UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20152018
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-34652
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SENSATA TECHNOLOGIES HOLDING N.V.PLC
(Exact Name of Registrant as Specified in Its Charter)
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THE NETHERLANDSENGLAND AND WALES | | 98-064125498-1386780 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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Kolthofsingel 8, 7602 EM AlmeloInterface House, Interface Business Park
The NetherlandsBincknoll Lane
Royal Wootton Bassett Swindon SN4 8SY United Kingdom | | 31-546-879-555+1 (508) 236 3800 |
| (Address of Principal Executive Offices, including Zip Code) | | (Registrant’s Telephone Number, Including Area Code) |
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Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Name of each exchange on which registered |
| Ordinary Shares—nominal value €0.01 per share | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by a 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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large"large accelerated filer,” “accelerated" "accelerated filer,”" "smaller reporting company," and “small reporting company”"emerging growth company" in Rule 12b-2 of the Exchange Act. |
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Large accelerated filer x | | Accelerated filer o |
Non-accelerated filer o | | Smaller reporting company o |
(Do not check if a smaller reporting company) | | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the registrant’s ordinary shares held by non-affiliates at June 30, 20152018 was approximately $8.9$8.1 billion based on the New York Stock Exchange closing price for such shares on that date.
As of January 15, 2016, 170,344,6812019, 164,158,929 ordinary shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report incorporates information from certain portions of the registrant’s Definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 19, 2016. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant's fiscal year ended December 31, 20152018.
TABLE OF CONTENTS
Cautionary Statements Concerning Forward-Looking Statements
In addition to historical facts, thisThis Annual Report on Form 10-K (this "Report"), including any documents incorporated by reference herein, includes “forward-looking statements”"forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These forward-looking statements also relate to our future prospects, developments, and business strategies. These forward-looking statements may be identified by terminology such as “may,” “will,” “could,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “forecast,” “continue,” “intend,” “plan,”"may," "will," "could," "should," "expect," "anticipate," "believe," "estimate," "predict," "project," "forecast," "continue," "intend," "plan," and similar terms or phrases, or the negative of such terminology, including references to assumptions. However, these terms are not the exclusive means of identifying such statements.
Forward-looking statements contained herein, or in other statements made by us, are made based on management’s expectations and beliefs concerning future events impacting us, andus. These statements are subject to uncertainties and other important factors relating to our operations and business environment, all of which are difficult to predict, and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed or implied by forward-looking statements. Although we believe that our plans, intentions, and expectations reflected in, or suggested by, such forward-looking statements are reasonable, we can give no assurances that any of the events anticipated by these forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition.
We believe that the following important factors, among others (including those described in Item 1A, “Risk"Risk Factors,”" included elsewhere in this Annual Report on Form 10-K)Report), could affect our future performance and the liquidity and value of our securities and cause our actual results to differ materially from those expressed or implied by forward-looking statements made by us or on our behalf:
instability and changes in the global markets, including regulatory, political, economic, and military matters, such as the impending exit of the United Kingdom (the "U.K.") from the European Union (the "EU");
adverse conditions or competition in the automotive industry have had, and may in the future have, adverse effects on our businesses;
competitive pressures could require us to lower our prices or result in reduced demand for our products;
integration of acquired companies,industries upon which we are dependent, including the acquisitions of August Cayman Company, Inc. ("Schrader") and certain subsidiaries of Custom Sensors & Technologies Ltd. in the U.S., the U.K., and France, as well as certain assets in China (collectively, "CST"), and any future acquisitions and joint venturesautomotive industry;
pressure from customers to reduce prices;
supplier interruption or dispositions, may require significant resources and/non-performance, limiting our access to manufactured components or result in significant unanticipated losses, costs, or liabilities, and raw materials;
we may not realize all of the revenue or achieve anticipated operating synergies and cost savingsgross margins from acquisitions;products subject to existing purchase orders for which we are currently engaged in development;
risks associated withrelated to the acquisition or disposition of businesses, or the restructuring of our non-U.S. operations, including compliance with export control regulations, foreign currency risks,business;
market acceptance of new product introductions and the potential for changes in socio-economic conditions and/or monetary and fiscal policies;product innovations;
we may incur material losses and costs as a result of intellectual property, product liability, warranty, and recall claims that may be brought against us;claims;
business disruptions due to natural disasters or other disasters outside our control;
labor disruptions or increased labor costs;
security breaches, cyber theft of our intellectual property, and other disruptions to our information technology infrastructure, or improper disclosure of confidential, personal, or proprietary data;
foreign currency risks, changes in socio-economic conditions, or changes to monetary and fiscal policies;
our level of indebtedness, or our inability to meet debt service obligations or comply with the covenants contained in the credit agreement and indentures;
risks related to the potential for goodwill impairment;
the impact of United States ("U.S.") federal income tax reform, or taxing authorities could challengechallenging our historical and future tax positions or our allocation of taxable income among our subsidiaries, and challenges to the sovereign taxation regimes of EU member states by the European Commission;
changes to current policies, such as trade tariffs, by the U.S. government;
changes to, or inability to comply with, various regulations, including tax laws, import/export regulations, anti-bribery laws, environmental, health, and safety laws, and other governmental regulations; and
risks related to which we are subject could change in a manner adverse to us;
labor disruptions or increased labor costs could adversely affect our business;
our substantial indebtedness could adversely affect our financial condition and our ability to operate our business, and we may not be able to generate sufficient cash flows to meet our debt service obligations or comply with the covenants containeddomicile in the credit agreements;
risks associated with security breaches and other disruptions to our information technology infrastructure; and
the other risks set forth in Item 1A, “Risk Factors,” included elsewhere in this Annual Report on Form 10-K.U.K.
All forward-looking statements attributable to us or persons acting on our behalf speak only as of the date of this Annual Report on Form 10-K and are expressly qualified in their entirety by the cautionary statements contained in this Annual Report on Form 10-K.Report. We undertake no obligation to update or revise forward-looking statements that may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. We urge readers to review carefully the risk factors described in this Annual Report on Form 10-K and in the other documents that we file with the U.S. Securities and Exchange Commission. You can read these documents at www.sec.gov or on our website at www.sensata.com.
PART I
The Company
The reporting company is Sensata Technologies Holding N.V. (“plc ("Sensata plc"), the successor issuer to Sensata Technologies Holding”Holding N.V. ("Sensata N.V."), and its wholly-owned subsidiaries, collectively referred to as the “Company,” “Sensata,” “we,” “our,”"Company," "Sensata," "we," "our," and “us.”"us."
On September 28, 2017, the Board of Directors of Sensata Technologies Holding isN.V. unanimously approved a plan to change our location of incorporation from the Netherlands to the United Kingdom (the "U.K."). To effect this change, on February 16, 2018 the shareholders of Sensata N.V. approved a cross-border merger between Sensata N.V. and Sensata plc, a newly formed, public limited company incorporated under the laws of England and Wales, with Sensata plc being the Netherlandssurviving entity (the "Merger").
We received approval of the Merger by the U.K. High Court of Justice, and the Merger was completed, on March 28, 2018. As a result thereof, Sensata plc became the publicly-traded parent of the subsidiary companies that were previously controlled by Sensata N.V., with no changes made to the business being conducted by us prior to the Merger. Due to the fact that the Merger was a business combination between entities under common control, the assets and liabilities exchanged were accounted for at their carrying values.
Overview
Sensata plc conducts its operations through subsidiary companies that operate business and product development centers primarily in Belgium, Bulgaria, China, Germany, Japan, the Netherlands, South Korea, the U.K., and the United States (the "U.S."), the Netherlands, Belgium, China, Germany, Japan, South Korea, and the United Kingdom (the "U.K."); and manufacturing operations primarily in Bulgaria, China, Germany, Malaysia, Mexico, the Dominican Republic, Bulgaria, Poland, France, Brazil, Germany, the U.K., and the U.S.
We organize our operations into two businesses, Performance Sensing (formerly referred to as "Sensors") and Sensing Solutions (formerly referred to as "Controls").
Overview
Sensata, a global industrial technology company, engages in the development,develop, manufacture, and sale of sensors and controls. We producesell a wide range of customized sensors and controls that address increasingly complex engineering requirements for specific customer applications and systems such as thermal circuit breakers in aircraft, pressure sensorsair conditioning, braking, exhaust, fuel oil, tire, operator controls, and transmission in automotive and heavy vehicle and off-road ("HVOR") systems, and bimetal currenttemperature and temperatureelectrical protection and control devices in electric motors.numerous industrial applications, including aircraft, refrigeration, material handling, telecommunications, and heating, ventilation and air conditioning ("HVAC") systems. The acquisition of GIGAVAC, LLC ("GIGAVAC"), discussed further below, expands our product offerings to include high voltage contactors and fuses. We can trace our origins back to entities that have been engaged in the sensors and controls business since 1916.
Our sensors are customized devices that translate a physical phenomenon, such as pressure, temperature, or position, into electronic signals that microprocessors or computer-based control systems can act upon. Our controls are customized devices embedded within systems to protect them from excessive heat or current. Underlying these sensors and controls are core technology platforms—thermal and magnetic-hydraulic circuit protection, micro electromechanical systems, ceramic capacitance, Microfused Silicon Strain Gage, and monosilicon strain gage—wireless communication protocol—that we leverage across multiple products and applications, enabling us to optimize our substantial research, development, and engineering investments and achieve economies of scale.
Our primary products include low-, medium-, and high-pressure sensors, temperature sensors, speed sensors, position sensors, motor protectors, and thermal and magnetic-hydraulic circuit breakers and switches. We develop customized, innovative solutions for specific customer requirements or applications across a variety of end-markets, including automotive, heavy vehicle on- and off-road ("HVOR"), appliance, heating, ventilation, and air conditioning (“HVAC”), industrial, aerospace, data/telecom, semiconductor, and mobile power, among others. We have long-standing relationships with a geographically diverse base of leading global original equipment manufacturers (“OEMs”) and other multinational companies.
We develop products that address increasingly complex engineering requirements by investing substantially in research, development, and application engineering. By locating our global engineering teamteams in close proximity to key customers in regional business centers, we are exposed to many development opportunities at an early stage and work closely with our customers to deliver solutions that meet their needs. As a result of the long development lead times and embedded nature of our products, we collaborate closely with our customers throughout the design and development phase of their products. Systems development by our customers typically requires significant multi-year investment for certification and qualification, which are often government or customer mandated. We believe the capital commitment and time required for this process significantly increases the switching costs once a customer has designed and installed a particular sensor or control into a system.
We use a broad range of manufactured components, subassemblies, and raw materials in the manufacture of our products, including silver, gold, platinum, palladium, copper, aluminum, nickel, zinc, and resins. Certain of our Performance Sensing product lines use magnets containing rare earth metals, of which a large majority of the world's production is in China. A reduction in the export of rare earth materials from China could limit the worldwide supply of these rare earth materials, significantly increasing the price of magnets, which could materially impact our Performance Sensing business.
We are a global business, with significant operations around the world. As of December 31, 2015, 36%, 37%, and 27% of our fixed assets were located in the Americas, Asia, and Europe, respectively. We have a diverse revenue mix by geography, customer, and end-market.end market. We generated 41%, 26%,organize the sales and 33%marketing function within our business into regions—the Americas, Asia, and Europe—but also globally across all geographies according to market segments, so as to facilitate knowledge sharing and coordinate activities involving our larger customers through global account managers.
Refer to Note 20, "Segment Reporting," of our audited consolidated financial statements and accompanying notes thereto (our "Financial Statements") included elsewhere in this Annual Report on Form 10-K (this "Report") for details of our net revenue in the Americas, Asia, and Europe, respectively,property, plant and equipment, net by region. Refer to Note 3, "Revenue Recognition," of our Financial Statements for details of our net revenue by end market.
We organize our business into two segments: Performance Sensing and Sensing Solutions. Performance Sensing designs and manufactures sensors for the year ended December 31, 2015.automotive and HVOR markets, including low-, medium-, and high-pressure sensors, speed and position sensors, and temperature sensors, and markets them to leading global automotive and HVOR original equipment manufacturers ("OEMs") and their Tier 1 suppliers. Sensing Solutions designs and manufactures various sensors and control products, including bimetal electromechanical controls, thermal and magnetic-hydraulic circuit breakers, solid state relays, power inverters, interconnection products, and temperature, pressure, and position sensors, selling them to a wide range of industrial and commercial manufacturers and suppliers across multiple end markets. The acquisition of GIGAVAC, portions of which will be integrated into each of our operating segments, expands our product offerings to include high voltage contactors and fuses.
Customers
We have long-standing relationships with a geographically diverse base of leading OEMs and other multinational companies. In geographic and product markets where we lack an established base of customers, we rely on third-party distributors to sell our sensors and control products. We have had relationships with our top ten customers for an average of 29 years. Our largest customer accounted for approximately 9%8% of our net revenue for the year ended December 31, 2015. Our net revenue for the year ended December 31, 2015 was derived from the following end-markets: 27.4% from European automotive, 18.5% from Asia and rest of world automotive, 21.5% from North American automotive, 5.8% from appliance and HVAC, 12.3% from HVOR, 6.5% from industrial, and 8.0% from all other end-markets. Within many of our end-markets, we are a significant supplier to multiple OEMs, reducing our exposure to fluctuations in market share within individual end-markets.
Acquisition History
We can trace our origins back to entities that have been engaged in the sensors and controls business since 1916. We operated as a part of Texas Instruments Incorporated ("TI") from 1959 until April 27, 2006, when Sensata Technologies B.V. ("STBV"), an indirect, wholly-owned subsidiary of Sensata Technologies Holding, completed the carve-out and acquisition of the Sensors & Controls business from TI (the "2006 Acquisition"), which was effected through a number of STBV's subsidiaries that collectively purchased the assets and assumed the liabilities being transferred.
Between the 2006 Acquisition and December 31, 2013, we completed the following significant acquisitions:
•First Technology Automotive and Special Products (2006);
•Airpax Holdings, Inc. (2007);
•Automotive on Board sensors business of Honeywell International Inc. (2011); and
•Sensor-NITE Group Companies (2011).
On January 2, 2014, we acquired Wabash Worldwide Holding Corp. ("Wabash") for an aggregate purchase price of $59.6 million. Wabash develops, manufactures, and sells a broad range of custom-designed sensors and has operations in the U.S., Mexico, and the U.K. We acquired Wabash in order to complement our existing magnetic speed and position sensor product portfolio and to provide new capabilities in throttle position and transmission range sensing, while enabling additional entry points into the HVOR end-market. Wabash has been integrated into our Performance Sensing segment.
On May 29, 2014, we acquired Magnum Energy Incorporated ("Magnum") for an aggregate purchase price of $60.6 million. Magnum is a supplier of pure sine, low-frequency inverters and inverter/chargers based in Everett, Washington. Magnum products are used in recreational vehicles and the solar/off-grid applications market. We acquired Magnum to complement our existing inverter business. Magnum has been integrated into our Sensing Solutions segment.
On August 4, 2014, we acquired CoActive US Holdings, Inc., the direct or indirect parent of companies comprising the DeltaTech Controls business ("DeltaTech") for an aggregate purchase price of $177.8 million. DeltaTech is a manufacturer of customized electronic operator controls based on magnetic position sensing technology for the construction, agriculture, and material handling industries. DeltaTech was acquired to expand our magnetic speed and position sensing business with new and existing customers in the HVOR market. DeltaTech is being integrated into our Performance Sensing segment.
On October 14, 2014, we acquired August Cayman Company, Inc. ("Schrader") for an aggregate purchase price of $1,004.7 million. Schrader is a manufacturer of tire pressure monitoring sensors (“TPMS”), a vehicle safety feature now standard on all cars and light trucks sold in the U.S. and growing in use globally in Europe and Asia. Schrader was acquired to add TPMS and additional low pressure sensing capabilities to our current product portfolio. Schrader is being integrated into our Performance Sensing segment.
On December 1, 2015, we completed the acquisition of all of the outstanding shares of certain subsidiaries of Custom Sensors & Technologies Ltd. in the U.S., the U.K., and France, as well as certain assets in China (collectively, "CST"), for an aggregate purchase price of approximately $1,008.8 million, subject to customary post-closing adjustments. The acquisition included the Kavlico, BEI, Crydom, and Newall product lines and brands, and encompassed sales, engineering, and manufacturing sites in the U.S., the U.K., Germany, France, and Mexico. We acquired CST to further extend our sensing content beyond automotive markets and build scale in pressure sensing. Portions of CST are being integrated into each of our segments.
Kavlico is a provider of linear and rotary position sensors to aerospace original equipment manufacturers and Tier 1 suppliers and pressure sensors to the general industrial and HVOR markets. BEI provides harsh environment position sensors, optical and magnetic encoders, and motion control sensors to the industrial, aerospace, agricultural, and medical device markets. Crydom manufactures solid state relays for power control applications in industrial markets. Newall provides encoders and digital readouts to machinery and machine tool markets.2018.
Performance Sensing Business
Overview
Our Performance Sensing business is a leading supplier of automotive and HVOR sensors, including pressure sensors, speed and position sensors, temperature sensors, and pressure switches. Our Performance Sensing business accounted for approximately 79% of our 2015 net revenue. Products manufactured by our Performance Sensing business are used in a wide
variety of applications, including automotive air conditioning, braking, transmission, tire, and air bag applications, as well as HVOR applications, including operator controls. We have historically derived most of the revenue in our Performance Sensing business from the sale of medium and high-pressure sensors. With the acquisition of Schrader, we added significant low pressure sensing capabilities, primarily TPMS, to our existing portfolio. We believe that we are one of the largest suppliers of sensors in the majority of the key applications in which we compete. Our customers consist primarily of leading global automotive and HVOR OEMs and their Tier 1 suppliers. Our products are ultimately used by the majority of global automotive OEMs, providing us with a balanced customer portfolio, which, we believe, helps to protect us against global shifts in market share between different OEMs. Sensing Solutions customers include a wide range of industrial and commercial manufacturers and suppliers across multiple end markets, primarily OEMs in the climate control, appliance, semiconductor, medical, energy and infrastructure, data/telecom, and aerospace industries, as well as Tier 1 aerospace and motor and compressor suppliers.
Seasonality
Because of the diverse global nature of the markets in which we operate, our net revenue is only moderately impacted by seasonality. However, Sensing Solutions experiences some seasonality, specifically in its air conditioning and refrigeration products, which tend to peak in the first two quarters of the year as inventory is built up for spring and summer sales. In addition, Performance Sensing net revenue tends to be weaker in the third quarter of the year as automotive OEMs retool production lines for the coming model year.
Acquisition and Divestiture History
In August 2018 we completed the sale of the capital stock of Schrader Bridgeport International, Inc. and August France Holding Company SAS (collectively, the "Valves Business") to Pacific Industrial Co. Ltd. The Valves Business, which we acquired in connection with the acquisition of Schrader in 2014, manufactures mechanical valves for pressure applications in tires and fluid control and assembles tire hardware aftermarket products with manufacturing locations in the U.S. and Europe. Refer to Note 18, "Segment Reporting,17, "Acquisitions and Divestitures," of our audited consolidated financial statements included elsewhereFinancial Statements for additional details on this divestiture.
In October 2018 we acquired GIGAVAC, an industry-leading producer of high voltage contactors and fuses that are mission-critical components for electric vehicles and equipment, for $233.0 million of cash consideration, subject to working capital and other adjustments. The acquisition of GIGAVAC extends our capabilities on battery electric vehicles, with significant potential for additional growth, and will enable us to tap into a broad market opportunity for high-voltage contactors required in mission-critical sensing and electrical protection applications across electrified vehicles and industrial equipment such as cars, delivery trucks, busses, material handling equipment, and charging stations. It will immediately augment our ongoing investments in electrification for many complex and challenging applications in the automotive, battery storage, industrial, and HVOR markets. Refer to Note 17, "Acquisitions and Divestitures," of our Financial Statements for additional details on this Annual Report on Form 10-K for detailsacquisition.
In addition, we completed the following other acquisitions within the last five years:
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| Date | | Acquired Entity | | Performance Sensing | | Sensing Solutions | | Purchase Price (in millions) |
| January 2, 2014 | | Wabash Worldwide Holding Corp. ("Wabash") | | X | | | | $ | 59.6 |
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| May 29, 2014 | | Magnum Energy Incorporated ("Magnum") | | | | X | | $ | 60.6 |
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| August 4, 2014 | | CoActive U.S. Holdings Inc. ("DeltaTech Controls") | | X | | | | $ | 177.8 |
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| October 14, 2014 | | August Cayman Company, Inc. ("Schrader") | | X | | | | $ | 1,004.7 |
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| December 1, 2015 | | Custom Sensors & Technologies Ltd. ("CST") (1) | | X | | X | | $ | 1,000.8 |
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(1) | Included the acquisition of all of the outstanding shares of certain subsidiaries of Custom Sensors & Technologies Ltd. in the U.S., the U.K., and France, as well as certain assets in China. |
Performance Sensing segment operating income for the years ended December 31, 2015, 2014, and 2013 and total assets as of December 31, 2015 and 2014.Segment
Overview
Performance Sensing, Business which accounted for approximately 75% of our net revenue in fiscal year 2018, is a developer and manufacturer of a broad portfolio of application-specific sensors, including pressure sensors, speed and position sensors, and temperature sensors, that are used in a wide variety of automotive and HVOR applications. The acquisition of GIGAVAC, portions of which will be integrated into each of our operating segments, expands our product offerings to include high voltage contactors and fuses.
We believe that we are one of the largest suppliers of pressure and high temperature sensors in the majority of the key markets in which we compete.
Markets
Sensors are customized devices that translatePerformance Sensing primarily serves the automotive and HVOR sensor markets through the design, manufacture, and sale of various types of sensors. Refer to the Product Categories section below for a physical phenomenon, such as pressure or position, into electronic signals that microprocessors or computer-based controlsummary of the key products, solutions, applications, systems, can act upon. and end markets for our sensor product category.
The global sensor market is characterized by a broad range of products and applications across a diverse set of end-markets.market segments. We believe large OEMs and other multinational companies are increasingly demanding a global presence to supply sensors for their key global platforms.
Automotive and HVOR sensors are included in the Performance Sensing business results, while industrial sensors are included in the Sensing Solutions business results. Refer According to the Sensing Solutions Business Markets section for discussion of industrial sensors.
Automotive and HVOR Sensors
Revenue growth froman October 2018 report prepared by Strategy Analytics, Inc., the global automotive and HVOR sensor end-markets, which include applicationsmarket was $24.3 billion in powertrain, tire, air conditioning, and chassis control, is driven, we believe, by three principal trends. First, global automotive vehicle unit sales have demonstrated moderate but consistent annual growth since the global recession2018, compared to $23.2 billion in 2008 and 2009 and are expected to continue to increase over the long-term due to population growth and increased usage of cars in emerging markets. Second, the number of sensors used per vehicle has expanded, driven by a combination of factors including government regulation of safety, emissions, and greater fuel efficiency, consumer demand for new applications, and productivity for HVOR applications. For example, governments have mandated sensor-intensive technologies in Europe for TPMS. Finally, revenue growth has been augmented by a continuing shift away from legacy electromechanical products towards higher-value electronic solid-state sensors.
According to the LMC Automotive "Global Car & Truck Forecast" for the fourth quarter 2015, the production of global light vehicles in 2015 was approximately 88.4 million units, an increase of 1.2% from 2014.2017.
The automotive and HVOR sensor markets are characterized by high switching costs and barriers to entry, benefiting incumbent market leaders. Sensors are critical components that enable a wide variety of applications, and many of whichare critical components that are essential to the proper functioning of the productproducts in which they are incorporated. Sensor application-specific products require close engineering collaboration between the sensor supplier and the OEM or the Tier 1 supplier. As a result, OEMs and Tier 1 suppliers make significant investments in selecting, integrating, and testing sensors as part of their product development. Switching to a different sensor results in considerable additional work, both in terms of sensor customization and extensive platform/product retesting.retesting and certification. This results in high switching costs for automotive and HVOR manufacturers once a sensor is designed-in, and wedesigned in. We believe this is one of the reasons that sensors are rarely changed during a platform lifecycle,life-cycle, which isin the case of the automotive industry typically lasts five to seven years. Given the importance of reliability and the fact that the sensors have tomust be supported through the length of a product life, our experience has been that OEMs and Tier 1 suppliers tend to work with suppliers that have a long track record of quality and on-time delivery and the scale and resources to meet their needs as the carautomobile platform evolves and grows. In addition, the automotive segment isindustry provides one of the largest markets for sensors, giving participants with a presence in this end-marketmarket significant scale advantages over those participating only in smaller, more niche industrial and medical markets.
According to an October 2015 report preparedNet revenue growth from the automotive and HVOR markets served by Strategy Analytics, Inc.,Performance Sensing has historically been driven, we believe, by three principal trends, including (1) growth in the global automotive sensor market was $19.9 billion in 2015, compared to $19.1 billion in 2014. We believe the increasenumber of vehicles produced globally, (2) expansion in the number of sensors per vehicle, and (3) a shift towards higher value sensors. We are also investing in new technologies that we believe will shape future revenue growth by increasing content per vehicle. In addition, our presence in emerging markets positions us to take advantage of future growth opportunities in these regions.
Light vehicle production: Global production of light vehicles has consistently demonstrated annual growth since the levelrecession in 2008 and 2009 and is expected to continue to increase over the long term due to population growth and increased usage of cars in emerging markets. According to the fourth quarter 2018 LMC Automotive "Global Car & Truck Forecast," the production of global vehicle sales are the primary driverslight vehicles in 2018 was approximately 94.7 million units, a decrease of the increase in the global automotive sensor market. 0.4% from 2017.
Number of sensors per vehicle: We believe that the increasing installation in vehicles of safety, emissions, efficiency, safety, and comfort-related features that depend on sensors for proper functioning, such as airbags, electronic stability control, TPMS,tire pressure monitoring, advanced driver assistance, transmission, and advanced combustion and exhaust after-treatment, as well as user interfaces in HVOR applications, will continue to drive increased sensor usage and content growth.
Performance Sensing Products
We offeremissions, including fuel economy standards such as the following significant productsNational Highway Traffic Safety Administration's Corporate Average Fuel Economy requirements in the U.S. and emissions requirements such as "Euro 6d" in Europe and "China National 6" in China lead to sensor-rich automobile powertrain strategies.
Other applications that are driving increased sensor content in vehicles include braking systems, which are transitioning from traditional hydraulic brakes towards electromechanical braking and regenerative braking systems, and electrified vehicles, which require tighter temperature control for efficient operation, driving more sophisticated thermal management systems to control heating and cooling throughout the vehicle.
Higher value sensors: We believe that our revenue growth has been augmented by a continuing shift away from legacy electromechanical products towards higher-value electronic solid-state sensors.
New Technology: As automobiles and heavy vehicles evolve, new alternative technologies are being developed to make these vehicles more efficient, robust, cost effective, and safe. We believe that emerging opportunities, or ("megatrends"), have the potential to grow our business for the foreseeable future, particularly in the areas of electrification, smart & connected, and autonomy. For example, we expect this growth to include content growth in both hybrid and electric vehicles, which require systems and sensors to drive high efficiency across the powertrain, managing better diagnostics, more efficient combustion, and reduced emissions. In addition, we are taking steps and making investments with the intent of positioning ourselves to capitalize on what we believe will be a large, attractive market for autonomous vehicles. In addition, we continue to engage with customers who are seeking enabling sensor technology for autonomous driving.
Also, sensor content on vehicle climate control and thermal management systems, where we enjoy high market share, is increasing. This is driven by the need for high efficiency control of thermal management in hybrid heating and cooling systems. Additionally, as long range plug-in hybrid and full battery electric vehicles gain share, multiple instances of efficient thermal management across the battery, electronics, and cabin systems is required to protect and manage the vehicle, which drive additional core Sensata sensor content on the market today. Other new emerging opportunities to improve on-vehicle energy density and battery life could also provide the potential for additional content per vehicle.
Other safety systems are also evolving on hybrid and electric vehicles. New and emerging energy recuperation technologies, such as regenerative motors, require additional sensing content to manage and efficiently switch between traditional braking systems and regenerative braking. Additionally, semi-automated vehicles containing advanced driver assistance systems benefit from more efficient and faster electromechanical braking systems, driving additional sensor content to control these brakes. Each of these systems enable more efficient use of energy, enabling greater electric vehicle range.
New content in high voltage electrical protection from our recent acquisition of GIGAVAC addresses many of the needs in evolving electric vehicle powertrain systems. These higher voltage systems must be adequately controlled and protected as vehicle voltages and currents increase. This protection is critical both in safeguarding the expensive electronics used to power the vehicle, and allows for an increase in power levels to improve charging times. These high voltage contactors are critical components in multiple sockets on all highly electrified vehicles.
Moreover, we believe our broad customer base, global diversification, and evolving portfolio provide the foundation that will allow us to grow with these megatrends across a diverse set of markets.
Emerging Markets: We have a long-standing position in emerging markets, including a presence in China for more than 20 years. With our presence in China, we believe that our automotive and HVOR businesses are well positioned to grow. With sustained vehicle modernization in China, we expect our content per vehicle in China will continue to increase, moving towards the levels we see in developed markets.
Product Categories
Prior to fiscal year 2018, we presented four significant product categories in Performance Sensing: pressure sensors, speed and position sensors, temperature sensors, and pressure switches. Beginning in fiscal year 2018, we are categorizing our products more broadly, as sensors, controls, or other, to better reflect how we view our products.
The following table presents the key products, solutions, applications, systems, and end markets related to the sensor product category (Performance Sensing business:sales of controls is immaterial and is not separately presented below):
|
| | | | |
Product CategoriesKey Products/Solutions | | Key Applications/SolutionsSystems | | Key End-MarketsEnd Markets |
Pressure sensors Microfused strain gage Ceramic capacitive Micro-electromechanical
Speed and position sensors Magnetic speed and position sensors Mechanical/electrical control systems
High temperature sensors | | AirThermal management and air conditioning systems
Transmission Engine oil Suspension Fuel raildelivery Braking Marine engine
Tire pressure monitoring Exhaust after treatment
after-treatment
| | Automotive HVOR Marine
|
| | | | |
Speed and position sensors | | Transmission
Braking
Engine
| | Automotive
HVOR
|
| | | | |
Temperature sensors | | Exhaust after-treatment | | Automotive
HVOR
|
| | | | |
Pressure switches | | Air conditioning systems
Power steering
Transmission
| | Automotive
HVORMotorcycle
|
The table below sets forth the amount of net revenue we generated from each of theseby our sensor product categoriescategory in Performance Sensing, reconciled to total segment net revenue, for each of the last three fiscal years:
|
| | | | | | | | | | | |
| Product Category | For the year ended December 31, |
| (Amounts in thousands) | 2015 | | 2014 | | 2013 |
| Pressure sensors | $ | 1,631,678 |
| | $ | 1,164,494 |
| | $ | 924,505 |
|
| Speed and position sensors | 328,102 |
| | 275,628 |
| | 153,537 |
|
| Temperature sensors | 191,369 |
| | 152,662 |
| | 137,016 |
|
| Pressure switches | 55,607 |
| | 65,129 |
| | 58,088 |
|
| Other | 139,470 |
| | 97,944 |
| | 85,092 |
|
| Total | $ | 2,346,226 |
| | $ | 1,755,857 |
| | $ | 1,358,238 |
|
In 2015, we determined that force sensors were no longer a significant product category for our business, and we reclassified the revenue related to this product category to "other." In addition, we determined that the products of certain businesses acquired in 2014 that were previously included in "other" were more appropriately categorized as speed and position sensors. Prioryears (prior periods have been recast to reflect these changes.current presentation):
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| (Dollars in thousands) | 2018 | | 2017 | | 2016 |
| Net revenue: | | | | | |
| Sensors | $ | 2,532,631 |
| | $ | 2,341,017 |
| | $ | 2,261,633 |
|
| Other | 95,020 |
| | 119,583 |
| | 123,747 |
|
| Performance Sensing net revenue | $ | 2,627,651 |
| | $ | 2,460,600 |
| | $ | 2,385,380 |
|
Competitors
Within each of the principal product categories in Performance Sensing, we compete with a variety of independent suppliers as well as the in-house operations of Tier 1 systems suppliers. We believe that the key competitive factors in the markets served by this segment are product performance, quality and reliability, the ability to produce customized solutions on a global basis, technical expertise, development capability, breadth and scale of product offerings, product service and responsiveness, and a commercially competitive offering.
