TE Connectivity Ltd. - Quarter Report: 2020 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 26, 2020
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.)

Mühlenstrasse 26, 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 24, 2020 was 330,038,478.

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 26, 2020 and June 28, 2019 (unaudited)	1
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Quarters and Nine Months Ended June 26, 2020 and June 28, 2019 (unaudited)	2
	Condensed Consolidated Balance Sheets as of June 26, 2020 and September 27, 2019 (unaudited)	3
	Condensed Consolidated Statements of Equity for the Quarters and Nine Months Ended June 26, 2020 and June 28, 2019 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 26, 2020 and June 28, 2019 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	42

Part II.	Other Information
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 6.	Exhibits	45
Signatures		46

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 26,		June 28,		June 26,		June 28,
	2020		2019		2020		2019

	(in millions, except per share data)
Net sales	$	2,548	$	3,389	$	8,911	$	10,148
Cost of sales		1,841		2,279		6,145		6,806
Gross margin		707		1,110		2,766		3,342
Selling, general, and administrative expenses		321		356		1,040		1,118
Research, development, and engineering expenses		146		158		465		485
Acquisition and integration costs		8		9		27		21
Restructuring and other charges, net		98		67		144		184
Impairment of goodwill		—		—		900		—
Operating income		134		520		190		1,534
Interest income		2		4		13		13
Interest expense		(13)		(13)		(36)		(55)
Other income, net		4		2		20		2
Income from continuing operations before income taxes		127		513		187		1,494
Income tax (expense) benefit		(185)		245		(674)		76
Income (loss) from continuing operations		(58)		758		(487)		1,570
Income (loss) from discontinued operations, net of income taxes		17		(1)		16		(98)
Net income (loss)	$	(41)	$	757	$	(471)	$	1,472

Basic earnings (loss) per share:
Income (loss) from continuing operations	$	(0.18)	$	2.25	$	(1.46)	$	4.63
Income (loss) from discontinued operations		0.05		—		0.05		(0.29)
Net income (loss)		(0.12)		2.25		(1.41)		4.34

Diluted earnings (loss) per share:
Income (loss) from continuing operations	$	(0.18)	$	2.24	$	(1.46)	$	4.60
Income (loss) from discontinued operations		0.05		—		0.05		(0.29)
Net income (loss)		(0.12)		2.23		(1.41)		4.32

Weighted-average number of shares outstanding:
Basic		330		337		333		339
Diluted		330		339		333		341

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

TE CONNECTIVITY LTD.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)


	For the				For the
	Quarters Ended				Nine Months Ended
	June 26,		June 28,		June 26,		June 28,
	2020		2019		2020		2019

	(in millions)
Net income (loss)	$	(41)	$	757	$	(471)	$	1,472
Other comprehensive income (loss):
Currency translation		21		(48)		(43)		35
Adjustments to unrecognized pension and postretirement benefit costs, net of income taxes		7		7		23		19
Gains on cash flow hedges, net of income taxes		37		—		15		51
Other comprehensive income (loss)		65		(41)		(5)		105
Comprehensive income (loss)		24		716		(476)		1,577
Less: comprehensive income attributable to noncontrolling interests		(3)		—		(1)		—
Comprehensive income (loss) attributable to TE Connectivity Ltd.	$	21	$	716	$	(477)	$	1,577

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

TE CONNECTIVITY LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	June 26,		September 27,
	2020		2019

	(in millions, except share
	data)
Assets
Current assets:
Cash and cash equivalents	$	474	$	927
Accounts receivable, net of allowance for doubtful accounts of $34 and $25, respectively		2,146		2,320
Inventories		2,227		1,836
Prepaid expenses and other current assets		472		471
Total current assets		5,319		5,554
Property, plant, and equipment, net		3,598		3,574
Goodwill		5,143		5,740
Intangible assets, net		1,612		1,596
Deferred income taxes		2,286		2,776
Other assets		882		454
Total assets	$	18,840	$	19,694
Liabilities and equity
Current liabilities:
Short-term debt	$	691	$	570
Accounts payable		1,271		1,357
Accrued and other current liabilities		1,765		1,613
Total current liabilities		3,727		3,540
Long-term debt		3,395		3,395
Long-term pension and postretirement liabilities		1,366		1,367
Deferred income taxes		161		156
Income taxes		244		239
Other liabilities		803		427
Total liabilities		9,696		9,124
Commitments and contingencies (Note 10)
Equity:
TE Connectivity Ltd. shareholders' equity:
Common shares, CHF 0.57 par value, 338,953,381 shares authorized and issued, and 350,951,381 shares authorized and issued, respectively		149		154
Accumulated earnings		10,125		12,256
Treasury shares, at cost, 8,961,449 and 15,862,337 shares, respectively		(729)		(1,337)
Accumulated other comprehensive loss		(509)		(503)
Total TE Connectivity Ltd. shareholders' equity		9,036		10,570
Noncontrolling interests		108		—
Total equity		9,144		10,570
Total liabilities and equity	$	18,840	$	19,694

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

TE CONNECTIVITY LTD.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED)


	For the Quarter Ended June 26, 2020
											Accumulated		TE Connectivity
											Other		Ltd.		Non-
	Common Shares			Treasury Shares			Contributed		Accumulated		Comprehensive		Shareholders'		controlling		Total
	Shares	Amount		Shares	Amount		Surplus		Earnings		Loss		Equity		Interests		Equity

	(in millions)
Balance at March 27, 2020	351	$	154	(20)	$	(1,639)	$	—	$	11,122	$	(571)	$	9,066	$	105	$	9,171
Net loss	—		—	—		—		—		(41)		—		(41)		—		(41)
Other comprehensive income	—		—	—		—		—		—		62		62		3		65
Share-based compensation expense	—		—	—		—		17		—		—		17		—		17
Dividends	—		—	—		—		—		2		—		2		—		2
Exercise of share options	—		—	—		2		—		—		—		2		—		2
Restricted share award vestings and other activity	—		—	—		15		(17)		12		—		10		—		10
Repurchase of common shares	—		—	(1)		(82)		—		—		—		(82)		—		(82)
Cancellation of treasury shares	(12)		(5)	12		975		—		(970)		—		—		—		—
Balance at June 26, 2020	339	$	149	(9)	$	(729)	$	—	$	10,125	$	(509)	$	9,036	$	108	$	9,144


	For the Nine Months Ended June 26, 2020
											Accumulated		TE Connectivity
											Other		Ltd.		Non-
	Common Shares			Treasury Shares			Contributed		Accumulated		Comprehensive		Shareholders'		controlling		Total
	Shares	Amount		Shares	Amount		Surplus		Earnings		Loss		Equity		Interests		Equity

	(in millions)
Balance at September 27, 2019	351	$	154	(16)	$	(1,337)	$	—	$	12,256	$	(503)	$	10,570	$	—	$	10,570
Acquisition	—		—	—		—		—		—		—		—		107		107
Net loss	—		—	—		—		—		(471)		—		(471)		—		(471)
Other comprehensive income (loss)	—		—	—		—		—		—		(6)		(6)		1		(5)
Share-based compensation expense	—		—	—		—		54		—		—		54		—		54
Dividends	—		—	—		—		—		(633)		—		(633)		—		(633)
Exercise of share options	—		—	—		29		—		—		—		29		—		29
Restricted share award vestings and other activity	—		—	1		109		(54)		(57)		—		(2)		—		(2)
Repurchase of common shares	—		—	(6)		(505)		—		—		—		(505)		—		(505)
Cancellation of treasury shares	(12)		(5)	12		975		—		(970)		—		—		—		—
Balance at June 26, 2020	339	$	149	(9)	$	(729)	$	—	$	10,125	$	(509)	$	9,036	$	108	$	9,144

Table of Contents

TE CONNECTIVITY LTD.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED) (Continued)


	For the Quarter Ended June 28, 2019
											Accumulated		TE Connectivity
											Other		Ltd.		Non-
	Common Shares			Treasury Shares			Contributed		Accumulated		Comprehensive		Shareholders'		controlling		Total
	Shares	Amount		Shares	Amount		Surplus		Earnings		Loss		Equity		Interests		Equity

	(in millions)
Balance at March 29, 2019	357	$	157	(20)	$	(1,713)	$	—	$	11,710	$	(160)	$	9,994	$	—	$	9,994
Net income	—		—	—		—		—		757		—		757		—		757
Other comprehensive loss	—		—	—		—		—		—		(41)		(41)		—		(41)
Share-based compensation expense	—		—	—		—		18		—		—		18		—		18
Dividends	—		—	—		—		—		1		—		1		—		1
Exercise of share options	—		—	—		38		—		—		—		38		—		38
Restricted share award vestings and other activity	—		—	—		30		(18)		(5)		—		7		—		7
Repurchase of common shares	—		—	(1)		(152)		—		—		—		(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	$	—	$	10,622


	For the Nine Months Ended June 28, 2019
											Accumulated		TE Connectivity
											Other		Ltd.		Non-
	Common Shares			Treasury Shares			Contributed		Accumulated		Comprehensive		Shareholders'		controlling		Total
	Shares	Amount		Shares	Amount		Surplus		Earnings		Loss		Equity		Interests		Equity

	(in millions)
Balance at September 28, 2018	357	$	157	(12)	$	(1,134)	$	—	$	12,114	$	(306)	$	10,831	$	—	$	10,831
Adoption of ASU No. 2016-16	—		—	—		—		—		(443)		—		(443)		—		(443)
Net income	—		—	—		—		—		1,472		—		1,472		—		1,472
Other comprehensive income	—		—	—		—		—		—		105		105		—		105
Share-based compensation expense	—		—	—		—		57		—		—		57		—		57
Dividends	—		—	—		—		—		(615)		—		(615)		—		(615)
Exercise of share options	—		—	—		55		—		—		—		55		—		55
Restricted share award vestings and other activity	—		—	1		118		(57)		(65)		—		(4)		—		(4)
Repurchase of common shares	—		—	(10)		(836)		—		—		—		(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	$	—	$	10,622

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

TE CONNECTIVITY LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	For the
	Nine Months Ended
	June 26,		June 28,
	2020		2019

	(in millions)
Cash flows from operating activities:
Net income (loss)	$	(471)	$	1,472
(Income) loss from discontinued operations, net of income taxes		(16)		98
Income (loss) from continuing operations		(487)		1,570
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:
Impairment of goodwill		900		—
Depreciation and amortization		530		515
Deferred income taxes		459		(290)
Non-cash lease cost		79		—
Provision for losses on accounts receivable and inventories		28		36
Share-based compensation expense		54		56
Other		40		26
Changes in assets and liabilities, net of the effects of acquisitions and divestitures:
Accounts receivable, net		182		(105)
Inventories		(342)		(59)
Prepaid expenses and other current assets		27		109
Accounts payable		(81)		(86)
Accrued and other current liabilities		(204)		(147)
Income taxes		20		(63)
Other		67		13
Net cash provided by continuing operating activities		1,272		1,575
Net cash used in discontinued operating activities		—		(31)
Net cash provided by operating activities		1,272		1,544
Cash flows from investing activities:
Capital expenditures		(439)		(570)
Proceeds from sale of property, plant, and equipment		6		16
Acquisition of businesses, net of cash acquired		(328)		(283)
Proceeds from divestiture of discontinued operation, net of cash retained by sold operation		—		297
Other		13		3
Net cash used in continuing investing activities		(748)		(537)
Net cash used in discontinued investing activities		—		(2)
Net cash used in investing activities		(748)		(539)
Cash flows from financing activities:
Net decrease in commercial paper		(219)		(270)
Proceeds from issuance of debt		593		746
Repayment of debt		(352)		(441)
Proceeds from exercise of share options		29		55
Repurchase of common shares		(523)		(913)
Payment of common share dividends to shareholders		(466)		(454)
Transfers to discontinued operations		—		(33)
Other		(32)		(32)
Net cash used in continuing financing activities		(970)		(1,342)
Net cash provided by discontinued financing activities		—		33
Net cash used in financing activities		(970)		(1,309)
Effect of currency translation on cash		(7)		2
Net decrease in cash, cash equivalents, and restricted cash		(453)		(302)
Cash, cash equivalents, and restricted cash at beginning of period		927		848
Cash, cash equivalents, and restricted cash at end of period	$	474	$	546

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

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 27, 2019.

