancellation of these shares was subject to a notice period and filing with the commercial register in Switzerland and became effective in May 2019.

Dividends

We paid cash dividends to shareholders as follows:

For the

Quarters Ended

Nine Months Ended

June 28,

June 29,

June 28,

June 29,

2019

2018

2019

2018

Dividends paid per common share

0.46

0.44

1.34

1.24

In March 2019, our shareholders approved a dividend payment to shareholders of $1.84 per share, payable in four equal quarterly installments of $0.46 per share beginning in the third quarter of fiscal 2019 and ending in the second quarter of fiscal 2020.

Upon shareholders’ approval of a dividend payment, we record a liability with a corresponding charge to shareholders’ equity. At June 28, 2019 and September 28, 2018, the unpaid portion of the dividends recorded in accrued and other current liabilities on the Condensed Consolidated Balance Sheets totaled $464 million and $303 million, respectively.

Share Repurchase Program

During the nine months ended June 28, 2019, our board of directors authorized an increase of $1.5 billion in our share repurchase program. Common shares repurchased under the share repurchase program were as follows:


	For the
	Nine Months Ended
	June 28,		June 29,
	2019		2018
	(in millions)
Number of common shares repurchased		10		6
Repurchase value	$	836	$	612

At June 28, 2019, we had $1.7 billion of availability remaining under our share repurchase authorization.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

15. Share Plans

Share-based compensation expense, which was included primarily in selling, general, and administrative expenses on the Condensed Consolidated Statements of Operations, was as follows:

For the

Quarters Ended

Nine Months Ended

June 28,

June 29,

June 28,

June 29,

2019

2018

2019

2018

(in millions)

Share-based compensation expense

As of June 28, 2019, there was $128 million of unrecognized compensation expense related to share-based awards, which is expected to be recognized over a weighted-average period of 1.9 years.

During the quarter ended December 28, 2018, we granted the following share-based awards as part of our annual incentive plan grant:


		Grant-Date
	Shares	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 June 28, 2019, we had 18 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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

16. Segment and Geographic Data

Net sales by segment⁽¹⁾ and industry end market⁽²⁾ were as follows:


	For the				For the
	Quarters Ended				Nine Months Ended
	June 28,		June 29,		June 28,		June 29,
	2019		2018		2019		2018
	(in millions)
Transportation Solutions:
Automotive	$	1,418	$	1,541	$	4,312	$	4,629
Commercial transportation		317		335		938		968
Sensors		233		236		675		681
Total Transportation Solutions		1,968		2,112		5,925		6,278
Industrial Solutions:
Industrial equipment		485		506		1,470		1,473
Aerospace, defense, oil, and gas		342		295		958		847
Energy		178		187		512		522
Total Industrial Solutions		1,005		988		2,940		2,842
Communications Solutions:
Data and devices		245		278		753		774
Appliances		171		203		530		585
Total Communications Solutions		416		481		1,283		1,359
Total	$	3,389	$	3,581	$	10,148	$	10,479

(1)

Intersegment sales were not material and were recorded at selling prices that approximated market prices.

(2)

Industry end market information is presented consistently with our internal management reporting and may be revised periodically as management deems necessary.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

Net sales by geographic region⁽¹⁾ and segment were as follows:


	For the				For the
	Quarters Ended				Nine Months Ended
	June 28,		June 29,		June 28,		June 29,
	2019		2018		2019		2018
	(in millions)
Europe/Middle East/Africa (“EMEA”):
Transportation Solutions	$	785	$	879	$	2,365	$	2,621
Industrial Solutions		369		393		1,101		1,147
Communications Solutions		63		79		198		226
Total EMEA		1,217		1,351		3,664		3,994
Asia–Pacific:
Transportation Solutions		705		750		2,143		2,311
Industrial Solutions		155		174		465		501
Communications Solutions		241		276		736		790
Total Asia–Pacific		1,101		1,200		3,344		3,602
Americas:
Transportation Solutions		478		483		1,417		1,346
Industrial Solutions		481		421		1,374		1,194
Communications Solutions		112		126		349		343
Total Americas		1,071		1,030		3,140		2,883
Total	$	3,389	$	3,581	$	10,148	$	10,479

(1)

Net sales to external customers are attributed to individual countries based on the legal entity that records the sale.

Operating income by segment was as follows:


	For the				For the
	Quarters Ended				Nine Months Ended
	June 28,		June 29,		June 28,		June 29,
	2019		2018		2019		2018
	(in millions)
Transportation Solutions	$	308	$	393	$	956	$	1,237
Industrial Solutions		156		92		393		319
Communications Solutions		56		69		185		205
Total	$	520	$	554	$	1,534	$	1,761

Table of Contents

TE CONNECTIVITY LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

17. 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 June 28, 2019


	TE
	Connectivity				Other		Consolidating
	Ltd.		TEGSA		Subsidiaries		Adjustments		Total
	(in millions)
Net sales	$	—	$	—	$	3,389	$	—	$	3,389
Cost of sales		—		—		2,279		—		2,279
Gross margin		—		—		1,110		—		1,110
Selling, general, and administrative expenses, net⁽¹⁾		40		(77)		393		—		356
Research, development, and engineering expenses		—		—		158		—		158
Acquisition and integration costs		—		—		9		—		9
Restructuring and other charges, net		—		—		67		—		67
Operating income (loss)		(40)		77		483		—		520
Interest income		—		—		4		—		4
Interest expense		—		(13)		—		—		(13)
Other income, net		—		—		2		—		2
Equity in net income of subsidiaries		830		831		—		(1,661)		—
Equity in net loss of subsidiaries of discontinued operations		(1)		(1)		—		2		—
Intercompany interest income (expense), net		(32)		(65)		97		—		—
Income from continuing operations before income taxes		757		829		586		(1,659)		513
Income tax benefit		—		—		245		—		245
Income from continuing operations		757		829		831		(1,659)		758
Loss from discontinued operations, net of income taxes		—		—		(1)		—		(1)
Net income		757		829		830		(1,659)		757
Other comprehensive loss		(41)		(41)		(20)		61		(41)
Comprehensive income	$	716	$	788	$	810	$	(1,598)	$	716

(1)	TEGSA selling, general, and administrative expenses include gains of $84 million related to intercompany transactions. These gains are offset by corresponding losses recorded by other subsidiaries.

Table of Contents

TE CONNECTIVITY LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

Condensed Consolidating Statement of Operations (unaudited)

For the Quarter Ended June 29, 2018


	TE
	Connectivity				Other		Consolidating
	Ltd.		TEGSA		Subsidiaries		Adjustments		Total
	(in millions)
Net sales	$	—	$	—	$	3,581	$	—	$	3,581
Cost of sales		—		—		2,394		—		2,394
Gross margin		—		—		1,187		—		1,187
Selling, general, and administrative expenses, net		19		—		375		—		394
Research, development, and engineering expenses		—		—		171		—		171
Acquisition and integration costs		—		—		4		—		4
Restructuring and other charges, net		—		—		64		—		64
Operating income (loss)		(19)		—		573		—		554
Interest income		—		—		3		—		3
Interest expense		—		(24)		(2)		—		(26)
Other expense, net		—		—		(1)		—		(1)
Equity in net income of subsidiaries		490		498		—		(988)		—
Equity in net income of subsidiaries of discontinued operations		1		1		—		(2)		—
Intercompany interest income (expense), net		(18)		16		2		—		—
Income from continuing operations before income taxes		454		491		575		(990)		530
Income tax expense		—		—		(77)		—		(77)
Income from continuing operations		454		491		498		(990)		453
Income from discontinued operations, net of income taxes		—		—		1		—		1
Net income		454		491		499		(990)		454
Other comprehensive loss		(250)		(250)		(255)		505		(250)
Comprehensive income	$	204	$	241	$	244	$	(485)	$	204