Sensing Solutions BusinessSegment
Overview
We areSensing Solutions, which accounted for approximately 25% of our net revenue in fiscal year 2018, is a leading providerdeveloper and manufacturer of a broad portfolio of application-specific products, including bimetal electromechanical controls, thermal and magnetic-hydraulic circuit breakers, power conversion and control products, industrial sensors, and interconnection products. Our Sensing Solutions business accounted for approximately 21% of our 2015 net revenue. We market and manufacture a broad portfolio of application-specific products, including motor and compressor protectors, circuit breakers, pressure sensors and switches, temperature sensors and switches/thermostats, linear and rotary position sensors, semiconductor burn-in test sockets, solid state relays, power inverters, interconnection products, and power inverters. Our control productstemperature, pressure, and position sensors, that are sold into industrial, aerospace, military, commercial, medical device, and residential end-markets. We derive most of our Sensing Solutions business revenue from products that prevent damage from excess heat or currentused in a wide variety of applications within thesein various end-markets, such as internalincluding aerospace and external motordefense, industrial, appliance, and compressor protectors, circuit protection, motor starters, thermostats, switches, semiconductor testing,HVAC. Our products help our customers' systems run safely and light industrial systems. Our industrial sensors, including pressure sensors, temperature sensors,in an efficient and linearenvironmentally-friendly manner. The acquisition of GIGAVAC, portions of which will be integrated into each of our operating segments, expands our product offerings to include high voltage contactors and rotary position sensors, provide real time information about the state of a specific system or subsystem, so control adjustments can be made to optimize system performance. fuses.
We believe that we are one of the largest suppliers of controls in the majority of the key applications in which we compete. For our industrial sensors, we have
Markets
Sensing Solutions designs and manufactures various categories of products, each of which serves a strategic planvariety of markets. Refer to build leading positions over time, leveraging the significant scale advantageProduct Categories section below for a summary of the key products, solutions, applications, systems, and innovative
capabilityend markets for each of our Performancesignificant product categories.
These products perform many functions in the applications in which they are used. Bimetal electromechanical controls and thermal and magnetic-hydraulic circuit breakers help prevent damage from excess heat or electrical current. Solid state relays are used where it is necessary to control a circuit by a low-power signal, or where several circuits must also be controlled by one signal. Solid state relays have certain advantages over mechanical relays, including long operation life, silent operation, low power, and low electrical interference. Sensors provided by Sensing business portfolio. In addition, on December 1, 2015, we acquired CST, which has expanded our product offerings in industrialSolutions employ similar technology to the automotive and HVOR sensors and power conversion and controls, as discloseddiscussed in the Performance Sensing Solutions Business MarketsSegment section below.above, but often require different customization in terms of packaging, calibration, and electrical output. These sensors measure specific parameters in order to provide real-time information about the state of a specific system or subsystem, so control adjustments can be made to optimize system performance. Power inverters and charge controllers enable conversion of electric power from direct current ("DC") power to alternating current ("AC") power, or AC power to DC power. Our interconnection products consist of semiconductor burn-in test sockets used by semiconductor manufacturers to verify packaged semiconductor reliability.
The demand for bimetal electromechanical controls and thermal and magnetic-hydraulic circuit breakers tend to follow the general economic environment and is affected by the increasing significance of new electronically-controlled applications. Demand for our sensor products used in industrial and commercial applications is driven by many of the same factors as in the automotive sensor market: regulation of emissions, greater energy efficiency, and safety, as well as consumer demand for new features. For example, many HVAC/Refrigeration ("HVAC/R") and industrial systems are converting to more efficient variable speed control, which inherently requires more sensor feedback than traditional fixed speed control systems. Global trends towards environmentally friendly refrigerants also require more sensors to deliver the desired system performance. Demand for power inverters and charge controllers is driven by economic development, the need to meet new energy efficiency standards, electrification of auxiliary loads on work trucks, emerging opportunities for residential energy storage and off-grid power systems, and a growing interest in clean energy to replace generators, which increases demand for both mobile and stationary power. Demand in the semiconductor market is driven by consumer and business computational, entertainment, transportation, and communication needs. These needs are driven by the desire to have smaller, lighter, faster, more functional, and energy conscious devices that make users more productive and interconnected to society.
Our Sensing Solutions business also benefits from strong agency relationships. For example, a number of electrical standards for motor control products, including portions of the Underwriters’ LaboratoriesUnderwriters' Laboratory ("UL") Standards for Safety, have been written based on the performance and specifications of our control products. We also have U.S. and Canadian Component Recognitions from UL a U.S.-based organization that issues safety standards for many electrical products in the U.S., for many of our control products, so that customers can use Klixon®, Crydom®, and Airpax® products throughout North America. Where our component parts are detailed in our customers' certifications from UL, changes to their certifications may be necessary in order for them to incorporate competitors' motor protectionofferings. Similarly, our aerospace products undergo exhaustive qualification procedures to customer or military performance standards, requiring a significant investment in a re-qualification effort to incorporate competitors’ offerings.
We continue to focus our efforts on expanding our presence in all global geographies, both emerging and mature. Our customers include established multinationals, as well as local producers in emerging markets such as China, India, Eastern Europe, and Turkey. China continues to remain a priority for us because of its export focus and the increasing domestic consumption of products that utilizeuse our devices. WeIn addition, we continue to focus on managing our costs and increasing our productivity in these lower-cost manufacturing regions.
ReferProduct Categories
Prior to Note 18, "Segment Reporting," of our audited consolidated financial statements included elsewherefiscal year 2018, we presented five significant product categories in this Annual Report on Form 10-K for details of the Sensing Solutions segment operating income for the years ended December 31, 2015, 2014, and 2013 and total assets as of December 31, 2015 and 2014.
Sensing Solutions Business Markets
Sensing Solutions products include controls, which are customized devices that protect equipment and electrical architecture from excessive heat or current, and sensors, which measure specific fluid based system parameters, including pressure and temperature. Our products help our customers' systems run safely and in an energy efficient and environmentally friendly manner. Our product lines encompassSolutions: bimetal electromechanical controls, industrial and aerospace sensors, power conversion and control, thermal and magnetic-hydraulic circuit breakers, power conversion and controlinterconnection. Beginning in fiscal year 2018, we are categorizing our products interconnection products, and industrialmore broadly, as sensors, each of which serves a highly diversified base of customers, end-markets, applications, and geographies.controls, or other, to better reflect how we view our products.
Bimetal Electromechanical Controls
Bimetal electromechanical controls include motor protectors, motor starters, thermostats, and switches, each of which helps prevent damage from excessive heat or current. Our bimetal electromechanical controls business serves a diverse group of end-markets, including commercial and residential HVAC systems, lighting, refrigeration, industrial motors, household appliances, and commercial and military aircraft. In developed markets such asThe following table presents the U.S., Europe, and Japan, the demand for many of these products, and their respective applications, tends to track to the general economic environment. In emerging markets, a growing middle class and rapid overall industrialization is creating growth for our control products in electric motors, consumer conveniences such as appliances and HVAC, and communication infrastructure.
Thermal and Magnetic-Hydraulic Circuit Breakers
Our circuit breaker portfolio includes customized magnetic-hydraulic circuit breakers and thermal circuit breakers, which help prevent damage from electrical or thermal overload. Our magnetic-hydraulic circuit breaker business serves a broad spectrum of OEMs and other multinational companies in the telecommunication, industrial, recreational vehicle, HVAC, refrigeration, marine, medical, information processing, electronic power supply, power generation, over-the-road trucking, construction, agricultural, and alternative energy markets. We provide thermal circuit breakers to the commercial and military aircraft markets. Demand for these products tends to pace the general economic environment.
Power Conversion and Control
Power conversion and control products include power inverters, and with the acquisition of CST, solid state relays.
Our power inverter products allow an electronic circuit to convert direct current ("DC") power to alternating current ("AC") power. Power inverters are used mainly in applications where DC power, such as that stored in a battery, must be converted for use in an electrical device that runs on AC power. Specific applications for power inverters include powering applications in utility/service trucks or recreational vehicles and providing power backup for critical applications such as traffic light signals and key business/computer systems. Demand for these products is drivensignificant product categories offered by economic development, the need to meet new energy efficiency standards, and a growing interest in clean energy to replace generators, which increases demand for both portable and stationary power.
With the acquisition of CST in December 2015, this product category was expanded to include solid state relays, which are used where it is necessary to control a circuit by a low-power signal, or where several circuits must also be controlled by one signal. Applications for solid state relays include those in the industrial equipment end-market.
Interconnection
Our interconnection products consist of semiconductor burn-in test sockets used by semiconductor manufacturers to verify packaged semiconductor reliability. Demand in the semiconductor market is driven by consumer and business computational, entertainment, transportation, and communication needs. These needs are driven by the desire to have smaller, lighter, faster, more functional, and energy conscious devices that make users more productive and interconnected to society.
Industrial Sensors
Industrial sensors employ similar technology to automotive sensors discussed in the Performance Sensing Business section above, but often require greater customization in terms of packaging, calibration, and electrical output. Commercial and industrial applications in which our industrial sensors have historically been widely used include: multiple HVAC and refrigeration systems, where refrigerant, water, or air is the sensed fluid media used to optimize performance of the heating and cooling application; discrete industrial equipment applications that have a fluid-based subsystem (e.g., air compressors and hydraulic machinery such as molding and metal machining); and applications such as pumps and storage tanks, where measurement of pressure and temperature is required for optimum performance.
With the acquisition of CST in December 2015, this product category was expanded to include linear and rotary position sensors. Linear and rotary position sensors translate linear or angular mechanical position to an electrical signal, and are typically used in systems where high reliability is desired, such as aircraft controls. The primary applications for our linear and rotary position sensors are in harsh environments in the aerospace and energy and infrastructure end-markets.
We believe that sensor usage in industrial and commercial applications is driven by many of the same factors as in the automotive sensor market: regulation of safety, emissions, and greater energy efficiency, and consumer demand for new features. For example, many HVAC/Refrigeration ("HVAC/R") and industrial systems are converting to more energy efficient variable speed control, which inherently requires more sensor feedback than traditional fixed speed control systems. Global trends towards environmentally friendly refrigerants also require more sensors to deliver the desired system performance.
Sensing Solutions Products
We offerand the following significantcorresponding key products, in the Sensing Solutions business:solutions, applications, systems, and end markets:
|
| | | | |
Product CategoriesKey Products/Solutions | | Key Applications/SolutionsSystems | | Key End-MarketsEnd Markets |
| Product category: Controls |
Bimetal electromechanical controls | | Internal motor and compressor protectors
External motor and compressorMotor protectors
Motor starters Thermostats Switches
Circuit breakers Thermal circuit breakers Magnetic-hydraulic circuit breakers | | HVAC/R Medical connectors
Industrial equipment
Small/large appliances
Lighting
Industrial motors
Auxiliary
DC motors
Commercial and military aircraft
Military
Marine/industrial
|
| | | | |
Thermal and magnetic-hydraulic circuit breakers | | Circuit protection | | Commercial aircraft
Data communicationsand telecom equipment TelecommunicationsMedical equipment
Computer servers
Marine/industrial
HVAC/R
Military
|
| | | | |
Interconnection | | Semiconductor testing | | Semiconductor manufacturing |
| | | | |
Power conversion and control | | DC/AC inverters
Solid state relays
Recreational vehicles
| | Mobile power equipmentAerospace and defense
Recreational vehicles
Solar powerHVAC/R
Industrial equipment Medical Marine Energy/solar Automotive |
| | | | Product category: Sensors |
IndustrialLinear and rotary position sensors | | System fluid measurement
Motion control systemsLinear variable differential transformers
Pressure sensors Temperature sensors Aircraft controls | | HVAC/R Industrial equipmentAir compressors
Hydraulic machinery Motion control systems Pumps and storage tanks Commercial and military aircraft | | Aerospace and defense HVAC/R Industrial equipment Energy Agriculture Construction Marine Motors |
The table below sets forth the amount of net revenue we generated from each of these product categories in each of the last three fiscal years:years (prior periods have been recast to reflect current presentation):
|
| | | | | | | | | | | |
| Product Category | For the year ended December 31, |
| (Amounts in thousands) | 2015 | | 2014 | | 2013 |
| Bimetal electromechanical controls | $ | 318,721 |
| | $ | 359,610 |
| | $ | 355,089 |
|
| Thermal and magnetic-hydraulic circuit breakers | 110,980 |
| | 117,816 |
| | 113,228 |
|
| Industrial sensors | 69,102 |
| | 56,779 |
| | 49,016 |
|
| Interconnection | 61,738 |
| | 69,332 |
| | 72,206 |
|
| Power conversion and control | 58,180 |
| | 35,160 |
| | 19,994 |
|
| Other | 10,014 |
| | 15,249 |
| | 12,961 |
|
| Total | $ | 628,735 |
| | $ | 653,946 |
| | $ | 622,494 |
|
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| (Dollars in thousands) | 2018 | | 2017 | | 2016 |
| Net revenue: | | | | | |
| Controls | $ | 508,745 |
| | $ | 497,853 |
| | $ | 486,207 |
|
| Sensors | 222,649 |
| | 201,846 |
| | 193,843 |
|
| Other | 162,582 |
| | 146,434 |
| | 136,858 |
|
| Sensing Solutions net revenue | $ | 893,976 |
| | $ | 846,133 |
| | $ | 816,908 |
|
Competitors
Within each of the principal product categories in Sensing Solutions, we compete with divisions of large multinational industrial corporations and companies with smaller market share that compete primarily in specific markets, applications, or products. We believe that the key competitive factors in these markets are product performance, quality, and reliability, although manufacturers in certain markets also compete based on price. Physical proximity to the facilities of the OEM/Tier 1 manufacturer customer has, in our experience, also increasingly become a basis for competition. We have additionally found that certain of our product categories have other specific competitive factors. For example, strength of technology, quality, and the ability to provide custom solutions are particularly important in thermal circuit breaker, thermostat, and switch products. With hydraulic-magnetic circuit breakers, as another example, we have encountered heightened competition on price and a greater emphasis on agency approvals, including approvals by the UL, a U.S.-based organization that issues safety standards for many electrical products in the U.S., military agencies, and similar organizations outside of the U.S., such as Verband der Elektrotechnik, Elektronik und Informationstechnik, and TÜV Rheinland in Europe, China Compulsory Certification in China, and Canadian Standards Association in Canada.
Technology and Intellectual Property
We develop products that address increasingly complex engineering requirements. We believe that continued focused investment in research and development ("R&D") is critical to our future growth and maintaining our leadership positions in the markets we serve. Our R&D efforts are directly related to timely development of new and enhanced products that are central to our core business strategy. We continuously develop our technologies to meet an evolving set of customer requirements and new product introductions. In addition, we constantly consider new technologies where we may have expertise for potential investment or acquisition. We incurred R&D expense of $147.3 million, $130.1 million, and $126.7 million for the years ended December 31, 2018, 2017, and 2016, respectively.
We rely primarily on patents, and trade secret laws,secrets, manufacturing know-how, confidentiality procedures, and licensing arrangements to maintain and protect our intellectual property rights. While we consider our patents to be valuable assets, we do not believe that our overall competitive position is dependent on patent protection or that our overall operations arebusiness is dependent upon any single patent or group of related patents. Many of our patents protect specific functionality in our products, and others consist of processes or techniques that result in reduced manufacturing costs. Our patents generally relate to improvements
The following table presents information on earlier filed Sensata, acquired, or competitor patents. We acquired ownership and license rights to a portfolio ofour patents and patent applications as well as certain registered trademarks and service marks for discrete product offerings, from TI in the 2006 Acquisition. We have also acquired intellectual property as part of our various acquisitions. We have continued to have issued to us, and to file for, additional U.S. and non-U.S. patents since the 2006 Acquisition. As of December 31, 2015, excluding the recent acquisition of CST, we had approximately 239 U.S. and 244 non-U.S. patents and approximately 47 U.S. and 172 non-U.S. pending patent applications that were filed within the last five years. We do not know whether any of our pending patent applications will result in the issuance of patents or whether the examination process will require us to narrow our claims. The acquisition of CST added2018:
|
| | | | | | |
| | | U.S. | | Non-U.S. |
| Patents | | 324 |
| | 450 |
|
| Pending patent applications, filed within the last five years | | 34 |
| | 209 |
|
approximately 83 U.S. and 175 non-U.S. patents and approximately 12 U.S. and 35 non-U.S. pending patent applications that were filed within the last five years. Our patents have expiration dates ranging from 20162019 to 2035.2042. We incurred Researchalso own a portfolio of trademarks and Development expense of $123.7 million, $82.2 million,license various patents and $58.0 million for the years ended December 31, 2015, 2014,trademarks. "Sensata" and 2013, respectively.our logo are trademarks.
We utilizeuse licensing arrangements with respect to certain technology that we useprovided in our sensor products and, to a lesser extent, our control products. WeIn 2006, we entered into a perpetual, royalty-free cross-license agreement with our former owner, TI, in connection with the 2006 Acquisition,Texas Instruments Incorporated, which permits each party to use specified technology owned by the other party in its business. No license may be terminated under the agreement, even in the event of a material breach.
We purchase sense element assemblies, which are components used primarily in our monosilicon strain gage pressure sensors, from Measurement Specialties, Inc. and its affiliates ("MEAS") and also manufacture them internally as a second source. Prior to March 2013, this internal sourcing was under a license provided for by an agreement entered into between MEAS and TI in May 2002 (the "2002 Agreement"), which was on a year-to-year basis, and limited our internal production to 40% of our needs. In March 2013, we entered into an intellectual property licensing arrangement (the "License Agreement") with MEAS to replace the 2002 Agreement, which was terminated in its entirety without penalty. The License Agreementthat provides for an indefinite duration license whichand is subject to royalties through 2019 and thereafter is royalty-free. Pursuant to the terms of the License Agreement, the 40% limitation on internal production under the 2002 Agreement has been eliminated, and we are authorized to produce our entire need for these sense elements within the passenger vehicle and heavy dutyheavy-duty truck fields of use. The License Agreement can be terminated by either party in the event of an uncured material breach. As of December 31, 2018, we only purchase sense element assemblies from MEAS that relate to limited industrial applications. We manufacture the rest internally.
The following table presents net revenue realized related to the sense element assemblies subject to the License AgreementAgreement:
|
| | | | | | | | | | | | |
| | | For the year ended December 31, |
| (Dollars in millions) | | 2018 | | 2017 | | 2016 |
| Net revenue: | | | | | | |
| Manufactured by Sensata | | $ | 424.6 |
| | $ | 348.4 |
| | $ | 247.1 |
|
| Manufactured by MEAS | | 8.8 |
| | 64.8 |
| | 150.6 |
|
| Total net revenue subject to License Agreement | | $ | 433.4 |
| | $ | 413.2 |
| | $ | 397.7 |
|
Raw Materials
We use a broad range of manufactured components, subassemblies, and raw materials in the manufacture of our products, including those containing certain commodities, resins, and rare earth metals, which may experience significant volatility in their price and availability.
The price and availability of raw materials and manufactured components may be subject to change due to, among other things, new laws or regulations and global economic or political events including strikes, suppliers' allocations to other purchasers, interruptions in production by suppliers, changes in foreign currency exchange rates, and prevailing price levels. It is generally difficult to pass increased prices for manufactured components and raw materials through to our customers in the form of price increases. Therefore, a significant increase in the price or a decrease in the availability of these items could materially increase our operating costs and materially and adversely affect our business and results of operations.
Employees
As of December 31, 2018, we had approximately 21,650 employees, of whom approximately 8% were located in the U.S. As of December 31, 2018, approximately 120 of our employees were covered by collective bargaining agreements. In addition, in various countries, local law requires our participation in works councils. We also engage contract workers in multiple locations, primarily to cost-effectively manage variations in manufacturing volume, but also to perform engineering and other general services. As of December 31, 2018, we had approximately 2,050 contract workers on a worldwide basis. We believe
that our relations with our employees are good. However, as discussed in Item 1A, "Risk Factors," included elsewhere in this Report, the loss of key employees or material work stoppages at our or our customers' manufacturing sites could have a material adverse impact on our financial condition and results of operations.
Environmental Regulations
Our operations and facilities are subject to numerous environmental, health, and safety laws and regulations, both domestic and foreign, including those governing air emissions, chemical usage, water discharges, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites. We are, however, not aware of any threatened or pending material environmental investigations, lawsuits, or claims involving us or our operations.
Many of our products are governed by material content restrictions and reporting requirements, examples of which include: European Union regulations, such as Registration, Evaluation, Authorization, and Restriction of Chemicals ("REACH"), Restriction of Hazardous Substances ("RoHS"), and End of Life Vehicles ("ELV"); U.S. regulations, such as the conflict minerals requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act; and similar regulations in other countries. Further, numerous customers, across all end markets, are requiring us to provide declarations of compliance or, in some cases, full material content disclosure as a requirement of doing business with them.
Compliance with these laws and meeting customer requirements has increased our cost of doing business in a variety of ways and may continue to do so in the future. We do not currently expect any material capital expenditures during fiscal year 2019 for environmental control facilities. We also do not believe that existing or pending climate change legislation, regulation, or international treaties or accords are reasonably likely to have a material adverse effect in the foreseeable future on our business or the markets we serve, nor on our results of operations, capital expenditures, earnings, competitive position, or financial standing.
Governmental Regulations
We are subject to compliance with laws and regulations controlling the import and export of goods and services. Certain of our products are subject to International Traffic in Arms Regulation ("ITAR"). The export of many such ITAR-controlled products requires an individual validated license from the U.S. State Department’s Directorate of Defense Trade Controls. The State Department makes licensing decisions based on type of product, destination of end use, end user, national security, and foreign policy. We have a trade compliance team and other systems in place to apply for licenses and otherwise comply with import and export regulations. Any failure to maintain compliance with domestic and foreign trade regulations could limit our ability to import or export raw material and finished goods across various jurisdictions. These laws and regulations are subject to change, and any such change may require us to change technology or incur expenditures to comply with such laws and regulations.
Available Information
We make available free of charge on our Internet website (www.sensata.com) our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (the "SEC"). Our website and the information contained or incorporated therein are not intended to be incorporated into this Report.
The SEC maintains an Internet site that contains reports, proxy, and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents on, or accessible through, this website or our website are not incorporated into this filing. Further, our references to the URLs for the SEC's website and our website are intended to be inactive textual references only.
Business and Operational Risks
Our business is subject to numerous global risks, including regulatory, political, economic, and military concerns and instability.
Our business, including our employees, customers, and suppliers, are located throughout the world. As a result, we are exposed to numerous global and local risks that could decrease revenue and/or increase expenses, and therefore decrease our profitability, including, without limitation:
trade regulations, including customs, import, and export matters;
tariffs, trade barriers, and disputes;
local employment costs, regulations, and conditions;
difficulties with, and costs for, protecting our intellectual property;
challenges in collecting accounts receivable;
tax laws and regulatory changes, including examinations by taxing authorities, variations in tax laws from country to country, changes to the terms of income tax treaties, and difficulties in the tax-efficient repatriation of earnings generated or held in a number of jurisdictions;
natural disasters;
instability in economic or political conditions, inflation, recession, actual or anticipated military or political conflicts, and potential impact due to the upcoming exit of the United Kingdom (the "U.K.") from the European Union (the "EU"); and
impact of each of the foregoing on our outsourcing and procurement arrangements.
The U.K.’s withdrawal from the EU ("Brexit"), which is scheduled to take place on March 29, 2019, has created uncertainty about the future relationship between the U.K. and the EU. A draft withdrawal agreement was published in November 2018, but we are still uncertain about the final agreements they will reach on topics such as financial laws and regulations, tax and free trade agreements, immigration laws, and employment laws. Our publicly traded parent is incorporated in the U.K., and we have significant operations and a substantial workforce therein and therefore enjoy certain benefits based on the U.K.’s membership in the EU. The lack of clarity about Brexit and the future U.K. laws and regulations creates uncertainty for us, as the outcome of these negotiations may affect our business and operations. Additionally, there also is a risk that other countries may decide to leave the EU. The uncertainty surrounding Brexit not only potentially affects our business in the U.K. and the EU, but may have a material adverse effect on global economic conditions and the stability of global financial markets, which in turn could have a material adverse effect on our business, financial condition, and results of operations. Additionally, any development that has the effect of devaluing the Euro could meaningfully reduce the value of our assets and reduce the usefulness of liquidity alternatives denominated in that currency, such as our multicurrency credit facility.
In addition, we have sizable operations in China, including two principal manufacturing sites. Approximately 16% of our net revenue in fiscal year 2018 was generated in China. Economic and political conditions in China have been and may continue to be volatile and uncertain, especially as the United States ("U.S.") and China continue to discuss and have differences in trade policies. In addition, the legal and regulatory system in China is still developing and is subject to change. Accordingly, our operations and transactions with customers in China could be adversely affected by changes to market conditions, changes to the regulatory environment, or interpretation of Chinese law.
Adverse conditions in the industries upon which we are dependent, including the automotive industry, have had, and may in the future have, adverse effects on our business.
We are dependent on market dynamics to sell our products, and our operating results could be adversely affected by cyclical and reduced demand in these markets. Periodic downturns in our customers’ industries could significantly reduce demand for certain of our products, which could have a material adverse effect on our results of operations, financial position, and cash flows.
Much of our business depends on, and is directly affected by, the global automobile industry. Sales in our automotive end markets accounted for $386.3 million inapproximately 60% of our total net revenue in fiscal year 2018. Adverse developments like those we have seen in past years in the automotive industry, including but not limited to declines in demand, customer bankruptcies, and increased demands on us for lower prices, could have adverse effects on our results of operations and could impact our liquidity and our ability to meet restrictive debt covenants. In addition, these same conditions could adversely impact certain of our vendors’ financial solvency, resulting in potential liabilities or additional costs to us to ensure uninterrupted supply to our customers.
Continued pricing and other pressures from our customers may adversely affect our business.
Many of our customers, including automotive manufacturers and other industrial and commercial original equipment manufacturers ("OEMs"), require annual price reductions. If we are not able to offset continued price reductions through improved operating efficiencies and reduced expenditures, these price reductions may have a material adverse effect on, our results of operations and cash flows. In addition, our customers occasionally require engineering, design, or production changes. In some circumstances, we may be unable to cover the costs of these changes with price increases. Further, as our customers grow larger, they may increasingly require us to provide them with our products on an exclusive basis, which could limit sales, cause an increase in the number of products we must carry and, consequently, increase our inventory levels and working capital requirements. Certain of our customers, particularly in the automotive industry, are increasingly requiring their suppliers to agree to their standard purchasing terms without deviation as a condition to engage in future business transactions. As a result, we may find it difficult to enter into agreements with such customers on terms that are commercially reasonable to us.
We operate in markets that are highly competitive, and competitive pressures could require us to lower our prices or result in reduced demand for our products.
We operate in markets that are highly competitive, and we compete on the basis of product performance, quality, service, and/or price across the industries and end markets we serve. A significant element of our competitive strategy is to design and manufacture high-quality products that meet the needs of our customers at a commercially competitive price, particularly in markets where low-cost, country-based suppliers, primarily in China with respect to the Sensing Solutions segment, have entered the markets or increased their per-unit sales in these markets by delivering products at low cost to local OEMs. In addition, certain of our competitors in the automotive sensor market are influenced or controlled by major OEMs or suppliers, thereby limiting our access to these customers. Many of our customers also rely on us as their sole source of supply for many of the products that we have historically sold to them. These customers may choose to develop relationships with additional suppliers or elect to produce some or all of these products internally, primarily to reduce risk of delivery interruptions or as a means of extracting price reductions from us. Certain of our customers currently have, or may develop in the future, the capability to internally produce the products that we sell to them and may compete with us with respect to those and other products and with respect to other customers. Competitive pressures such as these, and others, could affect prices or customer demand for our products, negatively impacting our profit margins and/or resulting in a loss of market share.
Increasing costs for, or limitations on the supply of or access to, manufactured components and raw materials may adversely affect our business and results of operations.
We use a broad range of manufactured components, subassemblies, and raw materials in the manufacture of our products, including those containing certain commodities, resins, and rare earth metals, which may experience significant volatility in their price and availability. We have entered into hedge arrangements in an attempt to minimize commodity pricing volatility and may continue to do so from time to time in the future. Such hedges might not be economically successful. In addition, these hedges do not qualify as accounting hedges in accordance with U.S. generally accepted accounting principles ("GAAP"). Accordingly, the change in fair value of these hedges is recognized in earnings immediately, which could cause volatility in our results of operations from quarter to quarter. Refer to Note 19, "Derivative Instruments and Hedging Activities," of our audited consolidated financial statements and accompanying notes thereto (our "Financial Statements") included elsewhere in this Annual Report on Form 10-K (this "Report") for further discussion of accounting for hedges of commodity prices, and Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," included elsewhere in this Report, for an analysis of the sensitivity on pretax earnings of changes in the forward prices on these hedges.
The price and availability of raw materials and manufactured components may be subject to change due to, among other things, new laws or regulations and global economic or political events including strikes, suppliers' allocations to other purchasers, interruptions in production by suppliers, changes in foreign currency exchange rates, and prevailing price levels. It is generally difficult to pass increased prices for manufactured components and raw materials through to our customers in the form of price increases. Therefore, a significant increase in the price or a decrease in the availability of these items could materially increase our operating costs and materially and adversely affect our business and results of operations.
We may not realize all of the revenue or achieve anticipated gross margins from products subject to existing purchase orders or for which we are currently engaged in development.
Our ability to generate revenue from products pending customer awards is subject to a number of important risks and uncertainties, many of which are beyond our control, including the number of products our customers will actually produce, as well as the timing of such production. Many of our customer agreements provide for the year ended December 31, 2015,supply of a certain share of the customer’s requirements for a particular application or platform, rather than for a specific quantity of products. In some cases, we have no remedy if a customer chooses to purchase less than we expect. In cases where customers do make minimum volume commitments to us, our remedy for their failure to meet those minimum volumes may be limited to increased pricing on those products that the customer does purchase from us or renegotiating other contract terms. There is no assurance that such price increases or new terms will offset a shortfall in expected revenue. In addition, some of our customers may have the right to discontinue a program or replace us with another supplier under certain circumstances. As a result, products for which $206.7 million waswe are currently incurring development expenses may not be manufactured by our customers at all, or may be manufactured in smaller amounts than currently anticipated. Therefore, our anticipated future revenue from products relating to existing customer awards or product development relationships may not result in firm orders from customers for the originally contracted amount. We also incur capital expenditures and other costs, and price our products, based on estimated production volumes. If actual production volumes were significantly lower than estimated, our anticipated revenue and gross margin from those new products would be adversely affected. We cannot predict the ultimate demand for our customers’ products, nor can we predict the extent to which we would be able to pass through unanticipated per-unit cost increases to our customers.
In connection with the implementation of our corporate strategies, we face risks associated with the acquisition or disposition of businesses, the entry into new lines of business, the integration of acquired businesses, and the growth and development of these businesses.
In pursuing our corporate strategy, we often acquire other businesses or dispose of or exit businesses we currently own. The success of this strategy is dependent upon our ability to identify appropriate acquisition and disposition targets, negotiate transactions on favorable terms, complete transactions and, in the case of acquisitions, successfully integrate them into our existing businesses. If a proposed transaction is not consummated, the time and resources spent pursuing it could adversely result in missed opportunities to locate and acquire other businesses. If acquisitions are made, there can be no assurance that we will realize the anticipated benefits of such acquisitions, including, but not limited to, revenue growth, operational efficiencies, or expected synergies. If we dispose of or otherwise exit certain businesses, we may incur significant write-offs, including those related to goodwill and other intangible assets, and face other risks, including difficulties in the separation of operations, services, products, and personnel; the diversion of management's attention from other business concerns; the disruption of our business; and the potential loss of key employees. There can be no assurance that we will be successful in addressing these or any other significant risks encountered.
