Business Context and Reporting Period
This Form 8-K filing by TE Connectivity Ltd. (TE Connectivity) is dated May 31, 2016. The report addresses the resolution of a long-standing tax dispute involving intercompany debt matters stemming from the Company's 2007 separation from Tyco International plc. The dispute covered audit cycles from 1997 through 2007 and involved the Internal Revenue Service (IRS), Tyco International, and Covidien plc (now a subsidiary of Medtronic plc).
Key Financial Metrics and Cash Flow
- Net Cash Payment: The Company made a net cash payment of $140 million during the second quarter of fiscal 2016 related to this matter.
- Pre-payment to IRS: TE Connectivity paid $443 million to the IRS to stop the accretion of deficiency interest.
- Reimbursements Received: The Company received $305 million in reimbursements from Tyco International and Covidien pursuant to indemnification agreements.
- Payments to Third Parties: The Company paid $2 million to Covidien for its share of deficiencies.
- Projected Net Income Benefit: The Company expects to recognize a net benefit to net income of $525 million to $550 million in the third quarter of fiscal 2016.
Material Changes and Resolution Details
The filing reports the final resolution of all aspects of the tax controversy. On May 17, 2016, the IRS Appeals Division issued fully-executed Forms 870-AD settling matters on appeal for the 2001-2007 audit cycles on the same terms as the 1997-2000 cycle. On May 31, 2016, the U.S. Tax Court entered orders dismissing the petitions as settled. The Company expects the resolution terms to be consistently applied to all U.S. income tax returns filed subsequent to fiscal 2007.
Guidance, Outlook, and Management Commentary
- Earnings Impact: The expected net benefit of $525 million to $550 million will impact GAAP Earnings Per Share (EPS) in the third quarter of fiscal 2016.
- Non-GAAP Measures: Management states there will be no impact to Adjusted Earnings Per Share for the third quarter, as this metric excludes special tax items and tax sharing income.
- Forward-Looking Statements: The filing includes standard disclaimers that actual results may differ materially from anticipated results due to risks and uncertainties.
Important Facts for Investor Verification
- Verify the timing of the $525 million to $550 million net income benefit recognition in the Q3 fiscal 2016 earnings release.
- Confirm the distinction between the impact on GAAP EPS versus Adjusted EPS as described in the filing.
- Review the Company's subsequent tax filings to ensure the IRS applies the settlement terms consistently to post-2007 returns as expected.
- Monitor the cash flow statement for the $140 million net outflow recorded in Q2 fiscal 2016.