Table of Contents

TE CONNECTIVITY LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

Condensed Consolidating Statement of Operations (unaudited)

For the Nine Months Ended June 28, 2019


	TE
	Connectivity				Other		Consolidating
	Ltd.		TEGSA		Subsidiaries		Adjustments		Total
	(in millions)
Net sales	$	—	$	—	$	10,148	$	—	$	10,148
Cost of sales		—		—		6,806		—		6,806
Gross margin		—		—		3,342		—		3,342
Selling, general, and administrative expenses, net⁽¹⁾		103		(175)		1,190		—		1,118
Research, development, and engineering expenses		—		—		485		—		485
Acquisition and integration costs		—		—		21		—		21
Restructuring and other charges, net		—		—		184		—		184
Operating income (loss)		(103)		175		1,462		—		1,534
Interest income		—		1		12		—		13
Interest expense		—		(54)		(1)		—		(55)
Other income, net		—		1		1		—		2
Equity in net income of subsidiaries		1,760		1,780		—		(3,540)		—
Equity in net loss of subsidiaries of discontinued operations		(98)		(47)		—		145		—
Intercompany interest income (expense), net		(87)		(143)		230		—		—
Income from continuing operations before income taxes		1,472		1,713		1,704		(3,395)		1,494
Income tax benefit		—		—		76		—		76
Income from continuing operations		1,472		1,713		1,780		(3,395)		1,570
Loss from discontinued operations, net of income taxes		—		(51)		(47)		—		(98)
Net income		1,472		1,662		1,733		(3,395)		1,472
Other comprehensive income		105		105		62		(167)		105
Comprehensive income	$	1,577	$	1,767	$	1,795	$	(3,562)	$	1,577

(1)	TEGSA selling, general, and administrative expenses include gains of $194 million related to intercompany transactions. These gains are offset by corresponding losses recorded by other subsidiaries.

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TE CONNECTIVITY LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

Condensed Consolidating Statement of Operations (unaudited)

For the Nine Months Ended June 29, 2018


	TE
	Connectivity				Other		Consolidating
	Ltd.		TEGSA		Subsidiaries		Adjustments		Total
	(in millions)
Net sales	$	—	$	—	$	10,479	$	—	$	10,479
Cost of sales		—		—		6,916		—		6,916
Gross margin		—		—		3,563		—		3,563
Selling, general, and administrative expenses, net		107		6		1,067		—		1,180
Research, development, and engineering expenses		—		—		509		—		509
Acquisition and integration costs		—		—		9		—		9
Restructuring and other charges, net		—		—		104		—		104
Operating income (loss)		(107)		(6)		1,874		—		1,761
Interest income		—		1		10		—		11
Interest expense		—		(79)		(1)		—		(80)
Other income, net		—		—		2		—		2
Equity in net income of subsidiaries		1,065		1,075		—		(2,140)		—
Equity in net loss of subsidiaries of discontinued operations		(6)		(6)		—		12		—
Intercompany interest income (expense), net		(48)		74		(26)		—		—
Income from continuing operations before income taxes		904		1,059		1,859		(2,128)		1,694
Income tax expense		—		—		(784)		—		(784)
Income from continuing operations		904		1,059		1,075		(2,128)		910
Loss from discontinued operations, net of income taxes		—		—		(6)		—		(6)
Net income		904		1,059		1,069		(2,128)		904
Other comprehensive loss		(101)		(101)		(74)		175		(101)
Comprehensive income	$	803	$	958	$	995	$	(1,953)	$	803

Table of Contents

TE CONNECTIVITY LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

Condensed Consolidating Balance Sheet (unaudited)

As of June 28, 2019


	TE
	Connectivity				Other		Consolidating
	Ltd.		TEGSA		Subsidiaries		Adjustments		Total
	(in millions)
Assets
Current assets:
Cash and cash equivalents	$	—	$	—	$	546	$	—	$	546
Accounts receivable, net		—		—		2,463		—		2,463
Inventories		—		—		1,961		—		1,961
Intercompany receivables		50		3,870		54		(3,974)		—
Prepaid expenses and other current assets		7		37		408		—		452
Total current assets		57		3,907		5,432		(3,974)		5,422
Property, plant, and equipment, net		—		—		3,636		—		3,636
Goodwill		—		—		5,800		—		5,800
Intangible assets, net		—		—		1,664		—		1,664
Deferred income taxes		—		—		2,845		—		2,845
Investment in subsidiaries		14,980		29,097		—		(44,077)		—
Intercompany loans receivable		1		2,784		16,683		(19,468)		—
Other assets		—		21		360		—		381
Total assets	$	15,038	$	35,809	$	36,420	$	(67,519)	$	19,748
Liabilities and shareholders' equity
Current liabilities:
Short-term debt	$	—	$	600	$	2	$	—	$	602
Accounts payable		2		—		1,436		—		1,438
Accrued and other current liabilities		491		46		1,117		—		1,654
Intercompany payables		3,923		—		51		(3,974)		—
Total current liabilities		4,416		646		2,606		(3,974)		3,694
Long-term debt		—		3,433		1		—		3,434
Intercompany loans payable		—		16,683		2,785		(19,468)		—
Long-term pension and postretirement liabilities		—		—		1,094		—		1,094
Deferred income taxes		—		—		203		—		203
Income taxes		—		—		240		—		240
Other liabilities		—		67		394		—		461
Total liabilities		4,416		20,829		7,323		(23,442)		9,126
Total shareholders' equity		10,622		14,980		29,097		(44,077)		10,622
Total liabilities and shareholders' equity	$	15,038	$	35,809	$	36,420	$	(67,519)	$	19,748

Table of Contents

TE CONNECTIVITY LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

Condensed Consolidating Balance Sheet (unaudited)

As of September 28, 2018


	TE
	Connectivity				Other		Consolidating
	Ltd.		TEGSA		Subsidiaries		Adjustments		Total
	(in millions)
Assets
Current assets:
Cash and cash equivalents	$	—	$	—	$	848	$	—	$	848
Accounts receivable, net		—		—		2,361		—		2,361
Inventories		—		—		1,857		—		1,857
Intercompany receivables		37		2,391		48		(2,476)		—
Prepaid expenses and other current assets		5		112		544		—		661
Assets held for sale		—		—		472		—		472
Total current assets		42		2,503		6,130		(2,476)		6,199
Property, plant, and equipment, net		—		—		3,497		—		3,497
Goodwill		—		—		5,684		—		5,684
Intangible assets, net		—		—		1,704		—		1,704
Deferred income taxes		—		—		2,144		—		2,144
Investment in subsidiaries		13,626		26,613		—		(40,239)		—
Intercompany loans receivable		2		6,535		17,887		(24,424)		—
Other assets		—		—		1,158		—		1,158
Total assets	$	13,670	$	35,651	$	38,204	$	(67,139)	$	20,386
Liabilities and shareholders' equity
Current liabilities:
Short-term debt	$	—	$	961	$	2	$	—	$	963
Accounts payable		2		—		1,546		—		1,548
Accrued and other current liabilities		400		36		1,275		—		1,711
Intercompany payables		2,437		—		39		(2,476)		—
Liabilities held for sale		—		—		188		—		188
Total current liabilities		2,839		997		3,050		(2,476)		4,410
Long-term debt		—		3,033		4		—		3,037
Intercompany loans payable		—		17,888		6,536		(24,424)		—
Long-term pension and postretirement liabilities		—		—		1,102		—		1,102
Deferred income taxes		—		—		207		—		207
Income taxes		—		—		312		—		312
Other liabilities		—		107		380		—		487
Total liabilities		2,839		22,025		11,591		(26,900)		9,555
Total shareholders' equity		10,831		13,626		26,613		(40,239)		10,831
Total liabilities and shareholders' equity	$	13,670	$	35,651	$	38,204	$	(67,139)	$	20,386