Subject to the terms of our indebtedness, we may finance future acquisitions with cash from operations, additional indebtedness, and/or by issuing additional equity securities. In addition, we could face financial risks associated with incurring additional indebtedness such as reducing our liquidity, limiting our access to financing markets, and increasing the amount of service on our debt. The availability of debt to finance future acquisitions may be restricted, and our ability to make future acquisitions may be limited.
There can be no assurance that any anticipated synergies or cost savings related to acquisitions will be achieved or that they will be achieved in our estimated time frame. We may not be able to successfully integrate and streamline overlapping functions from future acquisitions, and integration may be more costly to accomplish than we expect. In addition, we could encounter difficulties in managing our combined company due to its increased size and scope.
We also may seek to restructure our business in the future by disposing of certain assets or by consolidating operations. There can be no assurance that any restructuring of our business will not adversely affect our financial position, leverage, or results of operations. In addition, any significant restructuring of our business will require significant managerial attention, which may be diverted from our other operations.
Further, from time to time, either through acquisitions or internal development, we enter new lines of business or offer new products and services within existing lines of business. These new lines of business or new products and services present us with additional risks, particularly in instances where the markets are not fully developed. Such risks include the investment of significant time and resources; the possibility that these efforts will be not be successful; the possibility that the marketplace does not accept our products or services or that we are unable to retain customers that adopt our new products or services; and the risk of additional liabilities associated with these efforts. In addition, many of the businesses that we acquire and develop will likely have significantly smaller scales of operations prior to the implementation of our growth strategy. If we are not able to manage the growing complexity of these businesses, including improving, refining, or revising our systems and operational
practices, and enlarging the scale and scope of the businesses, our business may be adversely affected. Other risks include developing knowledge of and experience in the new business, integrating the acquired business into our systems and culture, recruiting professionals, and developing and capitalizing on new relationships with experienced market participants. External factors, such as compliance with new or revised regulations, competitive alternatives, and shifting market preferences may also impact the successful implementation of a new line of business. Failure to manage these risks in the acquisition or development of new businesses could materially and adversely affect our business, results of operations, and financial condition.
Restructuring our business or divesting some of our businesses or product lines in the future may have a material adverse effect on our results of operations, financial position, and cash flows.
We continue to evaluate the strategic fit of specific businesses and products that were manufactured by MEAS, and $179.6 million wasmay result in additional divestitures. Any divestitures may result in significant write-offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our results of operations and financial position. Divestitures could involve additional risks, including difficulties in the separation of operations, services, products, and personnel; the diversion of management's attention from other business concerns; the disruption of our business; and the potential loss of key employees. There can be no assurance that were manufacturedwe will be successful in addressing these or any other significant risks encountered.
We also may seek to restructure our business in the future by us.disposing of certain assets or by consolidating operations. There can be no assurance that any restructuring of our business will not adversely affect our financial position, leverage, or results of operations. In addition, any significant restructuring of our business will require significant managerial attention, which may be diverted from our other operations.
SeasonalityWe are dependent on market acceptance of our new product introductions and product innovations for future revenue.
Because of the diverse nature of theSubstantially all markets in which we compete,operate are impacted by technological change or change in consumer tastes and preferences, which are rapid in certain markets. Our operating results depend substantially upon our ability to continually design, develop, introduce, and sell new and innovative products; to modify existing products; and to customize products to meet customer requirements driven by such change. There are numerous risks inherent in these processes, including the risk that we will be unable to anticipate the direction of technological change or that we will be unable to develop and market profitable new products and applications before our competitors or in time to satisfy customer demands.
We may incur material losses and costs as a result of product liability, warranty, and recall claims that may be brought against us.
We have been, and may continue to be, exposed to product liability and warranty claims in the event that our products actually or allegedly fail to perform as expected, or the use of our products results, or is alleged to result, in death, bodily injury, and/or property damage. Accordingly, we could experience material warranty or product liability losses in the future and incur significant costs to defend these claims. In addition, if any of our products are, or are alleged to be, defective, we may be required to participate in a recall of the underlying end product, particularly if the defect or the alleged defect relates to product safety. Depending on the terms under which we supply products, an OEM may hold us responsible for some or all of the repair or replacement costs of these products under warranty when the product supplied did not perform as represented. In addition, a product recall could generate substantial negative publicity about our business and interfere with our manufacturing plans and product delivery obligations as we seek to repair affected products. Our costs associated with product liability, warranty, and recall claims could be material.
Natural disasters or other disasters outside of our control could cause significant business interruptions resulting in harm to our business operations and financial condition.
Our operations and those of our suppliers and customers, and the supply chains that support their operations, may potentially suffer interruptions caused by natural disasters such as earthquakes, tsunamis, hurricanes, typhoons, or floods; or other disasters such as fires, explosions, disease, and acts of terrorism or war that are outside of our control. 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/or cash flows could be materially adversely affected.
Labor disruptions or increased labor costs could adversely affect our business.
As of December 31, 2018, we had approximately 21,650 employees, of whom approximately 8% were located in the U.S. As of December 31, 2018, approximately 120 of our employees were covered by collective bargaining agreements. In addition, in various countries, local law requires our participation in works councils.
A material labor disruption or work stoppage at one or more of our manufacturing facilities could have a material adverse effect on our business. In addition, work stoppages occur relatively frequently in the industries in which many of our customers operate, such as the automotive industry. If one or more of our larger customers were to experience a material work stoppage for any reason, that customer may halt or limit the purchase of our products. This could cause us to shut down production facilities relating to those products, which could have a material adverse effect on our business, results of operations, and/or financial condition.
Security breaches and other disruptions to our information technology ("IT") infrastructure could interfere with our operations, compromise confidential information, and expose us to liability which could materially adversely impact our business and reputation.
Security breaches and other disruptions to our IT infrastructure could interfere with our operations; compromise information belonging to us, our employees, customers, and suppliers; and expose us to liability that could adversely impact our business and reputation. In the ordinary course of business, we rely on IT networks and systems, some of which are managed by third parties, to process, transmit, and store electronic information, and to manage or support a variety of business processes and activities. Additionally, we collect and store certain data, including proprietary business information and customer and employee data, and may have access to confidential or personal information that is subject to privacy and security laws, regulations, and customer-imposed controls. We also face the challenge of supporting our older systems and implementing necessary upgrades. Despite our cybersecurity measures (including employee and third-party training, monitoring of networks and systems, and maintenance of backup and protective systems) that are continuously reviewed and upgraded, our IT networks and infrastructure may still be vulnerable to damage, disruptions, or shutdowns due to attacks by hackers, breaches, employee error or malfeasance, power outages, computer viruses, telecommunication or utility failures, systems failures, natural disasters, or other catastrophic events.
We are at risk of attack by a growing list of adversaries through increasingly sophisticated methods of attack. Because the techniques used to obtain unauthorized access or sabotage systems change frequently, we may be unable to anticipate these techniques or implement adequate preventative measures. We regularly experience attacks to our systems and networks and have from time to time experienced cybersecurity breaches, such as computer viruses, unauthorized parties gaining access to our IT systems, and similar incidents, which to date have not had a material impact on our business. If we are unable to efficiently and effectively maintain and upgrade our system safeguards, we may incur unexpected costs and certain of our systems may become more vulnerable to unauthorized access. While we select our third party vendors carefully, problems with the IT systems of those vendors, including breakdowns or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, cyber-attacks, and security breaches at a vendor could adversely affect our ability to deliver products and services to our customers and otherwise conduct our business.
Additionally, we are an acquisitive organization and the process of integrating the information systems of the businesses we acquire is complex and exposes us to additional risk as we might not adequately identify weaknesses in the targets’ information systems, which could expose us to unexpected liabilities or make our own systems more vulnerable to attack. These types of incidents affecting us or our third-party vendors could result in intellectual property or other confidential information being lost or stolen, including client, employee, or company data. In addition, we may not be able to detect breaches in our IT systems or assess the severity or impact of a breach in a timely manner.
Any such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to our reputation, which could materially adversely affect our business. Further, to the extent that any disruption or security breach results in a loss of, or damage to, our data, or an inappropriate disclosure of confidential information, it could cause significant damage to our reputation, affect our relationships with our customers, lead to claims against us, and ultimately harm our business, financial condition, and/or results of operations.
Improper disclosure of confidential, personal, or proprietary data could result in regulatory scrutiny, legal liability, or harm to our reputation.
One of our significant responsibilities is to maintain the security and privacy of our employees’ and customers’ confidential and proprietary information, including confidential information about our employees’ compensation, medical information, and other personally identifiable information. We maintain policies, procedures, and technological safeguards designed to protect the security and privacy of this information. Nonetheless, we cannot eliminate the risk of human error, employee or vendor malfeasance, or cyber-attacks that could result in improper access to or disclosure of confidential, personal, or proprietary information. Such access or disclosure could harm our reputation and subject us to liability under our contracts and laws and regulations that protect personal data, resulting in increased costs, loss of revenue, and loss of customers. The release of confidential information as a result of a security breach could also lead to litigation or other proceedings against us by
affected individuals or business partners, or by regulators, and the outcome of such proceedings, which could include penalties or fines, could have a significant negative impact on our business.
In many jurisdictions, including in the EU and the U.S., we are subject to laws and regulations relating to the collection, use, retention, security, and transfer of this information. These laws and regulations are frequently changing and are becoming increasingly complex and sometimes conflict among the various jurisdictions and countries in which we operate, which makes compliance challenging and expensive. Additionally, certain jurisdictions’ regulations include notice provisions that may require us to inform affected customers or employees in the event of a breach of confidential information before we fully understand or appreciate the extent of the breach. These notice provisions present operational challenges and related risk.
In particular, the EU’s General Data Protection Regulation ("GDPR") went into effect in May 2018. Non-compliance could result in proceedings against us by governmental entities or others. Our failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impair our reputation in the marketplace. Further, regulatory initiatives in the area of data protection are more frequently including provisions allowing authorities to impose substantial fines and penalties, and therefore, failure to comply could also have a significant financial impact.
Financial Risks
We are exposed to fluctuations in currency exchange rates that could negatively impact our financial results and cash flows.
A portion of our net revenue, expenses, receivables, and payables are denominated in currencies other than the U.S. dollar. We, therefore, face exposure to adverse movements in exchange rates of currencies other than the U.S. dollar, which may change over time and could affect our financial results and cash flows. For financial reporting purposes, we, and each of our subsidiaries, operate under a U.S. dollar functional currency because of the significant influence of the U.S. dollar on our operations. In certain instances, we enter into transactions that are denominated in a currency other than the U.S. dollar. At the date that such transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction is measured and recorded in U.S. dollars using the exchange rate in effect at that date. At each balance sheet date, recorded monetary balances denominated in a currency other than the U.S. dollar are adjusted to U.S. dollars using the exchange rate at the balance sheet date, with gains or losses recorded in other, net in the consolidated statements of operations. During times of a weakening U.S. dollar, our reported international sales and earnings may increase because the non-U.S. currency will translate into more U.S. dollars. Conversely, during times of a strengthening U.S. dollar, our reported international sales and earnings may decrease because the local currency will translate into fewer U.S. dollars.
Our level of indebtedness could adversely affect our financial condition and our ability to operate our business.
As of December 31, 2018, we had $3,303.3 million of gross outstanding indebtedness, including $917.8 million of indebtedness under the term loan provided by the eighth amendment to the credit agreement dated as of May 12, 2011 (as amended, the "Credit Agreement"), $500.0 million aggregate principal amount of 4.875% senior notes due 2023 issued under an indenture dated as of April 17, 2013 (the "4.875% Senior Notes"), $400.0 million aggregate principal amount of 5.625% senior notes due 2024 issued under an indenture dated as of October 14, 2014 (the "5.625% Senior Notes"), $700.0 million aggregate principal amount of 5.0% senior notes due 2025 issued under an indenture dated as of March 26, 2015 (the "5.0% Senior Notes"), $750.0 million aggregate principal amount of 6.25% senior notes due 2026 issued under an indenture dated as of November 27, 2015 (the "6.25% Senior Notes," and together with the 4.875% Senior Notes, the 5.625% Senior Notes, and the 5.0% Senior Notes, the "Senior Notes"), and $35.5 million of capital lease and other financing obligations. We may incur additional indebtedness in the future. Our substantial indebtedness could have important consequences. For example, it could:
make it more difficult for us to satisfy our debt obligations;
restrict us from making strategic acquisitions;
limit our flexibility in planning for, or reacting to, changes in our business and future business opportunities, thereby placing us at a competitive disadvantage if our competitors are not as highly-leveraged;
increase our vulnerability to general adverse economic and market conditions; or
require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness if we do not maintain specified financial ratios or are not able to refinance our indebtedness as it comes due, thereby reducing the availability of our cash flows for other purposes.
In addition, the senior secured credit facilities provided for under the Credit Agreement (the "Senior Secured Credit Facilities"), permit us to incur additional indebtedness in the future, including borrowings under the $420.0 million revolving credit facility (the "Revolving Credit Facility") and $1.0 billion incremental availability (the "Accordion") under which, subject to certain limitations as defined in the indentures (the "Senior Notes Indentures") under which the Senior Notes were issued, additional secured debt may be issued or the capacity of the Revolving Credit Facility may be increased. As of December 31, 2018, we had $416.1 million available to us under the Revolving Credit Facility.
If we increase our indebtedness by borrowing under the Revolving Credit Facility or incur other new indebtedness under the Accordion, the risks described above would increase. Refer to Note 14, "Debt," of our Financial Statements for further discussion of our outstanding indebtedness.
Our business may not generate sufficient cash flows from operations, or future borrowings under the Senior Secured Credit Facilities or from other sources may not be available to us in an amount sufficient to enable us to service and/or repay our indebtedness when it becomes due, or to fund our other liquidity needs, including capital expenditures.
We cannot guarantee that we will be able to obtain enough capital to service our debt and fund our planned capital expenditures and business plan. If we complete additional acquisitions, our debt service requirements could also increase. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity investments, or reducing or delaying capital expenditures, strategic acquisitions, investments, and alliances, any of which could have a material adverse effect on our operations. Additionally, we may not be able to effect such actions, if necessary, on commercially reasonable terms, or at all.
Our failure to comply with the covenants contained in our credit arrangements, including non-compliance attributable to events beyond our control, could result in an event of default, which could materially and adversely affect our operating results and our financial condition.
The Revolving Credit Facility requires us to maintain a senior secured net leverage ratio not to exceed 5.0:1.0 at the conclusion of certain periods when outstanding loans and letters of credit that are not cash collateralized for the full face amount thereof exceed 10% of the commitments under the Revolving Credit Facility. In addition, Sensata Technologies B.V. and its Restricted Subsidiaries (as defined in the Credit Agreement) are required to satisfy this covenant, on a pro forma basis, in connection with any new borrowings (including any letter of credit issuances) under the Revolving Credit Facility as of the time of such borrowings. Additionally, the Revolving Credit Facility and the Senior Notes Indentures require us to comply with various operational and other covenants.
If we experienced an event of default under any of our debt instruments that was not cured or waived, the holders of the defaulted debt could cause all amounts outstanding with respect to the debt to become due and payable immediately, which, in turn, would result in cross defaults under our other debt instruments. Our assets and cash flows may not be sufficient to fully repay borrowings if accelerated upon an event of default.
If, when required, we are unable to repay, refinance, or restructure our indebtedness under, or amend the covenants contained in, the Credit Agreement, or if a default otherwise occurs, the lenders under the Senior Secured Credit Facilities could: elect to terminate their commitments thereunder; cease making further loans; declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable; institute foreclosure proceedings against those assets that secure the borrowings under the Senior Secured Credit Facilities; and prevent us from making payments on the Senior Notes. Any such actions could force us into bankruptcy or liquidation, and we might not be able to repay our obligations in such an event.
We have recorded a significant amount of goodwill and other identifiable intangible assets, and we may be required to recognize goodwill or intangible asset impairments, which would reduce our earnings.
We have recorded a significant amount of goodwill and other identifiable intangible assets. Goodwill and other intangible assets, net totaled approximately $4.0 billion as of December 31, 2018, or 59% of our total assets. Goodwill, which represents the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized, was approximately $3.1 billion as of December 31, 2018, or 45% of our total assets. Goodwill and other identifiable intangible assets were recognized at fair value as of the corresponding acquisition date. Impairment of goodwill and other identifiable intangible assets may result from, among other things, deterioration in our performance, adverse market conditions, adverse changes in laws or regulations, significant unexpected or planned changes in the use of assets, and a variety of other factors. The amount of any quantified impairment must be expensed immediately as a charge that is included in operating income, which may impact our ability to raise capital. Although no impairment charges have been recorded during the past three fiscal years, should certain assumptions used in the development of the fair value of our reporting units change, we
may be required to recognize goodwill or other intangible asset impairments. Refer to Note 11, "Goodwill and Other Intangible Assets, Net," of our Financial Statements for more details on our goodwill and other identifiable intangible assets. Refer to Critical Accounting Policies and Estimates, included in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this Report for further discussion of the assumptions used in the development of the fair value of our reporting units.
U.S. federal income tax reform could have a material impact on our business and financial condition.
On December 22, 2017, U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the "Tax Reform Act"), was signed into law, significantly changing the U.S. Internal Revenue Code. These changes include, among other things, lowering the corporate income tax rate, subjecting certain future foreign subsidiary earnings, whether or not distributed, to U.S. tax under a Global Intangible Low-Taxed Income provision, imposing a new alternative "Base Erosion and Anti-Abuse Tax" on U.S. corporations that limits deductions for certain amounts payable to foreign affiliates, imposing significant additional limitations on the deductibility of interest payable to related and unrelated lenders, further limiting deductible executive compensation, and imposing a one-time repatriation tax on deemed repatriated earnings of foreign subsidiaries through the end of 2017. The U.S. Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. We completed our analysis of how the Tax Reform Act may impact the results of our operations as of December 31, 2018. We have recognized the provisional tax impacts related to deemed repatriated earnings, the revaluation of deferred tax assets and liabilities, and provided for the probable impact of recently issued regulations concerning the Tax Reform Act. These amounts are included in our Financial Statements. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, issuance of final regulations and regulatory guidance, changes in interpretations and assumptions we have made, and actions we may take as a result of the Tax Reform Act. Continued analysis and resulting uncertainty, along with many of the changes effected pursuant to the Tax Reform Act, may have an adverse or volatile effect on our tax rate in fiscal years 2019 and beyond, thereby affecting our results of operations. Refer to Note 7, "Income Taxes," of our Financial Statements for further discussion of the Tax Reform Act.
Our global effective tax rate is subject to a variety of different factors, which could create volatility in that tax rate, expose us to greater than anticipated tax liabilities or cause us to adjust previously recognized tax assets and liabilities.
We are subject to income taxes in the U.K., China, the U.S., and many other jurisdictions. As a result, our global effective tax rate from period to period can be affected by many factors, including changes in tax legislation, such as changes in tax rates and tax laws as those noted in the U.S. Tax Reform Act above, our global mix of earnings, the use of global funding structures, the tax characteristics of our income, the effect of complying with transfer pricing requirements under laws of many different countries on our revenues and costs, the consequences of acquisitions and dispositions of businesses and business segments, and the taxation of subsidiary income in the jurisdiction of its parent company regardless of whether or not distributed. Significant judgment is required in determining our worldwide provision for income taxes, and our determination of the amount of our tax liability is always subject to review by applicable tax authorities.
We believe that our redomicile into the U.K. and related transactions should continue to support our ability to maintain a competitive global tax rate since the U.K. has implemented a dividend exemption system that generally does not subject non-U.K. earnings to U.K. tax when such earnings are repatriated to the U.K. in the form of dividends from non-U.K. subsidiaries. This system should allow us to optimize our capital allocation through global funding structures. However, we cannot provide any assurances as to what our tax rate will be in any period because of, among other things, uncertainty regarding the nature and extent of our business activities in any particular jurisdiction in the future and the tax laws of such jurisdictions, as well as changes in U.S. and other tax laws, treaties and regulations. Our actual global tax rate may vary from our expectation and that variance may be material. Additionally, the tax laws of the jurisdictions where we operate could change in the future, and such changes could cause a material change in our tax rate.
In addition, we could be subject to future audits conducted by foreign and domestic tax authorities, and the resolution of such audits could impact our tax rate in future periods, as would any reclassification or other changes (such as those in applicable accounting rules) that increases the amounts we have provided for income taxes in our consolidated financial statements. There can be no assurance that we would be successful in attempting to mitigate the adverse impacts resulting from any changes in law, audits and other matters. Our inability to mitigate the negative consequences of any changes in the law, audits and other matters could cause our global tax rate to increase, our use of cash to increase and our financial condition and results of operations to suffer. Refer to Note 7, "Income Taxes," of our Financial Statements for further discussion related to income taxes.
If significant tariffs or other restrictions continue or are increased on Chinese imports or any related counter-measures are taken by China, our revenue and results of operations may be materially harmed.
In July 2018, the Office of the U.S. Trade Representative announced a list of thousands of categories of goods that currently face tariffs of 10%. These tariffs may increase to 25% in March 2019 if the U.S. and China cannot reach an agreement on various related matters. These tariffs currently affect some of the products we import from China, and we may raise our prices on those products due to the tariffs or share the cost of such tariffs with our customers, which could harm our operating performance or cause our customers to seek alternative suppliers. It is only moderatelypossible that further tariffs may be imposed on other imports of our products, or that our business will be impacted by seasonality. However,retaliatory trade measures taken by China or other countries in response to existing or future tariffs, causing us to raise prices or make changes to our Sensing Solutionsoperations, any of which could materially harm our revenue or operating results. In addition, we may seek to shift some of our China manufacturing to other countries, which could result in additional costs and disruption to our operations.
We are a holding company and, therefore, may not be able to receive dividends or other payments in needed amounts from our subsidiaries.
We are organized as a holding company, a legal entity separate and distinct from our operating entities. As a holding company without significant operations of its own, our principal assets are the shares of capital stock of our subsidiaries. We rely on dividends, interest, and other payments from these subsidiaries to meet our obligations for paying principal and interest on outstanding debt, paying dividends to shareholders, repurchasing ordinary shares, and corporate expenses. Certain of our subsidiaries are subject to regulatory requirements of the jurisdictions in which they operate or other restrictions that may limit the amounts that subsidiaries can pay in dividends or other payments to us. No assurance can be given that there will not be further changes in law, regulatory actions, or other circumstances that could restrict the ability of our subsidiaries to pay dividends or otherwise make payments to us. Furthermore, no assurance can be given that our subsidiaries may be able to make timely payments to us in order for us to meet our obligations.
Legal and Regulatory Risks
We are subject to risks associated with our non-U.S. operations, including changes in local government regulations and policies, which could adversely impact the reported results of operations from our international businesses.
Our subsidiaries located outside of the U.S. generated approximately 61% of our net revenue in fiscal year 2018, and we expect sales from non-U.S. markets to continue to represent a significant portion of our total net revenue. International sales and operations are subject to changes in local government regulations and policies, including those related to tariffs and trade barriers, investments, taxation, exchange controls, and repatriation of earnings.
In addition, other risks are inherent in our non-U.S. operations, including the potential for changes in socio-economic conditions and/or monetary and fiscal policies, intellectual property protection difficulties and disputes, the settlement of legal disputes through certain foreign legal systems, the collection of receivables, exposure to possible expropriation or other government actions, unsettled political conditions, and possible terrorist attacks. These and other factors may have a material adverse effect on our non-U.S. operations and, therefore, on our business hasand results of operations.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act (the "FCPA"), the U.K.'s Bribery Act, and similar worldwide anti-bribery laws.
The U.S. FCPA, the U.K.'s Bribery Act, and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that have experienced governmental corruption to some seasonal elements, specificallydegree, and in its air conditioningcertain circumstances, strict compliance with anti-bribery laws may conflict with local customs and refrigerationpractices. Despite our training and compliance program, we cannot provide assurance that our internal control policies and procedures will protect us from reckless or criminal acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our results of operations, financial position, and/or cash flows.
Export of our products is subject to various export control regulations and may require a license from the U.S. Department of State, the U.S. Department of Commerce, or the U.S. Department of the Treasury. Any failure to comply with such regulations could result in governmental enforcement actions, fines, penalties, or other remedies, which could have a material adverse effect on our business, results of operations, and financial condition.
Certain of our products require us to comply with the U.S. Export Administration Regulations, International Traffic in Arms Regulation ("ITAR"), and the sanctions, regulations, and embargoes administered by the Office of Foreign Assets Control
("OFAC"). Our products that have military applications are on the munitions list of ITAR and require an individual validated license in order to be exported to certain jurisdictions. These restrictions also apply to technical data for design, development, production, use, repair, and maintenance of such ITAR-controlled products. The export of ITAR-controlled products or technical data requires an individual validated license from the U.S. State Department’s Directorate of Defense Trade Controls. Any delays in obtaining, or our inability to obtain, such licenses could result in a material reduction in revenue.
We also export products that are subject to other export regulations. Any changes in these export regulations may further restrict the export of our products, and we may cease to be able to procure export licenses for our products under existing regulations. This area remains fluid in terms of regulatory developments. Should we need an export license under existing regulations, the length of time required by the licensing process can vary, potentially delaying the shipment of products and the recognition of the corresponding revenue. We have no control over the time it takes to process an export license. Any restriction on the export of a significant product line or a significant amount of our products could cause a significant reduction in revenue.
We have discovered in the past, and may discover in the future, deficiencies in our OFAC and ITAR compliance programs. Although we continue to enhance these compliance programs, we cannot assure you that any such enhancements will ensure that we are in compliance with applicable laws and regulations at all times, or that applicable authorities will not raise compliance concerns or perform audits to confirm our compliance with applicable laws and regulations. Any failure by us to comply with applicable laws and regulations could result in governmental enforcement actions, fines or penalties, criminal and/or civil proceedings, or other remedies, any of which could have a material adverse effect on our business, results of operations, and/or financial condition.
Changes in existing environmental or safety laws, regulations, and programs could reduce demand for our products, which tendcould cause our revenue to peak in the first two quartersdecline.
A significant amount of the year as end-market inventory is built up for spring and summer sales.
Sales and Marketing
The sales and marketing function within our business is organizedgenerated either directly or indirectly as a result of existing laws, regulations, and programs related to environmental protection, fuel economy, energy efficiency, and safety regulation. Accordingly, a relaxation or repeal of these laws and regulations, or changes in governmental policies regarding the funding, implementation, or enforcement of these programs, could result in a decline in demand for environmental and/or safety products, which may have a material adverse effect on our revenue.
Our operations expose us to the risk of material environmental liabilities, litigation, government enforcement actions, and reputational risk.
We are subject to numerous federal, state, and local environmental protection and health and safety laws and regulations in the various countries where we operate and where our products are sold. These laws and regulations govern, among other things:
•the generation, storage, use, and transportation of hazardous materials;
•emissions or discharges of substances into regions—the Americas, Asia,environment;
•investigation and Europe—remediation of hazardous substances or materials at various sites;
•greenhouse gas emissions;
•product hazardous material content; and
•the health and safety of our employees.
We may not have been, or we may not always be, in compliance with all environmental and health and safety laws and regulations. If we violate these laws, we could be fined, criminally charged, or otherwise sanctioned by regulators. In addition, environmental and health and safety laws are becoming more stringent, resulting in increased costs and compliance burdens.
Certain environmental laws assess liability on current or previous owners or operators of real property for the costs of investigation, removal, and remediation of hazardous substances or materials at their properties or properties at which they have disposed of hazardous substances. Liability for investigation, removal, and remediation costs under certain federal and state laws is retroactive, strict, and joint and several. In addition to cleanup actions brought by governmental authorities, private parties could bring personal injury or other claims due to the presence of, or exposure to, hazardous substances.
We cannot provide assurance that our costs of complying with current or future environmental protection and health and safety laws, or our liabilities arising from past or future releases of, or exposures to, hazardous substances will not exceed our estimates or adversely affect our results of operations, financial position, and cash flows, or that we will not be subject to
additional environmental claims for personal injury, property damage, and/or cleanup in the future based on our past, present, or future business activities.
Our products are subject to various requirements related to chemical usage, hazardous material content, and recycling.
The EU, China, and other jurisdictions in which our products are sold have enacted or are proposing to enact laws addressing environmental and other impacts from product disposal, use of hazardous materials in products, use of chemicals in manufacturing, recycling of products at the end of their useful life, and other related matters. These laws include but are not limited to the EU Restriction of Hazardous Substances ("RoHS"), End of Life Vehicle ("ELV"), and Waste Electrical and Electronic Equipment Directives; the EU Registration, Evaluation, Authorization, and Restriction of Chemicals ("REACH") regulation; and the China law on Management Methods for Controlling Pollution by Electronic Information Products. These laws prohibit the use of certain substances in the manufacture of our products and directly and indirectly impose a variety of requirements for modification of manufacturing processes, registration, chemical testing, labeling, and other matters. These laws continue to proliferate and expand in these and other jurisdictions to address other materials and aspects of our product manufacturing and sale. These laws could make the manufacture or sale of our products more expensive or impossible, could limit our ability to sell our products in certain jurisdictions, and could result in liability for product recalls, penalties, or other claims.
Our ability to compete effectively depends, in part, on our ability to maintain the proprietary nature of our products and technology.
The electronics industry is characterized by litigation regarding patent and other intellectual property rights. Within this industry, companies have become more aggressive in asserting and defending patent claims against competitors. There can be no assurance that we will not be subject to future litigation alleging infringement or invalidity of certain of our intellectual property rights, or that we will not have to pursue litigation to protect our property rights. Depending on the importance of the technology, product, patent, trademark, or trade secret in question, an unfavorable outcome regarding one of these matters may have a material adverse effect on our results of operations, financial position, and/or cash flows.
We may be subject to claims that our products or processes infringe on the intellectual property rights of others, which may cause us to pay unexpected litigation costs or damages, modify our products or processes, or prevent us from selling our products.
Third parties may claim that our processes and products infringe on their intellectual property rights. Whether or not these claims have merit, we may be subject to costly and time consuming legal proceedings, and this could divert management’s attention from operating our business. If these claims are successfully asserted against us, we could be required to pay substantial damages, make future royalty payments, and/or could be prevented from selling some or all of our products. We also organizes globally acrossmay be obligated to indemnify our business partners or customers in any such litigation. Furthermore, we may need to obtain licenses from these third parties or substantially re-engineer or rename our products in order to avoid infringement. In addition, we might not be able to obtain the necessary licenses on acceptable terms, or at all, geographiesor be able to re-engineer or rename our products successfully. If we are prevented from selling some or all of our products, our sales could be materially adversely affected.
We are a defendant to a variety of litigation in the course of our business that could cause a material adverse effect on our results of operations, financial position, and/or cash flows.
In the normal course of business, we are, from time to time, a defendant in litigation, including litigation alleging the infringement of intellectual property rights, anti-competitive behavior, product liability, breach of contract, and employment-related claims. In certain circumstances, patent infringement and antitrust laws permit successful plaintiffs to recover treble damages. The defense of these lawsuits may divert our management's attention, and we may incur significant expenses in defending these lawsuits. In addition, we may be required to pay damage awards or settlements, or become subject to injunctions or other equitable remedies, that could cause a material adverse effect on our results of operations, financial position, and/or cash flows.
U.K. Domicile Risks
As a public limited company incorporated under the laws of England and Wales, we may have less flexibility with respect to certain aspects of capital management.