Unless otherwise indicated, references in the Condensed Consolidated Financial Statements to fiscal 2020 and fiscal 2019 are to our fiscal years ending September 25, 2020 and ended September 27, 2019, respectively.

Goodwill and Other Intangible Assets

We account for goodwill and other intangible assets in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles–Goodwill and Other, as updated by Accounting Standards Update (“ASU”) No. 2017-04, Simplifying the Test for Goodwill Impairment.

Intangible assets include both indeterminable-lived residual goodwill and determinable-lived identifiable intangible assets. Intangible assets with determinable lives primarily include intellectual property, consisting of patents, trademarks, and unpatented technology, and customer relationships. Recoverability estimates range from 1 to 50 years and costs are generally amortized on a straight-line basis. Evaluations of the remaining useful lives of determinable-lived intangible assets are performed on a periodic basis and when events and circumstances warrant.

At June 26, 2020, we had five reporting units, all of which contained goodwill. There were two reporting units in both the Transportation Solutions and Industrial Solutions segments and one reporting unit in the Communications Solutions segment. When changes occur in the composition of one or more reporting units, goodwill is reassigned to the reporting units affected based on their relative fair values.

Goodwill impairment is evaluated by comparing the carrying value of each reporting unit to its fair value on the first day of the fourth fiscal quarter of each year or whenever we believe a triggering event requiring a more frequent assessment has occurred. In assessing the existence of a triggering event, management relies on several reporting unit-specific factors including operating results, business plans, economic projections, anticipated future cash flows, transactions, and marketplace data. There are inherent uncertainties related to these factors and management’s judgment in applying these factors to the impairment analysis.

When testing for goodwill impairment, we identify potential impairment by comparing the fair value of a reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, a goodwill impairment charge will be recorded for the amount of the excess, limited to the total amount of goodwill allocated to the reporting unit.

Fair value estimates used in the goodwill impairment tests are calculated using an income approach based on the present value of future cash flows of each reporting unit. The income approach has been supported by guideline analyses (a market approach). These approaches incorporate several assumptions including future growth rates, discount rates, income tax rates, and market activity in assessing fair value and are reporting unit specific. Changes in economic and operating conditions impacting these assumptions could result in goodwill impairments in future periods.

Table of Contents

TE CONNECTIVITY LTD.

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

Recently Adopted Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-04, an update to ASC 350. The update simplifies the subsequent measurement of goodwill by eliminating step 2 of the goodwill impairment test. Under the amendments in the update, goodwill impairment should be tested by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments are to be applied on a prospective basis. We elected to early adopt this update and applied it during the quarter ended March 27, 2020. See Note 6 for additional information regarding the interim goodwill impairment test.

In February 2016, the FASB issued ASU No. 2016-02 which codified ASC 842, Leases. This guidance, as subsequently amended, requires lessees to recognize a lease liability and a right-of-use (“ROU”) asset for most leases. We adopted ASC 842, as amended, in the quarter ended December 27, 2019 using the optional transition method permitted by ASU No. 2018-11 which allows for application of the standard at the adoption date and no restatement of comparative periods. We elected to use the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows the carry forward of historical lease classification of existing and expired leases. In addition, we elected to use the hindsight practical expedient in determining the lease term for existing leases. As a result of adoption, we recorded ROU assets and related lease liabilities of approximately $520 million on the Condensed Consolidated Balance Sheet. Adoption did not have a material impact on our results of operations or cash flows. See Note 9 for additional information regarding leases.

2. Restructuring and Other Charges, Net

Net restructuring charges by segment were as follows:


	For the				For the
	Quarters Ended				Nine Months Ended
	June 26,		June 28,		June 26,		June 28,
	2020		2019		2020		2019

	(in millions)
Transportation Solutions	$	55	$	53	$	77	$	98
Industrial Solutions		40		8		56		60
Communications Solutions		3		6		11		26
Restructuring charges, net	$	98	$	67	$	144	$	184

Table of Contents

TE CONNECTIVITY LTD.

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

Activity in our restructuring reserves was as follows:


	Balance at										Currency		Balance at
	September 27,				Changes in		Cash		Non-Cash		Translation		June 26,
	2019		Charges		Estimate		Payments		Items		and Other		2020

	(in millions)
Fiscal 2020 Actions:
Employee severance	$	—	$	120	$	—	$	(10)	$	—	$	—	$	110
Property, plant, and equipment		—		18		—		—		(18)		—		—
Total		—		138		—		(10)		(18)		—		110
Fiscal 2019 Actions:
Employee severance		188		7		(19)		(83)		—		2		95
Facility and other exit costs		1		9		—		(10)		—		2		2
Property, plant, and equipment		—		6		—		—		(6)		—		—
Total		189		22		(19)		(93)		(6)		4		97
Pre-Fiscal 2019 Actions:
Employee severance		73		—		(5)		(40)		—		—		28
Facility and other exit costs		2		6		—		(6)		—		—		2
Property, plant, and equipment		—		2		—		—		(2)		—		—
Total		75		8		(5)		(46)		(2)		—		30
Total Activity	$	264	$	168	$	(24)	$	(149)	$	(26)	$	4	$	237

Fiscal 2020 Actions

During fiscal 2020, we initiated a restructuring program associated with footprint consolidation and structural improvements, due in part to the coronavirus disease COVID-19, across all segments. In connection with this program, during the nine months ended June 26, 2020, we recorded restructuring charges of $138 million. We expect to complete all restructuring actions commenced during the nine months ended June 26, 2020 by the end of fiscal 2022 and to incur additional charges of approximately $30 million related primarily to employee severance and facility exit costs in the Transportation Solutions and Industrial Solutions segments.

Fiscal 2019 Actions

During fiscal 2019, we initiated a restructuring program associated with footprint consolidation and structural improvements impacting all segments. In connection with this program, during the nine months ended June 26, 2020 and June 28, 2019, we recorded net restructuring charges of $3 million and $179 million, respectively. We expect to complete all restructuring actions commenced during fiscal 2019 by the end of fiscal 2021 and to incur additional charges of approximately $10 million related primarily to employee severance and facility exit costs in the Transportation Solutions and Industrial Solutions segments.

Pre-Fiscal 2019 Actions

Prior to fiscal 2019, we initiated a restructuring program associated with footprint consolidation and structural improvements primarily impacting the Industrial Solutions and Transportation Solutions segments. Also prior to fiscal 2019, we initiated a restructuring program associated with footprint consolidation related to recent acquisitions and structural improvements impacting all segments. During the nine months ended June 26, 2020 and June 28, 2019, we recorded net restructuring charges of $3 million and $5 million, respectively, related to pre-fiscal 2019 actions. We expect additional charges related to pre-fiscal 2019 actions to be insignificant.

Table of Contents

TE CONNECTIVITY LTD.

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

Total Restructuring Reserves

Restructuring reserves included on the Condensed Consolidated Balance Sheets were as follows:


	June 26,		September 27,
	2020		2019

	(in millions)
Accrued and other current liabilities	$	211	$	245
Other liabilities		26		19
Restructuring reserves	$	237	$	264

3. Discontinued Operations

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

In connection with the sale, we contractually agreed to continue to honor performance guarantees and letters of credit related to the SubCom business’ projects that existed as of the date of sale. These guarantees had a combined value of approximately $1.2 billion as of June 26, 2020 and are expected to expire at various dates through fiscal 2025. Also, under the terms of the definitive agreement, we are required to issue up to $300 million of new performance guarantees, subject to certain limitations, for projects entered into by the SubCom business following the sale for a period of up to three years. As of June 26, 2020, there were no such new performance guarantees outstanding. We have contractual recourse against the SubCom business if we are required to perform on any SubCom guarantees; however, based on historical experience, we do not anticipate having to perform.

The following table presents the summarized components of loss from discontinued operations, net of income taxes for the nine months ended June 28, 2019:


	(in millions)
Net sales	$	41
Cost of sales		(50)
Operating expenses		(12)
Pre-tax loss from discontinued operations		(21)
Pre-tax loss on sale of discontinued operations		(86)
Income tax benefit		9
Loss from discontinued operations, net of income taxes	$	(98)

4. Acquisitions

First Sensor AG

During the nine months ended June 26, 2020, we acquired approximately 72% of the outstanding shares of First Sensor AG (“First Sensor”), a provider of sensing solutions based in Germany, for €181 million in cash (equivalent to $201 million), net of cash acquired. As a result of the transaction, we recognized a noncontrolling interest with a fair value of €96 million (equivalent to $107 million) as of the acquisition date. The fair value of the noncontrolling interest for First Sensor common shares that were not acquired was determined using the stated price in the Domination and Profit and Loss Transfer

Table of Contents

TE CONNECTIVITY LTD.

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

Agreement (“DPLTA”) which is considered to be a level 2 observable input under the fair value hierarchy. The First Sensor business has been reported as part of our Transportation Solutions segment from the date of acquisition.

We and First Sensor entered into a DPLTA which was approved by First Sensor shareholders in May 2020 and became effective in the fourth quarter of fiscal 2020 following registration in the commercial register in Germany. Under the terms of the DPLTA, upon its effectiveness, First Sensor minority shareholders can elect either (1) to remain First Sensor minority shareholders and receive recurring annual compensation of €0.56 per First Sensor share or (2) to put their First Sensor shares in exchange for compensation of €33.27 per First Sensor share. The ultimate amount and timing of any future cash payments related to the DPLTA is uncertain. Following the registration of the DPLTA in July 2020, the First Sensor noncontrolling interest balance of $108 million was reclassified and will be presented as redeemable noncontrolling interest outside of equity on the Condensed Consolidated Balance Sheet in future periods as the exercise of the put right by First Sensor minority shareholders is not within our control.