Table of Contents

TE CONNECTIVITY LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

Condensed Consolidating Statement of Cash Flows (unaudited)

For the Nine Months Ended June 28, 2019


	TE
	Connectivity				Other		Consolidating
	Ltd.		TEGSA		Subsidiaries		Adjustments		Total
	(in millions)
Cash flows from operating activities:
Net cash provided by (used in) continuing operating activities⁽¹⁾	$	(198)	$	4,172	$	1,902	$	(4,301)	$	1,575
Net cash used in discontinued operating activities		—		—		(31)		—		(31)
Net cash provided by (used in) operating activities		(198)		4,172		1,871		(4,301)		1,544
Cash flows from investing activities:
Capital expenditures		—		—		(570)		—		(570)
Proceeds from sale of property, plant, and equipment		—		—		16		—		16
Acquisition of businesses, net of cash acquired		—		—		(283)		—		(283)
Proceeds from divestiture of discontinued operation, net of cash retained by sold operation		—		312		(15)		—		297
Change in intercompany loans		—		1,045		—		(1,045)		—
Other		—		—		3		—		3
Net cash provided by (used in) continuing investing activities		—		1,357		(849)		(1,045)		(537)
Net cash used in discontinued investing activities		—		—		(2)		—		(2)
Net cash provided by (used in) investing activities		—		1,357		(851)		(1,045)		(539)
Cash flows from financing activities:
Changes in parent company equity⁽²⁾		57		(5,560)		5,503		—		—
Net decrease in commercial paper		—		(270)		—		—		(270)
Proceeds from issuance of debt		—		746		—		—		746
Repayment of debt		—		(441)		—		—		(441)
Proceeds from exercise of share options		—		—		55		—		55
Repurchase of common shares		(892)		—		(21)		—		(913)
Payment of common share dividends to shareholders		(454)		—		—		—		(454)
Intercompany distributions⁽¹⁾		—		—		(4,301)		4,301		—
Loan activity with parent		1,487		—		(2,532)		1,045		—
Transfers to discontinued operations		—		—		(33)		—		(33)
Other		—		(4)		(28)		—		(32)
Net cash provided by (used in) continuing financing activities		198		(5,529)		(1,357)		5,346		(1,342)
Net cash provided by discontinued financing activities		—		—		33		—		33
Net cash provided by (used in) financing activities		198		(5,529)		(1,324)		5,346		(1,309)
Effect of currency translation on cash		—		—		2		—		2
Net decrease in cash, cash equivalents, and restricted cash		—		—		(302)		—		(302)
Cash, cash equivalents, and restricted cash at beginning of period		—		—		848		—		848
Cash, cash equivalents, and restricted cash at end of period	$	—	$	—	$	546	$	—	$	546

(1)	During fiscal 2019, other subsidiaries made distributions to TEGSA in the amount of $4,301 million. Cash flows are presented based upon the nature of the distributions.

(2)	Changes in parent company equity includes cash flows related to certain intercompany equity and funding transactions, and other intercompany activity.

Table of Contents

TE CONNECTIVITY LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)

Condensed Consolidating Statement of Cash Flows (unaudited)

For the Nine Months Ended June 29, 2018


	TE
	Connectivity				Other		Consolidating
	Ltd.		TEGSA		Subsidiaries		Adjustments		Total
	(in millions)
Cash flows from operating activities:
Net cash provided by (used in) continuing operating activities⁽¹⁾	$	(152)	$	(34)	$	1,580	$	(15)	$	1,379
Net cash provided by discontinued operating activities		—		—		148		—		148
Net cash provided by (used in) operating activities		(152)		(34)		1,728		(15)		1,527
Cash flows from investing activities:
Capital expenditures		—		—		(673)		—		(673)
Proceeds from sale of property, plant, and equipment		—		—		19		—		19
Intercompany distribution receipts⁽¹⁾		—		61		—		(61)		—
Change in intercompany loans		—		261		—		(261)		—
Other		—		—		(8)		—		(8)
Net cash provided by (used in) continuing investing activities		—		322		(662)		(322)		(662)
Net cash used in discontinued investing activities		—		—		(13)		—		(13)
Net cash provided by (used in) investing activities		—		322		(675)		(322)		(675)
Cash flows from financing activities:
Changes in parent company equity⁽²⁾		83		30		(113)		—		—
Net increase in commercial paper		—		271		—		—		271
Proceeds from issuance of debt		—		119		—		—		119
Repayment of debt		—		(708)		—		—		(708)
Proceeds from exercise of share options		—		—		96		—		96
Repurchase of common shares		(218)		—		(393)		—		(611)
Payment of common share dividends to shareholders		(441)		—		6		—		(435)
Intercompany distributions⁽¹⁾		—		—		(76)		76		—
Loan activity with parent		728		—		(989)		261		—
Transfers from discontinued operations		—		—		135		—		135
Other		—		—		(34)		—		(34)
Net cash provided by (used in) continuing financing activities		152		(288)		(1,368)		337		(1,167)
Net cash used in discontinued financing activities		—		—		(135)		—		(135)
Net cash provided by (used in) financing activities		152		(288)		(1,503)		337		(1,302)
Effect of currency translation on cash		—		—		2		—		2
Net decrease in cash, cash equivalents, and restricted cash		—		—		(448)		—		(448)
Cash, cash equivalents, and restricted cash at beginning of period		—		—		1,218		—		1,218
Cash, cash equivalents, and restricted cash at end of period	$	—	$	—	$	770	$	—	$	770

(1)	During fiscal 2018, other subsidiaries made distributions to TEGSA in the amount of $76 million. Cash flows are presented based upon the nature of the distributions.

(2)	Changes in parent company equity includes cash flows related to certain intercompany equity and funding transactions, and other intercompany activity.

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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.

Overview

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 third quarter and first nine months of fiscal 2019 include the following:

●

Our net sales decreased 5.4% and 3.2% in the third quarter and first nine months of fiscal 2019, respectively, as compared to the same periods of fiscal 2018, with sales declines in the Transportation Solutions and Communications Solutions segments, partially offset by growth in the Industrial Solutions segment. On an organic basis, our net sales decreased 2.8% and 0.5% during the third quarter and first nine months of fiscal 2019, respectively, as compared to the same periods of fiscal 2018.

●

Our net sales by segment were as follows:

●

Transportation Solutions—Our net sales decreased 6.8% and 5.6% in the third quarter and first nine months of fiscal 2019, respectively, due primarily to sales declines in the automotive end market.

●

Industrial Solutions—Our net sales increased 1.7% and 3.4% during the third quarter and first nine months of fiscal 2019, respectively, primarily as a result of increased sales in the aerospace, defense, oil, and gas end market.

●

Communications Solutions—Our net sales decreased 13.5% and 5.6% in the third quarter and first nine months of fiscal 2019, respectively, due to sales declines in both the appliances and the data and devices end markets.

●

Net cash provided by continuing operating activities was $1,575 million in the first nine months of fiscal 2019.

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Outlook

In the fourth quarter of fiscal 2019, we expect our net sales to be between $3.2 billion and $3.3 billion as compared to $3.5 billion in the fourth quarter of fiscal 2018. This decrease reflects sales declines in the Transportation Solutions and Communications Solutions segments, and to a lesser degree, the Industrial Solutions segment relative to the fourth quarter of fiscal 2018. Additional information regarding expectations for our reportable segments for the fourth quarter of fiscal 2019 as compared to the same period of fiscal 2018 is as follows:

●

Transportation Solutions—We expect our net sales to decrease in the automotive end market due primarily to market weakness in China and the Europe/Middle East/Africa (“EMEA”) region. We expect global automotive production to decline approximately 6% in the fourth quarter of fiscal 2019.