English law imposes additional restrictions on certain corporate actions. For example, English law provides that a board of directors may only allot, or issue, securities with the prior authorization of shareholders, such authorization being up to the aggregate nominal amount of shares and for a maximum period of five years, each as specified in the articles of association or
relevant shareholder resolution. English law also generally provides shareholders with preemptive rights when new shares are issued for cash; however, it is possible for the articles of association, or shareholders at a general meeting, to exclude preemptive rights. Such an exclusion of preemptive rights may be for a maximum period of up to five years as specified in the articles of association or relevant shareholder resolution. We currently only have authorization to issue shares under our equity plan excluding preemptive rights until our next annual general meeting. This authorization and exclusion needs to be renewed by our shareholders periodically and we intend to renew the authorization and exclusion at each annual general meeting.
English law also requires us to have available "distributable reserves" to make share repurchases or pay dividends to shareholders. Distributable reserves may be created through the earnings of the U.K. parent company or other actions. While we intend to maintain a sufficient level of distributable reserves, there is no assurance that we will continue to generate sufficient earnings in order to maintain the necessary level of distributable reserves to make share repurchases or pay dividends.
English law also generally prohibits a company from repurchasing its own shares by way of "off-market purchases" without the prior approval of our shareholders. Such approval lasts for a maximum period of up to five years. Our shares are traded on the New York Stock Exchange, which is not a recognized investment exchange in the U.K. Consequently, any repurchase of our shares is currently considered an "off-market purchase." Our current authorization expires on May 31, 2023, and we intend to renew this authorization periodically.
As a public limited company incorporated under the laws of England and Wales, the enforcement of civil liabilities against us may be more difficult.
Because we are a public limited company incorporated under the laws of England and Wales, investors could experience more difficulty enforcing judgments obtained against us in U.S. courts than would have been the case for a U.S. company. In addition, it may be more difficult (or impossible) to bring some types of claims against us in courts in England than it would be to bring similar claims against a U.S. company in a U.S. court.
As a public limited company incorporated under the laws of England and Wales, it may not be possible to effect service of process upon us within the U.S. to enforce judgments of U.S. courts against us based on the civil liability provisions of the U.S. federal securities laws.
There is doubt as to the enforceability in England and Wales, in original actions or in actions for enforcement of judgments of U.S. courts, of civil liabilities solely based on the U.S. federal securities laws. The English courts will, however, treat any amount payable by us under U.S. judgment as a debt and new proceedings can be commenced in the English courts to enforce this debt against us. The following criteria must be satisfied for the English court to enforce the debt created by the U.S. judgment:
the U.S. court having had jurisdiction over the original proceedings according to market segments,English conflicts of laws principles and rules of English private international law at the time when proceedings were initiated;
the U.S. proceedings not having been brought in breach of a jurisdiction or arbitration clause except with the agreement of the defendant or the defendant’s subsequent submission to the jurisdiction of the court;
the U.S. judgment being final and conclusive on the merits in the sense of being final and unalterable in the court which pronounced it and being for a definite sum of money;
the recognition or enforcement, as the case may be, of the U.S. judgment not contravening English public policy in a sufficiently significant way or contravening the Human Rights Act 1998 (or any subordinate legislation made thereunder, to the extent applicable);
the U.S. judgment not being for a sum payable in respect of taxes, or other charges of a like nature, or in respect of a penalty or fine, or otherwise based on a U.S. law that an English court considers to be a penal or revenue law;
the U.S. judgment not having been arrived at by doubling, trebling or otherwise multiplying a sum assessed as compensation for the loss or damages sustained, and not otherwise being a judgment contrary to section 5 of the Protection of Trading Interests Act 1980 or is a judgment based on measures designated by the Secretary of State under Section 1 of that Act;
the U.S. judgment not having been obtained by fraud or in breach of English principles of natural justice;
the U.S. judgment not being a judgment on a matter previously determined by an English court, or another court whose judgment is entitled to recognition (or enforcement as the case may be) in England, in proceedings involving the same parties that conflicts with an earlier judgment of such court;
the party seeking enforcement (being a party who is not ordinarily resident in some part of the U.K. or resident in an EU Member State) providing security for costs, if ordered to do so by the English courts; and
the English enforcement proceedings being commenced within the relevant limitation period.
If an English court gives judgment for the sum payable under a U.S. judgment, the English judgment will be enforceable by methods generally available for this purpose. These methods generally permit the English court discretion to prescribe the manner of enforcement. In addition, in any enforcement proceedings, the judgment debtor may raise any counterclaim that could have been brought if the action had been originally brought in England unless the subject of the counterclaim was in issue and denied in the U.S. proceedings.
| |
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
As of December 31, 2018, we occupied principal manufacturing facilities and business centers in the following locations:
|
| | | | | | | | | | |
| | | | | Operating Segment | | Approximate Square Footage (in thousands) |
| | | | | Performance Sensing | | Sensing Solutions | |
| Country | | Location | | | | Owned | | Leased |
| Bulgaria | | Botevgrad | | X | | | | 137 | | — |
| Bulgaria | | Plovdiv | | X | | | | 125 | | — |
| Bulgaria | | Sofia | | X | | | | — | | 108 |
| China | | Baoying (1) | | X | | X | | 296 | | 385 |
| China | | Changzhou (2) | | X | | X | | 252 | | 236 |
| Germany | | Berlin | | X | | | | — | | 33 |
| Malaysia | | Subang Jaya | | X | | | | 135 | | — |
| Mexico | | Aguascalientes | | X | | X | | 453 | | — |
| Mexico | | Tijuana | | X | | X | | — | | 287 |
| Netherlands | | Hengelo | | X | | X | | — | | 94 |
| United Kingdom | | Antrim | | X | | | | — | | 117 |
| United Kingdom | | Carrickfergus | | X | | | | 63 | | — |
| United Kingdom | | Swindon (3) | | X | | | | — | | 34 |
| United States | | Attleboro, MA (4) | | X | | X | | — | | 433 |
| United States | | Carpinteria, CA (5) | | X | | X | | — | | 50 |
| United States | | Thousand Oaks, CA | | X | | X | | — | | 115 |
| | | | | | | | | 1,461 | | 1,892 |
| |
(1) | The owned portion of the properties in this location serves the Sensing Solutions segment only. |
| |
(2) | In June 2018, ownership of a portion of this property that was previously leased was transferred to us. |
| |
(3) | Our United Kingdom headquarters is located in this facility. |
| |
(4) | This location includes our United States headquarters. The lease agreement relating to approximately 222 thousand square feet at this location was renegotiated in 2018, lowering our rental payments and extending the term to 2033. |
| |
(5) | Facilities at this location were added as part of our acquisition of GIGAVAC, LLC. Refer to Note 17, "Acquisitions and Divestitures," of our audited consolidated financial statements and accompanying notes thereto (our "Financial Statements") included elsewhere in this Annual Report on Form 10-K for additional details on this acquisition. |
These facilities are primarily devoted to research, development, engineering, manufacturing, and assembly. In addition to these primary facilities, we occupy other manufacturing, warehousing, administrative, and sales facilities that we do not consider to be principal.
On August 31, 2018 we completed the sale of the capital stock of Schrader Bridgeport International, Inc. and August France Holding Company SAS (collectively, the "Valves Business") to Pacific Industrial Co. Ltd. Facilities in Pontarlier, France and Alta Vista, Virginia that were previously considered principal were sold as part of the Valves Business. Refer to facilitate knowledge sharingNote 17, "Acquisitions and coordinate activities involvingDivestitures," of our larger customersFinancial Statements for additional details on this divestiture.
We consider our manufacturing facilities sufficient to meet our current operational requirements. An increase in demand for our products may require us to expand our production capacity, which could require us to identify and acquire or lease additional manufacturing facilities. We believe that suitable additional or substitute facilities will be available as required; however, if we are unable to acquire, integrate, and move into production the facilities, equipment, and personnel necessary to meet such an increase in demand, our customer relationships, results of operations, and/or financial condition may suffer materially. Leases covering our currently occupied principal leased facilities expire at varying dates within the next 18 years. We do not anticipate difficulty in retaining occupancy through global account managers.lease renewals, month-to-month occupancy, or by replacing the leased facilities with equivalent facilities.
CustomersA significant portion of our owned properties and equipment is subject to a lien under our senior secured credit facilities. Refer to Note 14, "Debt," of our Financial Statements for additional information on our senior secured credit facilities.
We are regularly involved in a number of claims and litigation matters in the ordinary course of business. Most of our litigation matters are third-party claims related to patent infringement allegations or for property damage allegedly caused by our products, but some involve allegations of personal injury or wrongful death. From time to time, we also are involved in disagreements with vendors and customers. Information on certain legal proceedings in which we are involved is included in Note 15, "Commitments and Contingencies," of our audited consolidated financial statements and accompanying notes thereto included elsewhere in this Annual Report on Form 10-K. Although it is not feasible to predict the outcome of these matters, based upon our experience and current information known to us, we do not expect the outcome of these matters, either individually or in the aggregate, to have a material adverse effect on our results of operations, financial position, or cash flows.
| |
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II
| |
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
Our customer baseordinary shares trade on the New York Stock Exchange under the symbol "ST."
Performance Graph
The following graph compares the total shareholder return of our ordinary shares since December 31, 2013 to the total shareholder return since that date of the Standard & Poor’s ("S&P") 500 Stock Index and the S&P 500 Industrial Index. The graph assumes that the value of the investment in our ordinary shares and each index was $100.00 on December 31, 2013.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Total Shareholder Return of $100.00 Investment from December 31, 2013 |
| | | As of December 31, |
| | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 |
| Sensata | | $ | 100.00 |
| | $ | 135.18 |
| | $ | 118.80 |
| | $ | 100.46 |
| | $ | 131.83 |
| | $ | 115.66 |
|
| S&P 500 | | $ | 100.00 |
| | $ | 113.68 |
| | $ | 115.24 |
| | $ | 129.02 |
| | $ | 157.17 |
| | $ | 150.27 |
|
| S&P 500 Industrial | | $ | 100.00 |
| | $ | 109.80 |
| | $ | 106.99 |
| | $ | 127.16 |
| | $ | 153.88 |
| | $ | 133.38 |
|
The information in the Performance Sensinggraph and table above is not "soliciting material," is not deemed "filed" with the United States Securities and Exchange Commission, and is not to be incorporated by reference in any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K (this "Report"), except to the extent that we specifically incorporate such information by reference. The total shareholder return shown on the graph represents past performance and should not be considered an indication of future price performance.
Stockholders
As of January 15, 2019, we had four holders of record of our ordinary shares, primarily Cede & Co. (which acts as nominee shareholder for the Depository Trust Company).
Dividends
We have never declared or paid any dividends on our ordinary shares, and we currently do not plan to declare any such dividends in the foreseeable future. Because we are a holding company, our ability to pay cash dividends on our ordinary shares may be limited by restrictions on our ability to obtain sufficient funds through dividends from our subsidiaries, including restrictions under the terms of the agreements governing our indebtedness. In that regard, our indirect, wholly-owned subsidiary, Sensata Technologies B.V. ("STBV"), is limited in its ability to pay dividends or otherwise make distributions to its immediate parent company and, ultimately, to us. Refer to Note 14, "Debt," of our audited consolidated financial statements and accompanying notes thereto included elsewhere in this Report for additional information on our dividend restrictions.
In addition, under Dutch law, STBV and certain of our other subsidiaries that are Dutch private limited liability companies may only pay dividends or make other distributions to the extent that the shareholders' equity of such subsidiary exceeds the reserves required to be maintained by law or under its articles of association.
Under the laws of England and Wales, we are able to declare dividends, make distributions, or repurchase shares only out of distributable reserves on our statutory balance sheet. Distributable reserves are a company’s accumulated, realized profits, so far as not previously utilized by distribution or capitalization, less its accumulated, realized losses, so far as not previously written off in a reduction or reorganization of capital duly made. Realized reserves are determined in accordance with generally accepted accounting principles at the time the relevant accounts are prepared. We are not permitted to make a distribution if, at the time, the amount of our net assets is less than the aggregate of our issued and paid-up share capital and undistributable reserves or to the extent that the distribution will reduce our net assets below such amount. Subject to these limitations, the payment of cash dividends in the future, if any, will depend upon such factors as earnings levels, capital requirements, contractual restrictions, our overall financial condition, and any other factors deemed relevant by our shareholders and Board of Directors.
Under current United Kingdom ("U.K.") tax legislation, any future dividends paid by us will not be subject to withholding or deduction on account of U.K. tax, irrespective of the tax residence or the individual circumstances of the recipient shareholder. Individual shareholders may need to review their personal circumstances to establish their exposure to U.K. income tax going forward on any dividend income received from us.
Issuer Purchases of Equity Securities
None.
| |
| ITEM 6. | SELECTED FINANCIAL DATA |
We have derived the selected consolidated statement of operations and other financial data for the years ended December 31, 2018, 2017, and 2016 and the selected consolidated balance sheet data as of December 31, 2018 and 2017 from our audited consolidated financial statements and accompanying notes thereto (our "Financial Statements") included elsewhere in this Annual Report on Form 10-K (this "Report"). We have derived the selected consolidated statement of operations and other financial data for the years ended December 31, 2015 and 2014 and the selected consolidated balance sheet data as of December 31, 2016, 2015, and 2014 from audited consolidated financial statements not included in this Report.
You should read the following information in conjunction with our Financial Statements and Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this Report. Our historical results are not necessarily indicative of the results to be expected in any future period.
|
| | | | | | | | | | | | | | | | | | | |
| | Sensata Technologies Holding plc (Consolidated) (a) |
| | For the year ended December 31, |
| (Amounts in thousands, except per share data) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
Statement of operations data: (b) | | | | | | | | | |
| Net revenue | $ | 3,521,627 |
| | $ | 3,306,733 |
| | $ | 3,202,288 |
| | $ | 2,974,961 |
| | $ | 2,409,803 |
|
| Operating costs and expenses: | | | | | | | | | |
Cost of revenue(c) | 2,266,863 |
| | 2,138,898 |
| | 2,084,159 |
| | 1,976,845 |
| | 1,567,527 |
|
Research and development(c) | 147,279 |
| | 130,127 |
| | 126,656 |
| | 123,603 |
| | 82,188 |
|
Selling, general and administrative(c) | 305,558 |
| | 301,896 |
| | 293,506 |
| | 270,773 |
| | 220,272 |
|
| Amortization of intangible assets | 139,326 |
| | 161,050 |
| | 201,498 |
| | 186,632 |
| | 146,704 |
|
| Restructuring and other charges, net | (47,818 | ) | | 18,975 |
| | 4,113 |
| | 21,919 |
| | 21,893 |
|
| Total operating costs and expenses | 2,811,208 |
| | 2,750,946 |
| | 2,709,932 |
| | 2,579,772 |
| | 2,038,584 |
|
| Profit from operations | 710,419 |
| | 555,787 |
| | 492,356 |
| | 395,189 |
| | 371,219 |
|
| Interest expense, net | (153,679 | ) | | (159,761 | ) | | (165,818 | ) | | (137,626 | ) | | (106,104 | ) |
Other, net(c)(d) | (30,365 | ) | | 6,415 |
| | (5,093 | ) | | (51,934 | ) | | (11,689 | ) |
| Income before taxes | 526,375 |
| | 402,441 |
| | 321,445 |
| | 205,629 |
| | 253,426 |
|
(Benefit from)/provision for income taxes(e) | (72,620 | ) | | (5,916 | ) | | 59,011 |
| | (142,067 | ) | | (30,323 | ) |
| Net income | $ | 598,995 |
| | $ | 408,357 |
| | $ | 262,434 |
| | $ | 347,696 |
| | $ | 283,749 |
|
| Basic net income per share | $ | 3.55 |
| | $ | 2.39 |
| | $ | 1.54 |
| | $ | 2.05 |
| | $ | 1.67 |
|
| Diluted net income per share | $ | 3.53 |
| | $ | 2.37 |
| | $ | 1.53 |
| | $ | 2.03 |
| | $ | 1.65 |
|
| Weighted-average ordinary shares outstanding—basic | 168,570 |
| | 171,165 |
| | 170,709 |
| | 169,977 |
| | 170,113 |
|
| Weighted-average ordinary shares outstanding—diluted | 169,859 |
| | 172,169 |
| | 171,460 |
| | 171,513 |
| | 172,217 |
|
Other financial data: (b) | | | | | | | | | |
| Net cash provided by/(used in): | | | | | | | | | |
| Operating activities | $ | 620,563 |
| | $ | 557,646 |
| | $ | 521,525 |
| | $ | 533,131 |
| | $ | 382,568 |
|
| Investing activities | $ | (237,606 | ) | | $ | (140,722 | ) | | $ | (174,778 | ) | | $ | (1,166,369 | ) | | $ | (1,430,065 | ) |
| Financing activities | $ | (406,213 | ) | | $ | (15,263 | ) | | $ | (337,582 | ) | | $ | 764,172 |
| | $ | 940,930 |
|
| Additions to property, plant and equipment and capitalized software | $ | (159,787 | ) | | $ | (144,584 | ) | | $ | (130,217 | ) | | $ | (177,196 | ) | | $ | (144,211 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| (Dollars in thousands) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
Balance sheet data: (b) | | | | | | | | | |
| Cash and cash equivalents | $ | 729,833 |
| | $ | 753,089 |
| | $ | 351,428 |
| | $ | 342,263 |
| | $ | 211,329 |
|
Working capital(f) | $ | 1,277,211 |
| | $ | 1,218,796 |
| | $ | 758,189 |
| | $ | 412,748 |
| | $ | 441,258 |
|
| Total assets | $ | 6,797,687 |
| | $ | 6,641,525 |
| | $ | 6,240,976 |
| | $ | 6,298,910 |
| | $ | 5,087,507 |
|
| Total debt, net including capital lease and other financing obligations | $ | 3,264,941 |
| | $ | 3,270,269 |
| | $ | 3,273,594 |
| | $ | 3,600,991 |
| | $ | 2,812,734 |
|
| Total shareholders’ equity | $ | 2,608,434 |
| | $ | 2,345,626 |
| | $ | 1,942,007 |
| | $ | 1,668,576 |
| | $ | 1,302,892 |
|
| |
| (a) | On March 28, 2018, the cross-border merger of Sensata Technologies Holding N.V. ("Sensata N.V.") and Sensata Technologies Holding plc ("Sensata plc") was completed, with Sensata plc being the surviving entity (the "Merger"). On the date of the Merger, Sensata plc became the publicly-traded parent of the subsidiary companies that were previously controlled by Sensata N.V., with no changes made to the business being conducted by Sensata N.V. prior to the Merger. Due to the various legal aspects of the Merger, Sensata plc retains the historical data of Sensata N.V., and no recasting or adjustment is required as a result of the Merger. |
| |
| (b) | We acquired Wabash Worldwide Holding Corp. ("Wabash"), Magnum Energy Incorporated ("Magnum"), CoActive US Holdings, Inc. ("DeltaTech Controls"), and August Cayman Company, Inc. ("Schrader") in 2014, certain assets and subsidiaries of Custom Sensors & Technologies Ltd. ("CST") in 2015, and GIGAVAC, LLC ("GIGAVAC") in 2018. Pro forma amounts are not shown. We sold the capital stock of Schrader Bridgeport International, Inc. and August France Holding Company SAS (collectively, the "Valves Business") in 2018. Prior year amounts have not been recast. Refer to Note 17, "Acquisitions and Divestitures," of our Financial Statements for further details on the acquisition of GIGAVAC and the sale of the Valves Business. |
| |
| (c) | For the fiscal years ended December 31, 2017, 2016, 2015, and 2014, cost of revenue, research and development expense, selling, general and administrative expense, and other, net have been recast to reflect our adoption of the guidance in FASB ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost on January 1, 2018. Refer to Note 6, "Other, Net," and Note 13, "Pension and Other Post-Retirement Benefits," of our Financial Statements for further discussion of this new guidance and the amounts recast for the years ended December 31, 2017 and 2016. |
| |
| (d) | Other, net for the years ended December 31, 2018, 2017, 2016, 2015, and 2014 consisted of the following: |
|
| | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| (Dollars in thousands) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
(Loss)/gain related to foreign currency exchange rates(i) | $ | (16,835 | ) | | $ | 2,423 |
| | $ | (12,471 | ) | | $ | (6,007 | ) | | $ | (1,443 | ) |
| (Loss)/gain on commodity forward contracts | (8,481 | ) | | 9,989 |
| | 7,399 |
| | (18,468 | ) | | (9,017 | ) |
| Loss on debt financing | (2,350 | ) | | (2,670 | ) | | — |
| | (25,538 | ) | | (1,875 | ) |
Net periodic benefit (cost)/credit, excluding service cost(ii) | (3,585 | ) | | (3,402 | ) | | (192 | ) | | (1,605 | ) | | 370 |
|
| Other | 886 |
| | 75 |
| | 171 |
| | (316 | ) | | 276 |
|
| Other, net | $ | (30,365 | ) | | $ | 6,415 |
| | $ | (5,093 | ) | | $ | (51,934 | ) | | $ | (11,689 | ) |
| |
| (i) | Includes foreign currency remeasurement (loss)/gain, net and gain/(loss), net on foreign currency forward contracts. Refer to Note 6, "Other, Net," of our Financial Statements for details. |
| |
| (ii) | Refer to footnote (c) above for further discussion. |
| |
| (e) | For the year ended December 31, 2018, the benefit from income taxes includes a net benefit of $122.1 million related to the realization of United States ("U.S.") deferred tax assets previously offset by a valuation allowance. For the year ended December 31, 2017, the benefit from income taxes includes a net benefit of $73.7 million related to the enactment of U.S. tax legislation in the fourth quarter of 2017. For the year ended December 31, 2015, the benefit from income taxes includes a net benefit of $180.0 million, primarily related to the release of a portion of our U.S. valuation allowance in connection with the acquisition of CST. For the year ended December 31, 2014, the benefit from income taxes includes a net benefit of $71.1 million related to the release of a portion of our U.S. valuation allowance in connection with certain 2014 acquisitions. Refer to Note 7, "Income Taxes," of our Financial Statements for additional information. |
| |
| (f) | We define working capital as current assets less current liabilities. |
| |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis is intended to help the reader understand our business, includesfinancial condition, results of operations, and liquidity and capital resources. You should read the following discussion in conjunction with Item 1, "Business," Item 6, "Selected Financial Data," and our audited consolidated financial statements and accompanying notes thereto (our "Financial Statements") included elsewhere in this Annual Report on Form 10-K (this "Report").
The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources, and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties including, but not limited to, the risks and uncertainties described in Item 1A, "Risk Factors," included elsewhere in this Report. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
Overview
Sensata Technologies Holding plc ("Sensata plc"), the successor issuer to Sensata Technologies Holding N.V. ("Sensata N.V.") and its wholly-owned subsidiaries, collectively referred to as the "Company," "Sensata," "we," "our," and "us," is a global industrial technology company that develops, manufactures, and sells a wide range of OEMscustomized sensors and Tier 1 supplierscontrols that address increasingly complex engineering requirements for specific customer applications and systems such as air conditioning, braking, exhaust, fuel oil, tire, operator controls, and transmission in automotive and heavy vehicle and off-road ("HVOR") systems, and temperature and electrical protection and control in numerous industrial applications, including aircraft, refrigeration, material handling, and telecommunications. The acquisition of GIGAVAC, LLC ("GIGAVAC") expands our product offerings to include high voltage contactors and fuses. We can trace our origins back to entities that have been engaged in the sensors and controls business since 1916.
We generate revenue from the sale of products across all major geographic areas. We serve a diverse mix of customers and end markets. We believe regulatory requirements for safer vehicles, higher fuel efficiency, and lower emissions, such as the National Highway Traffic Safety Administration's Corporate Average Fuel Economy requirements in the U.S., "Euro 6d" requirements in Europe, and "China National 6" requirements in China, as well as customer demand for operator productivity and convenience, drive the need for advancements in powertrain management, efficiency, safety features, and operator controls. These advancements lead to sensor growth rates that exceed underlying demand in many of our key end markets, which we expect will continue to offer us significant growth opportunities.
The technology-driven, highly-customized, and integrated nature of our products requires customers to invest heavily in certification and qualification to ensure proper functioning of the systems in which our products are embedded. We believe the capital commitment and time required for this process significantly increases the switching costs for customers once a particular sensor or control has been designed and installed in a system. As a result, our sensors and controls are rarely substituted during a product lifecycle, which in the case of the automotive market typically lasts five to seven years. We focus on new applications that will help us secure new business, drive long-term growth, and provide an opportunity to define a leading application technology in collaboration with our customers.
Our strategies of leveraging core technology platforms and focusing on high-volume applications enable us to provide our customers with highly-customized products at a relatively low cost, as compared to the costs of the systems in which our products are embedded. We have achieved our current cost position through a continuous process of migration and transformation to best-cost manufacturing locations, global best-cost sourcing, product design improvements, and ongoing productivity-enhancing initiatives.
We organize our business into two segments: Performance Sensing and Sensing Solutions. Performance Sensing designs and manufactures sensors for the automotive and HVOR end-markets. Our customers in themarkets, including low-, medium-, and high-pressure sensors, speed and position sensors, and temperature sensors, and markets them to leading global automotive and HVOR original equipment manufacturers ("OEMs") and their Tier 1 suppliers. Sensing Solutions business includedesigns and manufactures various sensors and control products, including bimetal electromechanical controls, thermal and magnetic-hydraulic circuit breakers, solid state relays, power inverters, interconnection products, and temperature, pressure, and position sensors, selling them to a wide range of industrial and commercial manufacturers and suppliers across multiple end-markets, primarily OEMsend markets. The acquisition of GIGAVAC, portions of which will be integrated into each of our operating segments, expands our product offerings to include high voltage contactors and fuses.
We develop products that address increasingly complex engineering requirements. We believe that continued focused investment in research and development ("R&D") activities is critical to our future growth and maintaining our leadership
position. Our R&D efforts are directly related to timely development of new and enhanced products that are central to our core business strategy. We develop our technologies to meet an evolving set of customer requirements and new product introductions. We conduct such activities in areas that we believe will increase our long-term revenue growth. Our development expense is typically associated with engineering core technology platforms to specific applications and engineering major upgrades that improve the functionality or reduce the cost of existing products.
In August 2018 we completed the sale of the capital stock of Schrader Bridgeport International, Inc. and August France Holding Company SAS (collectively, the "Valves Business") to Pacific Industrial Co. Ltd. ("Pacific"). The Valves Business, which was acquired as part of Sensata’s acquisition of the Schrader group of companies in 2014 and had been integrated into Performance Sensing, generated approximately $117 million in revenue in fiscal year 2017. It manufactures mechanical valves for pressure applications in tires and fluid control and assembles tire hardware aftermarket products with manufacturing locations in the climate control, appliance, semiconductor, medical, energyUnited States (the "U.S.") and infrastructure, data/telecom,Europe. The sale did not include our tire pressure monitoring system ("TPMS") business and aerospace industries,the Global TPMS Aftermarket business. Refer to Note 17, "Acquisitions and Divestitures," of our Financial Statements for additional details on this divestiture.
In October 2018 we acquired GIGAVAC, an industry-leading producer of high voltage contactors and fuses that are mission-critical components for electric vehicles and equipment, for $233.0 million of cash consideration, subject to working capital and other adjustments. The acquisition of GIGAVAC extends our capabilities on battery electric vehicles, with significant potential for additional growth, and will enable us to tap into a broad market opportunity for high-voltage contactors required in mission-critical sensing and electrical protection applications across electrified vehicles and industrial equipment such as wellcars, delivery trucks, busses, material handling equipment, and charging stations. It will immediately augment our ongoing investments in electrification for many complex and challenging applications in the automotive, battery storage, industrial, and HVOR markets. Refer to Note 17, "Acquisitions and Divestitures," of our Financial Statements for additional details on this acquisition.
Refer to Item 1, "Business," included elsewhere in this Report for additional discussion of our business.
Selected Segment Information
We manage Performance Sensing and Sensing Solutions separately and report their results of operations as Tier 1 motortwo segments. Set forth below is selected information for each of these segments for the periods presented. Amounts in the tables below have been calculated based on unrounded numbers. Accordingly, certain amounts may not sum due to the effect of rounding.
The following table presents net revenue by segment:
|
| | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| (Dollars in millions) | Amount | | Percent of Total Net Revenue | | Amount | | Percent of
Total
Net Revenue | | Amount | | Percent of
Total
Net Revenue |
| Net revenue: | | | | | | | | | | | |
| Performance Sensing | $ | 2,627.7 |
| | 74.6 | % | | $ | 2,460.6 |
| | 74.4 | % | | $ | 2,385.4 |
| | 74.5 | % |
| Sensing Solutions | 894.0 |
| | 25.4 |
| | 846.1 |
| | 25.6 |
| | 816.9 |
| | 25.5 |
|
| Total net revenue | $ | 3,521.6 |
| | 100.0 | % | | $ | 3,306.7 |
| | 100.0 | % | | $ | 3,202.3 |
| | 100.0 | % |
The following table presents segment profit in U.S. dollars and compressor suppliers. In geographic and product markets where we lack an established baseas a percentage of customers, we rely on third-party distributors to sell our sensor and control products. We have had relationships with our top ten customers for an average of 26 years. Our largest customer accounted for approximately 9% of oursegment net revenue for the year ended December 31, 2015.identified periods:
|
| | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| (Dollars in millions) | Amount | | Percent of
Segment Net Revenue | | Amount | | Percent of
Segment
Net Revenue | | Amount | | Percent of
Segment
Net Revenue |
| Segment profit: | | | | | | | | | | | |
| Performance Sensing | $ | 712.7 |
| | 27.1 | % | | $ | 664.2 |
| | 27.0 | % | | $ | 615.5 |
| | 25.8 | % |
| Sensing Solutions | 293.0 |
| | 32.8 | % | | 277.5 |
| | 32.8 | % | | 261.9 |
| | 32.1 | % |
| Total segment profit | $ | 1,005.7 |
| | | | $ | 941.6 |
| | | | $ | 877.4 |
| | |
For a reconciliation of total segment profit to consolidated profit from operations, refer to Note 20, "Segment Reporting," of our Financial Statements.
Selected Geographic InformationIssuer Purchases of Equity Securities
Refer to Note 18, "Segment Reporting,"None.
| |
| ITEM 6. | SELECTED FINANCIAL DATA |
We have derived the selected consolidated statement of operations and other financial data for the years ended December 31, 2018, 2017, and 2016 and the selected consolidated balance sheet data as of December 31, 2018 and 2017 from our audited consolidated financial statements and accompanying notes thereto (our "Financial Statements") included elsewhere in this Annual Report on Form 10-K for details(this "Report"). We have derived the selected consolidated statement of our net revenue by selected geographic areasoperations and other financial data for the years ended December 31, 2015, 2014, and 2013 and long-lived assets by selected geographic area as of December 31, 2015 and 2014.
Competition
Within each of the principal product categories in our Performance Sensing business, we compete with a variety of independent suppliers and with the in-house operations of Tier 1 systems suppliers. We believe that the key competitive factors in this market are product quality and reliability, the ability to produce customized solutions on a global basis, technical expertise and development capability, breadth and scale of product offerings, product service and responsiveness, and price.
Within each of the principal product categories in our Sensing Solutions business, we compete with divisions of large multinational industrial corporations and fragmented companies, which compete primarily in specific end-markets or applications. We believe that the key competitive factors in these markets are product quality and reliability, although manufacturers in certain markets also compete based on price. Physical proximity to the facilities of the OEM/Tier 1 manufacturer customer has, in our experience, also increasingly become a basis for competition. We have additionally found that certain of the product categories have specific competitive factors. For example, in the thermal circuit breaker, thermostat, and switch markets, strength of technology, quality, and the ability to provide custom solutions are particularly important. In the hydraulic-magnetic circuit breaker markets, as another example, we have encountered heightened competition on price and a greater emphasis on agency approvals, including approvals by UL, and similar organizations outside of the U.S., such as Verband der Elektrotechnik, Elektronik und Informationstechnik, and TÜV Rheinland in Europe, China Compulsory Certification in China, and Canadian Standards Association in Canada.