Other Acquisitions

During the nine months ended June 26, 2020, we acquired three additional businesses for a combined cash purchase price of $124 million, net of cash acquired. The acquisitions were reported as part of our Transportation Solutions and Industrial Solutions segments from the date of acquisition.

5. Inventories

Inventories consisted of the following:


	June 26,		September 27,
	2020		2019

	(in millions)
Raw materials	$	281	$	260
Work in progress		934		739
Finished goods		1,012		837
Inventories	$	2,227	$	1,836

6. Goodwill

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


	Transportation		Industrial		Communications
	Solutions		Solutions		Solutions		Total

	(in millions)
September 27, 2019⁽¹⁾	$	2,124	$	3,039	$	577	$	5,740
Impairment of goodwill		(900)		—		—		(900)
Acquisitions		273		10		—		283
Currency translation		7		11		2		20
June 26, 2020⁽²⁾	$	1,504	$	3,060	$	579	$	5,143

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

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

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

Table of Contents

TE CONNECTIVITY LTD.

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

allocated the purchase price of First Sensor to goodwill due to the timing of the transaction. Adjustments to the allocation were made during the quarter ended June 26, 2020 to recognize the identifiable intangible assets, assets acquired, and liabilities assumed. Further adjustments to the purchase price allocation may be needed in future periods. In addition, during the nine months ended June 26, 2020, we recognized goodwill in the Transportation Solutions and Industrial Solutions segments in connection with other recent acquisitions. See Note 4 for additional information regarding acquisitions.

We test goodwill allocated to reporting units for impairment annually during the fiscal fourth quarter, or more frequently if events occur or circumstances exist that indicate that a reporting unit’s carrying value may exceed its fair value. As a result of current and projected declines in sales and profitability, due in part to the impact of COVID-19 and projected reductions in global automotive production, of the Sensors reporting unit of the Transportation Solutions segment during the quarter ended March 27, 2020, we determined that an indicator of impairment had occurred and goodwill impairment testing of this reporting unit was required.

As discussed in Note 1, during the quarter ended March 27, 2020, we adopted ASU No. 2017-04 which simplifies the subsequent measurement of goodwill by eliminating step 2 of the goodwill impairment test. Under the new standard, goodwill impairment is measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. We determined the fair value of the Sensors reporting unit to be $1.0 billion as of March 27, 2020. This valuation was based on a discounted cash flows analysis incorporating our estimate of future operating performance, which we consider to be a level 3 unobservable input in the fair value hierarchy, and was corroborated using a market approach valuation. The goodwill impairment test indicated that the carrying value of the reporting unit exceeded its fair value by $900 million. As a result, we recorded a partial impairment charge of $900 million in the quarter ended March 27, 2020. The Sensors reporting unit had a remaining goodwill allocation of $626 million as of March 27, 2020. There were no triggering events identified in the quarter ended June 26, 2020 and therefore no goodwill impairment testing was required.

Should economic conditions deteriorate further or remain depressed for a prolonged period of time, estimates of future cash flows for each of our reporting units may be insufficient to support the carrying value and the goodwill assigned to it, requiring impairment charges, including additional impairment charges for the Sensors reporting unit. Further impairment charges, if any, may be material to our results of operations and financial position.

7. Intangible Assets, Net

Intangible assets consisted of the following:


	June 26, 2020						September 27, 2019
	Gross				Net		Gross				Net
	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
	Amount		Amortization		Amount		Amount		Amortization		Amount

	(in millions)
Customer relationships	$	1,623	$	(524)	$	1,099	$	1,513	$	(459)	$	1,054
Intellectual property		1,212		(714)		498		1,260		(734)		526
Other		23		(8)		15		33		(17)		16
Total	$	2,858	$	(1,246)	$	1,612	$	2,806	$	(1,210)	$	1,596

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

Table of Contents

TE CONNECTIVITY LTD.

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

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


	(in millions)
Remainder of fiscal 2020	$	47
Fiscal 2021		188
Fiscal 2022		187
Fiscal 2023		186
Fiscal 2024		155
Fiscal 2025		137
Thereafter		712
Total	$	1,612

8. Debt

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

During the nine months ended June 26, 2020, TEGSA issued €550 million aggregate principal amount of 0.0% senior notes due in February 2025. The notes are TEGSA’s unsecured senior obligations and rank equally in right of payment with all existing and any future senior indebtedness of TEGSA and senior to any subordinated indebtedness that TEGSA may incur. The notes are fully and unconditionally guaranteed as to payment on an unsecured basis by TE Connectivity Ltd.

During the nine months ended June 26, 2020, we reclassified $250 million of 4.875% senior notes due in January 2021 and €350 million of fixed-to-floating rate senior notes due in June 2021 from long-term debt to short-term debt on the Condensed Consolidated Balance Sheet.

As of September 27, 2019, TEGSA had $219 million of commercial paper outstanding at a weighted-average interest rate of 2.20%. TEGSA had no commercial paper outstanding at June 26, 2020.

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

9. Leases

We have facility, land, vehicle, and equipment leases that expire at various dates. We determine if a contract qualifies as a lease at inception. A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The right to control the use of an asset includes the right to obtain substantially all of the economic benefits of the identified asset and the right to direct the use of the identified asset.

Lease ROU assets and lease liabilities are recognized at the commencement date of the lease based on the present value of remaining lease payments over the lease term. Lease ROU assets represent our right to use the underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. We do not recognize ROU assets or lease liabilities that arise from short-term leases. Since our lease contracts do not contain a readily determinable implicit rate, we determine a fully-collateralized incremental borrowing rate that reflects a similar term to the lease and the economic environment of the applicable country or region in which the asset is leased.

We have elected to account for lease and non-lease components in our real estate leases as a single lease component; other leases generally do not contain non-lease components. The non-lease components in our real estate leases include logistics services, warehousing, and other operational costs. Many of these costs are variable, fluctuating based on services provided, such as pallets shipped in and out of a location or square footage of space occupied. These costs, and any other variable rental costs, are excluded from our ROU assets and lease liabilities, and instead are expensed as incurred. Some of

Table of Contents

TE CONNECTIVITY LTD.

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

our leases may include options to either renew or early terminate the lease. The exercise of these options is generally at our sole discretion and would only occur if there is an economic, financial, or business reason to do so. Such options are included in the lease term if we determine it is reasonably certain they will be exercised.

The components of lease cost were as follows:


	For the		For the
	Quarter Ended		Nine Months Ended
	June 26,		June 26,
	2020		2020

	(in millions)
Operating lease cost	$	27	$	79
Variable lease cost		12		38
Total lease cost	$	39	$	117

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


	June 26,
	2020
	($ in millions)
Operating lease ROU assets:
Other assets	$	451
Operating lease liabilities:
Accrued and other current liabilities	$	115
Other liabilities		346
Total operating lease liabilities	$	461

Weighted-average remaining lease term (in years)		5.7
Weighted-average discount rate		1.8	%

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


	For the
	Nine Months Ended
	June 26,
	2020
	(in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Payments for operating leases⁽¹⁾	$	78

ROU assets obtained in exchange for new operating lease liabilities		17

(1)

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

Table of Contents

TE CONNECTIVITY LTD.

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

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


	(in millions)
Remainder of fiscal 2020	$	30
Fiscal 2021		114
Fiscal 2022		90
Fiscal 2023		72
Fiscal 2024		57
Thereafter		121
Total lease payments		484
Less: interest		(23)
Present value of lease liabilities	$	461

The following table, which was included in our Annual Report on Form 10-K for the fiscal year ended September 27, 2019 and presented in accordance with the previous lease accounting standard, presents the future minimum lease payments under non-cancelable operating lease obligations as of September 27, 2019:


	(in millions)
Fiscal 2020	$	117
Fiscal 2021		102
Fiscal 2022		81
Fiscal 2023		67
Fiscal 2024		55
Thereafter		118
Total	$	540

10. Commitments and Contingencies

Legal Proceedings

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

Environmental Matters

We are involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites. The ultimate cost of site cleanup is difficult to predict given the uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations, and alternative cleanup methods. As of June 26, 2020, we concluded that we would incur investigation and remediation costs at these sites in the reasonably possible range of $14 million to $45 million, and we accrued $18 million as the probable loss, which was the best estimate within this range. We believe that any potential payment of such estimated amounts will not have a material adverse effect on our results of operations, financial position, or cash flows.

Guarantees

Table of Contents

TE CONNECTIVITY LTD.

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

investigation and remediation of environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not expect that these uncertainties will have a material adverse effect on our results of operations, financial position, or cash flows.

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

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

11. Financial Instruments

Foreign Currency Exchange Rate Risk

During fiscal 2015, we entered into cross-currency swap contracts to reduce our exposure to foreign currency exchange rate risk associated with certain intercompany loans. The aggregate notional value of these contracts was €700 million and €1,000 million at June 26, 2020 and September 27, 2019, respectively. Certain contracts were terminated during the nine months ended June 26, 2020; the remaining contracts mature in fiscal 2022. Under the terms of these contracts, which have been designated as cash flow hedges, we make interest payments in euros at 3.50% per annum and receive interest in U.S. dollars at a weighted-average rate of 5.34% per annum. Upon maturity, we will pay the notional value of the contracts in euros and receive U.S. dollars from our counterparties. In connection with the cross-currency swap contracts, both counterparties to each contract are required to provide cash collateral.

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


	June 26,		September 27,
	2020		2019

	(in millions)
Other assets	$	25	$	19

At June 26, 2020 and September 27, 2019, collateral received from or paid to our counterparties approximated the net derivative position. Collateral is recorded in accrued and other current liabilities when the contracts are in a net asset position, or prepaid expenses and other current assets when the contracts are in a net liability position on the Condensed Consolidated Balance Sheets. The impacts of these cross-currency swap contracts were as follows:


	For the				For the
	Quarters Ended				Nine Months Ended
	June 26,		June 28,		June 26,		June 28,
	2020		2019		2020		2019

	(in millions)
Gains recorded in other comprehensive income (loss)	$	—	$	10	$	32	$	42
Gains (losses) excluded from the hedging relationship⁽¹⁾		(14)		(16)		(19)		22

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

Hedge of Net Investment

We hedge our net investment in certain foreign operations using intercompany loans and external borrowings denominated in the same currencies. The aggregate notional value of these hedges was $3,320 million and $3,374 million at June 26, 2020 and September 27, 2019, respectively.

Table of Contents

TE CONNECTIVITY LTD.