●

Industrial Solutions—We expect our net sales declines in the industrial equipment and energy end markets to be partially offset by growth in the aerospace, defense, oil, and gas end market. In the industrial equipment end market, sales declines resulting from high inventory levels at distributors are expected to be partially offset by growth in medical applications.

●

Communications Solutions—We expect our net sales to decline in the data and devices and the appliances end markets primarily as a result of reduced demand resulting from high inventory levels at distributors.

We expect diluted earnings per share from continuing operations to be in the range of $0.81 to $0.87 per share in the fourth quarter of fiscal 2019. This outlook reflects the negative impact of foreign currency exchange rates on net sales and earnings per share of approximately $50 million and $0.03 per share, respectively, in the fourth quarter of fiscal 2019 as compared to the fourth quarter of fiscal 2018.

For fiscal 2019, we expect our net sales to be between $13.35 billion and $13.45 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, partially offset by growth in the Industrial Solutions segment relative to fiscal 2018. Additional information regarding expectations for our reportable segments for fiscal 2019 compared to fiscal 2018 is as follows:

●

Transportation Solutions—We expect our net sales to decrease in the automotive end market due primarily to market weakness in China and the EMEA region. We expect global automotive production to decline approximately 7% in fiscal 2019.

●

Industrial Solutions—We expect our net sales increase in the aerospace, defense, oil, and gas end market to be partially offset by declines in the industrial equipment and energy end markets. In the industrial equipment end market, we expect net sales declines resulting from market weakness in industrial applications to be partially offset by growth in medical applications.

●

Communications Solutions—We expect our net sales to decline in the appliances and the data and devices end markets due to market weakness in the Asia–Pacific region and reduced demand resulting from high inventory levels at distributors.

We expect diluted earnings per share from continuing operations to be in the range of $5.42 to $5.48 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 $400 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, including the uncertain market conditions in China, 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.”

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Swiss Parliament approved the Federal Act on Tax Reform and AHV Financing (“Swiss Tax Reform”) in September 2018, and it was approved by public vote in May 2019. Certain measures became effective in the third quarter of fiscal 2019 and accordingly are reflected in our Condensed Consolidated Financial Statements. We are currently assessing the impacts of the federal provisions and subsequent cantonal implementation. We will reflect the impacts of the remaining measures on our Condensed Consolidated Financial Statements when enacted. Upon enactment at the cantonal level, which is expected to occur in the first quarter of fiscal 2020, we expect to recognize approximately $300 million of income tax expense related to the write-down of certain deferred tax assets. See Note 12 to the Condensed Consolidated Financial Statements for additional information regarding Swiss Tax Reform.

Acquisitions

During the first nine months of fiscal 2019, we acquired three businesses for a combined cash purchase price of $296 million, net of cash acquired. The acquisitions were reported as part of our Transportation Solutions segment from the date of acquisition.

In June 2019, we announced our intent to acquire all outstanding shares of First Sensor AG through a voluntary public tender offer. We expect to complete the transaction in fiscal 2020.

Discontinued Operations

During the first nine months of fiscal 2019, we sold our Subsea Communications (“SubCom”) business for net cash proceeds of $297 million and incurred a pre-tax loss on sale of $86 million. The SubCom business met the held for sale and discontinued operations criteria and was reported as such in all periods presented on the Condensed Consolidated Financial Statements. Prior to reclassification to discontinued operations, the SubCom business was included in the Communications Solutions segment. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding discontinued operations.

Results of Operations

Net Sales

The following table presents our net sales and the percentage of total net sales by segment:


	For the								For the
	Quarters Ended								Nine Months Ended
	June 28,				June 29,				June 28,				June 29,
	2019				2018				2019				2018
	($ in millions)
Transportation Solutions	$	1,968	58	%	$	2,112	59	%	$	5,925	58	%	$	6,278	60	%
Industrial Solutions		1,005	30			988	28			2,940	29			2,842	27
Communications Solutions		416	12			481	13			1,283	13			1,359	13
Total	$	3,389	100	%	$	3,581	100	%	$	10,148	100	%	$	10,479	100	%

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The following table provides an analysis of the change in our net sales by segment:


	Changes in Net Sales for the Quarter Ended June 28, 2019												Changes in Net Sales for the Nine Months Ended June 28, 2019
	versus Net Sales for the Quarter Ended June 29, 2018												versus Net Sales for the Nine Months Ended June 29, 2018
	Net				Organic Net								Net				Organic Net
	Sales Growth				Sales Growth				Translation		Acquisitions		Sales Growth				Sales Growth				Translation		Acquisitions
	($ in millions)
Transportation Solutions	$	(144)	(6.8)	%	$	(73)	(3.5)	%	$	(84)	$	13	$	(353)	(5.6)	%	$	(131)	(2.1)	%	$	(235)	$	13
Industrial Solutions		17	1.7			23	2.3			(26)		20		98	3.4			115	4.0			(80)		63
Communications Solutions		(65)	(13.5)			(52)	(10.8)			(13)		—		(76)	(5.6)			(40)	(3.0)			(36)		—
Total	$	(192)	(5.4)	%	$	(102)	(2.8)	%	$	(123)	$	33	$	(331)	(3.2)	%	$	(56)	(0.5)	%	$	(351)	$	76

Net sales decreased $192 million, or 5.4%, in the third quarter of fiscal 2019 as compared to the third quarter of fiscal 2018 primarily as a result of the negative impact of foreign currency translation of 3.4% due to the weakening of certain foreign currencies and organic net sales declines of 2.8%. Price erosion adversely affected organic net sales by $20 million in the third quarter of fiscal 2019.

In the first nine months of fiscal 2019, net sales decreased $331 million, or 3.2%, as compared to the first nine months of fiscal 2018. The decrease resulted primarily from the negative impact of foreign currency translation of 3.3% due to the weakening of certain foreign currencies. Price erosion adversely affected organic net sales by $75 million in the first nine months of fiscal 2019.

See further discussion of net sales below under “Segment Results.”

Net Sales by Geographic Region. Our business operates in three geographic regions—EMEA, Asia–Pacific and the Americas—and our results of operations are influenced by changes in foreign currency exchange rates. Increases or decreases in the value of the U.S. dollar, compared to other currencies, will directly affect our reported results as we translate those currencies into U.S. dollars at the end of each fiscal period.

Approximately 60% of our net sales were invoiced in currencies other than the U.S. dollar in the first nine months of fiscal 2019.

The following table presents our net sales and the percentage of total net sales by geographic region⁽¹⁾:


	For the								For the
	Quarters Ended								Nine Months Ended
	June 28,				June 29,				June 28,				June 29,
	2019				2018				2019				2018
	($ in millions)
EMEA	$	1,217	36	%	$	1,351	38	%	$	3,664	36	%	$	3,994	38	%
Asia–Pacific		1,101	32			1,200	34			3,344	33			3,602	34
Americas		1,071	32			1,030	28			3,140	31			2,883	28
Total	$	3,389	100	%	$	3,581	100	%	$	10,148	100	%	$	10,479	100	%

(1)	Net sales to external customers are attributed to individual countries based on the legal entity that records the sale.