Employees
As of December 31, 2015, we had approximately 19,650 employees, of whom approximately 11% were located in the U.S. As of December 31, 2015, approximately 830 of our employees were covered by collective bargaining agreements. In addition, in various countries, local law requires our participation in works councils. We also utilize contract workers in multiple locations in order to cost-effectively manage variations in manufacturing volume. As of December 31, 2015, we had approximately 1,790 contract workers on a worldwide basis. We believe that our relations with our employees are good.
Environmental Matters and Governmental Regulation
Our operations and facilities are subject to U.S. and non-U.S. laws and regulations governing the protection of the environment and our employees, including those governing air emissions, water discharges, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites. We are, however, not aware of any threatened or pending material environmental investigations, lawsuits, or claims involving us or our operations, other than as set forth in Note 14, "Commitments and Contingencies," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. As of December 31, 2015, compliance with federal, state, and local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect on our capital expenditures, earnings, or competitive position. We have not budgeted any material capital expenditures for environmental control facilities during 2016.
Our products are governed by material content restrictions and reporting requirements, examples of which include the European Union regulations, such as REACH (Registration, Evaluation, Authorization, and Restriction of Chemicals), RoHS (Restriction of Hazardous Substances), and ELV (End of Life Vehicles), etc., U.S. regulations, such as the conflict minerals requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and similar regulations in other countries. Numerous customers, across all end-markets, are requiring us to provide declarations of compliance or, in some cases, full material content disclosure as a requirement of doing business with them.
We are subject to compliance with laws and regulations controlling the export of goods and services. Certain of our products are subject to International Traffic in Arms Regulation (“ITAR”). These products represent an immaterial portion of our net revenue, and we have not exported ITAR-controlled products. However, if in the future we decided to export ITAR-controlled products, such transactions would require an individual validated license from the U.S. State Department’s Directorate of Defense Trade Controls. The State Department makes licensing decisions based on type of product, destination of end use, end user, national security, and foreign policy. The length of time involved in the licensing process varies but currently averages approximately six to eight weeks. The license processing time could result in delays in the shipping of products. These laws and regulations are subject to change, and any such change may require us to change technology or incur expenditures to comply with such laws and regulations.
Available Information
We make available free of charge on our Internet website (www.sensata.com2014) our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (the "SEC"). Our website and the information contained or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K.
The public may read and copy any materials filed by us with the SEC at the SEC's Public Reference Room at 100 F Street, NE., Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-202-551-8300. The SEC maintains an Internet site that contains reports, proxy, and information
statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents on, or accessible through, this website is not incorporated into this filing. Further, our references to the URLs for the SEC's website and our website are intended to be inactive textual references only.
Adverse conditions in the automotive industry have had, and may in the future have, adverse effects on our businesses.
Much of our business depends on, and is directly affected by, the global automobile industry. Sales to customers in the automotive industry accounted for approximately 67% of our total 2015 net revenue. Adverse developments like those we have seen in past years in the automotive industry, including but not limited to declines in demand, customer bankruptcies, and increased demands on us for pricing decreases, could have adverse effects on our results of operations and could impact our liquidity position and our ability to meet restrictive debt covenants. In addition, these same conditions could adversely impact certain of our vendors’ financial solvency, resulting in potential liabilities or additional costs to us to ensure uninterrupted supply to our customers.
Continued pricing and other pressures from our customers may adversely affect our business.
Many of our customers, including automotive manufacturers and other industrial and commercial original equipment manufacturers ("OEMs"), have policies that require annual price reductions. If we are not able to offset continued price reductions through improved operating efficiencies and reduced expenditures, those price reductions may have a material adverse effect on our results of operations and cash flows. In addition, our customers occasionally require engineering, design, or production changes. In some circumstances, we may be unable to cover the costs of these changes with price increases. Additionally, as our customers grow larger, they may increasingly require us to provide them with our products on an exclusive basis, which could cause an increase in the number of products we must carry and, consequently, increase our inventory levels and working capital requirements. Certain of our customers, particularly domestic automotive manufacturers, are increasingly requiring their suppliers to agree to their standard purchasing terms without deviation as a condition to engage in future business transactions. As a result, we may find it difficult to enter into agreements with such customers on terms that are commercially reasonable to us.
Our businesses operate in markets that are highly competitive, and competitive pressures could require us to lower our prices or result in reduced demand for our products.
Our businesses operate in markets that are highly competitive, and we compete on the basis of product performance, quality, service, and/or price across the industries and markets we serve. A significant element of our competitive strategy is to manufacture high-quality products at low cost, particularly in markets where low-cost country-based suppliers, primarily in China with respect to the Sensing Solutions business, have entered our markets, or increased their sales in our markets, by delivering products at low cost to local OEMs. In addition, certain of our competitors in the automotive sensor market are controlled by major OEMs or suppliers, limiting our access to certain customers. Many of our customers also rely on us as their sole source of supply for many of the products that we have historically sold to them. These customers may choose to develop relationships with additional suppliers or elect to produce some or all of these products internally, in each case in order to reduce risk of delivery interruptions or as a means of extracting pricing concessions. Certain of our customers currently have, or may develop in the future, the capability to internally produce the products that we sell to them and may compete with us with respect to those and other products and with respect to other customers. Competitive pressures such as these, and others, could affect prices or customer demand for our products, negatively impacting our profit margins and/or resulting in a loss of market share.
We are subject to risks associated with our non-U.S. operations, which could adversely impact the reported results of operations from our international businesses, or subject us to potential penalties and/or sanctions in the event of non-compliance with the Foreign Corrupt Practices Act (the "FCPA") or similar worldwide anti-bribery laws.
Our subsidiaries located outside of the United States (the "U.S.") generated approximately 67% of our 2015 net revenue, and we expect sales from non-U.S. markets to continue to represent a significant portion of our total sales. International sales and operations are subject to changes in local government regulations and policies, including those related to tariffs and trade barriers, investments, taxation, exchange controls, and repatriation of earnings.
A portion of our revenue, expenses, receivables, and payables are denominated in currencies other than U.S. dollars, in particular the Euro. We are, therefore, subject to foreign currency risks and foreign exchange exposure. Changes in the relative values of currencies occur from time to time and could affect our operating results. For financial reporting purposes, the functional currency that we use is the U.S. dollar because of the significant influence of the U.S. dollar on our operations. In
certain instances, we enter into transactions that are denominated in a currency other than the U.S. dollar. At the date that such transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction is measured and recorded in U.S. dollars using the exchange rate in effect at that date. At eachselected consolidated balance sheet date, recorded monetary balances denominated in a currency other than the U.S. dollar are adjusted to the U.S. dollar using the exchange rate at the balance sheet date, with gains or losses recorded in Other, net. During times of a weakening U.S. dollar, our reported international sales and earnings will increase because the non-U.S. currency will translate into more U.S. dollars. Conversely, during times of a strengthening U.S. dollar, our reported international sales and earnings will be reduced because the local currency will translate into fewer U.S. dollars.
There are other risks that are inherent in our non-U.S. operations, including the potential for changes in socio-economic conditions and/or monetary and fiscal policies, intellectual property protection difficulties and disputes, the settlement of legal disputes through certain foreign legal systems, the collection of receivables, exposure to possible expropriation or other government actions, unsettled political conditions, and possible terrorist attacks. These and other factors may have a material adverse effect on our non-U.S. operations and, therefore, on our business and results of operations.
In addition, we could be adversely affected by violations of the FCPA and similar worldwide anti-bribery laws, which generally prohibit companies and their intermediaries from making improper payments to non-U.S. government officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these laws. Many of the countries in which we operate have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. Despite our compliance program, we cannot assure you that our internal control policies and procedures always will protect us from reckless or negligent acts committed by our employees or agents. Violations of these laws, or allegations of such violations, may have a negative effect on our results of operations, financial condition, and reputation.
Integration of acquired companies, and any future acquisitions, joint ventures, and/or dispositions, may require significant resources and/or result in significant unanticipated losses, costs, or liabilities, and we may not realize all of the anticipated operating synergies and cost savings from acquisitions.
We have grown, and in the future we intend to continue to grow, by making acquisitions or entering into joint ventures or similar arrangements. There can be no assurance that our acquisitions will perform as expected in the future. Any future acquisitions will depend on our ability to identify suitable acquisition candidates, to negotiate acceptable terms for their acquisition, and to finance those acquisitions. We will also face competition for suitable acquisition candidates, which may increase our costs. In addition, acquisitions or investments require significant managerial attention, which may be diverted from our other operations. Furthermore, acquisitions of businesses or facilities entail a number of additional risks, including:
problems with effective integration of operations;
the inability to maintain key pre-acquisition customer, supplier, and employee relationships;
increased operating costs; and
exposure to unanticipated liabilities.
Subject to the terms of our indebtedness, we may finance future acquisitions with cash from operations, additional indebtedness, and/or by issuing additional equity securities. In addition, we could face financial risks associated with incurring additional indebtedness such as reducing our liquidity, limiting our access to financing markets, and increasing the amount of service on our debt. The availability of debt to finance future acquisitions may be restricted, and our ability to make future acquisitions may be limited.
We may also seek to restructure our business in the future by disposing of certain of our assets or by consolidating operations. There can be no assurance that any restructuring of our business will not adversely affect our financial position, leverage, or results of operations. In addition, any significant restructuring of our business will require significant managerial attention, which may be diverted from our operations.
There can be no assurance that any anticipated synergies or cost savings generated through acquisitions will be achieved or that they will be achieved in our estimated time frame. We may not be able to successfully integrate and streamline overlapping functions from future acquisitions, and integration may be more costly to accomplish than we expect. In addition, we could encounter difficulties in managing our combined company due to its increased size and scope.
We may be unable to successfully integrate the operations of August Cayman Company, Inc. (“Schrader”) and the acquired assets and subsidiaries of Custom Sensors & Technologies Ltd. ("CST") into our operations and we may not realize the anticipated efficiencies and synergies of the acquisitions of Schrader and CST (the "Acquisitions"). If the Acquisitions do not achieve their intended results, our business, financial condition, and results of operations could be materially and adversely affected.
The integration of Schrader and CST into our operations are significant undertakings and will continue to require significant attention from our management team. The Acquisitions involve the integration of companies that previously operated independently, and the unique business cultures of these companies may prove to be incompatible. It is possible that the integration processes could take longer than anticipated and could result in the loss of valuable employees, the disruption of each company’s ongoing businesses, processes, and systems, or inconsistencies in standards, controls, procedures, practices, policies, and compensation arrangements, any of which could adversely affect our ability to achieve the anticipated benefits of the Acquisitions. Our results of operations and financial condition could also be adversely affected by any issues attributable to the operations of Schrader or CST that arose or are based on events or actions that occurred prior to the closing of the Acquisitions. We may have difficulty addressing possible differences in corporate cultures and management philosophies. The integration process is subject to a number of uncertainties, and although we currently anticipate significant long-term synergies, no assurance can be given that these anticipated synergies will be realized or, if realized, the timing of their realization. Our actual synergies and the expenses required to realize these synergies could differ materially from our current expectations, and we cannot assure you that these synergies will not have other adverse effects on our business. Failure to achieve the anticipated benefits of the Acquisitions could result in increased costs or decreased revenue and could materially adversely affect our business, financial condition, and results of operations. Refer to Note 6, "Acquisitions," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of the Acquisitions.
The assumption of known and unknown liabilities in the Acquisitions may harm our financial condition and results of operations.
As a result of the Acquisitions, we have assumed all of the liabilities of Schrader and CST, including known and unknown contingent liabilities. If there are significant unknown obligations of Schrader or CST, or if we incur significant losses arising from known contingent liabilities assumed by us in connection with the Acquisitions, our business could be materially and adversely affected. We may obtain additional information about Schrader's or CST’s business that adversely affects the combined company, such as unknown liabilities, or issues that could affect our ability to comply with applicable laws. As a result, we cannot assure you that the Acquisitions will be successful or that they will not, in fact, harm our business. Among other things, if the liabilities of Schrader or CST are greater than expected, or if there are material obligations of which we are not aware, our business could be materially and adversely affected. If we become responsible for substantial unindemnified or uninsured liabilities, these liabilities may have a material adverse effect on our financial condition and results of operations.
We may be subject to claims that our products or processes infringe on the intellectual property rights of others, which may cause us to pay unexpected litigation costs or damages, modify our products or processes, or prevent us from selling our products.
Third parties may claim that our processes and products infringe on their intellectual property rights. Whether or not these claims have merit, we may be subject to costly and time consuming legal proceedings, and this could divert our management’s attention from operating our business. If these claims are successfully asserted against us, we could be required to pay substantial damages, make future royalty payments, and/or could be prevented from selling some or all of our products. We may also be obligated to indemnify our business partners or customers in any such litigation. Furthermore, we may need to obtain licenses from these third parties or substantially re-engineer or rename our products in order to avoid infringement. In addition, we might not be able to obtain the necessary licenses on acceptable terms, or at all, or be able to re-engineer or rename our products successfully. If we are prevented from selling some or all of our products, our sales could be materially adversely affected. Refer to Note 14, "Commitments and Contingencies," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of material intellectual property claims against us.
We may incur material losses and costs as a result of product liability, warranty, and recall claims that may be brought against us.
We have been, and may continue to be, exposed to product liability and warranty claims in the event that our products actually or allegedly fail to perform as expected, or the use of our products results, or is alleged to result, in death, bodily injury, and/or property damage. Accordingly, we could experience material warranty or product liability losses in the future and incur significant costs to defend these claims. In addition, if any of our products are, or are alleged to be, defective, we may be required to participate in a recall of the underlying end product, particularly if the defect or the alleged defect relates to product safety. Depending on the terms under which we supply products, an OEM may hold us responsible for some or all of the repair
or replacement costs of these products under warranty when the product supplied did not perform as represented. In addition, a product recall could generate substantial negative publicity about our business and interfere with our manufacturing plans and product delivery obligations as we seek to repair affected products. Our costs associated with product liability, warranty, and recall claims could be material.Refer to Note 14, "Commitments and Contingencies," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of our product liability, warranty, and recall claims.
Changes in existing environmental and/or safety laws, regulations, and programs could reduce demand for environmental and/or safety-related products, which could cause our revenue to decline.
A significant amount of our business is generated either directly or indirectly as a result of existing laws, regulations, and programs related to environmental protection, fuel economy, energy efficiency, and safety regulation. Accordingly, a relaxation or repeal of these laws and regulations, or changes in governmental policies regarding the funding, implementation, or enforcement of these programs, could result in a decline in demand for environmental and/or safety products, which may have a material adverse effect on our revenue.
Our substantial indebtedness could adversely affect our financial condition and our ability to operate our business.
As of December 31, 2015, we had $3,659.5 million of gross outstanding indebtedness, including $982.7 million of indebtedness under the term loan (the "Term Loan") provided by the sixth amendment to the credit agreement dated as of May 12, 2011 (as amended, the "Credit Agreement"), $500.0 million aggregate principal amount of 4.875% senior notes due 2023 issued under an indenture dated as of April 17, 2013 (the "4.875% Senior Notes"), $400.0 million aggregate principal amount of 5.625% senior notes due 2024 issued under an indenture dated as of October 14, 2014 (the "5.625% Senior Notes"), $700.0 million aggregate principal amount of 5.0% senior notes due 2025 issued under an indenture dated as of March 26, 2015 (the "5.0% Senior Notes"), $750.0 million aggregate principal amount of 6.25% senior notes due 2026 issued under an indenture dated as of November 27, 2015 (together with the 4.875% Senior Notes, the 5.625% Senior Notes, and the 5.0% Senior Notes, the "Senior Notes"), $280.0 million outstanding under our $420.0 million revolving credit facility (the "Revolving Credit Facility") provided by the Credit Agreement, and $46.8 million of capital lease and other financing obligations. We may incur additional indebtedness in the future. Our substantial indebtedness could have important consequences. For example, it could:
make it more difficult for us to satisfy our debt obligations;
restrict us from making strategic acquisitions;
limit our flexibility in planning for, or reacting to, changes in our business and future business opportunities, thereby placing us at a competitive disadvantage if our competitors are not as highly-leveraged;
increase our vulnerability to general adverse economic and industry conditions; or
require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness if we do not maintain specified financial ratios or are not able to refinance our indebtedness as it comes due, thereby reducing the availability of our cash flows for other purposes.
In addition, the senior secured credit facilities provided for under the Credit Agreement (the "Senior Secured Credit Facilities"), under which the Term Loan and the Revolving Credit Facility were issued, permit us to incur additional indebtedness in the future. As of December 31, 2015, we had $134.5 million available to us under the Revolving Credit Facility. If we increase our indebtedness by borrowing under the Revolving Credit Facility or incur other new indebtedness, the risks described above would increase. Refer to Note 8, "Debt," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of our outstanding indebtedness.
Our business may not generate sufficient cash flows from operations, or future borrowings under the Senior Secured Credit Facilities or from other sources may not be available to us in an amount sufficient to enable us to service and/or repay our indebtedness when it becomes due, or to fund our other liquidity needs, including capital expenditure requirements.
We cannot guarantee that we will be able to obtain enough capital to service our debt and fund our planned capital expenditures and business plan. If we complete additional acquisitions, our debt service requirements could also increase. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity investments, or reducing or delaying capital expenditures, strategic acquisitions, investments, and alliances, any of which could have a material adverse effect on our operations. Additionally, we may not be able to effect such actions, if necessary, on commercially reasonable terms, or at all.
Our failure to comply with the covenants contained in our credit arrangements, including non-compliance attributable to events beyond our control, could result in an event of default, which could materially and adversely affect our operating results and our financial condition.
The Revolving Credit Facility requires us to maintain a senior secured net leverage ratio not to exceed 5.0:1.0 at the conclusion of certain periods when outstanding loans and letters of credit that are not cash collateralized for the full face amount thereof exceed 10% of the commitments under the Revolving Credit Facility. In addition, Sensata Technologies B.V. and its Restricted Subsidiaries (as defined in the Credit Agreement) are required to satisfy this covenant, on a pro forma basis, in connection with any new borrowings (including any letter of credit issuances) under the Revolving Credit Facility as of the time of such borrowings. Additionally, the Revolving Credit Facility and the indentures governing the Senior Notes require us to comply with various operational and other covenants.
If we experienced an event of default under any of our debt instruments that was not cured or waived, the holders of the defaulted debt could cause all amounts outstanding with respect to the debt to become due and payable immediately, which, in turn, would result in cross defaults under our other debt instruments. Our assets and cash flows may not be sufficient to fully repay borrowings if accelerated upon an event of default.
If, when required, we are unable to repay, refinance, or restructure our indebtedness under, or amend the covenants contained in, the Credit Agreement, or if a default otherwise occurs, the lenders under the Senior Secured Credit Facilities could: elect to terminate their commitments thereunder; cease making further loans; declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable; institute foreclosure proceedings against those assets that secure the borrowings under the Senior Secured Credit Facilities; and prevent us from making payments on the Senior Notes. Any such actions could force us into bankruptcy or liquidation, and we might not be able to repay our obligations in such an event.
Labor disruptions or increased labor costs could adversely affect our business.
As of December 31, 2015, we had approximately 19,650 employees, of whom approximately 11% were located in the U.S. As of December 31, 2015, approximately 830 of our employees were covered by collective bargaining agreements. In addition, in various countries, local law requires our participation in works councils.
A material labor disruption or work stoppage at one or more of our manufacturing facilities could have a material adverse effect on our business. In addition, work stoppages occur relatively frequently in the industries in which many of our customers operate, such as the automotive industry. If one or more of our larger customers were to experience a material work stoppage for any reason, that customer may halt or limit the purchase of our products. This could cause us to shut down production facilities relating to those products, which could have a material adverse effect on our business, results of operations, and financial condition.
The loss, or significant non-performance, of one or more of our suppliers of manufactured components or raw materials may interrupt our supplies and materially harm our business.
Our ability to meet our customers’ needs depends on our ability to maintain an uninterrupted supply of raw materials and finished products from our third-party suppliers and manufacturers. We purchase raw materials and components from a wide range of suppliers. For certain raw materials or components, however, we are dependent on sole source suppliers. We generally obtain these raw materials and components through individual purchase orders executed on an as needed basis, rather than pursuant to long-term supply agreements.
Our business, financial condition, and/or results of operations could be adversely affected if any of our principal third-party suppliers or manufacturers experience production problems, lack of capacity, transportation disruptions, or otherwise determine to cease producing such raw materials or components. The magnitude of this risk depends upon the timing of the changes, the materials or products that the third-party manufacturers provide, and the volume of the production. We may not be able to make arrangements to transition supply and qualify replacement suppliers in a cost-effective or timely manner, or at all.
Our dependence on third parties for raw materials and components subjects us to the risk of supplier non-performance and customer dissatisfaction with the quality of our products. Quality failures by our third-party manufacturers or changes in their financial or business condition that affect their production could disrupt our ability to supply quality products to our customers and thereby materially harm our business. Supplier non-performance may consist of delivery delays or failures caused by production issues or delivery of non-conforming products. The risk of non-performance may also result from the insolvency or bankruptcy of one or more of our suppliers.
Our efforts to protect against and to minimize these risks may not always be effective. We may occasionally seek to engage new suppliers with which we have little or no experience. The use of new suppliers can pose technical, quality, and other risks.
Increasing costs for, or limitations on the supply of or access to, manufactured components and raw materials may adversely affect our business and results of operations.
We use a broad range of manufactured components, subassemblies, and raw materials in the manufacture of our products, including silver, gold, platinum, palladium, copper, aluminum, nickel, zinc, resins, and certain rare earth metals, which may experience significant volatility in their price and availability. We have entered into hedge arrangements in an attempt to minimize commodity pricing volatility and may continue to do so from time to time in the future. Such hedges might not be economically successful. In addition, these hedges do not qualify as accounting hedges in accordance with U.S. generally accepted accounting principles. Accordingly, the change in fair value of these hedges is recognized in earnings immediately, which could cause volatility in our results of operations from quarter to quarter. Refer to Note 16, "Derivative instruments and Hedging Activities," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of accounting for hedges of commodity prices.
The availability and price of raw materials and manufactured components may be subject to change due to, among other things, new laws or regulations, global economic or political events including strikes, terrorist actions, war, suppliers' allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates, and prevailing price levels. For example, certain of our product lines utilize magnets containing certain rare earth metals. A large majority of the world's production of rare earth metals is in China. If China limits the export of such materials, there could be a world-wide shortage, leading to a lack of supply and higher prices for magnets made using these materials. It is generally difficult to pass increased prices for manufactured components and raw materials through to our customers in the form of price increases. Therefore, a significant increase in the price or a decrease in the availability of these items could materially increase our operating costs and materially and adversely affect our business and results of operations.
We may not realize all of the revenue or achieve anticipated gross margins from products subject to existing purchase orders or for which we are currently engaged in development.
Our ability to generate revenue from products subject to customer awards is subject to a number of important risks and uncertainties, many of which are beyond our control, including the number of products our customers will actually produce, as well as the timing of such production. Many of our customer contracts provide for supplying a certain share of the customer’s requirements for a particular application or platform, rather than for manufacturing a specific quantity of products. In some cases, we have no remedy if a customer chooses to purchase less than we expect. In cases where customers do make minimum volume commitments to us, our remedy for their failure to meet those minimum volumes is limited to increased pricing on those products that the customer does purchase from us or renegotiating other contract terms. There is no assurance that such price increases or new terms will offset a shortfall in expected revenue. In addition, some of our customers may have the right to discontinue a program or replace us with another supplier under certain circumstances. As a result, products for which we are currently incurring development expenses may not be manufactured by customers at all, or may be manufactured in smaller amounts than currently anticipated. Therefore, our anticipated future revenue from products relating to existing customer awards or product development relationships may not result in firm orders from customers for the originally contracted amount. We also incur capital expenditures and other costs, and price our products, based on estimated production volumes. If actual production volumes were significantly lower than estimated, our anticipated revenue and gross margin from those new products would be adversely affected. We cannot predict the ultimate demand for our customers’ products, nor can we predict the extent to which we would be able to pass through unanticipated per-unit cost increases to our customers.
Export of our products is subject to various export control regulations and may require a license from either the U.S. Department of State, the U.S. Department of Commerce, or the U.S. Department of the Treasury. Any failure to comply with such regulations could result in governmental enforcement actions, fines, penalties, or other remedies, which could have a material adverse effect on our business, results of operations, or financial condition.
We must comply with the U.S. Export Administration Regulations, International Traffic in Arms Regulation ("ITAR"), and the sanctions, regulations, and embargoes administered by the Office of Foreign Assets Control (“OFAC”). Certain of our products that have military applications are on the munitions list of ITAR and require an individual validated license in order to be exported to certain jurisdictions. These restrictions also apply to technical data for design, development, production, use, repair, and maintenance of such ITAR-controlled products. While we have not exported ITAR-controlled products or technical data in the past, if in the future we decided to export ITAR-controlled products or technical data, such transactions would require an individual validated license from the U.S. State Department’s Directorate of Defense Trade Controls. ITAR-controlled products do not currently represent a material portion of our net revenue, but if in the future such products do
represent a material portion of our net revenue, any delays in obtaining, or inability to obtain, such licenses could result in a material reduction in revenue.
We export products that are subject to other export regulations, and any changes in these export regulations may further restrict the export of our products, and we may cease to be able to procure export licenses for our products under existing regulations. This area remains fluid in terms of regulatory developments. Should we need an export license under existing regulations, the length of time required by the licensing process can vary, potentially delaying the shipment of products and the recognition of the corresponding revenue. We have no control over the time it takes to process an export license. Any restriction on the export of a significant product line or a significant amount of our products could cause a significant reduction in revenue.
We have discovered in the past, and may discover in the future, deficiencies in our OFAC compliance program. Although we continue to enhance our OFAC compliance program, we cannot assure you that any such enhancements will ensure that we are in compliance with applicable laws and regulations at all times, or that OFAC (or other applicable authorities) will not raise compliance concerns or perform audits to confirm our compliance with applicable laws and regulations. Any failure by us to comply with applicable laws and regulations could result in governmental enforcement actions, fines or penalties, criminal and/or civil proceedings, or other remedies, any of which could have a material adverse effect on our business, results of operations, or financial condition.
We may be adversely affected by environmental, safety, and governmental regulations or concerns.
We are subject to the requirements of environmental and occupational safety and health laws and regulations in the U.S. and other countries, as well as product performance standards established by quasi-governmental and industrial standards organizations. We cannot assure you that we have been, and will continue to be, in compliance with all of these requirements on account of circumstances or events that have occurred or exist but that we are unaware of, or that we will not incur material costs or liabilities in connection with these requirements in excess of amounts we have reserved. In addition, these requirements are complex, change frequently, and have tended to become more stringent over time. These requirements may change in the future in a manner that could have a material adverse effect on our business, results of operations, and financial condition. In addition, certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act require us to report on "conflict minerals" used in our products and the due diligence plan we put in place to track whether such minerals originate from the Democratic Republic of Congo and adjoining countries. The continuing implementation of these requirements could affect the sourcing and availability of minerals used in certain of our products. We have made, and may be required in the future to make, capital and other expenditures to comply with environmental requirements. In addition, certain of our subsidiaries are subject to pending litigation raising various environmental and human health and safety claims. We cannot assure you that our costs to defend and/or settle these claims will not be material.
Taxing authorities could challenge our historical and future tax positions or our allocation of taxable income among our subsidiaries, or tax laws to which we are subject could change in a manner adverse to us.
Sensata Technologies Holding N.V. is a Dutch public limited liability company that operates through various subsidiaries in a number of countries throughout the world. Consequently, we are subject to tax laws, treaties, and regulations in the countries in which we operate, and these laws and treaties are subject to interpretation. We have taken, and will continue to take, tax positions based on our interpretation of such tax laws. There can be no assurance that a taxing authority will not have a different interpretation of applicable law and assess us with additional taxes. Should we be assessed with additional taxes, this may result in a material adverse effect on our results of operations and/or financial condition.
We conduct operations through manufacturing and distribution subsidiaries in numerous tax jurisdictions around the world. Our transfer pricing arrangements are not generally binding on applicable tax authorities. Our transfer pricing methodology is based on economic studies. The price charged for products, services, and financing among our companies, or the royalty rates and other amounts paid for intellectual property rights, could be challenged by the various tax authorities, resulting in additional tax liability, interest, and/or penalties.
Tax laws are subject to change in the various countries in which we operate. Such future changes could be unfavorable and result in an increased tax burden to us.Refer to Note 9, "Income Taxes," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion related to income taxes.
We have recorded a significant amount of goodwill and other identifiable intangible assets, and we may be required to recognize goodwill or intangible asset impairments, which would reduce our earnings.
We have recorded a significant amount of goodwill and other identifiable intangible assets. Goodwill and other net identifiable intangible assets totaled approximately $4,282.3 million as of December 31, 2016, 2015, or 68% of our total assets.
Goodwill, which represents the excess of cost over the fair value of the net assets of businesses acquired, was approximately $3,019.7 million as ofand December 31, 20152014, or 48% of our total assets. Goodwill and other identifiable intangible assets were recorded at fair value on the respective dates of acquisition. Impairment of goodwill and other identifiable intangible assets may result from among other things, deterioration in our performance, adverse market conditions, adverse changes in laws or regulations, unexpected significant or planned changes in the use of assets, and a variety of other factors. The amount of any quantified impairment must be expensed immediately as a charge that is included in operating income, which may impact our ability to raise capital. Although no impairment charges have been recorded during the past three fiscal years, should certain assumptions used in the development of the fair value of our reporting units change, we may be required to recognize goodwill or other intangible asset impairments. Refer to Note 5, "Goodwill and Other Intangible Assets," of our audited consolidated financial statements not included elsewhere in this Annual Report on Form 10-K for more details onReport.
You should read the following information in conjunction with our goodwillFinancial Statements and other identifiable intangible assets. Refer to Critical Accounting Policies and Estimates, included in Item 7, "Management's"Management’s Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this Annual Report on Form 10-K for further discussionReport. Our historical results are not necessarily indicative of the assumptions used in the development of the fair value of our reporting units.
We are a Dutch public limited liability company, and it mayresults to be difficult for shareholders to obtain or enforce judgments against us in the U.S.
Sensata Technologies Holding, N.V. is incorporated under the laws of the Netherlands, and a substantial portion of our assets are located outside of the U.S. As a result, although we have appointed an agent for service of process in the U.S., it may be difficult or impossible for U.S. investors to effect service of process upon us within the U.S. or to realize any judgment against us in the U.S., including for civil liabilities under the U.S. securities laws. Therefore, any judgment obtained against usexpected in any U.S. federal or state court may have to be enforced in the courts of the Netherlands, or such other foreign jurisdiction, as applicable. Because there is no treaty or other applicable convention between the U.S. and the Netherlands with respect to the recognition and enforcement of legal judgments regarding civil or commercial matters, a judgment rendered by any U.S. federal or state court will not be enforced by the courts of the Netherlands unless the underlying claim is relitigated before a Dutch court. Under current practice, however, a Dutch court will generally grant the same judgment without a review of the merits of the underlying claim (i) if that judgment resulted from legal proceedings compatible with Dutch notions of due process, (ii) if that judgment does not contravene public policy of the Netherlands, and (iii) if the jurisdiction of the U.S. federal or state court has been based on internationally accepted principles of private international law.future period.