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

We also use a cross-currency swap program to hedge our net investment in certain foreign operations. The aggregate notional value of the contracts under this program was $1,776 million and $1,844 million at June 26, 2020 and September 27, 2019, respectively. Under the terms of these contracts, we receive interest in U.S. dollars at a weighted-average rate of 2.56% per annum and pay no interest. Upon the maturity of these contracts at various dates through fiscal 2024, we will pay the notional value of the contracts in the designated foreign currency and receive U.S. dollars from our counterparties. We are not required to provide collateral for these contracts.

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


	June 26,		September 27,
	2020		2019

	(in millions)
Prepaid expenses and other current assets	$	16	$	27
Other assets		30		46
Accrued and other current liabilities		3		2
Other liabilities		2		1

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


		For the			For the
		Quarters Ended			Nine Months Ended
	June 26,		June 28,		June 26,		June 28,
	2020		2019		2020		2019

	(in millions)
Foreign currency exchange gains (losses) on intercompany loans and external borrowings⁽¹⁾	$	(52)	$	(58)	$	(60)	$	54
Gains (losses) on cross-currency swap contracts designated as hedges of net investment⁽¹⁾		(25)		(20)		(3)		17

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

Interest Rate Risk Management

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


	June 26,		September 27,
	2020		2019

	(in millions)
Other liabilities	$	66	$	34

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

For the

Quarters Ended

Nine Months Ended

June 26,

June 28,

June 26,

June 28,

2020

2019

2020

2019

(in millions)

Losses recorded in other comprehensive income (loss)

—

(12)

(32)

(18)

Table of Contents

TE CONNECTIVITY LTD.

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

12. Retirement Plans

The net periodic pension benefit cost (credit) for all non-U.S. and U.S. defined benefit pension plans was as follows:


	Non-U.S. Plans				U.S. Plans
	For the				For the
	Quarters Ended				Quarters Ended
	June 26,		June 28,		June 26,		June 28,
	2020		2019		2020		2019

	(in millions)
Operating expense:
Service cost	$	13	$	12	$	2	$	4
Other (income) expense:
Interest cost		6		11		9		11
Expected return on plan assets		(15)		(16)		(15)		(14)
Amortization of net actuarial loss		10		6		3		4
Amortization of prior service credit		(1)		(2)		—		—
Net periodic pension benefit cost (credit)	$	13	$	11	$	(1)	$	5


	Non-U.S. Plans				U.S. Plans
	For the				For the
	Nine Months Ended				Nine Months Ended
	June 26,		June 28,		June 26,		June 28,
	2020		2019		2020		2019

	(in millions)
Operating expense:
Service cost	$	38	$	36	$	7	$	10
Other (income) expense:
Interest cost		18		32		27		34
Expected return on plan assets		(45)		(48)		(44)		(43)
Amortization of net actuarial loss		30		18		7		13
Amortization of prior service credit		(4)		(6)		—		—
Net periodic pension benefit cost (credit)	$	37	$	32	$	(3)	$	14

During the nine months ended June 26, 2020, we contributed $29 million to our non-U.S. pension plans.

13. Income Taxes

We recorded income tax expense of $185 million and an income tax benefit of $245 million for the quarters ended June 26, 2020 and June 28, 2019, respectively. The income tax expense for the quarter ended June 26, 2020 included $170 million of income tax expense related to an increase to the valuation allowance for certain non-U.S. deferred tax assets. Due to the COVID-19 pandemic and its negative impact on our current and expected future operating profit and taxable income, we believe it is more likely than not that a portion of our deferred tax assets will not be realized. Depending on the duration and severity of COVID-19 disruptions to our business, additional adjustments to our valuation allowance may be required in future periods. 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.

We recorded income tax expense of $674 million and an income tax benefit of $76 million for the nine months ended June 26, 2020 and June 28, 2019, respectively. The income tax expense for the nine months ended June 26, 2020 included $355 million of income tax expense related to the tax impacts of certain measures of Swiss Tax Reform. In addition,

Table of Contents

TE CONNECTIVITY LTD.

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

the income tax expense included $170 million of income tax expense related to an increase to the valuation allowance for certain non-U.S. deferred tax assets, partially offset by an income tax benefit of $31 million related to pre-separation tax matters and the termination of the Tax Sharing Agreement. See the “Swiss Tax Reform” and “Tax Sharing Agreement” below for additional information. The pre-tax goodwill impairment charge of $900 million recorded during the nine months ended June 26, 2020 resulted in a tax benefit of $4 million as the associated goodwill was primarily not deductible for income tax purposes. See Note 6 for additional information regarding the impairment of goodwill. The income tax 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.

Although it is difficult to predict the timing or results of our worldwide examinations, we estimate that approximately $50 million of unrecognized income tax benefits, excluding the impact relating to accrued interest and penalties, could be resolved within the next twelve months.

We are not aware of any other matters that would result in significant changes to the amount of unrecognized income tax benefits reflected on the Condensed Consolidated Balance Sheet as of June 26, 2020.

Swiss Tax Reform

The Federal Act on Tax Reform and AHV Financing eliminates certain preferential tax items and implements new tax rates at both the federal and cantonal levels. During the quarter ended June 28, 2019, the federal tax authority issued guidance abolishing certain interest deductions, and as a result of this measure, we recorded a $214 million income tax benefit related primarily to the reduction of the valuation allowance for deferred tax assets. Based on our forecast of taxable income, reflecting this measure, we believed it was more likely than not that additional deferred tax assets for tax loss carryforwards in Switzerland would be realized in the future. The federal provisions of Swiss Tax Reform were enacted into law in the quarter ended September 27, 2019.

In October 2019, the canton of Schaffhausen enacted Swiss Tax Reform into law, including reductions in tax rates. During the nine months ended June 26, 2020, we recognized $355 million of income tax expense related primarily to cantonal implementation and the resulting write-down of certain deferred tax assets to the lower tax rates.

Tax Sharing Agreement

Upon our separation from Tyco International plc in fiscal 2007, we entered into a Tax Sharing Agreement with Tyco International plc (now part of Johnson Controls International plc) and Covidien plc (now part of Medtronic plc) under which we shared certain income tax liabilities for periods prior to and including June 29, 2007. Pursuant to the Tax Sharing Agreement, we entered into certain guarantee commitments and indemnifications.

In March 2020, we, Johnson Controls International plc, and Medtronic plc entered into an agreement to terminate the Tax Sharing Agreement. We believe that substantially all income tax matters that may be subject to the Tax Sharing Agreement have been settled with tax authorities and we do not expect any remaining tax matters to have a material effect on our results of operations, financial position, or cash flows. Accordingly, during the nine months ended June 26, 2020, we recognized an income tax benefit of $31 million and net other income of $8 million representing settlement of the remaining shared pre-separation income tax matters and indemnification balances.

Table of Contents

TE CONNECTIVITY LTD.

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

14. Earnings (Loss) Per Share

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


	For the		For the
	Quarters Ended		Nine Months Ended
	June 26,	June 28,	June 26,	June 28,
	2020	2019	2020	2019

	(in millions)
Basic	330	337	333	339
Dilutive impact of share-based compensation arrangements	—	2	—	2
Diluted	330	339	333	341

For both the quarter and nine months ended June 26, 2020, there were one million nonvested share awards and options outstanding with underlying exercise prices less than the average market prices of our common shares; however, these were excluded from the calculation of diluted loss per share as inclusion would be antidilutive as a result of our loss during the period.

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


	For the		For the
	Quarters Ended		Nine Months Ended
	June 26,	June 28,	June 26,	June 28,
	2020	2019	2020	2019

	(in millions)
Antidilutive share options	4	1	3	1

15. Equity

Common Shares

In March 2020, our shareholders reapproved and extended through March 11, 2022, our board of directors’ authorization to issue additional new shares, subject to certain conditions specified in our articles of association, in aggregate not exceeding 50% of the amount of our authorized shares.

Common Shares Held in Treasury

In March 2020, our shareholders approved the cancellation of approximately 12 million shares purchased under our share repurchase program during the period beginning September 29, 2018 and ending September 27, 2019. The capital reduction by cancellation of these shares was subject to a notice period and filing with the commercial register in Switzerland and became effective in May 2020.

Table of Contents

TE CONNECTIVITY LTD.

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

Dividends

We paid cash dividends to shareholders as follows:

For the

Quarters Ended

Nine Months Ended

June 26,

June 28,

June 26,

June 28,

2020

2019

2020

2019

Dividends paid per common share

0.48

0.46

1.40

1.34

In March 2020, our shareholders approved a dividend payment to shareholders of $1.92 per share, payable in four equal quarterly installments of $0.48 per share beginning in the third quarter of fiscal 2020 and ending in the second quarter of fiscal 2021.

Upon shareholders’ approval of a dividend payment, we record a liability with a corresponding charge to shareholders’ equity. At June 26, 2020 and September 27, 2019, the unpaid portion of the dividends recorded in accrued and other current liabilities on the Condensed Consolidated Balance Sheets totaled $475 million and $308 million, respectively.

Share Repurchase Program

Common shares repurchased under the share repurchase program were as follows:


	For the
	Nine Months Ended
	June 26,		June 28,
	2020		2019

	(in millions)
Number of common shares repurchased		6		10
Repurchase value	$	505	$	836

At June 26, 2020, we had $1.0 billion of availability remaining under our share repurchase authorization.

Table of Contents

TE CONNECTIVITY LTD.

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

16. 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 26,

June 28,

June 26,

June 28,

2020

2019

2020

2019

(in millions)

Share-based compensation expense

As of June 26, 2020, there was $135 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 27, 2019, we granted the following share-based awards as part of our annual incentive plan grant:


		Grant-Date
	Shares	Fair Value
	(in millions)
Share options	1.5	$	15.52
Restricted share awards	0.5		93.63
Performance share awards	0.2		93.63

As of June 26, 2020, we had 15 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		21	%
Risk-free interest rate		1.8	%
Expected annual dividend per share	$	1.84
Expected life of options (in years)		5.1

Table of Contents

TE CONNECTIVITY LTD.

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

17. 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 26,		June 28,		June 26,		June 28,
	2020		2019		2020		2019

	(in millions)
Transportation Solutions:
Automotive	$	797	$	1,418	$	3,567	$	4,312
Commercial transportation		233		317		785		938
Sensors		225		233		628		675
Total Transportation Solutions		1,255		1,968		4,980		5,925
Industrial Solutions:
Aerospace, defense, oil, and gas		265		342		892		958
Industrial equipment		265		309		808		950
Medical⁽³⁾		161		176		526		520
Energy		174		178		528		512
Total Industrial Solutions		865		1,005		2,754		2,940
Communications Solutions:
Data and devices		276		245		713		753
Appliances		152		171		464		530
Total Communications Solutions		428		416		1,177		1,283
Total	$	2,548	$	3,389	$	8,911	$	10,148

(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.