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The following table provides an analysis of the change in our net sales by geographic region:


	Change in Net Sales for the Quarter Ended June 28, 2019												Change in Net Sales for the Nine Months Ended June 28, 2019
	versus Net Sales for the Quarter Ended June 29, 2018												versus Net Sales for the Nine Months Ended June 29, 2018
	Net				Organic Net								Net				Organic Net
	Sales Growth				Sales Growth				Translation		Acquisitions		Sales Growth				Sales Growth				Translation		Acquisitions
	($ in millions)
EMEA	$	(134)	(9.9)	%	$	(84)	(6.3)	%	$	(70)	$	20	$	(330)	(8.3)	%	$	(161)	(4.1)	%	$	(216)	$	47
Asia–Pacific		(99)	(8.3)			(56)	(4.6)			(45)		2		(258)	(7.2)			(151)	(4.2)			(113)		6
Americas		41	4.0			38	3.7			(8)		11		257	8.9			256	8.8			(22)		23
Total	$	(192)	(5.4)	%	$	(102)	(2.8)	%	$	(123)	$	33	$	(331)	(3.2)	%	$	(56)	(0.5)	%	$	(351)	$	76

Cost of Sales and Gross Margin

The following table presents cost of sales and gross margin information:


	For the								For the
	Quarters Ended								Nine Months Ended
	June 28,			June 29,					June 28,			June 29,
	2019			2018			Change		2019			2018			Change
	($ in millions)
Cost of sales	$	2,279		$	2,394		$	(115)	$	6,806		$	6,916		$	(110)
As a percentage of net sales		67.2	%		66.9	%				67.1	%		66.0	%

Gross margin	$	1,110		$	1,187		$	(77)	$	3,342		$	3,563		$	(221)
As a percentage of net sales		32.8	%		33.1	%				32.9	%		34.0	%

Gross margin decreased $77 million in the third quarter of fiscal 2019 due primarily to lower volume, the unfavorable impact of product mix, and the negative impact of foreign currency translation, partially offset by lower material costs. In the first nine months of fiscal 2019, gross margin decreased $221 million primarily as a result of the unfavorable impact of product mix, the negative impact of foreign currency translation, and price erosion, partially offset by lower material costs. Gross margin as a percentage of net sales decreased to 32.8% in the third quarter of fiscal 2019 from 33.1% in the third quarter of fiscal 2018 and decreased to 32.9% in the first nine months of fiscal 2019 from 34.0% in the same period 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 170 million pounds of copper, 125,000 troy ounces of gold, and 2.6 million troy ounces of silver in fiscal 2019. The following table presents the average prices incurred related to copper, gold, and silver:


		For the				For the
		Quarters Ended				Nine Months Ended
		June 28,		June 29,		June 28,		June 29,
	Measure	2019		2018		2019		2018
Copper	Lb.	$	3.02	$	2.95	$	2.96	$	2.83
Gold	Troy oz.		1,305		1,291		1,304		1,283
Silver	Troy oz.		16.14		17.30		16.45		17.30

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Operating Expenses

The following table presents operating expense information:


	For the								For the
	Quarters Ended								Nine Months Ended
	June 28,			June 29,					June 28,			June 29,
	2019			2018			Change		2019			2018			Change
	($ in millions)
Selling, general, and administrative expenses	$	356		$	394		$	(38)	$	1,118		$	1,180		$	(62)
As a percentage of net sales		10.5	%		11.0	%				11.0	%		11.3	%

Restructuring and other charges, net		67			64			3		184			104			80

Selling, General, and Administrative Expenses. Selling, general, and administrative expenses decreased $38 million and $62 million in the third quarter and first nine months of fiscal 2019 from the same periods of fiscal 2018 due primarily to cost control measures and savings attributable to restructuring actions as well as lower incentive compensation costs and reduced selling expenses. Selling, general, and administrative expenses as a percentage of net sales decreased to 10.5% in the third quarter of fiscal 2019 from 11.0% in the third quarter of fiscal 2018 and decreased to 11.0% in the first nine months of fiscal 2019 from 11.3% in the same period of fiscal 2018.

Restructuring and Other Charges, Net. We are committed to continuous productivity improvements, and we evaluate opportunities to simplify our global manufacturing footprint, migrate facilities to lower-cost regions, reduce fixed costs, and eliminate excess capacity. These initiatives are designed to help us maintain our competitiveness in the industry, improve our operating leverage, and position us for future growth.

During fiscal 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 $184 million during the first nine months of fiscal 2019, of which $179 million related to the fiscal 2019 restructuring program. Annualized cost savings related to the fiscal 2019 actions commenced during the first nine months of fiscal 2019 are expected to be approximately $145 million and are expected to be realized by the end of fiscal 2021. Cost savings will be reflected primarily in cost of sales and selling, general, and administrative expenses.

In response to market weakness, we are initiating incremental restructuring actions, primarily consisting of employee severance, to broaden the scope of our cost reduction initiatives and accelerate cost reduction and factory footprint consolidation activities. We previously disclosed that we expected total restructuring charges to be approximately $250 million in fiscal 2019. We have now increased this amount by $125 million. We currently expect total restructuring charges, which will impact all segments, to be approximately $375 million and total spending, which will be funded with cash from operations, to be approximately $165 million in 2019.

See Note 2 to the Condensed Consolidated Financial Statements for additional information regarding net restructuring and other charges.

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Operating Income

The following table presents operating income and operating margin information:


	For the								For the
	Quarters Ended								Nine Months Ended
	June 28,			June 29,					June 28,			June 29,
	2019			2018			Change		2019			2018			Change
	($ in millions)
Operating income	$	520		$	554		$	(34)	$	1,534		$	1,761		$	(227)
Operating margin		15.3	%		15.5	%				15.1	%		16.8	%

Operating income included the following:


	For the				For the
	Quarters Ended				Nine Months Ended
	June 28,		June 29,		June 28,		June 29,
	2019		2018		2019		2018
	(in millions)
Acquisition related charges:
Acquisition and integration costs	$	9	$	4	$	21	$	9
Charges associated with the amortization of acquisition-related fair value adjustments		—		1		3		8
		9		5		24		17
Restructuring and other charges, net		67		64		184		104
Total	$	76	$	69	$	208	$	121

See discussion of operating income below under “Segment Results.”

Non-Operating Items

The following table presents select non-operating information:


	For the								For the
	Quarters Ended								Nine Months Ended
	June 28,			June 29,					June 28,			June 29,
	2019			2018			Change		2019			2018			Change
	($ in millions)
Interest expense	$	13		$	26		$	(13)	$	55		$	80		$	(25)
Income tax expense (benefit)		(245)			77			(322)		(76)			784			(860)
Effective tax rate		(47.8)	%		14.5	%				(5.1)	%		46.3	%

Income (loss) from discontinued operations, net of income taxes	$	(1)		$	1		$	(2)	$	(98)		$	(6)		$	(92)

Interest Expense. Interest expense decreased $13 million and $25 million during the third quarter and first nine months of fiscal 2019, respectively, due primarily to the expansion of our cross-currency swap program in fiscal 2019. Under the terms of the fiscal 2019 contracts, we receive interest in U.S. dollars at a weighted-average rate of 2.96% per annum and pay no interest. See Note 10 to the Condensed Consolidated Financial Statements for additional information regarding our cross-currency swap program.

Income Taxes. See Note 12 to the Condensed Consolidated Financial Statements for information regarding items impacting income tax expense and the effective tax rate for the third quarters and first nine months of fiscal 2019 and 2018 and information regarding Swiss Tax Reform.

Income (Loss) from Discontinued Operations, Net of Income Taxes. During the first nine months of fiscal 2019, we sold our SubCom business for net cash proceeds of $297 million and incurred a pre-tax loss on sale of $86 million. The

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net sales of the business were $41 million and $510 million in the first nine months of fiscal 2019 and 2018, respectively. The results for the first nine months of fiscal 2019 represent one month of activity. In the first nine months 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.