To date, we are aware of only limited published case law in which Dutch courts have considered whether such a judgment rendered by a U.S. federal or state court would be enforceable in the Netherlands. In all of these cases, Dutch lower courts applied the aforementioned criteria with respect to the U.S. judgment. If all three criteria were satisfied, the Dutch courts granted the same judgment without a review of the merits of the underlying claim.Investors should not assume, however, that the courts of the Netherlands, or such other foreign jurisdiction, would enforce judgments of U.S. courts obtained against us predicated upon the civil liability provisions of the U.S. securities laws, or that such courts would enforce, in original actions, liabilities against us predicated solely upon such laws. |
| | | | | | | | | | | | | | | | | | | |
| | Sensata Technologies Holding plc (Consolidated) (a) |
| | For the year ended December 31, |
| (Amounts in thousands, except per share data) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
Statement of operations data: (b) | | | | | | | | | |
| Net revenue | $ | 3,521,627 |
| | $ | 3,306,733 |
| | $ | 3,202,288 |
| | $ | 2,974,961 |
| | $ | 2,409,803 |
|
| Operating costs and expenses: | | | | | | | | | |
Cost of revenue(c) | 2,266,863 |
| | 2,138,898 |
| | 2,084,159 |
| | 1,976,845 |
| | 1,567,527 |
|
Research and development(c) | 147,279 |
| | 130,127 |
| | 126,656 |
| | 123,603 |
| | 82,188 |
|
Selling, general and administrative(c) | 305,558 |
| | 301,896 |
| | 293,506 |
| | 270,773 |
| | 220,272 |
|
| Amortization of intangible assets | 139,326 |
| | 161,050 |
| | 201,498 |
| | 186,632 |
| | 146,704 |
|
| Restructuring and other charges, net | (47,818 | ) | | 18,975 |
| | 4,113 |
| | 21,919 |
| | 21,893 |
|
| Total operating costs and expenses | 2,811,208 |
| | 2,750,946 |
| | 2,709,932 |
| | 2,579,772 |
| | 2,038,584 |
|
| Profit from operations | 710,419 |
| | 555,787 |
| | 492,356 |
| | 395,189 |
| | 371,219 |
|
| Interest expense, net | (153,679 | ) | | (159,761 | ) | | (165,818 | ) | | (137,626 | ) | | (106,104 | ) |
Other, net(c)(d) | (30,365 | ) | | 6,415 |
| | (5,093 | ) | | (51,934 | ) | | (11,689 | ) |
| Income before taxes | 526,375 |
| | 402,441 |
| | 321,445 |
| | 205,629 |
| | 253,426 |
|
(Benefit from)/provision for income taxes(e) | (72,620 | ) | | (5,916 | ) | | 59,011 |
| | (142,067 | ) | | (30,323 | ) |
| Net income | $ | 598,995 |
| | $ | 408,357 |
| | $ | 262,434 |
| | $ | 347,696 |
| | $ | 283,749 |
|
| Basic net income per share | $ | 3.55 |
| | $ | 2.39 |
| | $ | 1.54 |
| | $ | 2.05 |
| | $ | 1.67 |
|
| Diluted net income per share | $ | 3.53 |
| | $ | 2.37 |
| | $ | 1.53 |
| | $ | 2.03 |
| | $ | 1.65 |
|
| Weighted-average ordinary shares outstanding—basic | 168,570 |
| | 171,165 |
| | 170,709 |
| | 169,977 |
| | 170,113 |
|
| Weighted-average ordinary shares outstanding—diluted | 169,859 |
| | 172,169 |
| | 171,460 |
| | 171,513 |
| | 172,217 |
|
Other financial data: (b) | | | | | | | | | |
| Net cash provided by/(used in): | | | | | | | | | |
| Operating activities | $ | 620,563 |
| | $ | 557,646 |
| | $ | 521,525 |
| | $ | 533,131 |
| | $ | 382,568 |
|
| Investing activities | $ | (237,606 | ) | | $ | (140,722 | ) | | $ | (174,778 | ) | | $ | (1,166,369 | ) | | $ | (1,430,065 | ) |
| Financing activities | $ | (406,213 | ) | | $ | (15,263 | ) | | $ | (337,582 | ) | | $ | 764,172 |
| | $ | 940,930 |
|
| Additions to property, plant and equipment and capitalized software | $ | (159,787 | ) | | $ | (144,584 | ) | | $ | (130,217 | ) | | $ | (177,196 | ) | | $ | (144,211 | ) |
Our shareholders’ rights and responsibilities are governed by Dutch law and differ in some respects from the rights and responsibilities of shareholders under U.S. law, and shareholder rights under Dutch law may not be as clearly established as shareholder rights are established under the laws of some U.S. jurisdictions.
Our corporate affairs are governed by our articles of association and by the laws governing companies incorporated in the Netherlands. The rights of our shareholders and the responsibilities of members of our Board of Directors under Dutch law may not be as clearly established as under the laws of some U.S. jurisdictions. In the performance of its duties, our Board of Directors is required by Dutch law to consider the interests of our company and our business, including our shareholders, our employees, and other stakeholders, in all cases with reasonableness and fairness. It is possible that some of these parties will have interests that are different from, or in addition to, the interests of our shareholders. It is anticipated that all of our shareholder meetings will take place in the Netherlands.In addition, the rights of holders of ordinary shares, and many of the rights of shareholders as they relate to, for example, the exercise of shareholder rights, are governed by Dutch law and our articles of association and differ from the rights of shareholders under U.S. law. For example, Dutch law does not grant appraisal rights to a company’s shareholders who wish to challenge the consideration to be paid upon a merger or consolidation of the company. |
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| (Dollars in thousands) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
Balance sheet data: (b) | | | | | | | | | |
| Cash and cash equivalents | $ | 729,833 |
| | $ | 753,089 |
| | $ | 351,428 |
| | $ | 342,263 |
| | $ | 211,329 |
|
Working capital(f) | $ | 1,277,211 |
| | $ | 1,218,796 |
| | $ | 758,189 |
| | $ | 412,748 |
| | $ | 441,258 |
|
| Total assets | $ | 6,797,687 |
| | $ | 6,641,525 |
| | $ | 6,240,976 |
| | $ | 6,298,910 |
| | $ | 5,087,507 |
|
| Total debt, net including capital lease and other financing obligations | $ | 3,264,941 |
| | $ | 3,270,269 |
| | $ | 3,273,594 |
| | $ | 3,600,991 |
| | $ | 2,812,734 |
|
| Total shareholders’ equity | $ | 2,608,434 |
| | $ | 2,345,626 |
| | $ | 1,942,007 |
| | $ | 1,668,576 |
| | $ | 1,302,892 |
|
| |
| (a) | On March 28, 2018, the cross-border merger of Sensata Technologies Holding N.V. ("Sensata N.V.") and Sensata Technologies Holding plc ("Sensata plc") was completed, with Sensata plc being the surviving entity (the "Merger"). On the date of the Merger, Sensata plc became the publicly-traded parent of the subsidiary companies that were previously controlled by Sensata N.V., with no changes made to the business being conducted by Sensata N.V. prior to the Merger. Due to the various legal aspects of the Merger, Sensata plc retains the historical data of Sensata N.V., and no recasting or adjustment is required as a result of the Merger. |
| |
| (b) | We acquired Wabash Worldwide Holding Corp. ("Wabash"), Magnum Energy Incorporated ("Magnum"), CoActive US Holdings, Inc. ("DeltaTech Controls"), and August Cayman Company, Inc. ("Schrader") in 2014, certain assets and subsidiaries of Custom Sensors & Technologies Ltd. ("CST") in 2015, and GIGAVAC, LLC ("GIGAVAC") in 2018. Pro forma amounts are not shown. We sold the capital stock of Schrader Bridgeport International, Inc. and August France Holding Company SAS (collectively, the "Valves Business") in 2018. Prior year amounts have not been recast. Refer to Note 17, "Acquisitions and Divestitures," of our Financial Statements for further details on the acquisition of GIGAVAC and the sale of the Valves Business. |
| |
| (c) | For the fiscal years ended December 31, 2017, 2016, 2015, and 2014, cost of revenue, research and development expense, selling, general and administrative expense, and other, net have been recast to reflect our adoption of the guidance in FASB ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost on January 1, 2018. Refer to Note 6, "Other, Net," and Note 13, "Pension and Other Post-Retirement Benefits," of our Financial Statements for further discussion of this new guidance and the amounts recast for the years ended December 31, 2017 and 2016. |
| |
| (d) | Other, net for the years ended December 31, 2018, 2017, 2016, 2015, and 2014 consisted of the following: |
The provisions of Dutch corporate law and our articles of association have the effect of concentrating control over certain corporate decisions and transactions in the hands of our Board of Directors. As a result, holders of our shares may have more difficulty in protecting their interests in the face of actions by members of our Board of Directors than if we were incorporated in the U.S. |
| | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| (Dollars in thousands) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
(Loss)/gain related to foreign currency exchange rates(i) | $ | (16,835 | ) | | $ | 2,423 |
| | $ | (12,471 | ) | | $ | (6,007 | ) | | $ | (1,443 | ) |
| (Loss)/gain on commodity forward contracts | (8,481 | ) | | 9,989 |
| | 7,399 |
| | (18,468 | ) | | (9,017 | ) |
| Loss on debt financing | (2,350 | ) | | (2,670 | ) | | — |
| | (25,538 | ) | | (1,875 | ) |
Net periodic benefit (cost)/credit, excluding service cost(ii) | (3,585 | ) | | (3,402 | ) | | (192 | ) | | (1,605 | ) | | 370 |
|
| Other | 886 |
| | 75 |
| | 171 |
| | (316 | ) | | 276 |
|
| Other, net | $ | (30,365 | ) | | $ | 6,415 |
| | $ | (5,093 | ) | | $ | (51,934 | ) | | $ | (11,689 | ) |
| |
| (i) | Includes foreign currency remeasurement (loss)/gain, net and gain/(loss), net on foreign currency forward contracts. Refer to Note 6, "Other, Net," of our Financial Statements for details. |
| |
| (ii) | Refer to footnote (c) above for further discussion. |
| |
| (e) | For the year ended December 31, 2018, the benefit from income taxes includes a net benefit of $122.1 million related to the realization of United States ("U.S.") deferred tax assets previously offset by a valuation allowance. For the year ended December 31, 2017, the benefit from income taxes includes a net benefit of $73.7 million related to the enactment of U.S. tax legislation in the fourth quarter of 2017. For the year ended December 31, 2015, the benefit from income taxes includes a net benefit of $180.0 million, primarily related to the release of a portion of our U.S. valuation allowance in connection with the acquisition of CST. For the year ended December 31, 2014, the benefit from income taxes includes a net benefit of $71.1 million related to the release of a portion of our U.S. valuation allowance in connection with certain 2014 acquisitions. Refer to Note 7, "Income Taxes," of our Financial Statements for additional information. |
| |
| (f) | We define working capital as current assets less current liabilities. |
Security breaches and other disruptions to our information technology infrastructure could interfere with our operations, compromise confidential information, and expose us to liability which could materially adversely impact our business and reputation.
Security breaches and other disruptions to our information technology infrastructure could interfere with our operations; compromise information belonging to us, our employees, customers, and suppliers; and expose us to liability which could adversely impact our business and reputation. In the ordinary course of business, we rely on information technology networks and systems, some of which are managed by third parties, to process, transmit, and store electronic information, and to manage or support a variety of business processes and activities. Additionally, we collect and store certain data, including proprietary business information and customer and employee data, and may have access to confidential or personal information in certain of our businesses that is subject to privacy and security laws, regulations, and customer-imposed controls. Despite our cybersecurity measures (including employee and third-party training, monitoring of networks and systems, and maintenance of backup and protective systems) which are continuously reviewed and upgraded, our information technology networks and infrastructure may still be vulnerable to damage, disruptions, or shutdowns due to attack by hackers, breaches, employee error or malfeasance, power outages, computer viruses, telecommunication or utility failures, systems failures, natural disasters, or other catastrophic events. Any such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to our reputation, which could materially adversely affect our business. While we have experienced, and expect to continue to experience, these types of threats to our information technology networks and infrastructure, to date none of these threats has had a material impact on our business or operations.
| |
ITEM 1B.7. | UNRESOLVED STAFF COMMENTSMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
None.
As of December 31, 2015, we occupied 17 principal manufacturing facilitiesoperations, and business centers totaling approximately 3,518 thousand square feet,liquidity and capital resources. You should read the following discussion in conjunction with the majority devoted to research, development, engineering, manufacturing,Item 1, "Business," Item 6, "Selected Financial Data," and assembly. We lease approximately 433 thousand square feet for our United States headquarters in Attleboro, Massachusetts. Of our principal facilities, approximately 1,484 thousand square feet are owned and approximately 2,034 thousand square feet are occupied under leases. A significant portion of our owned properties and equipment is subject to a lien under the Senior Secured Credit Facilities. Refer to Note 8, "Debt," of our audited consolidated financial statements and accompanying notes thereto (our "Financial Statements") included elsewhere in this Annual Report on Form 10-K for additional information on(this "Report").
The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources, and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties including, but not limited to, the Senior Secured Credit Facilities. We consider our manufacturing facilities sufficient to meet our current operational requirements. The table below lists the location of our principal executiverisks and operating facilities:
|
| | | | | | | | | | |
| | | | Operating Segment | | | | |
Country | | Location | | Performance Sensing | | Sensing Solutions | | Owned or Leased | | Approximate Square Footage (in thousands)
|
Bulgaria | | Botevgrad | | X | | | | Owned | | 137 |
China | | Baoying | | | | X | | Owned | | 360 |
China | | Baoying | | X | | X | | Leased | | 385 |
China | | Changzhou | | X | | X | | Leased | | 488 |
France | | Pontarlier | | X | | | | Owned | | 178 |
Germany | | Berlin | | X | | | | Leased | | 33 |
Malaysia | | Subang Jaya | | X | | | | Leased (1)
| | 108 |
Mexico | | Aguascalientes | | X | | X | | Owned | | 411 |
Mexico | | Tijuana (2)
| | X | | X | | Leased | | 287 |
Netherlands | | Almelo | | X | | X | | Owned | | 185 |
Poland | | Bydgoszcz | | X | | | | Leased | | 54 |
United Kingdom | | Antrim | | X | | | | Leased | | 97 |
United Kingdom | | Carrickfergus | | X | | | | Owned | | 63 |
United Kingdom | | Swindon | | X | | | | Leased | | 34 |
United States | | Attleboro, MA | | X | | X | | Leased | | 433 |
United States | | Altavista, VA | | X | | | | Owned | | 150 |
United States | | Thousand Oaks, CA (2)
| | X | | X | | Leased | | 115 |
(1) In December 2015, we reached an agreement to reacquire this facility. This transaction is expected to closeuncertainties described in 2016.
(2) These facilities were included in the acquisition of certain assets and subsidiaries of Custom Sensors & Technologies Ltd ("CST"). The Tijuana location includes two principal manufacturing facilities.
Leases covering our currently occupied principal leased facilities expire at varying dates within the next 20 years. We do not anticipate difficulty in retaining occupancy through lease renewals, month-to-month occupancy, or by replacing the leased facilities with equivalent facilities. An increase in demand for our products may require us to expand our production capacity, which could require us to identify and acquire or lease additional manufacturing facilities. We believe that suitable additional or substitute facilities will be available as required; however, if we are unable to acquire, integrate, and move into production the facilities, equipment, and personnel necessary to meet such increase in demand, our customer relationships, results of operations, and/or financial condition may suffer materially.
We are regularly involved in a number of claims and litigation matters in the ordinary course of business. Most of our litigation matters are third-party claims related to patent infringement allegations or for property damage allegedly caused by our products, but some involve allegations of personal injury or wrongful death. From time to time, we are also involved in disagreements with vendors and customers. Information on certain legal proceedings in which we are involved is included in Note 14, "Commitments and Contingencies,Item 1A, "Risk Factors," of our audited consolidated financial statements included elsewhere in this AnnualReport. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
Overview
22
TableSensata Technologies Holding plc ("Sensata plc"), the successor issuer to Sensata Technologies Holding N.V. ("Sensata N.V.") and its wholly-owned subsidiaries, collectively referred to as the "Company," "Sensata," "we," "our," and "us," is a global industrial technology company that develops, manufactures, and sells a wide range of Contentscustomized sensors and controls that address increasingly complex engineering requirements for specific customer applications and systems such as air conditioning, braking, exhaust, fuel oil, tire, operator controls, and transmission in automotive and heavy vehicle and off-road ("HVOR") systems, and temperature and electrical protection and control in numerous industrial applications, including aircraft, refrigeration, material handling, and telecommunications. The acquisition of GIGAVAC, LLC ("GIGAVAC") expands our product offerings to include high voltage contactors and fuses. We can trace our origins back to entities that have been engaged in the sensors and controls business since 1916.We generate revenue from the sale of products across all major geographic areas. We serve a diverse mix of customers and end markets. We believe regulatory requirements for safer vehicles, higher fuel efficiency, and lower emissions, such as the National Highway Traffic Safety Administration's Corporate Average Fuel Economy requirements in the U.S., "Euro 6d" requirements in Europe, and "China National 6" requirements in China, as well as customer demand for operator productivity and convenience, drive the need for advancements in powertrain management, efficiency, safety features, and operator controls. These advancements lead to sensor growth rates that exceed underlying demand in many of our key end markets, which we expect will continue to offer us significant growth opportunities.
ReportThe technology-driven, highly-customized, and integrated nature of our products requires customers to invest heavily in certification and qualification to ensure proper functioning of the systems in which our products are embedded. We believe the capital commitment and time required for this process significantly increases the switching costs for customers once a particular sensor or control has been designed and installed in a system. As a result, our sensors and controls are rarely substituted during a product lifecycle, which in the case of the automotive market typically lasts five to seven years. We focus on Form 10-K.new applications that will help us secure new business, drive long-term growth, and provide an opportunity to define a leading application technology in collaboration with our customers.
Our strategies of leveraging core technology platforms and focusing on high-volume applications enable us to provide our customers with highly-customized products at a relatively low cost, as compared to the costs of the systems in which our products are embedded. We have achieved our current cost position through a continuous process of migration and transformation to best-cost manufacturing locations, global best-cost sourcing, product design improvements, and ongoing productivity-enhancing initiatives.
We organize our business into two segments: Performance Sensing and Sensing Solutions. Performance Sensing designs and manufactures sensors for the automotive and HVOR markets, including low-, medium-, and high-pressure sensors, speed and position sensors, and temperature sensors, and markets them to leading global automotive and HVOR original equipment manufacturers ("OEMs") and their Tier 1 suppliers. Sensing Solutions designs and manufactures various sensors and control products, including bimetal electromechanical controls, thermal and magnetic-hydraulic circuit breakers, solid state relays, power inverters, interconnection products, and temperature, pressure, and position sensors, selling them to a wide range of industrial and commercial manufacturers and suppliers across multiple end markets. The acquisition of GIGAVAC, portions of which will be integrated into each of our operating segments, expands our product offerings to include high voltage contactors and fuses.
We develop products that address increasingly complex engineering requirements. We believe that continued focused investment in research and development ("R&D") activities is critical to our future growth and maintaining our leadership
position. Our R&D efforts are directly related to timely development of new and enhanced products that are central to our core business strategy. We develop our technologies to meet an evolving set of customer requirements and new product introductions. We conduct such activities in areas that we believe will increase our long-term revenue growth. Our development expense is typically associated with engineering core technology platforms to specific applications and engineering major upgrades that improve the ultimate resolutionfunctionality or reduce the cost of existing products.
In August 2018 we completed the sale of the current litigation matters that are pending against us will not have a material effect on our financial condition or resultscapital stock of operations.
Schrader Bridgeport International, Inc. and August France Holding Company SAS (collectively, the "Valves Business") to Pacific Industrial Co. Ltd. ("Pacific"). The Internal Revenue Code requires that companies disclose in their Annual Report on Form 10-K whether they have been required to pay penalties to the Internal Revenue Service (“IRS”) for certain transactions that have been identified by the IRSValves Business, which was acquired as abusive or that have a significant tax avoidance purpose. We have not been required to pay any such penalties.
| |
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II
| |
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
Our ordinary shares trade on the New York Stock Exchange (“NYSE”) under the symbol “ST.” The following table sets forth the high and low intraday sales prices per share of our ordinary shares, as reported by the NYSE, for the periods indicated:
|
| | | | | | | |
| Price Range |
| High | | Low |
| 2014 | | | |
| Quarter ended March 31, 2014 | $ | 43.28 |
| | $ | 36.50 |
|
| Quarter ended June 30, 2014 | $ | 46.81 |
| | $ | 41.30 |
|
| Quarter ended September 30, 2014 | $ | 49.97 |
| | $ | 44.40 |
|
| Quarter ended December 31, 2014 | $ | 54.14 |
| | $ | 41.56 |
|
| 2015 | | | |
| Quarter ended March 31, 2015 | $ | 58.16 |
| | $ | 48.75 |
|
| Quarter ended June 30, 2015 | $ | 59.04 |
| | $ | 52.39 |
|
| Quarter ended September 30, 2015 | $ | 53.51 |
| | $ | 41.98 |
|
| Quarter ended December 31, 2015 | $ | 49.73 |
| | $ | 42.48 |
|
Performance Graph
The following graph compares the total cumulative return of our ordinary shares since December 31, 2010, to the total cumulative return since that date on the Standard & Poor’s ("S&P") 500 Stock Index and the S&P 500 Industrial Index.
The graph assumes that the valueSensata’s acquisition of the investmentSchrader group of companies in our ordinary shares2014 and each index was $100.00 on December 31, 2010.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Value of $100.00 Investment from December 31, 2010 | | |
| | | 12/31/2010 | | 12/31/2011 | | 12/31/2012 | | 12/31/2013 | | 12/31/2014 | | 12/31/2015 |
| Sensata | | $ | 100.00 |
| | $ | 87.28 |
| | $ | 107.87 |
| | $ | 128.76 |
| | $ | 174.06 |
| | $ | 152.97 |
|
| S&P 500 | | $ | 100.00 |
| | $ | 100.00 |
| | $ | 113.40 |
| | $ | 146.97 |
| | $ | 163.71 |
| | $ | 162.52 |
|
| S&P 500 Industrial | | $ | 100.00 |
| | $ | 97.08 |
| | $ | 109.17 |
| | $ | 150.26 |
| | $ | 161.55 |
| | $ | 153.93 |
|
The informationhad been integrated into Performance Sensing, generated approximately $117 million in the graphrevenue in fiscal year 2017. It manufactures mechanical valves for pressure applications in tires and table above is not “soliciting material,” is not deemed “filed”fluid control and assembles tire hardware aftermarket products with manufacturing locations in the United States ("U.S.(the "U.S.") Securities and Exchange Commission,Europe. The sale did not include our tire pressure monitoring system ("TPMS") business and is not to be incorporated by reference in any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, except to the extent that we specifically incorporate such information by reference. The share price performance shown on the graph represents past performance and should not be considered an indication of future price performance.
Stockholders
As of January 15, 2016, there was one holder of record of our ordinary shares. This holder of record is Cede & Co., which acts as nominee shareholder for the Depository Trust Company. All of our ordinary shares traded on the NYSE are held by Cede & Co.
Dividends
We have never declared or paid any dividends on our ordinary shares, and we currently do not plan to declare any such dividends in the foreseeable future. Because we are a holding company, our ability to pay cash dividends on our ordinary shares may be limited by restrictions on our ability to obtain sufficient funds through dividends from our subsidiaries, including restrictions under the terms of the agreements governing our indebtedness. In that regard, our indirect, wholly-owned subsidiary, Sensata Technologies B.V. ("STBV"), is limited in its ability to pay dividends or otherwise make distributions to its immediate parent company and, ultimately, to us.Global TPMS Aftermarket business. Refer to Note 8, "Debt,17, "Acquisitions and Divestitures," of our audited consolidated financial statementsFinancial Statements for additional details on this divestiture.
In October 2018 we acquired GIGAVAC, an industry-leading producer of high voltage contactors and fuses that are mission-critical components for electric vehicles and equipment, for $233.0 million of cash consideration, subject to working capital and other adjustments. The acquisition of GIGAVAC extends our capabilities on battery electric vehicles, with significant potential for additional growth, and will enable us to tap into a broad market opportunity for high-voltage contactors required in mission-critical sensing and electrical protection applications across electrified vehicles and industrial equipment such as cars, delivery trucks, busses, material handling equipment, and charging stations. It will immediately augment our ongoing investments in electrification for many complex and challenging applications in the automotive, battery storage, industrial, and HVOR markets. Refer to Note 17, "Acquisitions and Divestitures," of our Financial Statements for additional details on this acquisition.
Refer to Item 1, "Business," included elsewhere in this Annual Report on Form 10-K for additional information on our dividend restrictions.
In addition, under Dutch law, STBV, Sensata Technologies Intermediate Holding B.V., and certaindiscussion of our other subsidiaries that are Dutch private limited liability companiesbusiness.
Selected Segment Information
We manage Performance Sensing and Sensing Solutions separately and report their results of operations as two segments. Set forth below is selected information for each of these segments for the periods presented. Amounts in the tables below have been calculated based on unrounded numbers. Accordingly, certain amounts may only pay dividends or make other distributionsnot sum due to the extent thateffect of rounding.
The following table presents net revenue by segment:
|
| | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| (Dollars in millions) | Amount | | Percent of Total Net Revenue | | Amount | | Percent of
Total
Net Revenue | | Amount | | Percent of
Total
Net Revenue |
| Net revenue: | | | | | | | | | | | |
| Performance Sensing | $ | 2,627.7 |
| | 74.6 | % | | $ | 2,460.6 |
| | 74.4 | % | | $ | 2,385.4 |
| | 74.5 | % |
| Sensing Solutions | 894.0 |
| | 25.4 |
| | 846.1 |
| | 25.6 |
| | 816.9 |
| | 25.5 |
|
| Total net revenue | $ | 3,521.6 |
| | 100.0 | % | | $ | 3,306.7 |
| | 100.0 | % | | $ | 3,202.3 |
| | 100.0 | % |
The following table presents segment profit in U.S. dollars and as a percentage of segment net revenue for the shareholders' equityidentified periods:
|
| | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| (Dollars in millions) | Amount | | Percent of
Segment Net Revenue | | Amount | | Percent of
Segment
Net Revenue | | Amount | | Percent of
Segment
Net Revenue |
| Segment profit: | | | | | | | | | | | |
| Performance Sensing | $ | 712.7 |
| | 27.1 | % | | $ | 664.2 |
| | 27.0 | % | | $ | 615.5 |
| | 25.8 | % |
| Sensing Solutions | 293.0 |
| | 32.8 | % | | 277.5 |
| | 32.8 | % | | 261.9 |
| | 32.1 | % |
| Total segment profit | $ | 1,005.7 |
| | | | $ | 941.6 |
| | | | $ | 877.4 |
| | |
For a reconciliation of such subsidiary exceeds the reserves requiredtotal segment profit to be maintained by law or under its articles of association.
Under Dutch law, we may only pay dividends out of profits as shown in our adopted annual accounts prepared in accordance with International Financialconsolidated profit from operations, refer to Note 20, "Segment Reporting, Standards. Should we wish to do so, we would only be able to declare and pay dividends to the extent our equity exceeds the sum of the paid and called up portion" of our ordinary share capital and the reserves that must be maintained in accordance with the provisions of Dutch law and our articles of association. Subject to these limitations, the payment of cash dividends in the future, if any, will depend upon such factors as earnings levels, capital requirements, contractual restrictions, our overall financial condition, and any other factors deemed relevant by our shareholders and Board of Directors.Financial Statements.
U.S. holders of our ordinary shares are generally not subject to any Dutch taxes on income or capital gains derived from ownership or disposal of such ordinary shares. However, we are generally required to withhold Dutch income tax (at a rate of 15%) on actual or deemed dividend distributions. There is no reciprocal tax treaty between the U.S. and the Netherlands regarding withholding.
Issuer Purchases of Equity Securities
|
| | | | | | | | | | | | | | |
| Period | | Total Number
of Shares
Purchased | | Weighted- Average Price
Paid per Share | | Total Number of
Shares Purchased as Part of Publicly
Announced Plan or Programs | | Approximate Dollar Value of Shares that
May Yet Be Purchased
Under the Plan or Programs (in millions) |
| October 1 through October 31, 2015 | — |
| | $ | — |
| | — |
| | $ | 74.7 |
|
| November 1 through November 30, 2015 | — |
| | $ | — |
| | — |
| | $ | 74.7 |
|
| December 1 through December 31, 2015 | 53,336 |
| (1) | $ | 46.06 |
| | — |
| | $ | 74.7 |
|
| Total | | 53,336 |
| | $ | 46.06 |
| | — |
| | $ | 74.7 |
|
__________________
(1) Pursuant to the “withhold to cover” method for collecting and paying withholding taxes for our employees upon the vesting of restricted securities, we withheld from certain employees the ordinary shares noted in the table above to cover such statutory minimum tax withholdings. These transactions took place outside of a publicly-announced repurchase plan. The weighted-average price per ordinary share listed in the above table is the weighted-average of the fair market prices at which we calculated the number of ordinary shares withheld to cover tax withholdings for the employees.
| |
| ITEM 6. | SELECTED FINANCIAL DATA |
We have derived the selected consolidated statement of operations and other financial data for the years ended December 31, 20152018, 20142017, and 20132016, and the selected consolidated balance sheet data as of December 31, 20152018 and 20142017, from our audited consolidated financial statements and accompanying notes thereto (our "Financial Statements") included elsewhere in this Annual Report on Form 10-K.10-K (this "Report"). We have derived the selected consolidated statement of operations and other financial data for the years ended December 31, 20122015 and 20112014, and the selected consolidated balance sheet data as of December 31, 20132016, 20122015, and 20112014, from audited consolidated financial statements not included in this Annual Report on Form 10-K.Report.