(3)

Effective for fiscal 2020, we are separately presenting net sales in the medical end market. Such amounts were previously included in net sales in the industrial equipment end market.

Table of Contents

TE CONNECTIVITY LTD.

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 26,		June 28,		June 26,		June 28,
	2020		2019		2020		2019

	(in millions)
Europe/Middle East/Africa (“EMEA”):
Transportation Solutions	$	410	$	785	$	1,878	$	2,365
Industrial Solutions		313		369		1,014		1,101
Communications Solutions		54		63		170		198
Total EMEA		777		1,217		3,062		3,664
Asia–Pacific:
Transportation Solutions		606		705		1,979		2,143
Industrial Solutions		153		155		436		465
Communications Solutions		273		241		721		736
Total Asia–Pacific		1,032		1,101		3,136		3,344
Americas:
Transportation Solutions		239		478		1,123		1,417
Industrial Solutions		399		481		1,304		1,374
Communications Solutions		101		112		286		349
Total Americas		739		1,071		2,713		3,140
Total	$	2,548	$	3,389	$	8,911	$	10,148

(1)

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

Operating income (loss) by segment was as follows:


	For the				For the
	Quarters Ended				Nine Months Ended
	June 26,		June 28,		June 26,			June 28,
	2020		2019		2020			2019

	(in millions)
Transportation Solutions	$	(1)	$	308	$	(291)	⁽¹⁾	$	956
Industrial Solutions		70		156		327			393
Communications Solutions		65		56		154			185
Total	$	134	$	520	$	190		$	1,534

(1)

Includes goodwill impairment charge of $900 million. See Note 6 for additional information.

Table of Contents

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 (decline) 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 industrial technology leader creating a safer, sustainable, productive, and connected future. Our broad range of connectivity and sensor solutions, proven in the harshest environments, enable advancements in transportation, industrial applications, medical technology, energy, data communications, and the home.

The third quarter and first nine months of fiscal 2020 included the following:

●

Our net sales decreased 24.8% in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019 due primarily to sales declines in the Transportation Solutions and Industrial Solutions segments. In the first nine months of fiscal 2020, our net sales decreased 12.2% as compared to the same period of fiscal 2019 with sales declines across all segments. On an organic basis, our net sales decreased 25.0% and 11.7% during the third quarter and first nine months of fiscal 2020, respectively, as compared to the same periods of fiscal 2019. Our net sales declines included significant unfavorable impacts from the COVID-19 pandemic.

●

Our net sales by segment were as follows:

●

Transportation Solutions—Our net sales decreased 36.2% and 15.9% in the third quarter and first nine months of fiscal 2020, respectively, due to sales declines in all end markets.

●

Industrial Solutions—Our net sales decreased 13.9% and 6.3% in the third quarter and first nine months of fiscal 2020, respectively, primarily as a result of sales declines in the aerospace, defense, oil, and gas and the industrial equipment end markets.

●

Communications Solutions—Our net sales increased 2.9% and decreased 8.3% in the third quarter and first nine months of fiscal 2020, respectively. The sales increase in the third quarter of fiscal 2020 resulted primarily from sales increases in the data and devices end market. The sales decrease in the first nine months of fiscal 2020 was due to sales declines in both the appliances and the data and devices end markets.

●

Net cash provided by continuing operating activities was $1,272 million in the first nine months of fiscal 2020.

●

We acquired approximately 72% of the outstanding shares of First Sensor AG (“First Sensor”), a provider of sensing solutions based in Germany, during the first nine months of fiscal 2020.

Table of Contents

●

During the first nine months of fiscal 2020, we recorded a goodwill impairment charge of $900 million related to the Sensors reporting unit in our Transportation Solutions segment.

COVID-19 Pandemic and Economic Conditions

A novel strain of coronavirus (“COVID-19”) was first identified in China in December 2019 and subsequently declared a pandemic by the World Health Organization. To date, COVID-19 has surfaced in nearly all regions around the world and resulted in travel restrictions and business slowdowns or shutdowns in affected areas. The COVID-19 pandemic negatively affected our sales and operating results during the second and third quarters of fiscal 2020, and we expect that COVID-19 will have a material impact on our financial condition and results of operations in the near term and may have a material impact on our financial condition, liquidity, and results of operations in future periods.

COVID-19 is currently impacting, and we expect that COVID-19 will continue to impact, our business operations globally, causing disruption in our suppliers’ and customers’ supply chains, some of our business locations to reduce or suspend operations, and a reduction in demand for certain products from direct customers or end markets. Accordingly, while a number of our businesses are operating as essential businesses, some have had and continue to have adjusted, reduced, or suspended operating activities at certain locations. In addition, COVID-19 may have far-reaching impacts on many additional aspects of our operations, directly and indirectly, including with respect to its impacts on customer behaviors, business and manufacturing operations, inventory, our employees, and the market generally, and the scope and nature of these impacts continue to evolve each day. We expect to continue to assess the evolving impact of the COVID-19 pandemic and intend to adjust our operations accordingly. For example, throughout our operations, we have enacted additional health and safety measures for the protection of our employees, including providing personal protective equipment, enhanced cleaning and sanitizing of our facilities, and remote working arrangements.

We expect that COVID-19 will negatively impact several of the markets we serve, in particular the automotive and commercial aerospace markets. We are expecting reduced sales volumes in these markets in the near term relative to prior year and may experience reduced sales volumes in these markets in future periods. However, we expect an overall increase in our net sales in the fourth quarter of fiscal 2020 as compared to the third quarter of fiscal 2020. See “Outlook” below for additional information.

In response to the current economic environment and our sales declines relative to prior year, we have taken and continue to focus on actions to manage costs. These include restructuring and other cost reduction initiatives, such as reducing discretionary spending, cutting capital expenditures, reducing travel, and furloughing certain employees. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, suppliers, shareholders, and the communities in which we operate.

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act provides certain relief to companies, including provisions relating to payroll tax credits, deferral of employer side social security taxes, net operating loss carryback periods, acceleration of alternative minimum tax credit refunds, modifications to the net interest deduction rules, and delayed minimum contributions with respect to defined benefit plans. We do not expect the CARES Act to have a material effect on our results of operations, financial position, or liquidity.

For a further discussion of the risks and uncertainties relating to the COVID-19 pandemic for our results of operations and business condition, see “Part II. Item 1A. Risk Factors” below.

Outlook

We expect our net sales to increase approximately 10% in the fourth quarter of fiscal 2020 as compared to $2.5 billion in the third quarter of fiscal 2020. This increase is driven primarily by expected growth of approximately 20% in the Transportation Solutions segment. We expect a slight increase in our net sales in the Industrial Solutions segment in the

Table of Contents

fourth quarter of fiscal 2020; however, we expect this growth will be offset by modest declines in the Communications Solutions segment.

Within the Transportation Solutions segment, we expect our net sales growth in the automotive end market in the fourth quarter of fiscal 2020 to be driven by an approximate 40% increase in global automotive production as compared to the third quarter of fiscal 2020.

In the fourth quarter of fiscal 2020, we expect our net sales to be negatively impacted by residual supply chain disruptions resulting from the COVID-19 pandemic.

The above outlook is based on foreign currency exchange rates that are consistent with current levels.

We are monitoring the current macroeconomic environment and its potential effects on our customers and the end markets we serve, including developments related to the COVID-19 pandemic. We have taken actions to manage costs and will 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.”

Acquisitions

We acquired approximately 72% of the outstanding shares of First Sensor for €181 million in cash (equivalent to $201 million), net of cash acquired, during the first nine months of fiscal 2020. This business has been reported as part of our Transportation Solutions segment from the date of acquisition.

During the first nine months of fiscal 2020, we acquired three additional businesses for a combined cash purchase price of $124 million, net of cash acquired. The acquisitions were reported as part of our Transportation Solutions and Industrial Solutions segments from the date of acquisition.

See Note 4 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions.

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 26,				June 28,				June 26,				June 28,
	2020				2019				2020				2019

	($ in millions)
Transportation Solutions	$	1,255	49	%	$	1,968	58	%	$	4,980	56	%	$	5,925	58	%
Industrial Solutions		865	34			1,005	30			2,754	31			2,940	29
Communications Solutions		428	17			416	12			1,177	13			1,283	13
Total	$	2,548	100	%	$	3,389	100	%	$	8,911	100	%	$	10,148	100	%

Table of Contents

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


	Change in Net Sales for the Quarter Ended June 26, 2020												Change in Net Sales for the Nine Months Ended June 26, 2020
	versus Net Sales for the Quarter Ended June 28, 2019												versus Net Sales for the Nine Months Ended June 28, 2019
	Net Sales				Organic Net Sales								Net Sales				Organic Net Sales
	Growth (Decline)				Growth (Decline)				Translation		Acquisitions		Growth (Decline)				Growth (Decline)				Translation		Acquisitions

	($ in millions)
Transportation Solutions	$	(713)	(36.2)	%	$	(738)	(37.3)	%	$	(19)	$	44	$	(945)	(15.9)	%	$	(949)	(16.0)	%	$	(91)	$	95
Industrial Solutions		(140)	(13.9)			(128)	(12.7)			(12)		—		(186)	(6.3)			(147)	(5.0)			(39)		—
Communications Solutions		12	2.9			16	3.8			(4)		—		(106)	(8.3)			(98)	(7.6)			(8)		—
Total	$	(841)	(24.8)	%	$	(850)	(25.0)	%	$	(35)	$	44	$	(1,237)	(12.2)	%	$	(1,194)	(11.7)	%	$	(138)	$	95

Net sales decreased $841 million, or 24.8%, in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019. The decrease in net sales resulted from organic net sales declines of 25.0% and the negative impact of foreign currency translation of 1.1% due to the weakening of certain foreign currencies, partially offset by sales contributions from acquisitions of 1.3%. In the third quarter of fiscal 2020, our net sales declines included significant unfavorable impacts from the COVID-19 pandemic. Price erosion adversely affected organic net sales by $42 million in the third quarter of fiscal 2020.

In the first nine months of fiscal 2020, net sales decreased $1,237 million, or 12.2%, as compared to the first nine months of fiscal 2019 due to organic net sales declines of 11.7% and the negative impact of foreign currency translation of 1.4% due to the weakening of certain foreign currencies, partially offset by sales contributions from acquisitions of 0.9%. The significant unfavorable impacts of the COVID-19 pandemic were included in our net sales declines in the first nine months of fiscal 2020. Price erosion adversely affected organic net sales by $136 million in the first nine months of fiscal 2020.

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

Net Sales by Geographic Region. Our business operates in three geographic regions—Europe/Middle East/Africa (“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 2020.