Segment Results

Transportation Solutions

Net Sales. The following table presents the Transportation Solutions segment’s net sales and the percentage of total net sales by industry end market⁽¹⁾:


	For the								For the
	Quarters Ended								Nine Months Ended
	June 28,				June 29,				June 28,				June 29,
	2019				2018				2019				2018
	($ in millions)
Automotive	$	1,418	72	%	$	1,541	73	%	$	4,312	73	%	$	4,629	74	%
Commercial transportation		317	16			335	16			938	16			968	15
Sensors		233	12			236	11			675	11			681	11
Total	$	1,968	100	%	$	2,112	100	%	$	5,925	100	%	$	6,278	100	%

(1)	Industry end market information is presented consistently with our internal management reporting and may be revised periodically as management deems necessary.

The following table provides an analysis of the change in the Transportation Solutions segment’s net sales by industry end market:


	Change in Net Sales for the Quarter Ended June 28, 2019												Change in Net Sales for the Nine Months Ended June 28, 2019
	versus Net Sales for the Quarter Ended June 29, 2018												versus Net Sales for the Nine Months Ended June 29, 2018
	Net				Organic Net								Net				Organic Net
	Sales Growth				Sales Growth				Translation		Acquisitions		Sales Growth				Sales Growth				Translation		Acquisitions
	($ in millions)
Automotive	$	(123)	(8.0)	%	$	(59)	(3.9)	%	$	(64)	$	—	$	(317)	(6.8)	%	$	(139)	(3.1)	%	$	(178)	$	—
Commercial transportation		(18)	(5.4)			(16)	(5.1)			(12)		10		(30)	(3.1)			(5)	(0.7)			(35)		10
Sensors		(3)	(1.3)			2	0.7			(8)		3		(6)	(0.9)			13	1.8			(22)		3
Total	$	(144)	(6.8)	%	$	(73)	(3.5)	%	$	(84)	$	13	$	(353)	(5.6)	%	$	(131)	(2.1)	%	$	(235)	$	13

Net sales in the Transportation Solutions segment decreased $144 million, or 6.8%, in the third quarter of fiscal 2019 from the third quarter of fiscal 2018 due primarily to the negative impact of foreign currency translation of 4.0% and organic net sales declines of 3.5%. Our organic net sales by industry end market were as follows:

●

Automotive—Our organic net sales decreased 3.9% in the third quarter of fiscal 2019 due primarily to declines of 5.2% and 4.3% in the Asia–Pacific and EMEA regions, respectively. Organic net sales in the Americas region were flat relative to the third quarter of fiscal 2018. Our declines in the Asia–Pacific and EMEA regions were driven by market weakness.

●

Commercial transportation—Our organic net sales decreased 5.1% in the third quarter of fiscal 2019 due to market weakness in the Americas and EMEA regions.

●

Sensors—Our organic net sales increased 0.7% in the third quarter of fiscal 2019 due primarily to growth in the industrial equipment market, partially offset by declines in the commercial transportation market.

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In the first nine months of fiscal 2019, net sales in the Transportation Solutions segment decreased $353 million, or 5.6%, as compared to the first nine months of fiscal 2018 primarily as a result of the negative impact of foreign currency translation of 3.7% and organic net sales declines of 2.1%. Our organic net sales by industry end market were as follows:

●

Automotive—Our organic net sales decreased 3.1% in the first nine months of fiscal 2019 due to declines of 6.1% and 3.5% in the Asia–Pacific and EMEA regions, respectively, partially offset by growth of 5.0% in the Americas region. Our declines in the Asia–Pacific and EMEA regions resulted from market weakness. In the Americas region, our growth was attributable to electronification and market share gains.

●

Commercial transportation—Our organic net sales decreased 0.7% in the first nine months of fiscal 2019 as a result of market weakness in the Asia–Pacific and EMEA regions, partially offset by growth in the Americas region.

●

Sensors—Our organic net sales increased 1.8% in the first nine months of fiscal 2019 as a result of growth in the industrial equipment market, partially offset by declines in the commercial transportation and automotive markets.

Operating Income. The following table presents the Transportation Solutions segment’s operating income and operating margin information:


	For the								For the
	Quarters Ended								Nine Months Ended
	June 28,			June 29,					June 28,			June 29,
	2019			2018			Change		2019			2018			Change
	($ in millions)
Operating income	$	308		$	393		$	(85)	$	956		$	1,237		$	(281)
Operating margin		15.7	%		18.6	%				16.1	%		19.7	%

Operating income in the Transportation Solutions segment decreased $85 million and $281 million in the third quarter and first nine months of fiscal 2019, respectively, as compared to the same periods of fiscal 2018. The Transportation Solutions segment’s operating income included the following:


	For the				For the
	Quarters Ended				Nine Months Ended
	June 28,		June 29,		June 28,		June 29,
	2019		2018		2019		2018
	(in millions)
Acquisition related charges:
Acquisition and integration costs	$	6	$	2	$	13	$	5
Charges associated with the amortization of acquisition-related fair value adjustments		—		—		—		4
		6		2		13		9
Restructuring and other charges, net		53		11		98		13
Total	$	59	$	13	$	111	$	22

Excluding these items, operating income decreased in the third quarter of fiscal 2019 due primarily to lower volume and the unfavorable impact of product mix, partially offset by lower material costs. Excluding these items, operating income decreased in the first nine months of fiscal 2019 primarily as a result of the unfavorable impact of product mix, price erosion, and the negative impact of foreign currency translation, partially offset by lower material costs.

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Industrial Solutions

Net Sales. The following table presents the Industrial Solutions segment’s net sales and the percentage of total net sales by industry end market⁽¹⁾:


	For the								For the
	Quarters Ended								Nine Months Ended
	June 28,				June 29,				June 28,				June 29,
	2019				2018				2019				2018
	($ in millions)
Industrial equipment	$	485	48	%	$	506	51	%	$	1,470	50	%	$	1,473	52	%
Aerospace, defense, oil, and gas		342	34			295	30			958	33			847	30
Energy		178	18			187	19			512	17			522	18
Total	$	1,005	100	%	$	988	100	%	$	2,940	100	%	$	2,842	100	%

(1)	Industry end market information is presented consistently with our internal management reporting and may be revised periodically as management deems necessary.

The following table provides an analysis of the change in the Industrial Solutions segment’s net sales by industry end market:


	Change in Net Sales for the Quarter Ended June 28, 2019												Change in Net Sales for the Nine Months Ended June 28, 2019
	versus Net Sales for the Quarter Ended June 29, 2018												versus Net Sales for the Nine Months Ended June 29, 2018
	Net				Organic Net								Net				Organic Net
	Sales Growth				Sales Growth				Translation		Acquisition		Sales Growth				Sales Growth				Translation		Acquisition
	($ in millions)
Industrial equipment	$	(21)	(4.2)	%	$	(27)	(5.5)	%	$	(14)	$	20	$	(3)	(0.2)	%	$	(25)	(1.8)	%	$	(41)	$	63
Aerospace, defense, oil, and gas		47	15.9			51	16.9			(4)		—		111	13.1			123	14.4			(12)		—
Energy		(9)	(4.8)			(1)	(0.4)			(8)		—		(10)	(1.9)			17	3.0			(27)		—
Total	$	17	1.7	%	$	23	2.3	%	$	(26)	$	20	$	98	3.4	%	$	115	4.0	%	$	(80)	$	63

Net sales in the Industrial Solutions segment increased $17 million, or 1.7%, in the third quarter of fiscal 2019 from the third quarter of fiscal 2018 as a result of organic net sales growth of 2.3% and sales contributions from an acquisition of 2.0%, partially offset by the negative impact of foreign currency translation of 2.6%. Our organic net sales by industry end market were as follows:

●

Industrial equipment—Our organic net sales decreased 5.5% in the third quarter of fiscal 2019 due primarily to reduced demand resulting from high inventory levels at distributors, partially offset by strength in medical applications.