You should read the following information in conjunction with our Financial Statements and Item 7, “Management’s"Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our audited consolidated financial statements and accompanying notes thereto" included elsewhere in this Annual Report on Form 10-K.Report. Our historical results are not necessarily indicative of the results to be expected in any future period. |
| | | | | | | | | | | | | | | | | | | |
| | Sensata Technologies Holding N.V. (consolidated) |
| | For the year ended December 31, |
| (Amounts in thousands, except per share data) | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
Statement of Operations Data(a): | | | | | | | | | |
| Net revenue | $ | 2,974,961 |
| | $ | 2,409,803 |
| | $ | 1,980,732 |
| | $ | 1,913,910 |
| | $ | 1,826,945 |
|
| Operating costs and expenses: | | | | | | | | | |
| Cost of revenue | 1,977,799 |
| | 1,567,334 |
| | 1,256,249 |
| | 1,257,547 |
| | 1,166,842 |
|
| Research and development | 123,666 |
| | 82,178 |
| | 57,950 |
| | 52,072 |
| | 44,597 |
|
| Selling, general and administrative | 271,361 |
| | 220,105 |
| | 163,145 |
| | 141,894 |
| | 164,790 |
|
| Amortization of intangible assets | 186,632 |
| | 146,704 |
| | 134,387 |
| | 144,777 |
| | 141,575 |
|
| Restructuring and special charges | 21,919 |
| | 21,893 |
| | 5,520 |
| | 40,152 |
| | 15,012 |
|
| Total operating costs and expenses | 2,581,377 |
| | 2,038,214 |
| | 1,617,251 |
| | 1,636,442 |
| | 1,532,816 |
|
| Profit from operations | 393,584 |
| | 371,589 |
| | 363,481 |
| | 277,468 |
| | 294,129 |
|
| Interest expense, net | (137,626 | ) | | (106,104 | ) | | (93,915 | ) | | (99,222 | ) | | (98,744 | ) |
Other, net(b) | (50,329 | ) | | (12,059 | ) | | (35,629 | ) | | (5,581 | ) | | (120,050 | ) |
| Income before income taxes | 205,629 |
| | 253,426 |
| | 233,937 |
| | 172,665 |
| | 75,335 |
|
(Benefit from)/provision for income taxes (c) | (142,067 | ) | | (30,323 | ) | | 45,812 |
| | (4,816 | ) | | 68,861 |
|
| Net income | $ | 347,696 |
| | $ | 283,749 |
| | $ | 188,125 |
| | $ | 177,481 |
| | $ | 6,474 |
|
| Basic net income per share | $ | 2.05 |
| | $ | 1.67 |
| | $ | 1.07 |
| | $ | 1.00 |
| | $ | 0.04 |
|
| Diluted net income per share | $ | 2.03 |
| | $ | 1.65 |
| | $ | 1.05 |
| | $ | 0.98 |
| | $ | 0.04 |
|
| Weighted-average ordinary shares outstanding—basic | 169,977 |
| | 170,113 |
| | 176,091 |
| | 177,473 |
| | 175,307 |
|
| Weighted-average ordinary shares outstanding—diluted | 171,513 |
| | 172,217 |
| | 179,024 |
| | 181,623 |
| | 181,212 |
|
Other Financial Data(a): | | | | | | | | | |
| Net cash provided by/(used in): | | | | | | | | | |
| Operating activities | $ | 533,131 |
| | $ | 382,568 |
| | $ | 395,838 |
| | $ | 397,313 |
| | $ | 305,867 |
|
| Investing activities | (1,166,369 | ) | | (1,430,065 | ) | | (87,650 | ) | | (62,501 | ) | | (554,458 | ) |
| Financing activities | 764,172 |
| | 940,930 |
| | (403,831 | ) | | (13,400 | ) | | (152,944 | ) |
| Capital expenditures | (177,196 | ) | | (144,211 | ) | | (82,784 | ) | | (54,786 | ) | | (89,807 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
Balance Sheet Data (as of December 31)(a): | | | | | | | | | |
| Cash and cash equivalents | $ | 342,263 |
| | $ | 211,329 |
| | $ | 317,896 |
| | $ | 413,539 |
| | $ | 92,127 |
|
Working capital(d) | 412,748 |
| | 441,258 |
| | 537,139 |
| | 616,317 |
| | 313,914 |
|
| Total assets | 6,337,255 |
| | 5,116,609 |
| | 3,498,824 |
| | 3,648,391 |
| | 3,456,651 |
|
| Total debt, including capital lease and other financing obligations | 3,639,336 |
| | 2,841,836 |
| | 1,723,966 |
| | 1,824,655 |
| | 1,835,710 |
|
| Total shareholders’ equity | 1,668,576 |
| | 1,302,892 |
| | 1,141,588 |
| | 1,222,294 |
| | 1,044,951 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Sensata Technologies Holding plc (Consolidated) (a) |
| | For the year ended December 31, |
| (Amounts in thousands, except per share data) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
Statement of operations data: (b) | | | | | | | | | |
| Net revenue | $ | 3,521,627 |
| | $ | 3,306,733 |
| | $ | 3,202,288 |
| | $ | 2,974,961 |
| | $ | 2,409,803 |
|
| Operating costs and expenses: | | | | | | | | | |
Cost of revenue(c) | 2,266,863 |
| | 2,138,898 |
| | 2,084,159 |
| | 1,976,845 |
| | 1,567,527 |
|
Research and development(c) | 147,279 |
| | 130,127 |
| | 126,656 |
| | 123,603 |
| | 82,188 |
|
Selling, general and administrative(c) | 305,558 |
| | 301,896 |
| | 293,506 |
| | 270,773 |
| | 220,272 |
|
| Amortization of intangible assets | 139,326 |
| | 161,050 |
| | 201,498 |
| | 186,632 |
| | 146,704 |
|
| Restructuring and other charges, net | (47,818 | ) | | 18,975 |
| | 4,113 |
| | 21,919 |
| | 21,893 |
|
| Total operating costs and expenses | 2,811,208 |
| | 2,750,946 |
| | 2,709,932 |
| | 2,579,772 |
| | 2,038,584 |
|
| Profit from operations | 710,419 |
| | 555,787 |
| | 492,356 |
| | 395,189 |
| | 371,219 |
|
| Interest expense, net | (153,679 | ) | | (159,761 | ) | | (165,818 | ) | | (137,626 | ) | | (106,104 | ) |
Other, net(c)(d) | (30,365 | ) | | 6,415 |
| | (5,093 | ) | | (51,934 | ) | | (11,689 | ) |
| Income before taxes | 526,375 |
| | 402,441 |
| | 321,445 |
| | 205,629 |
| | 253,426 |
|
(Benefit from)/provision for income taxes(e) | (72,620 | ) | | (5,916 | ) | | 59,011 |
| | (142,067 | ) | | (30,323 | ) |
| Net income | $ | 598,995 |
| | $ | 408,357 |
| | $ | 262,434 |
| | $ | 347,696 |
| | $ | 283,749 |
|
| Basic net income per share | $ | 3.55 |
| | $ | 2.39 |
| | $ | 1.54 |
| | $ | 2.05 |
| | $ | 1.67 |
|
| Diluted net income per share | $ | 3.53 |
| | $ | 2.37 |
| | $ | 1.53 |
| | $ | 2.03 |
| | $ | 1.65 |
|
| Weighted-average ordinary shares outstanding—basic | 168,570 |
| | 171,165 |
| | 170,709 |
| | 169,977 |
| | 170,113 |
|
| Weighted-average ordinary shares outstanding—diluted | 169,859 |
| | 172,169 |
| | 171,460 |
| | 171,513 |
| | 172,217 |
|
Other financial data: (b) | | | | | | | | | |
| Net cash provided by/(used in): | | | | | | | | | |
| Operating activities | $ | 620,563 |
| | $ | 557,646 |
| | $ | 521,525 |
| | $ | 533,131 |
| | $ | 382,568 |
|
| Investing activities | $ | (237,606 | ) | | $ | (140,722 | ) | | $ | (174,778 | ) | | $ | (1,166,369 | ) | | $ | (1,430,065 | ) |
| Financing activities | $ | (406,213 | ) | | $ | (15,263 | ) | | $ | (337,582 | ) | | $ | 764,172 |
| | $ | 940,930 |
|
| Additions to property, plant and equipment and capitalized software | $ | (159,787 | ) | | $ | (144,584 | ) | | $ | (130,217 | ) | | $ | (177,196 | ) | | $ | (144,211 | ) |
__________________
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| (Dollars in thousands) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
Balance sheet data: (b) | | | | | | | | | |
| Cash and cash equivalents | $ | 729,833 |
| | $ | 753,089 |
| | $ | 351,428 |
| | $ | 342,263 |
| | $ | 211,329 |
|
Working capital(f) | $ | 1,277,211 |
| | $ | 1,218,796 |
| | $ | 758,189 |
| | $ | 412,748 |
| | $ | 441,258 |
|
| Total assets | $ | 6,797,687 |
| | $ | 6,641,525 |
| | $ | 6,240,976 |
| | $ | 6,298,910 |
| | $ | 5,087,507 |
|
| Total debt, net including capital lease and other financing obligations | $ | 3,264,941 |
| | $ | 3,270,269 |
| | $ | 3,273,594 |
| | $ | 3,600,991 |
| | $ | 2,812,734 |
|
| Total shareholders’ equity | $ | 2,608,434 |
| | $ | 2,345,626 |
| | $ | 1,942,007 |
| | $ | 1,668,576 |
| | $ | 1,302,892 |
|
| |
| (a) | Amounts shown reflectOn March 28, 2018, the acquisitionscross-border merger of Sensata Technologies Holding N.V. ("Sensata N.V.") and Sensata Technologies Holding plc ("Sensata plc") was completed, with Sensata plc being the surviving entity (the "Merger"). On the date of the Merger, Sensata plc became the publicly-traded parent of the subsidiary companies that were previously controlled by Sensata N.V., with no changes made to the business being conducted by Sensata N.V. prior to the Merger. Due to the various legal aspects of the Merger, Sensata plc retains the historical data of Sensata N.V., and no recasting or adjustment is required as a result of the Merger. |
| |
| (b) | We acquired Wabash Worldwide Holding Corp. ("Wabash"), Magnum Energy Incorporated ("Magnum"), CoActive US Holdings, Inc. ("DeltaTech Controls"), and August Cayman Company, Inc. ("Schrader") in 2014, and certain assets and subsidiaries of Custom Sensors & Technologies Ltd. ("CST") in 2015.2015, and GIGAVAC, LLC ("GIGAVAC") in 2018. Pro forma amounts are not shown. We sold the capital stock of Schrader Bridgeport International, Inc. and August France Holding Company SAS (collectively, the "Valves Business") in 2018. Prior year amounts have not been recast. Refer to Note 6,17, "Acquisitions and Divestitures," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-KFinancial Statements for further details on our acquisitions.the acquisition of GIGAVAC and the sale of the Valves Business. |
| |
(b)(c) | For the fiscal years ended December 31, 2017, 2016, 2015, and 2014, cost of revenue, research and development expense, selling, general and administrative expense, and other, net have been recast to reflect our adoption of the guidance in FASB ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost on January 1, 2018. Refer to Note 6, "Other, Net," and Note 13, "Pension and Other Post-Retirement Benefits," of our Financial Statements for further discussion of this new guidance and the amounts recast for the years ended December 31, 2017 and 2016. |
| |
| (d) | Other, net for the years ended December 31, 2018, 2017, 2016, 2015, and 2014 2013, 2012, and 2011 primarily includes losses recognized on debt financing transactionsconsisted of $25.5 million, $1.9 million, $9.0 million, $2.2 million, and $44.0 million, respectively, and losses on commodity contracts of $18.5 million, $9.0 million, $23.2 million, $0.4 million, and $1.1 million, respectively. The year ended December 31, 2011 also includes a loss of $60.1 million onthe following: |
|
| | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| (Dollars in thousands) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
(Loss)/gain related to foreign currency exchange rates(i) | $ | (16,835 | ) | | $ | 2,423 |
| | $ | (12,471 | ) | | $ | (6,007 | ) | | $ | (1,443 | ) |
| (Loss)/gain on commodity forward contracts | (8,481 | ) | | 9,989 |
| | 7,399 |
| | (18,468 | ) | | (9,017 | ) |
| Loss on debt financing | (2,350 | ) | | (2,670 | ) | | — |
| | (25,538 | ) | | (1,875 | ) |
Net periodic benefit (cost)/credit, excluding service cost(ii) | (3,585 | ) | | (3,402 | ) | | (192 | ) | | (1,605 | ) | | 370 |
|
| Other | 886 |
| | 75 |
| | 171 |
| | (316 | ) | | 276 |
|
| Other, net | $ | (30,365 | ) | | $ | 6,415 |
| | $ | (5,093 | ) | | $ | (51,934 | ) | | $ | (11,689 | ) |
| |
| (i) | Includes foreign currency remeasurement associated with debt.(loss)/gain, net and gain/(loss), net on foreign currency forward contracts. Refer to Note 2, "Significant Accounting Policies,6, "Other, Net," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-KFinancial Statements for further details of amounts included in Other, net.details. |
| |
(c)(ii) | Refer to footnote (c) above for further discussion. |
| |
| (e) | For the year ended December 31, 2018, the benefit from income taxes includes a net benefit of $122.1 million related to the realization of United States ("U.S.") deferred tax assets previously offset by a valuation allowance. For the year ended December 31, 2017, the benefit from income taxes includes a net benefit of $73.7 million related to the enactment of U.S. tax legislation in the fourth quarter of 2017. For the year ended December 31, 2015, the benefit from income taxes includes a net benefit of approximately $180.0 million, primarily related to the release of a portion of our United States ("U.S.") valuation allowance in connection with the acquisition of CST. For the year ended December 31, 2014, the benefit from income taxes includes a net benefit of approximately $71.1 million related to the release of a portion of our U.S. valuation allowance in connection with certain 2014 acquisitions. Refer to Note 9,7, "Income Taxes," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-KFinancial Statements for additional information. For the year ended December 31, 2012, the benefit from income taxes includes a net benefit of approximately $66.0 million related to the release of the Netherlands' deferred tax asset valuation allowance. |
| |
(d)(f) | We define working capital as current assets less current liabilities. Working capital amounts for prior years have not been recast to include assets designated as held for sale in any year. |
| |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, and liquidity and capital resources. You should read the following discussion in conjunction with Item 1, "Business," Item 6, “Selected"Selected Financial Data,”" and our audited consolidated financial statements and the accompanying notes thereto (our "Financial Statements") included elsewhere in this Annual Report on Form 10-K.10-K (this "Report").
The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources, and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties including, but not limited to, the risks and uncertainties described in Item 1A, “Risk"Risk Factors,”" included elsewhere in this Annual Report on Form 10-K.Report. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
Overview
Sensata Technologies Holding plc ("Sensata plc"), the successor issuer to Sensata Technologies Holding N.V. ("Sensata Technologies Holding"N.V.") and its wholly-owned subsidiaries, collectively referred to as the "Company," "Sensata," "we," "our," and "us," is a global industrial technology company engaged in the development, manufacture,that develops, manufactures, and sale of sensors and controls. We conduct our operations through subsidiary companies that operate business and product development centers primarily in the United States (the "U.S."), the Netherlands, Belgium, China, Germany, Japan, South Korea, and the United Kingdom (the "U.K."); and manufacturing operations primarily in China, Malaysia, Mexico, the Dominican Republic, Bulgaria, Poland, France, Brazil, Germany, the U.K., and the U.S. We organize our operations into two businesses, Performance Sensing (formerly referred to as "Sensors") and Sensing Solutions (formerly referred to as "Controls").
We generated 41%, 26%, and 33% of our net revenue in the Americas, Asia, and Europe, respectively, for the year ended December 31, 2015. Our largest customer accounted for approximately 9% of our net revenue for the year ended December 31, 2015. Our net revenue for the year ended December 31, 2015 was derived from the following end-markets: 27.4% from European automotive, 18.5% from Asia and rest of world automotive, 21.5% from North American automotive, 5.8% from appliance and HVAC, 12.3% from HVOR, 6.5% from industrial, and 8.0% from all other end-markets. Within many of our end-markets, we are a significant supplier to multiple original equipment manufacturers, reducing our exposure to fluctuations in market share within individual end-markets.
We producesells a wide range of customized sensors and controls that address increasingly complex engineering requirements for specific customer applications and systems such as thermal circuit breakers in aircraft, pressure sensorsair conditioning, braking, exhaust, fuel oil, tire, operator controls, and transmission in automotive and heavy vehicle and off-road ("HVOR") systems, and bimetal currenttemperature and temperatureelectrical protection and control devices in electric motors. We compete in growing global market segments driven by demand for products that are safe, energy efficient,numerous industrial applications, including aircraft, refrigeration, material handling, and environmentally friendly. We have a long-standing position in emerging markets, including a 20-year presence in China.
Refertelecommunications. The acquisition of GIGAVAC, LLC ("GIGAVAC") expands our product offerings to Item 1, "Business," included elsewhere in this Annual Report on Form 10-K for more detailed discussion of factors affecting our business, including those specific to our Performance Sensinginclude high voltage contactors and Sensing Solutions segments.
History
fuses. We can trace our origins back to entities that have been engaged in the sensors and controls business since 1916.
We operatedgenerate revenue from the sale of products across all major geographic areas. We serve a diverse mix of customers and end markets. We believe regulatory requirements for safer vehicles, higher fuel efficiency, and lower emissions, such as the National Highway Traffic Safety Administration's Corporate Average Fuel Economy requirements in the U.S., "Euro 6d" requirements in Europe, and "China National 6" requirements in China, as well as customer demand for operator productivity and convenience, drive the need for advancements in powertrain management, efficiency, safety features, and operator controls. These advancements lead to sensor growth rates that exceed underlying demand in many of our key end markets, which we expect will continue to offer us significant growth opportunities.
The technology-driven, highly-customized, and integrated nature of our products requires customers to invest heavily in certification and qualification to ensure proper functioning of the systems in which our products are embedded. We believe the capital commitment and time required for this process significantly increases the switching costs for customers once a particular sensor or control has been designed and installed in a system. As a result, our sensors and controls are rarely substituted during a product lifecycle, which in the case of the automotive market typically lasts five to seven years. We focus on new applications that will help us secure new business, drive long-term growth, and provide an opportunity to define a leading application technology in collaboration with our customers.
Our strategies of leveraging core technology platforms and focusing on high-volume applications enable us to provide our customers with highly-customized products at a relatively low cost, as compared to the costs of the systems in which our products are embedded. We have achieved our current cost position through a continuous process of migration and transformation to best-cost manufacturing locations, global best-cost sourcing, product design improvements, and ongoing productivity-enhancing initiatives.
We organize our business into two segments: Performance Sensing and Sensing Solutions. Performance Sensing designs and manufactures sensors for the automotive and HVOR markets, including low-, medium-, and high-pressure sensors, speed and position sensors, and temperature sensors, and markets them to leading global automotive and HVOR original equipment manufacturers ("OEMs") and their Tier 1 suppliers. Sensing Solutions designs and manufactures various sensors and control products, including bimetal electromechanical controls, thermal and magnetic-hydraulic circuit breakers, solid state relays, power inverters, interconnection products, and temperature, pressure, and position sensors, selling them to a wide range of industrial and commercial manufacturers and suppliers across multiple end markets. The acquisition of GIGAVAC, portions of which will be integrated into each of our operating segments, expands our product offerings to include high voltage contactors and fuses.
We develop products that address increasingly complex engineering requirements. We believe that continued focused investment in research and development ("R&D") activities is critical to our future growth and maintaining our leadership
position. Our R&D efforts are directly related to timely development of new and enhanced products that are central to our core business strategy. We develop our technologies to meet an evolving set of customer requirements and new product introductions. We conduct such activities in areas that we believe will increase our long-term revenue growth. Our development expense is typically associated with engineering core technology platforms to specific applications and engineering major upgrades that improve the functionality or reduce the cost of existing products.
In August 2018 we completed the sale of the capital stock of Schrader Bridgeport International, Inc. and August France Holding Company SAS (collectively, the "Valves Business") to Pacific Industrial Co. Ltd. ("Pacific"). The Valves Business, which was acquired as part of Texas Instruments Incorporated ("TI") from 1959 until April 27, 2006, when Sensata Technologies B.V. ("STBV"), an indirect, wholly-owned subsidiary of Sensata Technologies Holding, completed theSensata’s acquisition of the Sensors & Controls businessSchrader group of TI (the "2006 Acquisition"). Since then, we have expanded our operationscompanies in part through acquisitions, including Wabash Worldwide Holding Corp. ("Wabash") in January 2014, Magnum Energy Incorporated ("Magnum") in May 2014, CoActive US Holdings, Inc. ("DeltaTech") in August 2014 and August Cayman Company, Inc. ("Schrader")had been integrated into Performance Sensing, generated approximately $117 million in October 2014.
On December 1, 2015, we completed the acquisition of all of the outstanding shares of certain subsidiaries of Custom Sensors & Technologies, Ltd.revenue in fiscal year 2017. It manufactures mechanical valves for pressure applications in tires and fluid control and assembles tire hardware aftermarket products with manufacturing locations in the U.S.,United States (the "U.S.") and Europe. The sale did not include our tire pressure monitoring system ("TPMS") business and the U.K.,Global TPMS Aftermarket business. Refer to Note 17, "Acquisitions and France, as well as certain assets in China (collectively, "CST"),Divestitures," of our Financial Statements for additional details on this divestiture.
In October 2018 we acquired GIGAVAC, an aggregate purchase priceindustry-leading producer of $1,008.8high voltage contactors and fuses that are mission-critical components for electric vehicles and equipment, for $233.0 million of cash consideration, subject to customary post-closingworking capital and other adjustments. The acquisition included the Kavlico, BEI, Crydom,of GIGAVAC extends our capabilities on battery electric vehicles, with significant potential for additional growth, and Newall product lineswill enable us to tap into a broad market opportunity for high-voltage contactors required in mission-critical sensing and brands,electrical protection applications across electrified vehicles and encompassed sales, engineering,industrial equipment such as cars, delivery trucks, busses, material handling equipment, and manufacturing sitescharging stations. It will immediately augment our ongoing investments in electrification for many complex and challenging applications in the U.S., the U.K., Germany, France,automotive, battery storage, industrial, and Mexico. We acquired CSTHVOR markets. Refer to further extend our sensing content beyond automotive marketsNote 17, "Acquisitions and build scale in pressure sensing.
Prior to our initial public offering ("IPO") in March 2010, we were a direct, 99% owned subsidiary of Sensata Investment Company S.C.A. (“SCA”), a Luxembourg company, which was owned by investment funds or vehicles advised or managed by Bain Capital Partners, LLC, its co-investors, and certain membersDivestitures," of our senior management. SubsequentFinancial Statements for additional details on this acquisition.
Refer to our IPO, we
completed various secondary offeringsItem 1, "Business," included elsewhere in this Report for additional discussion of our ordinary shares in which SCA and certain members of senior management participated. The last offering of our ordinary shares was completed in September 2014, after which SCA no longer owned any of our outstanding ordinary shares.business.
Selected Segment Information
We manage our Performance Sensing and Sensing Solutions businesses separately and report their results of operations as two segments. Set forth below is selected information for each of these segments for each of the periods presented. Amounts in the tabletables below have been calculated based on unrounded numbers. Accordingly, certain amounts may not addsum due to the effect of rounding.
The following table presents net revenue by segment and as a percentage of total net revenue for the identified periods:segment:
|
| | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2015 |
| 2014 |
| 2013 |
| (Amounts in millions) | Amount | | Percent of
Net Revenue | | Amount | | Percent of
Net Revenue | | Amount | | Percent of
Net Revenue |
| Net revenue | | | | | | | | | | | |
| Performance Sensing | $ | 2,346.2 |
| | 78.9 | % | | $ | 1,755.9 |
| | 72.9 | % | | $ | 1,358.2 |
| | 68.6 | % |
| Sensing Solutions | 628.7 |
| | 21.1 |
| | 653.9 |
| | 27.1 |
| | 622.5 |
| | 31.4 |
|
| Total | $ | 2,975.0 |
| | 100.0 | % | | $ | 2,409.8 |
| | 100.0 | % | | $ | 1,980.7 |
| | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| (Dollars in millions) | Amount | | Percent of Total Net Revenue | | Amount | | Percent of
Total
Net Revenue | | Amount | | Percent of
Total
Net Revenue |
| Net revenue: | | | | | | | | | | | |
| Performance Sensing | $ | 2,627.7 |
| | 74.6 | % | | $ | 2,460.6 |
| | 74.4 | % | | $ | 2,385.4 |
| | 74.5 | % |
| Sensing Solutions | 894.0 |
| | 25.4 |
| | 846.1 |
| | 25.6 |
| | 816.9 |
| | 25.5 |
|
| Total net revenue | $ | 3,521.6 |
| | 100.0 | % | | $ | 3,306.7 |
| | 100.0 | % | | $ | 3,202.3 |
| | 100.0 | % |
The following table presents segment operating incomeprofit in U.S. dollars and segment operating income as a percentage of segment net revenue for the identified periods:
|
| | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2015 | | 2014 | | 2013 |
| (Amounts in millions) | Amount | | Percent of
Segment Net Revenue | | Amount | | Percent of
Segment Net Revenue | | Amount | | Percent of
Segment Net Revenue |
| Segment operating income | | | | | | | | | | | |
| Performance Sensing | $ | 598.5 |
| | 25.5 | % | | $ | 475.9 |
| | 27.1 | % | | $ | 401.6 |
| | 29.6 | % |
| Sensing Solutions | 199.7 |
| | 31.8 | % | | 202.1 |
| | 30.9 | % | | 195.8 |
| | 31.5 | % |
| Total | $ | 798.3 |
| | | | $ | 678.1 |
| | | | $ | 597.4 |
| | |
|
| | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| (Dollars in millions) | Amount | | Percent of
Segment Net Revenue | | Amount | | Percent of
Segment
Net Revenue | | Amount | | Percent of
Segment
Net Revenue |
| Segment profit: | | | | | | | | | | | |
| Performance Sensing | $ | 712.7 |
| | 27.1 | % | | $ | 664.2 |
| | 27.0 | % | | $ | 615.5 |
| | 25.8 | % |
| Sensing Solutions | 293.0 |
| | 32.8 | % | | 277.5 |
| | 32.8 | % | | 261.9 |
| | 32.1 | % |
| Total segment profit | $ | 1,005.7 |
| | | | $ | 941.6 |
| | | | $ | 877.4 |
| | |
For a reconciliation of total segment operating incomeprofit to consolidated profit from operations, refer to Note 18,20, "Segment Reporting," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.Financial Statements.
AcquisitionsSelected Geographic Information
RecentWe are a global business combinations includewith significant operations around the acquisitionsworld and a diverse revenue mix by geography, customer, and end market. The following table presents, as a percentage of Wabash in January 2014total, the geographic location of property, plant, and equipment ("PP&E"), net as of December 31, 2018 and 2017 and net revenue generated for $59.6 million, Magnum in May 2014 for $60.6 million, DeltaTech in August 2014 for $177.8 million, Schrader in October 2014 for $1,004.7 million,the years ended December 31, 2018, 2017, and CST in December 2015 for $1,008.8 million, subject to customary post-closing adjustments. 2016:
|
| | | | | | | | | | | | | | |
| | PP&E, net as of December 31, | | Net revenue for the year ended December 31, |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2016 |
| Americas | 37.2 | % | | 39.6 | % | | 42.0 | % | | 41.3 | % | | 42.7 | % |
| Asia and rest of world | 39.3 | % | | 35.5 | % | | 28.8 | % | | 27.3 | % | | 25.3 | % |
| Europe | 23.5 | % | | 24.9 | % | | 29.2 | % | | 31.4 | % | | 32.0 | % |
Refer to Note 6, "Acquisitions,20, "Segment Reporting," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-KFinancial Statements for additional details of our acquisitions and a discussion ofnet revenue by selected geographic area for the valuation of the related intangible assets.
Material Changes in Financial Position
The following sets forth a discussion of factors impacting certain amounts recorded in our consolidated balance sheets for which there was a material change in balance from December 31, 2014.
Property, Plant & Equipment, net ("PP&E")
PP&E at December 31, 2015 and 2014 was $694.2 million and $589.5 million, respectively. The increase in PP&E primarily relates to capital expenditures and the acquisition of CST, partially offset by depreciation expense recorded during the yearyears ended December 31, 2015. Refer to Note 3, "Property, Plant & Equipment,"2018, 2017, and 2016 and PP&E, net by selected geographic area as of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for details of the components of PP&E.
Goodwill and Other Intangible Assets, net
Goodwill at December 31, 20152018 and 2014 was $3,019.7 million and $2,424.8 million, respectively. Other intangible assets,2017.
Net Revenue by End Market
Our net at December 31, 2015 and 2014 was $1,262.6 million and $910.8 million, respectively. The increase inrevenue for the goodwill balance relates primarily to the acquisition of CST. The increase in the other intangible assets, net balance relates to the acquisition of CST, partially offset by amortization expense recorded during the yearyears ended December 31, 2015. Refer2018, 2017, and 2016 was derived from the following end markets:
|
| | | | | | | | |
| | For the year ended December 31, |
| (Percentage of total) | 2018 | | 2017 | | 2016 |
| Automotive | 60.4 | % | | 61.7 | % | | 63.1 | % |
| HVOR | 15.6 | % | | 14.3 | % | | 12.9 | % |
| Industrial | 9.6 | % | | 9.4 | % | | 9.0 | % |
| Appliance and heating, ventilation and air conditioning ("HVAC") | 5.9 | % | | 6.3 | % | | 5.9 | % |
| Aerospace | 4.7 | % | | 4.6 | % | | 4.7 | % |
| Other | 3.8 | % | | 3.7 | % | | 4.4 | % |
We are a significant supplier to Note 5, "Goodwill and Other Intangible Assets,"multiple OEMs within many of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more details of our goodwill and other intangible assets balances.these end markets, thereby reducing customer concentration risk.
Long-term debt, gross, including current portion
Gross outstanding indebtedness (including capital leases and other financing obligations and the current portion of long-term debt, excluding discounts) at December 31, 2015 and 2014 was $3,659.5 million and $2,848.1 million, respectively. The increase in gross outstanding indebtedness was due primarily to new debt incurred as a result of the acquisition of CST. Refer to Note 8, "Debt," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of our debt.
Factors Affecting Our Operating Results
The following discussion sets forth certaindescribes components of ourthe consolidated statements of operations as well as factors that impact those components. Refer to Note 2, "Significant Accounting Policies," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K,Financial Statements, and Critical Accounting Policies and Estimates included elsewhere in this Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of the accounting policies and estimates made related to these components.
Net revenue
We generate revenue primarily from the sale of sensor and control products across all major geographic areas. We believe increased regulation of safety and emissions, as well as a growing emphasis on energy efficiency and consumer demand for electronic products with advanced features, are driving sensor growth rates exceeding underlying end-market demand in many of our key markets and will continue to offer us significant growth opportunities. The technology-driven, highly-customized, and integrated nature of our products require customers to invest heavily in certification and qualification to ensure proper functioning of the system in which our products are embedded. We believe the capital commitment and time required for this process significantly increases the switching costs for customers once a particular sensor or control has been designed and installed in a system. As a result, our sensors and controls are rarely substituted during a product lifecycle, which in the case of the automotive end-market typically lasts five to seven years. We focus on new applications that will help us secure new business and drive long-term growth. New applications for sensors typically provide an opportunity to define a leading application technology in collaboration with our customers.
tangible products. Because we sellderive a significant portion of our productsrevenue from sales in theour automotive industry (67% in 2015),end market, demand for our products is driven in large part by conditions in thisthe automotive industry. However, outside of the automotive industry, we sell our products to end-users in a wide range of end-marketsindustries, end markets, and geographies.geographic regions. As a result, the drivers of demand for these products is generally driven morevary considerably and are influenced by the level of general economic activity rather than conditions in one particular industrythese industries, end markets, or geographic region. regions. Refer to Item 1, "Business," included elsewhere in this Report for more detailed discussion of factors impacting each of these end markets.
Our overall net revenue is generallyimpacted by various factors, which we characterize as either "organic" or "inorganic." Organic factors are reflective of our ongoing operations. Inorganic factors either are not reflective of our historical business or are related to situations for which we have little to no control (e.g. changes in foreign currency exchange rates).
Our net revenue may be impacted by the following organic factors:
fluctuations in overall economic activity within the geographic marketsregions in which we operate;
underlying growth in one or more of our core end-markets,end markets, either worldwide or in particular geographies in which we operate;
the number of sensors and/or controls used within existing applications, or the development of new applications requiring sensors and/or controls, due to regulations or other factors;
the “mix”"mix" of products sold, including the proportion of new or upgraded products and their pricing relative to existing products;
changes in product sales prices (including quantity discounts, rebates, and cash discounts for prompt payment);
changes in the level of competition faced by our products, including the launch of new products by competitors; and
our ability to successfully develop, launch, and launchsell new products and applications;applications.
31Our net revenue may be impacted by the following inorganic factors:
fluctuations in foreign currency exchange rates; and
acquisitions.acquisitions and divestitures.
While the factors described above may impact net revenue in each of our operating segments, the impact of these factors on our operating segments can differ. For example, adverse changes in the automotive industry will impact the Performance Sensing segment more significantly than the Sensing Solutions segment. For more information about revenue risks relating to our business, refer to Item 1A, “Risk"Risk Factors,”" included elsewhere in this Annual Report on Form 10-K.Report.
Cost of revenue
Our strategy of leveraging core technology platforms and focusing on high-volume applications enables us to provide our customers with highly-customized products at a relatively low cost, as compared to the costs of the systems in which our products are embedded. We have achieved our current cost position through a continuous process of migration to low-cost manufacturing locations, transformation of our supply chain to low-cost sourcing, product design improvements, and ongoing productivity-enhancing initiatives. Over the past sixteen years, we have aggressively shifted our manufacturing base from countries with higher labor costs, such as the U.S., Australia, Canada, Italy, Japan, South Korea, and the Netherlands, to low-cost countries, such as China, Mexico, Bulgaria, and Malaysia.