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 26,				June 28,				June 26,				June 28,
	2020				2019				2020				2019

	($ in millions)
EMEA	$	777	30	%	$	1,217	36	%	$	3,062	34	%	$	3,664	36	%
Asia–Pacific		1,032	41			1,101	32			3,136	35			3,344	33
Americas		739	29			1,071	32			2,713	31			3,140	31
Total	$	2,548	100	%	$	3,389	100	%	$	8,911	100	%	$	10,148	100	%

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

Table of Contents

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 26, 2020												Change in Net Sales for the Nine Months Ended June 26, 2020
	versus Net Sales for the Quarter Ended June 28, 2019												versus Net Sales for the Nine Months Ended June 28, 2019
	Net Sales				Organic Net Sales								Net Sales				Organic Net Sales
	Growth (Decline)				Growth (Decline)				Translation		Acquisitions		Growth (Decline)				Growth (Decline)				Translation		Acquisitions

	($ in millions)
EMEA	$	(440)	(36.2)	%	$	(462)	(37.7)	%	$	(12)	$	34	$	(602)	(16.4)	%	$	(584)	(15.9)	%	$	(75)	$	57
Asia–Pacific		(69)	(6.3)			(53)	(4.7)			(16)		—		(208)	(6.2)			(167)	(5.0)			(41)		—
Americas		(332)	(31.0)			(335)	(31.3)			(7)		10		(427)	(13.6)			(443)	(14.1)			(22)		38
Total	$	(841)	(24.8)	%	$	(850)	(25.0)	%	$	(35)	$	44	$	(1,237)	(12.2)	%	$	(1,194)	(11.7)	%	$	(138)	$	95

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 26,			June 28,					June 26,			June 28,
	2020			2019			Change		2020			2019			Change

	($ in millions)
Cost of sales	$	1,841		$	2,279		$	(438)	$	6,145		$	6,806		$	(661)
As a percentage of net sales		72.3	%		67.2	%				69.0	%		67.1	%

Gross margin	$	707		$	1,110		$	(403)	$	2,766		$	3,342		$	(576)
As a percentage of net sales		27.7	%		32.8	%				31.0	%		32.9	%

Gross margin decreased $403 million and $576 million in the third quarter and first nine months of fiscal 2020, respectively, as compared to the same periods of fiscal 2019. The decreases were primarily a result of lower volume, price erosion, and lower manufacturing productivity, partially offset by lower material costs. Gross margin as a percentage of net sales decreased to 27.7% in the third quarter of fiscal 2020 from 32.8% in the third quarter of fiscal 2019 and decreased to 31.0% in the first nine months of fiscal 2020 from 32.9% in the same period of fiscal 2019.

We use a wide variety of raw materials in the manufacture of our products. Cost of sales and gross margin are subject to variability in raw material prices which continue to fluctuate for many of the raw materials we use, including copper, gold, and silver. We expect to purchase approximately 160 million pounds of copper, 110,000 troy ounces of gold, and 2.3 million troy ounces of silver in fiscal 2020. The following table presents the average prices incurred related to copper, gold, and silver:


		For the				For the
		Quarters Ended				Nine Months Ended
		June 26,		June 28,		June 26,		June 28,
	Measure	2020		2019		2020		2019
Copper	Lb.	$	2.78	$	3.02	$	2.80	$	2.96
Gold	Troy oz.		1,411		1,305		1,380		1,304
Silver	Troy oz.		15.97		16.14		16.13		16.45

Table of Contents

Operating Expenses

The following table presents operating expense information:


	For the								For the
	Quarters Ended								Nine Months Ended
	June 26,			June 28,					June 26,			June 28,
	2020			2019			Change		2020			2019			Change

	($ in millions)
Selling, general, and administrative expenses	$	321		$	356		$	(35)	$	1,040		$	1,118		$	(78)
As a percentage of net sales		12.6	%		10.5	%				11.7	%		11.0	%

Restructuring and other charges, net	$	98		$	67		$	31	$	144		$	184		$	(40)
Impairment of goodwill		—			—			—		900			—			900

Selling, General, and Administrative Expenses. Selling, general, and administrative expenses decreased $35 million in the third quarter of fiscal 2020 from the third quarter of fiscal 2019 due primarily to reduced selling expenses. In the first nine months of fiscal 2020, selling, general, and administrative expenses decreased $78 million from the same period of fiscal 2019 due primarily to reduced selling expenses, cost control measures and savings attributable to restructuring actions, and receipt of a lease termination incentive. Selling, general, and administrative expenses as a percentage of net sales increased to 12.6% in the third quarter of fiscal 2020 from 10.5% in the third quarter of fiscal 2019 and increased to 11.7% in the first nine months of fiscal 2020 from 11.0% in the same period of fiscal 2019.

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 2020, we initiated a restructuring program associated with footprint consolidation and structural improvements, due in part to COVID-19, across all segments. We incurred net restructuring charges of $144 million during the first nine months of fiscal 2020, of which $138 million related to the fiscal 2020 restructuring program. Annualized cost savings related to the fiscal 2020 actions commenced during the first nine months of fiscal 2020 are expected to be approximately $140 million and are expected to be realized by the end of fiscal 2022. Cost savings will be reflected primarily in cost of sales and selling, general, and administrative expenses. For fiscal 2020, we expect total restructuring charges to be approximately $250 million and total spending, which will be funded with cash from operations, to be approximately $265 million.

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

Impairment of Goodwill. As a result of current and projected declines in sales and profitability, due in part to the impact of COVID-19 and projected reductions in global automotive production, of the Sensors reporting unit of the Transportation Solutions segment during the second quarter of fiscal 2020, we determined that an indicator of impairment had occurred and goodwill impairment testing of this reporting unit was required.

As discussed in Note 1 to the Condensed Consolidated Financial Statements, during the second quarter of fiscal 2020, we adopted Accounting Standards Update (“ASU”) No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating step 2 of the goodwill impairment test. Under the new standard, goodwill impairment is measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. We determined the fair value of the Sensors reporting unit to be $1.0 billion as of March 27, 2020. This valuation was based on a discounted cash flows analysis incorporating our estimate of future operating performance, which we consider to be a level 3 unobservable input in the fair value hierarchy, and was corroborated using a market approach valuation. The goodwill impairment test indicated that the carrying value of the reporting unit exceeded its fair value by $900 million. As a result, we recorded a partial impairment charge of $900 million in the second quarter of fiscal 2020. The Sensors reporting unit had a remaining goodwill allocation of $626 million as of March 27, 2020. There were no triggering events identified in the third quarter of fiscal 2020 and therefore no goodwill

Table of Contents

impairment testing was required. See Note 6 to the Condensed Consolidated Financial Statements for additional information regarding the impairment of goodwill.

Operating Income

The following table presents operating income and operating margin information:


	For the								For the
	Quarters Ended								Nine Months Ended
	June 26,			June 28,					June 26,			June 28,
	2020			2019			Change		2020			2019			Change

	($ in millions)
Operating income	$	134		$	520		$	(386)	$	190		$	1,534		$	(1,344)
Operating margin		5.3	%		15.3	%				2.1	%		15.1	%

Operating income included the following:


	For the				For the
	Quarters Ended				Nine Months Ended
	June 26,		June 28,		June 26,		June 28,
	2020		2019		2020		2019

	(in millions)
Acquisition-related charges:
Acquisition and integration costs	$	8	$	9	$	27	$	21
Charges associated with the amortization of acquisition-related fair value adjustments		—		—		—		3
		8		9		27		24
Restructuring and other charges, net		98		67		144		184
Impairment of goodwill		—		—		900		—
Total	$	106	$	76	$	1,071	$	208

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 26,			June 28,					June 26,			June 28,
	2020			2019			Change		2020			2019			Change

	($ in millions)
Interest expense	$	13		$	13		$	—	$	36		$	55		$	(19)

Income tax expense (benefit)		185			(245)			430		674			(76)			750
Effective tax rate		145.7	%		(47.8)	%				360.4	%		(5.1)	%

Income (loss) from discontinued operations, net of income taxes	$	17		$	(1)		$	18	$	16		$	(98)		$	114

Interest Expense. Interest expense decreased $19 million in the first nine months of fiscal 2020 as compared to the same period of fiscal 2019 due primarily to the cross-currency swap program that hedges our net investment in certain foreign operations. The aggregate notional value of the contracts under this program was $1,776 million at June 26, 2020. Under the terms of these contracts, we receive interest in U.S. dollars at a weighted-average rate of 2.56% per annum and pay no interest. See Note 11 to the Condensed Consolidated Financial Statements for additional information regarding our cross-currency swap program.

Table of Contents

Income Taxes. See Note 13 to the Condensed Consolidated Financial Statements for discussion of items impacting income tax expense and the effective tax rate for the third quarters and first nine months of fiscal 2020 and 2019, including an increase to the valuation allowance for certain non-U.S. deferred tax assets, the Switzerland Federal Act on Tax Reform and AHV Financing, and the termination of the Tax Sharing Agreement.

Income (Loss) from Discontinued Operations, Net of Income Taxes. 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. The net sales of the business were $41 million in the first nine months of fiscal 2019 which represented one month of activity. 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 26,				June 28,				June 26,				June 28,
	2020				2019				2020				2019

	($ in millions)
Automotive	$	797	63	%	$	1,418	72	%	$	3,567	71	%	$	4,312	73	%
Commercial transportation		233	19			317	16			785	16			938	16
Sensors		225	18			233	12			628	13			675	11
Total	$	1,255	100	%	$	1,968	100	%	$	4,980	100	%	$	5,925	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 26, 2020												Change in Net Sales for the Nine Months Ended June 26, 2020
	versus Net Sales for the Quarter Ended June 28, 2019												versus Net Sales for the Nine Months Ended June 28, 2019
	Net Sales				Organic Net Sales								Net Sales				Organic Net Sales
	Growth (Decline)				Growth (Decline)				Translation		Acquisitions		Growth (Decline)				Growth (Decline)				Translation		Acquisitions

	($ in millions)
Automotive	$	(621)	(43.8)	%	$	(609)	(42.8)	%	$	(12)	$	—	$	(745)	(17.3)	%	$	(681)	(15.8)	%	$	(64)	$	—
Commercial transportation		(84)	(26.5)			(78)	(24.1)			(6)		—		(153)	(16.3)			(159)	(16.9)			(21)		27
Sensors		(8)	(3.4)			(51)	(22.1)			(1)		44		(47)	(7.0)			(109)	(16.2)			(6)		68
Total	$	(713)	(36.2)	%	$	(738)	(37.3)	%	$	(19)	$	44	$	(945)	(15.9)	%	$	(949)	(16.0)	%	$	(91)	$	95

Net sales in the Transportation Solutions segment decreased $713 million, or 36.2%, in the third quarter of fiscal 2020 from the third quarter of fiscal 2019 due to organic net sales declines of 37.3% and the negative impact of foreign currency translation of 1.1%, partially offset by sales contributions from acquisitions of 2.2%. In the third quarter of fiscal 2020, our net sales declines included significant unfavorable impacts from the COVID-19 pandemic. Our organic net sales by industry end market were as follows:

●

Automotive—Our organic net sales decreased 42.8% in the third quarter of fiscal 2020 with declines of 64.2% in the Americas region, 55.4% in the EMEA region, and 18.3% in the Asia–Pacific region. Our overall organic net sales decreased due to declines in global automotive production.