●

Aerospace, defense, oil, and gas—Our organic net sales increased 16.9% in the third quarter of fiscal 2019 as a result of strength in the commercial aerospace, defense, and oil and gas markets.

●

Energy—Our organic net sales were flat in the third quarter of fiscal 2019 as declines in the EMEA region were largely offset by strength in the Americas region.

In the first nine months of fiscal 2019, net sales in the Industrial Solutions segment increased $98 million, or 3.4%, from the first nine months of fiscal 2018 due to organic net sales growth of 4.0% and sales contributions from an acquisition of 2.2%, partially offset by the negative impact of foreign currency translation of 2.8%. Our organic net sales by industry end market were as follows:

●

Industrial equipment—Our organic net sales decreased 1.8% in the first nine months of fiscal 2019 primarily as a result of market weakness in industrial applications, partially offset by strength in medical applications.

●

Aerospace, defense, oil, and gas—Our organic net sales increased 14.4% in the first nine months of fiscal 2019 due to growth in the commercial aerospace, defense, and oil and gas markets.

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●

Energy—Our organic net sales increased 3.0% in the first nine months of fiscal 2019 primarily as a result of strength in the Americas region, partially offset by declines in the EMEA region.

Operating Income. The following table presents the Industrial Solutions segment’s operating income and operating margin information:


	For the								For the
	Quarters Ended								Nine Months Ended
	June 28,			June 29,					June 28,			June 29,
	2019			2018			Change		2019			2018			Change
	($ in millions)
Operating income	$	156		$	92		$	64	$	393		$	319		$	74
Operating margin		15.5	%		9.3	%				13.4	%		11.2	%

Operating income in the Industrial Solutions segment increased $64 million and $74 million in the third quarter and first nine months of fiscal 2019, respectively, as compared to the same periods of fiscal 2018. The Industrial Solutions segment’s operating income included the following:


	For the				For the
	Quarters Ended				Nine Months Ended
	June 28,		June 29,		June 28,		June 29,
	2019		2018		2019		2018
	(in millions)
Acquisition related charges:
Acquisition and integration costs	$	3	$	2	$	8	$	4
Charges associated with the amortization of acquisition-related fair value adjustments		—		1		3		4
		3		3		11		8
Restructuring and other charges, net		8		47		60		76
Total	$	11	$	50	$	71	$	84

Excluding these items, operating income increased in the third quarter of fiscal 2019 due primarily to higher volume and lower material costs. Excluding these items, operating income increased in the first nine months of fiscal 2019 primarily as a result of higher volume and improved manufacturing productivity.

Communications Solutions

Net Sales. The following table presents the Communications Solutions segment’s net sales and the percentage of total net sales by industry end market⁽¹⁾:


	For the								For the
	Quarters Ended								Nine Months Ended
	June 28,				June 29,				June 28,				June 29,
	2019				2018				2019				2018
	($ in millions)
Data and devices	$	245	59	%	$	278	58	%	$	753	59	%	$	774	57	%
Appliances		171	41			203	42			530	41			585	43
Total	$	416	100	%	$	481	100	%	$	1,283	100	%	$	1,359	100	%

(1)	Industry end market information is presented consistently with our internal management reporting and may be revised periodically as management deems necessary.

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The following table provides an analysis of the change in the Communications Solutions segment’s net sales by industry end market:


	Change in Net Sales for the Quarter Ended June 28, 2019										Change in Net Sales for the Nine Months Ended June 28, 2019
	versus Net Sales for the Quarter Ended June 29, 2018										versus Net Sales for the Nine Months Ended June 29, 2018
	Net				Organic Net						Net				Organic Net
	Sales Growth				Sales Growth				Translation		Sales Growth				Sales Growth				Translation
	($ in millions)
Data and devices	$	(33)	(11.9)	%	$	(26)	(9.4)	%	$	(7)	$	(21)	(2.7)	%	$	(4)	(0.5)	%	$	(17)
Appliances		(32)	(15.8)			(26)	(12.8)			(6)		(55)	(9.4)			(36)	(6.3)			(19)
Total	$	(65)	(13.5)	%	$	(52)	(10.8)	%	$	(13)	$	(76)	(5.6)	%	$	(40)	(3.0)	%	$	(36)

Net sales in the Communications Solutions segment decreased $65 million, or 13.5%, in the third quarter of fiscal 2019 as compared to the third quarter of fiscal 2018 due to organic net sales declines of 10.8% and the negative impact of foreign currency translation of 2.7%. Our organic net sales by industry end market were as follows:

●

Data and devices—Our organic net sales decreased 9.4% in the third quarter of fiscal 2019 due primarily to reduced demand resulting from high inventory levels at distributors, partially offset by growth in high speed connectivity in data center applications.

●

Appliances—Our organic net sales decreased 12.8% in the third quarter of fiscal 2019 due to market weakness in all regions and reduced demand resulting from high inventory levels at distributors.

In the first nine months of fiscal 2019, net sales in the Communications Solutions segment decreased $76 million, or 5.6%, as compared to the same period of fiscal 2018 due to organic net sales declines of 3.0% and the negative impact of foreign currency translation of 2.6%. Our organic net sales by industry end market were as follows:

●

Data and devices—Our organic net sales decreased 0.5% in the first nine months of fiscal 2019 due primarily to market weakness in the Asia-Pacific region.

●

Appliances—Our organic net sales decreased 6.3% in the first nine months of fiscal 2019 primarily as a result of market weakness in the Asia–Pacific and EMEA regions.

Operating Income. The following table presents the Communications Solutions segment’s operating income and operating margin information:


	For the								For the
	Quarters Ended								Nine Months Ended
	June 28,			June 29,					June 28,			June 29,
	2019			2018			Change		2019			2018			Change
	($ in millions)
Operating income	$	56		$	69		$	(13)	$	185		$	205		$	(20)
Operating margin		13.5	%		14.3	%				14.4	%		15.1	%

Operating income in the Communications Solutions segment decreased $13 million and $20 million in the third quarter and first nine months of fiscal 2019, respectively, as compared to the same periods of fiscal 2018. The Communications Solutions segment’s operating income included the following:

For the

Quarters Ended

Nine Months Ended

June 28,

June 29,

June 28,

June 29,

2019

2018

2019

2018

(in millions)

Restructuring and other charges, net

Excluding these items, operating income decreased in the third quarter and first nine months of fiscal 2019 as compared to the same periods of fiscal 2018 due primarily to lower volume.

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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 nine months of fiscal 2019, net cash provided by continuing operating activities increased $196 million to $1,575 million from $1,379 million in the first nine months of fiscal 2018. The increase resulted primarily from higher collections of accounts receivable and fluctuations in cash collateral requirements under our cross-currency swap contracts, partially offset by a decrease in pre-tax income levels.

The amount of income taxes paid, net of refunds, during the first nine months of fiscal 2019 and 2018 was $277 million and $317 million, respectively.

Cash Flows from Investing Activities

Capital expenditures were $570 million and $673 million in the first nine months 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 nine months of fiscal 2019, we acquired three businesses for a combined cash purchase price of $296 million, net of cash acquired. See Note 4 to the Condensed Consolidated Financial Statements.

During the first nine months of fiscal 2019, we received net cash proceeds of $297 million related to the sale of our SubCom business. See additional information in Note 3 to the Condensed Consolidated Financial Statements.

Cash Flows from Financing Activities and Capitalization

Total debt at June 28, 2019 and September 28, 2018 was $4,036 million and $4,000 million, respectively. See Note 8 to the Condensed Consolidated Financial Statements for additional information regarding debt.