Table of Contents

●

Commercial transportation—Our organic net sales decreased 24.1% in the third quarter of fiscal 2020 as a result of market weakness in the Americas and EMEA regions, partially offset by growth in the Asia–Pacific region.

●

Sensors—Our organic net sales decreased 22.1% in the third quarter of fiscal 2020 due to weakness across all markets.

In the first nine months of fiscal 2020, net sales in the Transportation Solutions segment decreased $945 million, or 15.9%, as compared to the first nine months of fiscal 2019 as a result of organic net sales declines of 16.0% and the negative impact of foreign currency translation of 1.5%, partially offset by sales from acquisitions of 1.6%. Net sales declines in the first nine months of fiscal 2020 included the significant unfavorable impacts of the COVID-19 pandemic. Our organic net sales by industry end market were as follows:

●

Automotive—Our organic net sales decreased 15.8% in the first nine months of fiscal 2020 with declines of 21.7% in the Americas region, 20.1% in the EMEA region, and 8.3% in the Asia–Pacific region. Our overall organic net sales decreased as a result of declines in global automotive production; however, our sales decreased at a lesser rate than global automotive production due to content gains and customer inventory builds.

●

Commercial transportation—Our organic net sales decreased 16.9% in the first nine months of fiscal 2020 due to market weakness in the Americas and EMEA regions, partially offset by growth in the Asia–Pacific region.

●

Sensors—Our organic net sales decreased 16.2% in the first nine months of fiscal 2020 as a result of weakness across all markets.

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


	For the								For the
	Quarters Ended								Nine Months Ended
	June 26,			June 28,					June 26,			June 28,
	2020			2019			Change		2020			2019			Change

	($ in millions)
Operating income (loss)	$	(1)		$	308		$	(309)	$	(291)		$	956		$	(1,247)
Operating margin		(0.1)	%		15.7	%				(5.8)	%		16.1	%

Operating income (loss) in the Transportation Solutions segment decreased $309 million and $1,247 million in the third quarter and first nine months of fiscal 2020, respectively, as compared to the same periods of fiscal 2019. The Transportation Solutions segment’s operating income (loss) included the following:


	For the				For the
	Quarters Ended				Nine Months Ended
	June 26,		June 28,		June 26,		June 28,
	2020		2019		2020		2019

	(in millions)
Acquisition and integration costs	$	6	$	6	$	21	$	13
Restructuring and other charges, net		55		53		77		98
Impairment of goodwill		—		—		900		—
Total	$	61	$	59	$	998	$	111

Excluding these items, operating income decreased in the third quarter and first nine months of fiscal 2020 as compared to the same periods of fiscal 2019 primarily as a result of lower volume and, to a lesser degree, price erosion and lower manufacturing productivity, partially offset by lower material costs.

Table of Contents

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 26,				June 28,				June 26,				June 28,
	2020				2019				2020				2019

	($ in millions)
Aerospace, defense, oil, and gas	$	265	31	%	$	342	34	%	$	892	32	%	$	958	33	%
Industrial equipment		265	31			309	31			808	30			950	32
Medical		161	19			176	17			526	19			520	18
Energy		174	19			178	18			528	19			512	17
Total	$	865	100	%	$	1,005	100	%	$	2,754	100	%	$	2,940	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 26, 2020										Change in Net Sales for the Nine Months Ended June 26, 2020
	versus Net Sales for the Quarter Ended June 28, 2019										versus Net Sales for the Nine Months Ended June 28, 2019
	Net Sales				Organic Net Sales						Net Sales				Organic Net Sales
	Growth (Decline)				Growth (Decline)				Translation		Growth (Decline)				Growth (Decline)				Translation

	($ in millions)
Aerospace, defense, oil, and gas	$	(77)	(22.5)	%	$	(74)	(21.9)	%	$	(3)	$	(66)	(6.9)	%	$	(57)	(6.0)	%	$	(9)
Industrial equipment		(44)	(14.2)			(40)	(12.7)			(4)		(142)	(14.9)			(127)	(13.4)			(15)
Medical		(15)	(8.5)			(15)	(8.5)			—		6	1.2			7	1.3			(1)
Energy		(4)	(2.2)			1	0.5			(5)		16	3.1			30	5.8			(14)
Total	$	(140)	(13.9)	%	$	(128)	(12.7)	%	$	(12)	$	(186)	(6.3)	%	$	(147)	(5.0)	%	$	(39)

In the Industrial Solutions segment, net sales decreased $140 million, or 13.9%, in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019 due to organic net sales declines of 12.7% and the negative impact of foreign currency translation of 1.2%. Net sales declines in the third quarter of fiscal 2020 included significant unfavorable impacts from the COVID-19 pandemic. Our organic net sales by industry end market were as follows:

●

Aerospace, defense, oil, and gas—Our organic net sales decreased 21.9% in the third quarter of fiscal 2020 due primarily to weakness in the commercial aerospace and the defense markets.

●

Industrial equipment—Our organic net sales decreased 12.7% in the third quarter of fiscal 2020 as a result of market weakness in the Americas and EMEA regions, partially offset by growth in the Asia–Pacific region.

●

Medical—Our organic net sales decreased 8.5% in the third quarter of fiscal 2020 due primarily to delays in elective procedures.

●

Energy—Our organic net sales increased 0.5% in the third quarter of fiscal 2020 primarily as a result of growth in the EMEA region, partially offset by declines in the Americas region.

In the first nine months of fiscal 2020, net sales in the Industrial Solutions segment decreased $186 million, or 6.3%, as compared to the same period of fiscal 2019 as a result of organic net sales declines of 5.0% and the negative impact of foreign currency translation of 1.3%. The significant unfavorable impacts of the COVID-19 pandemic were included in our net sales declines in the first nine months of fiscal 2020. Our organic net sales by industry end market were as follows:

●

Aerospace, defense, oil, and gas—Our organic net sales decreased 6.0% in the first nine months of fiscal 2020 due primarily to weakness in the commercial aerospace and the defense markets.

Table of Contents

●

Industrial equipment—Our organic net sales decreased 13.4% in the first nine months of fiscal 2020 due to market weakness in industrial applications across all regions.

●

Medical—Our organic net sales increased 1.3% in the first nine months of fiscal 2020 primarily as a result of strength in interventional medical applications, partially offset by delays in elective procedures.

●

Energy—Our organic net sales increased 5.8% in the first nine months of fiscal 2020 due to growth across all regions.

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 26,			June 28,					June 26,			June 28,
	2020			2019			Change		2020			2019			Change

	($ in millions)
Operating income	$	70		$	156		$	(86)	$	327		$	393		$	(66)
Operating margin		8.1	%		15.5	%				11.9	%		13.4	%

Operating income in the Industrial Solutions segment decreased $86 million and $66 million in the third quarter and first nine months of fiscal 2020, respectively, as compared to the same periods of fiscal 2019. The Industrial Solutions segment’s operating income included the following:


	For the				For the
	Quarters Ended				Nine Months Ended
	June 26,		June 28,		June 26,		June 28,
	2020		2019		2020		2019

	(in millions)
Acquisition-related charges:
Acquisition and integration costs	$	2	$	3	$	6	$	8
Charges associated with the amortization of acquisition-related fair value adjustments		—		—		—		3
		2		3		6		11
Restructuring and other charges, net		40		8		56		60
Total	$	42	$	11	$	62	$	71

Excluding these items, operating income decreased in the third quarter and first nine months of fiscal 2020 as compared to the same periods of fiscal 2019 primarily as a result of lower volume and price erosion, partially offset by lower material costs.

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 26,				June 28,				June 26,				June 28,
	2020				2019				2020				2019

	($ in millions)
Data and devices	$	276	64	%	$	245	59	%	$	713	61	%	$	753	59	%
Appliances		152	36			171	41			464	39			530	41
Total	$	428	100	%	$	416	100	%	$	1,177	100	%	$	1,283	100	%

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

Table of Contents

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 26, 2020										Change in Net Sales for the Nine Months Ended June 26, 2020
	versus Net Sales for the Quarter Ended June 28, 2019										versus Net Sales for the Nine Months Ended June 28, 2019
	Net Sales				Organic Net Sales						Net Sales				Organic Net Sales
	Growth (Decline)				Growth (Decline)				Translation		Growth (Decline)				Growth (Decline)				Translation

	($ in millions)
Data and devices	$	31	12.7	%	$	31	12.7	%	$	—	$	(40)	(5.3)	%	$	(40)	(5.3)	%	$	—
Appliances		(19)	(11.1)			(15)	(8.9)			(4)		(66)	(12.5)			(58)	(10.8)			(8)
Total	$	12	2.9	%	$	16	3.8	%	$	(4)	$	(106)	(8.3)	%	$	(98)	(7.6)	%	$	(8)

Net sales in the Communications Solutions segment increased $12 million, or 2.9%, in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019 due primarily to organic net sales growth of 3.8%. In the third quarter of fiscal 2020, the unfavorable impacts of the COVID-19 pandemic partially offset our net sales growth. Our organic net sales by industry end market were as follows:

●

Data and devices—Our organic net sales increased 12.7% in the third quarter of fiscal 2020 primarily a result of increased sales to cloud infrastructure customers.

●

Appliances—Our organic net sales decreased 8.9% in the third quarter of fiscal 2020 due to market weakness across all regions.

In the first nine months of fiscal 2020, net sales in the Communications Solutions segment decreased $106 million, or 8.3%, as compared to the first nine months of fiscal 2019 primarily as a result of organic net sales declines of 7.6%. Net sales declines in the first nine months of fiscal 2020 included the unfavorable impacts of the COVID-19 pandemic. Our organic net sales by industry end market were as follows:

●

Data and devices—Our organic net sales decreased 5.3% in the first nine months of fiscal 2020 due primarily to market weakness in the Americas and EMEA regions, partially offset by increased sales to cloud infrastructure customers.

●

Appliances—Our organic net sales decreased 10.8% in the first nine months of fiscal 2020 primarily as a result of market weakness in all 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 26,			June 28,					June 26,			June 28,
	2020			2019			Change		2020			2019			Change

	($ in millions)
Operating income	$	65		$	56		$	9	$	154		$	185		$	(31)
Operating margin		15.2	%		13.5	%				13.1	%		14.4	%

Operating income in the Communications Solutions segment increased $9 million and decreased $31 million in the third quarter and first nine months of fiscal 2020, respectively, as compared to the same periods of fiscal 2019. The Communications Solutions segment’s operating income included the following:

For the

Quarters Ended

Nine Months Ended

June 26,

June 28,

June 26,

June 28,

2020

2019

2020

2019

(in millions)

Restructuring and other charges, net

Table of Contents

Excluding these items, operating income increased slightly in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019. Excluding these items, operating income decreased in the first nine months of fiscal 2020 primarily as a result of price erosion and lower volume, partially offset by lower material costs.