During the third quarter of fiscal 2019, Tyco Electronics Group S.A. (“TEGSA”), our 100%-owned subsidiary, issued €350 million aggregate principal amount of fixed-to-floating rate senior notes due June 2021. The fixed-to-floating rate senior notes bear interest at a rate of 0% until June 2020 and then at a rate of three-month Euro Interbank Offered Rate (“EURIBOR”) plus 0.30% per year until maturity. In June 2020, we may, at our option, redeem the fixed-to-floating rate senior notes, as a whole, at 100% of the principal amount. Also, during the first nine months of fiscal 2019, TEGSA issued $350 million aggregate principal amount of floating rate senior notes due June 2020. The floating rate senior notes bear interest at a rate of three-month London Interbank Offered Rate (“LIBOR”) plus 0.45% per year. The fixed-to-floating rate senior notes and floating rate senior notes are TEGSA’s unsecured senior obligations and rank equally in right of payment with all existing and any future senior indebtedness of TEGSA and senior to any subordinated indebtedness that TEGSA may incur.

During the first nine months of fiscal 2019, TEGSA repaid, at maturity, $325 million 2.375% senior notes due 2018.

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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 June 28, 2019 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 June 28, 2019, 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 $454 million and $435 million in the first nine months of fiscal 2019 and 2018, respectively.

During the first nine months of fiscal 2019, our board of directors authorized an increase of $1.5 billion in our share repurchase program. We repurchased approximately 10 million of our common shares for $836 million and approximately 6 million of our common shares for $612 million under the share repurchase program during the first nine months of fiscal 2019 and 2018, respectively. At June 28, 2019, we had $1.7 billion of availability remaining under our share repurchase authorization.

Commitments and Contingencies

Legal Proceedings

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.

At June 28, 2019, we had outstanding letters of credit, letters of guarantee, and surety bonds of $316 million.

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As discussed above, in the first nine months of fiscal 2019, we sold our SubCom business. In connection with the sale, we contractually agreed to continue to honor performance guarantees and letters of credit related to the SubCom business’ projects that existed as of the date of sale. These guarantees had a combined value of approximately $1.7 billion as of June 28, 2019 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. As of June 28, 2019, there were no such new performance guarantees outstanding. We have contractual recourse against the SubCom business if we are required to perform on any SubCom guarantees; however, based on historical experience, we do not anticipate having to perform. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding the divestiture of the SubCom business.

Critical Accounting Policies and Estimates

The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses.

Our accounting policies for revenue recognition, goodwill and other intangible assets, income taxes, and pension 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 nine months of fiscal 2019.

Revenue Recognition

We adopted Accounting Standards Codification (“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.

Accounting Pronouncements

See Note 1 to the Condensed Consolidated Financial Statements for information regarding recently issued and adopted accounting pronouncements.

Non-GAAP Financial Measure

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.

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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.

Forward-Looking Information

Certain statements in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These statements are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include, among others, the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities, potential operating performance improvements, acquisitions, divestitures, the effects of competition, and the effects of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believe,” “expect,” “plan,” “intend,” “anticipate,” “estimate,” “predict,” “potential,” “continue,” “may,” “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:

●

conditions in the global or regional economies and global capital markets, and cyclical industry conditions;

●

conditions affecting demand for products in the industries we serve, particularly the automotive industry;

●

competition and pricing pressure;

●

market acceptance of our new product introductions and product innovations and product life cycles;

●

raw material availability, quality, and cost;

●

fluctuations in foreign currency exchange rates and impacts of offsetting hedges;

●

financial condition and consolidation of customers and vendors;

●

reliance on third-party suppliers;

●

risks associated with current and future acquisitions and divestitures;

●

global risks of business interruptions such as natural disasters;

●

global risks of political, economic, and military instability, including volatile and uncertain economic conditions in China;

●

risks associated with security breaches and other disruptions to our information technology infrastructure;

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●

risks related to compliance with current and future environmental and other laws and regulations;

●

our ability to protect our intellectual property rights;

●

risks of litigation;

●

our ability to operate within the limitations imposed by our debt instruments;

●

the possible effects on us of various non-U.S. and U.S. legislative proposals, including Swiss Tax Reform, and other initiatives that, if adopted, could materially increase our worldwide corporate effective tax rate and negatively impact our U.S. government contracts business;

●

various risks associated with being a Swiss corporation;

●

the impact of fluctuations in the market price of our shares; and

●

the impact of certain provisions of our articles of association on unsolicited takeover proposals.

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 nine months of fiscal 2019, we expanded our cross-currency swap program to hedge our net investment in certain foreign operations. The aggregate notional value of the fiscal 2019 contracts was $1,901 million at June 28, 2019. See Note 10 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 nine months 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 June 28, 2019. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 28, 2019.

Changes in Internal Control Over Financial Reporting

During the quarter ended June 28, 2019, 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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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There have been no material developments in our legal proceedings since we filed our Annual Report on Form 10-K for the fiscal year ended September 28, 2018, except as set forth in “Part II. Item 1. Legal Proceedings” in our Quarterly Report on Form 10-Q for the quarterly period ended December 28, 2018. Refer to “Part I. Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended September 28, 2018 and “Part II. Item 1. Legal Proceedings” in our Quarterly Report on Form 10-Q for the quarterly period ended December 28, 2018 for additional information regarding legal proceedings.

ITEM 1A. RISK FACTORS

There have been no material changes in our risk factors from those disclosed in “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 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 June 28, 2019:


					Maximum
					Approximate
				Total Number of	Dollar Value of
				Shares Purchased	Shares that May
	Total Number	Average Price		as Part of Publicly	Yet Be Purchased
	of Shares	Paid Per		Announced Plans	Under the Plans
Period	Purchased⁽¹⁾	Share⁽¹⁾		or Programs⁽²⁾	or Programs⁽²⁾
March 30–April 26, 2019	630,885	$	88.33	627,600	$	1,775,896,063
April 27–May 31, 2019	858,402		89.40	855,500		1,699,431,887
June 1–June 28, 2019	220,063		91.99	219,800		1,679,210,861
Total	1,709,350	$	89.34	1,702,900

(1)	These columns include the following transactions which occurred during the quarter ended June 28, 2019:

(i)the acquisition of 6,450 common shares from individuals in order to satisfy tax withholding requirements in connection with the vesting of restricted share awards issued under equity compensation plans; and

(ii)open market purchases totaling 1,702,900 common shares, summarized on a trade-date basis, in conjunction with the share repurchase program announced in September 2007.

(2)	Our share repurchase program authorizes us to purchase a portion of our outstanding common shares from time to time through open market or private transactions, depending on business and market conditions. The share repurchase program does not have an expiration date.

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ITEM 6. EXHIBITS


Exhibit Number		Exhibit
3.1		Articles of Association of TE Connectivity Ltd., as amended and restated (incorporated by reference to Exhibit 3.1 to TE Connectivity’s Current Report on Form 8-K, filed May 21, 2019)
31.1	*	Certification by the Chief Executive Officer pursuant to Section 302 of the SarbanesOxley Act of 2002
31.2	*	Certification by the Chief Financial Officer pursuant to Section 302 of the SarbanesOxley Act of 2002
32.1	**	Certification by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the SarbanesOxley Act of 2002
101.INS	† ‡	XBRL Instance Document
101.SCH	†	XBRL Taxonomy Extension Schema Document
101.CAL	†	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	†	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	†	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	†	XBRL Taxonomy Extension Presentation Linkbase Document

*	Filed herewith

**	Furnished herewith

†	Submitted electronically with this report in accordance with the provisions of Regulation S-T

‡	The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	TE CONNECTIVITY LTD.

	By:	/s/ HEATH A. MITTS Heath A. Mitts Executive Vice President and Chief Financial Officer (Principal Financial Officer)

Date: July 26, 2019