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 payments of $250 million of 4.875% senior notes due in January 2021 and €350 million of fixed-to-floating rate senior notes due in June 2021, and compensation payments to First Sensor minority shareholders. 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, including future developments related to the COVID-19 pandemic. There is uncertainty surrounding the duration and scope of the COVID-19 pandemic and it may have a material impact on our liquidity and financial conditions. We believe that we have sufficient financial resources and liquidity which, along with managing expenses and capital structure flexibility, will enable us to meet our ongoing working capital and other cash flow needs during the COVID-19 pandemic and resulting period of economic uncertainty which will include reduced sales and net income levels for us relative to fiscal 2019. For further information regarding the impact of COVID-19 on our liquidity and capital resources, see “Part II. Item 1A. Risk Factors” in this report.

Cash Flows from Operating Activities

In the first nine months of fiscal 2020, net cash provided by continuing operating activities decreased $303 million to $1,272 million from $1,575 million in the first nine months of fiscal 2019. The decrease resulted primarily from lower pre-tax income and increased inventory levels, partially offset by the favorable effects of changes in accounts receivable levels and a reduction in income tax payments. The amount of income taxes paid, net of refunds, during the first nine months of fiscal 2020 and 2019 was $195 million and $277 million, respectively.

Cash Flows from Investing Activities

Capital expenditures were $439 million and $570 million in the first nine months of fiscal 2020 and 2019, respectively. We expect fiscal 2020 capital spending to be approximately $575 million. 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 2020, we acquired four businesses, including First Sensor, for a combined cash purchase price of $325 million, net of cash acquired. 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 for additional information regarding acquisitions.

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 26, 2020 and September 27, 2019 was $4,086 million and $3,965 million, respectively. See Note 8 to the Condensed Consolidated Financial Statements for additional information regarding debt.

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

Table of Contents

During the first nine months of fiscal 2020, TEGSA issued €550 million aggregate principal amount of 0.0% senior notes due in February 2025. The notes are TEGSA’s unsecured senior obligations and rank equally in right of payment with all existing and any future senior indebtedness of TEGSA and senior to any subordinated indebtedness that TEGSA may incur.

TEGSA has a five-year unsecured senior revolving credit facility (“Credit Facility”) with a maturity date of November 2023 and total commitments of $1.5 billion. TEGSA had no borrowings under the Credit Facility at June 26, 2020 or September 27, 2019.

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 26, 2020, 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 on an unsecured basis by its parent, TE Connectivity Ltd.

Payments of common share dividends to shareholders were $466 million and $454 million in the first nine months of fiscal 2020 and 2019, respectively.

We repurchased approximately 6 million of our common shares for $505 million and approximately 10 million of our common shares for $836 million under the share repurchase program during the first nine months of fiscal 2020 and 2019, respectively. At June 26, 2020, we had $1.0 billion of availability remaining under our share repurchase authorization.

Summarized Guarantor Financial Information

In March 2020, the Securities and Exchange Commission adopted amendments to the financial disclosure requirements of Regulation S-X for subsidiary issuers and guarantors of registered debt securities and for affiliates whose securities are pledged as collateral for registered securities. The amended disclosure requirements permit alternative disclosures of summarized financial information for subsidiary issuers and guarantors and allow for these disclosures to be made outside the Condensed Consolidated Financial Statements and accompanying notes. We elected to early adopt these amendments in the third quarter of fiscal 2020.

As discussed above, our senior notes, commercial paper, and Credit Facility are issued by TEGSA and are fully and unconditionally guaranteed on an unsecured basis by TEGSA’s parent, TE Connectivity Ltd. In addition to being the issuer of our debt securities, TEGSA owns, directly or indirectly, all of our operating subsidiaries. The following tables present

Table of Contents

summarized financial information, excluding investments in and equity in earnings of our non-guarantor subsidiaries, for TE Connectivity Ltd. and TEGSA on a combined basis.


	June 26,		September 27,
	2020		2019
	(in millions)
Balance Sheet Data:
Total current assets	$	91	$	89
Total noncurrent assets⁽¹⁾		2,683		2,634

Total current liabilities		1,256		1,014
Total noncurrent liabilities⁽²⁾		19,863		19,475

(1)

Includes $2,626 million and $2,562 million as of June 26, 2020 and September 27, 2019, respectively, of intercompany loans receivable from non-guarantor subsidiaries.

(2)

Includes $16,396 million and $16,033 million as of June 26, 2020 and September 27, 2019, respectively, of intercompany loans payable to non-guarantor subsidiaries.


	For the		For the
	Nine Months Ended		Fiscal Year Ended
	June 26,		September 27,
	2020		2019

	(in millions)
Statement of Operations Data:
Loss from continuing operations	$	(92)	$	(341)
Net loss		(89)		(391)

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 2020 through the completion of such transactions. The guarantees would be triggered in the event of nonperformance, and the potential exposure for nonperformance under the guarantees would not have a material effect on our results of operations, financial position, or cash flows.

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

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

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

Table of Contents

business’ projects that existed as of the date of sale. These guarantees had a combined value of approximately $1.2 billion as of June 26, 2020 and are expected to expire at various dates through fiscal 2025. Also, under the terms of the definitive agreement, we are required to issue up to $300 million of new performance guarantees, subject to certain limitations, for projects entered into by the SubCom business following the sale for a period of up to three years. As of June 26, 2020, there were no such new performance guarantees outstanding. We have contractual recourse against the SubCom business if we are required to perform on any SubCom guarantees; however, based on historical experience, we do not anticipate having to perform. 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 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 27, 2019. Except as set forth below, there were no significant changes to this information during the first nine months of fiscal 2020.

Goodwill and Other Intangible Assets

We adopted ASU No. 2017-04, an update to Accounting Standards Codification 350, Intangibles–Goodwill and Other, in the second quarter of fiscal 2020. See Note 1 to the Condensed Consolidated Financial Statements for information regarding our goodwill and other intangible assets policy and the adoption of ASU No. 2017-04.

Accounting Pronouncements

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

Non-GAAP Financial Measure

Organic Net Sales Growth (Decline)

We present organic net sales growth (decline) 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 (decline) represents net sales growth (decline) (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 (decline) 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 (decline) provides useful information about our results and the trends of our business. Management uses this measure to monitor and evaluate performance. Also, management uses this measure 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 (decline) to net sales growth (decline) calculated in accordance with GAAP.

Organic net sales growth (decline) 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

Table of Contents

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 (decline) in combination with net sales growth (decline) 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,” and “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 27, 2019, and in this report, 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;

●

risk of future goodwill impairment;

●

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 due to natural disasters or other disasters such as the COVID-19 pandemic, which have and could continue to negatively impact our results of operations as well as customer behaviors, business, and manufacturing operations as well as our facilities and the facilities of our suppliers, and other aspects of our business;

●

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

Table of Contents

●

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

●

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 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

There have been no significant changes in our exposures to market risk during the first nine months of fiscal 2020. 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 27, 2019.

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 26, 2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 26, 2020.

Changes in Internal Control Over Financial Reporting

During the quarter ended June 26, 2020, 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.

Table of Contents

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 27, 2019. Refer to “Part I. Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended September 27, 2019 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 27, 2019 except as described below. The risk factors described in our Annual Report on Form 10-K, in addition to other information set forth below and 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.

We have suffered and could continue to suffer significant business interruptions, including as a result of COVID-19.

Our operations and those of our suppliers and customers, and the supply chains that support their operations, may be vulnerable to interruption by natural disasters such as earthquakes, tsunamis, typhoons, or floods; or other disasters such as fires, explosions, acts of terrorism or war, disease or other adverse health developments, including as a result of COVID-19, or failures of management information or other systems due to internal or external causes. These effects could include disruptions or restrictions on our employees’ ability to travel, as well as temporary closures of our facilities or the facilities of our customers, suppliers, or other vendors in our supply chain. In addition, such interruptions could result in a widespread crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our end customers’ products. If a business interruption occurs and we are unsuccessful in our continuing efforts to minimize the impact of these events, our business, results of operations, financial position, and cash flows could be materially adversely affected. COVID-19 is currently impacting countries, communities, workforces, supply chains, and markets around the world, and as a result we have experienced disruptions and restrictions on our employees’ ability to travel, as well as temporary closures of our facilities and the facilities of our customers, suppliers, and other vendors in our supply chain. We expect that COVID-19 will have a material impact on our financial condition and results of operations in the near term and may have a material impact on our financial condition, liquidity, and results of operations in future periods. The extent to which COVID-19 will further impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted. Such developments may include the geographic spread of the virus, the severity of the virus, the duration of the pandemic, the impact on our suppliers’ and customers’ supply chains and financial positions, including their ability to pay us, the actions that may be taken by various governmental authorities in response to the outbreak in jurisdictions in which we operate, and the possible impact on the global economy and local economies in which we operate.

Table of Contents

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 26, 2020:


					Maximum
				Total Number of	Approximate
				Shares Purchased	Dollar Value
				as Part of	of Shares that May
	Total Number	Average Price		Publicly Announced	Yet Be Purchased
	of Shares	Paid Per		Plans or	Under the Plans
Period	Purchased⁽¹⁾	Share⁽¹⁾		Programs⁽²⁾	or Programs⁽²⁾
March 28–April 24, 2020	1,275,115	$	65.04	1,275,075	$	995,115,788
April 25–May 29, 2020	4,872		72.72	—		995,115,788
May 30–June 26, 2020	366		82.16	—		995,115,788
Total	1,280,353	$	65.08	1,275,075

(1)	These columns include the following transactions which occurred during the quarter ended June 26, 2020:

(i)the acquisition of 5,278 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 1,275,075 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.

Table of Contents

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 19, 2020)
22.1	*	Guaranteed Securities
31.1	*	Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	*	Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	**	Certification by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document⁽¹⁾⁽²⁾
101.SCH		XBRL Taxonomy Extension Schema Document⁽²⁾
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document⁽²⁾
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document⁽²⁾
101.LAB		XBRL Taxonomy Extension Label Linkbase Document⁽²⁾
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document⁽²⁾
104		Cover Page Interactive Data File⁽³⁾

*Filed herewith

**	Furnished herewith

(1)Submitted electronically with this report in accordance with the provisions of Regulation S-T

(2)	The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

(3)	Formatted in Inline XBRL and contained in exhibit 101

Table of Contents

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 30, 2020