We manufacture the majority of our products and subcontract only a limited number of products to third parties. As such, our cost of revenue consists principally of the following:
Production Materials Costs. We purchase much of the materials used in production on a global lowest-costbest-cost basis, but we are still impacted by global and local market conditions. A portion of our production materials contains certain commodities, resins and rare earth metals, such as copper, nickel, zinc, aluminum, gold, silver, platinum, and palladium, and the costscost of these materials may vary with underlying commodities pricing. However, we enter into forward contracts to economically hedge a portion of our exposure to the potential change in prices associated with certain of these commodities. The terms of these contracts fix the price at a future date for various notional amounts associated with these commodities. Gains and losses recognized on these non-designated derivatives are recorded in other, net and are not included in Other, net. Certaincost of our product lines use magnets containing rare earth metals, of which a large majority of the world's production is in China. A reduction in the export of rare earth materials from China could limit the worldwide supply of these rare earth materials, significantly increasing the price of magnets.revenue (refer to Note 6, "Other, Net").
Employee Costs. Employee costs include the wagewages and benefit chargesbenefits for employees involved in our manufacturing operations. TheseA significant portion of these costs generally increasecan fluctuate on an aggregate basis asin direct correlation with changes in production volumes increase and may decline asvolumes. As a percentage of net revenue, these costs may decline as a result of economies of scale associated with higher production volumes, and conversely, may increase with lower production volumes. These costs also will fluctuate based on local market conditions. We rely significantly on contract workers for direct labor in certain geographies. As of December 31, 20152018, we had approximately 1,7901,855 direct labor contract workers on a worldwide basis.
Sustaining Engineering Activity costs.Costs. These costs relate to modifications of existing products for use by new and existing customers in familiar applications.
Other. Our remaining cost of revenue primarily consists of:
gains and losses on certain foreign currency forward contracts that are designated as cash flow hedges;
costs to import raw materials, such as tariffs;
depreciation of fixed assets;assets used in the manufacturing process;
freight costs;
warehousing expenses;
purchasing costs;maintenance and repair expenses;
operating supplies; and
other general manufacturing expenses, such as expenses for energy consumption and operating lease expense.
The main factors that influence ourChanges in cost of revenue as a percentpercentage of net revenue include:have historically been impacted by a number of factors, including:
changes in the price of raw materials, including certain metals;the impact of changes in costs to import such raw materials, such as tariffs;
the price reductions provided to our customers;
implementation of cost controlimprovement measures aimed at improvingincreasing productivity, including reduction of fixed production costs, refinements in inventory management, design and process driven changes, and the coordination of procurement within each subsidiary and at the business level;
changes in production volumes—volumes – production costs are capitalized in inventory based on normal production volumes, as revenue increases, the fixed portion of these costs does not;
transfer of production to our lower cost productionlower-cost manufacturing facilities;
product lifecycles, as we typically incur higher cost of revenue associated with excess manufacturing capacity during the initial stages of product launches and during the phase-out of discontinued products;
the increase in the carrying value of inventory that is adjusted to fair value as a result of the application of purchase accounting associated with acquisitions;
changes in depreciation expense, including amountsthose arising from the adjustment of PP&E to fair value associated with acquisitions; and
fluctuations in foreign currency exchange rates.rates;
changes in product mix; and
acquisitions and divestitures – acquired and divested businesses may generate higher or lower cost of revenue as a percentage of net revenue than our core business.
Research and development ("R&D")expense
We develop products that address increasingly complex engineering requirements by investing substantially in R&D. We believe that continued focused investment in R&D activities is critical to our future growth and maintenance of our leadership position.requirements. Our R&D efforts are directly related to timely development of new and enhanced products that are central to our core business strategy. We continuously develop our technologies to meet an evolving set of customer requirements and new product introductions. In addition, we constantly consider new technologies where we may have expertise for potential investment or acquisition.
R&D expense consists of costs related to direct product design, development, and process engineering. Costs related to modifications of existing products for use by new and existing customers in familiar applications are presented in cost of revenue and are not included in R&D expense. The level of R&D expense in any period is related to the number of products in development, the stage of the development process, the complexity of the underlying technology, the potential scale of the product upon successful commercialization, and the level of our exploratory research. We conduct such activities in areas that we believe will accelerate our longer term net revenue growth. Our development expense is typically associated with engineering core technology platforms to specific applications and engineering major upgrades that improve the functionality or reduce the cost of existing products.
Costs related to modifications of existing products for use by new customers in familiar applications are recorded in cost of revenue and not included in R&D expense.
Selling, general and administrative ("SG&A")expense
SG&A expense consists of all expenditures incurred in connection with the sale and marketing of our products, as well as administrative overhead costs, including:
salary and benefit costs for sales and marketing personnel and administrative staff, including cash and share-based incentive compensation expense. Expenses relating to our sales personnel generally increase or decrease with changes in sales volume due to the need to increase or decrease sales headcount to meet changes in demand. Expenses relating to administrative personnel generally do not increase or decrease directly with changes in sales volume;expense;
expensescharges related to the use and maintenance of administrative offices, including depreciation expense;
other administrative expenses,costs, including expenses relating to information systems, human resources, and legal and accounting services;
other selling expenses,and marketing related costs, such as expenses incurred in connection with travel and communications; and
transaction costs associated with acquisitions.
Changes in SG&A expense as a percentpercentage of net revenue have historically been impacted by a number of factors, including:
changes in sales volume, as higher volumes enable us to spread the fixed portion of our selling, marketing, and administrative expense over higher revenue;revenue (e.g. expenses relating to our sales and marketing personnel can fluctuate due to prolonged trends in sales volume, while expenses relating to administrative personnel generally do not increase or decrease directly with changes in sales volume);
price reductions provided to our customers;
changes in the mix of products we sell, as some products may require more customer support and sales effort than others;
changes in our customer base, as new customers may require different levels of sales and marketing attention;
new product launches in existing and new markets, as these launches typically involve a more intense sales and marketing activity before they are integrated into customer applications;
customer credit issues requiring increases to the allowance for doubtful accounts;
volumeapplications and timing of acquisitions; andsystems;
fluctuations in foreign currency exchange rates.rates; and
The salesacquisitions and marketing function withindivestitures - acquired and divested businesses may require different levels of SG&A expense as a percentage of net revenue than our business is organized into regions—the Americas, Asia, and Europe—but also organizes globally across all geographies according to market segments.core business.
Depreciation expense
Depreciation expense includes depreciation of PP&E, amortization of leasehold improvements, and amortization ofwhich includes assets held under capital leases.lease, and amortization of leasehold improvements. Depreciation expense is included in either cost of revenue or SG&A expense depending on the use of the asset as a manufacturing or administrative asset.
Depreciation expense will change depending onvary according to the age of existing PP&E and the level of capital expenditures. Depreciation expense is computed using the straight-line method. Refer to Note 2, "Significant Accounting Policies," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details on methods for calculating depreciation expense.
Amortization of definite-lived intangible assetsexpense
We have recognized a significant amount of identifiable definite-lived intangible assets since the 2006 Acquisition, which are recorded at fair value on the date of the related acquisition.assets. Definite-lived, acquisition-related intangible assets are amortized on an economic-benefit basis according to the useful lives of the assets, or on a straight-line basis if a pattern of economic benefits cannot be reliably determined. The amount of amortization expense related to definite-lived intangible assets depends on the amount and timing of intangible assets acquired and where previously acquired intangible assets are in their estimated life-cycle. Capitalized software licenses, which are considered intangible assets, are amortized on a straight-line basis overIn general, the lessereconomic benefit of the term of the license or the useful life of the software. Capitalized software, which is also considered an intangible asset is amortized on a straight-line basis over its estimatedconcentrated towards the beginning of that intangible asset's useful life.
Impairment of goodwillRestructuring and other identifiable intangible assets
Goodwill and other indefinite-lived intangible assets are reviewed for impairment on an annual basis, unless events or circumstances occur that trigger the need for an earlier impairment review. No impairment charges, were recorded during any period presented.
Impairment of goodwill and other identifiable intangible assets may result from a change in revenue and earnings forecasts. Our revenue and earnings forecasts may be impacted by many factors, including deterioration in our performance, adverse market conditions, adverse changes in laws or regulations, significant unexpected or planned changes in the use of assets, and our ability to project customer spending, particularly within the semiconductor industry. Changes in the level of spending in the industry and/or by our customers could result in a change to our forecasts, which could result in a future impairment of goodwill and/or intangible assets.
Should certain other assumptions used in the development of the fair value of our reporting units change, we may be required to recognize impairments in goodwill or other intangible assets. See Critical Accounting Policies and Estimates included elsewhere in this Management’s Discussion and Analysis for more discussion of the key assumptions that are used in the determination of the fair value of our reporting units and factors that could result in future impairment charges.net
Restructuring and specialother charges,
Restructuring charges consist net consists of severance, outplacement, other separation benefits, certain pension settlement and curtailment losses, and facility exit and other costs. RestructuringThese charges may be incurred as part of an announced restructuring plan, or may be individual charges recorded related to acquired businesses or the termination of a limited number of employees that do not represent the initiation of a larger restructuring plan. Restructuring and other charges, net also includes the gain, net of transaction costs, from the sale of businesses.
Amounts recognized in restructuring and other charges, net will vary according to the extent of our restructuring programs and other exit activities as well as the existence and frequency of divested businesses and any gains or losses resulting therefrom.
Interest expense, net
As of December 31, 2018 and 2017, we had gross outstanding indebtedness of $3,303.3 million and $3,312.5 million, respectively.
Our senior notes accrue interest at a fixed rate. However, the term loan (the "Term Loan") provided by the eighth amendment (the "Eighth Amendment") to the credit agreement dated as of May 12, 2011 (as amended, the "Credit Agreement")
and the $420.0 million revolving credit facility (the "Revolving Credit Facility") accrue interest at variable interest rates, which drives some of the variability in interest expense, net. Refer to Note 17, “RestructuringItem 7A, "Quantitative and Special Charges,” of our audited consolidated financial statementsQualitative Disclosures About Market Risk—Interest Rate Risk," included elsewhere in this Annual Report on Form 10-K for discussion ofmore information regarding our restructuring costs and special charges.exposure to potential changes in variable interest rates.
Interest income is netted against interest expense
on our consolidated statements of operations. Interest expense consists primarily ofincome relates to interest incurred relatedearned on our cash and cash equivalents balances, and will vary according to institutional borrowingsthe balances in, and capital lease and other financing obligations. Interest expense also includes the amortization of deferred financing costs and original issue discounts. As of December 31, 2015, we had $3,659.5 million in gross outstanding indebtedness, including both variable-rate and fixed-rate debt and outstanding capital lease and other financing obligations. Refer to Effects of Other Significant Transactions-Leverage included elsewhere in this Management’s Discussion and Analysis for further discussion of transactions and risks impacting our interest expense.rates provided by, these bank accounts.
Other, net
Other, net primarily includes gains and losses on foreign currencyassociated with the remeasurement of netnon-U.S. dollar denominated monetary assets gains and losses on our non-designated derivatives used to hedge commodity prices and certain foreign currency exposures, and losses onliabilities into U.S. dollars, changes in the fair value of derivative financial instruments not designated as cash flow hedges, debt financing transactions.transactions, and net periodic benefit cost, excluding service cost.
We derive a significant portion of our revenue from markets outside of the U.S., primarily Europe and Asia. For financial reporting purposes, the functional currency of all our subsidiaries is the U.S. dollar. In certain instances, we enter into transactions that are denominatedAmounts recognized in a currency other, than the U.S. dollar. At the date the transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction is measured and recorded in U.S. dollars using the exchange rate in effect at that date. At each balance sheet date, recorded monetary balances denominated in a currency other than the U.S. dollar are adjusted to the U.S. dollar using the current exchange rate, with gains or losses recognized within Other, net.
In order to mitigate the potential exposure to variability in cash flows and earnings relatednet vary according to changes in foreign currency exchange rates, we enter into foreign currency exchange rate forward contracts that may or may not be designated as cash flow hedges. The change in fair value of foreign currency forward contracts that were not designated for hedge accounting purposes are recognized in Other, net, and are driven by changes in the forward prices for the foreign exchange rates that we hedge. We cannot predict the future trends in foreign exchange rates,currencies and there can be no assurance that gains or losses experienced in past periods will not recur in future periods.
We enter into forward contracts with third parties to offset a portion of our exposure to the potential change in prices associated with certain commodities, including silver, gold, platinum, palladium, copper, aluminum, nickel, and zinc, used in the manufacturing of our products. The terms of these forward contracts fix the price at a future date for various notional amounts associated with these commodities. These derivatives are not designated as accounting hedges. Changes in the fair value of these forward contracts are recognized within Other, net, and are driven by changes in the forward prices for the commodities that we hedge. We cannot predicthedge, the future trends in commodity prices,number and there can be no assurance that commodity losses experienced in past periods will not recur in future periods.
We periodically enter intomagnitude of debt financing transactions. In accounting for these transactions, costs may be capitalized as either an asset or a reduction in long-term debt, or they may be recorded in the consolidated statements of operations as Other, net or interest expense, net, with each treatment depending on the type of transaction and the naturechange in funded status of the costs.our pension and other post-retirement benefit plans.
Refer to Note 2, "Significant Accounting Policies,6, "Other, Net," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-KFinancial Statements for further discussiondetails of the amounts recorded in Other,components of other, net. Refer to Note 8, "Debt," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of the amounts recorded in Other, net related to losses on debt financing transactions. Refer to Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," included elsewhere in this Annual Report on Form 10-Kfor more information regarding our exposure to potential changes in foreign currency exchange rates and commodity prices. Refer to Note 14, "Debt," of our Financial Statements for further discussion of the sensitivityour debt financing transactions. Refer to Note 13, "Pension and Other Post-Retirement Benefits," of amounts recorded in Other,our Financial Statements for further discussion of our net related to our non-designated commodity and foreign exchange forward contracts.periodic benefit cost reclassification.
Provision for income taxes
We are subject to income tax in the various jurisdictions in which we operate. The provision for income taxes consists of:
current tax expense, which relates primarily to our profitable operations in non-U.S. tax jurisdictions and withholding taxes related to interest, royalties, and repatriation of foreign earnings; and
deferred tax expense (or benefit), which represents adjustments in book-to-tax basis differences primarily related to the step-up in fair value of fixed and intangible assets, including goodwill, acquired in connection with business combination transactions, the utilization of net operating losses, changes in tax rates, and changes in our assessment of the realizability of our deferred tax assets.
We have a low effective cash tax rate due to the amortization of intangible assets resulting from the carve-out and acquisition of the Sensors & Controls business in the 2006 Acquisition and other tax benefits derived from our operating and capital structure, including tax incentives in both the U.K.United Kingdom (the "U.K.") and China as well as favorable tax status in Mexico, and the DutchMexico. In addition, our tax structure takes advantage of participation exemption which permitsregimes that permit the payment of intercompany dividends without incurring taxable income in the Netherlands.those jurisdictions.
While the extent of our future tax liability is uncertain, the impact of purchase accounting for past and future acquisitions, changes to debt and equity capitalization of our subsidiaries, and the realignment of the functions performed and risks assumed by our various subsidiaries are among the factors that will determine the future book and taxable income of each respective subsidiary and Sensata as a whole.
Our effective tax rate will generally not equal the U.S. statutory rate of 35% due to various factors, the most significant of which are described below. As these factors fluctuate from year to year, our effective tax rate will change. The factors include, but are not limited to, the following:
changes in tax law;
establishing or releasing a portion of the valuation allowance related to our gross deferred tax assets;
because we operate in locations outside the U.S., including Bermuda, Bulgaria, China, Malaysia, the Netherlands, South Korea, Malaysia, and Bulgaria,the U.K., that historically have had statutory tax rates significantly lowerdifferent than the U.S. statutory rate. This can result in a foreign tax rate we generally see an effectivedifferential that may reflect a tax benefit or detriment. This foreign rate benefit, which changesdifferential can change from year to year based upon the jurisdictional mix of earnings;earnings and changes in current and future enacted tax rates, tax holidays, and favorable tax regimes available to certain of our foreign subsidiaries;
as incomechanges in tax audits related to our subsidiaries are closed, either as a result of negotiated settlementslaws, including the U.S. Tax Cuts and Jobs Act ("Tax Reform" or final assessments, we may recognize a tax expense or benefit;"the Act"), enacted in 2017;
due to lapses of the applicable statute of limitations related to unrecognized tax benefits, we may recognize a tax benefit, including a benefit from the reversal of interest and penalties;
in certain jurisdictions, we record withholding and other taxes on intercompany payments, including dividends; and
losses incurred, in the U.S. are notcertain jurisdictions, which cannot be currently benefited, as it is not more likely than not that the associated deferred tax asset will be realized in the foreseeable future.future;
Effects of Other Significant Transactionsunrealized foreign exchanges gains and losses;
Purchase Accounting
We account for business combinations using the acquisition method of accounting. Application of this method of accounting requires that (i) identifiable assets acquired (including identifiable intangible assets) and liabilities assumed generally be measured and recognized at fair value as of the acquisition date and (ii) the excess of the purchase price over the net fair value of identifiable assets acquired and liabilities assumed be recognized as goodwill, which is not amortized for accounting purposes but is subjectincome tax audits related to testing for impairment at least annually. The application of the acquisition method of accounting in 2015 and 2014 resulted in an increase in amortization and depreciation expense in the periods subsequent to the business combinations relating to acquired intangible assets and PP&E, respectively. The application of the acquisition method of accounting also resulted in the adjustment of the value of the acquired inventory to fair value, increasing the costs recognized upon its sale.
Refer to Note 6, "Acquisitions," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information regarding amounts recognized in purchase accounting transactions and the methodology and principal assumptions used in determining the fair value of each class of identifiable intangible assets acquired.
Leverage
Wesubsidiaries are a highly leveraged company, and interest expense is a significant portion of our results of operations. As of December 31, 2015 and 2014 we had gross outstanding indebtedness of $3,659.5 million and $2,848.1 million, respectively.
Our indebtedness at December 31, 2015 included $982.7 million of indebtedness under the term loan (the "Term Loan") provided by the sixth amendment to the credit agreement dated as of May 12, 2011 (as amended, the "Credit Agreement"), $500.0 million aggregate principal amount of 4.875% senior notes due 2023 (the "4.875% Senior Notes"), $400.0 million aggregate principal amount of 5.625% senior notes due 2024 (the "5.625% Senior Notes"), $700.0 million aggregate principal amount of 5.0% senior notes due 2025 (the "5.0% Senior Notes"), $750.0 million aggregate principal amount of 6.25% senior notes due 2026 (the "6.25% Senior Notes," and together with the 4.875% Senior Notes, the 5.625% Senior Notes, and the 5.0% Senior Notes, the "Senior Notes"), $280.0 million outstanding under our $420.0 million revolving credit facility (the "Revolving Credit Facility") provided by the Credit Agreement, and $46.8 million of capital lease and other financing obligations.
The increase in indebtedness from December 31, 2014 primarily relates to additional indebtedness incurredclosed, either as a result of negotiated settlements, final assessments, or lapse of the acquisitionapplicable statute of CST limitations related to unrecognized tax benefits, we may recognize a tax expense or benefit, including a benefit from the reversal of interest and penalties; and
in December 2015. certain jurisdictions, we record withholding and other taxes on intercompany payments, including dividends.
Seasonality
Because of the diverse global nature of the markets in which we operate, our revenue is only moderately impacted by seasonality. However, Sensing Solutions experiences some seasonality, specifically in its air conditioning and refrigeration products, which tend to peak in the first two quarters of the year as inventory is built up for spring and summer sales. In addition, Performance Sensing net revenue tends to be weaker in the third quarter of the year as automotive OEMs retool production lines for the coming model year.
Inflation
We havedo not believe that inflation has had a material effect on our financial condition or results of operations in recent years.
Legal Proceedings
We are regularly involved in a number of claims and litigation matters in the ordinary course of business. Most of our litigation matters are third-party claims related to patent infringement allegations or for property damage allegedly caused by our products, but some involve allegations of personal injury or wrongful death. From time to time, we are also entered into various other debt transactionsinvolved in disagreements with vendors and amendments to the Credit Agreement,customers. Information on certain legal proceedings in which had varying levels of impact on interest expense. Refer to Debt Transactionswe are involved is included elsewhere in this Management's DiscussionNote 15, "Commitments and Analysis, and Note 8, "Debt,Contingencies," of our audited consolidatedFinancial Statements. Although it is not feasible to predict the outcome of these matters, based upon our experience and current information known to us, we do not expect the outcome of these matters, either individually or in the aggregate, to have a material adverse effect on our results of operations, financial statements included elsewhere in this Annual Report on Form 10-K for more information regarding our debt transactions.position, or cash flows.
The Term Loan and Revolving Credit Facility accrue interest at variable interest rates. Refer to Item 7A, “Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk,” included elsewhere in this Annual Report on Form 10-K for more information regarding our exposure to potential changes in variable interest rates.
Our large amount of indebtedness may limit our flexibility in planning for, or reacting to, changes in our business and future business opportunities, since a substantial portion of our cash flows from operations will be dedicated to the servicing of our debt, and this may place us at a competitive disadvantage as some of our competitors are less leveraged. Our leverage may make us more vulnerable to a downturn in our business, industry, or the economy in general. Refer to Item 1A, “Risk Factors,” included elsewhere in this Annual Report on Form 10-K.
Results of Operations
Our discussion and analysis of results of operations and financial condition are based upon our audited consolidated financial statements.Financial Statements. These financial statementsFinancial Statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these financial statementsFinancial Statements requires us to make estimates and judgments that affect the amounts reported in the financial statements.therein. We base our estimates on historical experiencesexperience and assumptions believed to be reasonable under the circumstances, and we re-evaluate themsuch estimates on an ongoing basis. These estimates form the basis for our judgments that affect the amounts reported in the financial statements. Actual results could differ from our estimates under different assumptions or conditions. Our significant accounting policies and estimates are more fully described in Note 2, "Significant Accounting Policies," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K,Financial Statements, and Critical Accounting Policies and Estimates included elsewhere in this Management's Discussion and Analysis.Analysis of Financial Condition and Results of Operations.
The table below presents our historical results of operations in millions of dollars and as a percentage of net revenue. We have derived the statementsthese results of operations for the years ended December 31, 2015, 2014, and 2013from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.Financial Statements. Amounts and percentages in the table and discussion below have been calculated based on unrounded numbers. Accordingly, certain amounts may not addsum due to the effect of rounding.
| | | | For the year ended December 31, | For the year ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| (Dollars in millions) | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue |
| Net revenue |
|
|
| | | | | | | | | |
| Net revenue: | |
|
|
| | | | | | | | |
| Performance Sensing | $ | 2,346.2 |
|
| 78.9 | % | | $ | 1,755.9 |
| | 72.9 | % | | $ | 1,358.2 |
| | 68.6 | % | $ | 2,627.7 |
|
| 74.6 | % | | $ | 2,460.6 |
| | 74.4 | % | | $ | 2,385.4 |
| | 74.5 | % |
| Sensing Solutions | 628.7 |
|
| 21.1 |
| | 653.9 |
| | 27.1 |
| | 622.5 |
| | 31.4 |
| 894.0 |
|
| 25.4 |
| | 846.1 |
| | 25.6 |
| | 816.9 |
| | 25.5 |
|
| Net revenue | 2,975.0 |
|
| 100.0 | % | | 2,409.8 |
| | 100.0 | % | | 1,980.7 |
| | 100.0 | % | |
| Total net revenue | | 3,521.6 |
|
| 100.0 | % | | 3,306.7 |
| | 100.0 | % | | 3,202.3 |
| | 100.0 | % |
| Operating costs and expenses: |
|
|
| | | | | | | | |
|
|
| | | | | | | | |
| Cost of revenue | 1,977.8 |
|
| 66.5 |
| | 1,567.3 |
| | 65.0 |
| | 1,256.2 |
| | 63.4 |
| 2,266.9 |
|
| 64.4 |
| | 2,138.9 |
| | 64.7 |
| | 2,084.2 |
| | 65.1 |
|
| Research and development | 123.7 |
|
| 4.2 |
| | 82.2 |
| | 3.4 |
| | 58.0 |
| | 2.9 |
| 147.3 |
|
| 4.2 |
| | 130.1 |
| | 3.9 |
| | 126.7 |
| | 4.0 |
|
| Selling, general and administrative | 271.4 |
|
| 9.1 |
| | 220.1 |
| | 9.1 |
| | 163.1 |
| | 8.2 |
| 305.6 |
|
| 8.7 |
| | 301.9 |
| | 9.1 |
| | 293.5 |
| | 9.2 |
|
| Amortization of intangible assets | 186.6 |
|
| 6.3 |
| | 146.7 |
| | 6.1 |
| | 134.4 |
| | 6.8 |
| 139.3 |
|
| 4.0 |
| | 161.1 |
| | 4.9 |
| | 201.5 |
| | 6.3 |
|
| Restructuring and special charges | 21.9 |
|
| 0.7 |
| | 21.9 |
| | 0.9 |
| | 5.5 |
| | 0.3 |
| |
| Restructuring and other charges, net | | (47.8 | ) |
| (1.4 | ) | | 19.0 |
| | 0.6 |
| | 4.1 |
| | 0.1 |
|
| Total operating costs and expenses | 2,581.4 |
|
| 86.8 |
| | 2,038.2 |
| | 84.6 |
| | 1,617.3 |
| | 81.6 |
| 2,811.2 |
|
| 79.8 |
| | 2,750.9 |
| | 83.2 |
| | 2,709.9 |
| | 84.6 |
|
| Profit from operations | 393.6 |
|
| 13.2 |
| | 371.6 |
| | 15.4 |
| | 363.5 |
| | 18.4 |
| 710.4 |
|
| 20.2 |
| | 555.8 |
| | 16.8 |
| | 492.4 |
| | 15.4 |
|
| Interest expense, net | (137.6 | ) |
| (4.6 | ) | | (106.1 | ) | | (4.4 | ) | | (93.9 | ) | | (4.7 | ) | (153.7 | ) |
| (4.4 | ) | | (159.8 | ) | | (4.8 | ) | | (165.8 | ) | | (5.2 | ) |
| Other, net | (50.3 | ) |
| (1.7 | ) | | (12.1 | ) | | (0.5 | ) | | (35.6 | ) | | (1.8 | ) | (30.4 | ) |
| (0.9 | ) | | 6.4 |
| | 0.2 |
| | (5.1 | ) | | (0.2 | ) |
| Income before taxes | 205.6 |
|
| 6.9 |
| | 253.4 |
| | 10.5 |
| | 233.9 |
| | 11.8 |
| 526.4 |
|
| 14.9 |
| | 402.4 |
| | 12.2 |
| | 321.4 |
| | 10.0 |
|
| (Benefit from)/provision for income taxes | (142.1 | ) |
| (4.8 | ) | | (30.3 | ) | | (1.3 | ) | | 45.8 |
| | 2.3 |
| (72.6 | ) |
| (2.1 | ) | | (5.9 | ) | | (0.2 | ) | | 59.0 |
| | 1.8 |
|
| Net income | $ | 347.7 |
|
| 11.7 | % | | $ | 283.7 |
| | 11.8 | % | | $ | 188.1 |
| | 9.5 | % | $ | 599.0 |
|
| 17.0 | % | | $ | 408.4 |
| | 12.3 | % | | $ | 262.4 |
| | 8.2 | % |
Net revenue - Overall
Net revenue for fiscal year 20152018 increased $565.2$214.9 million, or 23.5%6.5%, to $2,975.0$3,521.6 million from $2,409.8$3,306.7 million for fiscal year 2014.2017. The increase in net revenue was composed of a 33.6%6.8% increase in Performance Sensing and a 3.9% decrease5.7% increase in Sensing Solutions.
Net revenue for fiscal year 20142017 increased $429.1$104.4 million, or 21.7%3.3%, to $2,409.8$3,306.7 million from $1,980.7$3,202.3 million for fiscal year 2013.2016. The increase in net revenue was composed of a 29.3%3.2% increase in Performance Sensing and a 5.1%3.6% increase in Sensing Solutions.
The following table reconciles reported net revenue growth, a GAAP financial measure, to organic revenue growth, a non-GAAP financial measure, for fiscal years 2018 and 2017. Refer to the section entitled Non-GAAP Financial Measures for further information on our use of this measure.
|
| | | | | | | | | | | | | | | | | | |
| | | Fiscal Year 2018 Compared to Prior Year | | Fiscal Year 2017 Compared to Prior Year |
| | | Total | | Performance Sensing | | Sensing Solutions | | Total | | Performance Sensing | | Sensing Solutions |
| Reported net revenue growth | | 6.5 | % | | 6.8 | % | | 5.7 | % | | 3.3 | % | | 3.2 | % | | 3.6 | % |
| Percent impact of: | | | | | | | | | | | | |
Acquisition and divestiture, net (1) | | (0.8 | ) | | (1.3 | ) | | 0.7 |
| | — |
| | — |
| | — |
|
Foreign currency remeasurement (2) | | 1.3 |
| | 1.5 |
| | 0.8 |
| | (0.7 | ) | | (0.7 | ) | | (0.5 | ) |
| Organic revenue growth | | 6.0 | % | | 6.6 | % | | 4.2 | % | | 4.0 | % | | 3.9 | % | | 4.1 | % |
| |
(1) | Represents the percentage change in net revenue attributed to the effect of acquisitions and divestitures for the 12 months immediately following the respective transaction dates. The percentage amounts presented for fiscal year 2018 relate to the sale of the Valves Business and the acquisition of GIGAVAC, each of which is discussed in Note 17, "Acquisitions and Divestitures," of our Financial Statements. |
| |
(2) | Represents the percentage change in net revenue between the comparative periods attributed to differences in exchange rates used to remeasure foreign denominated revenue transactions into U.S. dollars, which is the functional currency of the |
Company and each of its subsidiaries. The percentage amounts presented above relate primarily to the Euro to U.S. dollar and U.S. dollar to Chinese Renminbi exchange rates.
Net revenue - Performance Sensing
Performance Sensing net revenue for fiscal year 20152018 increased $590.4$167.1 million, or 33.6%6.8%, to $2,346.2$2,627.7 million from $1,755.9$2,460.6 million for fiscal year 2014. The increase2017. Organic revenue growth of 6.6% in Performance Sensing net revenuefiscal year 2018 was primarily composed of 33.8% growth dueattributable to acquisitions (primarily DeltaTech and Schrader in the third and fourth quarters of 2014, respectively) and 3.4%content growth in organic revenue (definedour automotive business, principally in China and North America, as sales, including the impactwell as a combination of pricing, but excluding the impact of acquisitionsmarket and the effect of foreign currency exchange),content growth in our HVOR business, partially offset by a 3.6% decline dueprice reductions of 1.9%, primarily related to changes in foreign currency exchange rates, particularly the Euro to U.S. dollar. The growth in organic revenue was primarily driven by growth in content, partially offset by a 2.3% reduction due to pricing,automotive customers, which isare consistent with past trends andour expectations for future pricing pressures,pressures. Our HVOR business benefited from production growth in the construction, North American on-road truck, and weakening heavy vehicle, agricultural, construction,agriculture markets, and Chinese light vehicle markets. In general, regulatory requirements for higher fuel efficiency, lower emissions,we generated content growth from sales to on-road truck customers, particularly in China and safer vehicles driveEurope, as well as off-road customers in the need for advancements in engine management and safety features that in turn lead to greater demand for our sensors. We expect the heavy vehicle and off-road markets to continue to be weak in 2016. We expect that the impact of foreign currency exchange rates on Performance Sensing net revenue in fiscal year 2016 will be a decline of approximately 2% to 3% when compared to fiscal year 2015.agriculture industry.
Performance Sensing net revenue for fiscal year 20142017 increased $397.6$75.2 million, or 29.3%3.2%, to $1,755.9$2,460.6 million from $1,358.2$2,385.4 million for fiscal year 2013. The increase2016. Organic revenue growth of 3.9% in Performance Sensing net revenue was primarily composed of 20.1% growth due to the impact of acquisitions in 2014, including Wabash, DeltaTech, and Schrader, and 8.8% growth in organic revenue. The growth in organic revenuefiscal year 2017 was primarily driven by our HVOR business, mainly as a result of the combination of stronger market and content growth in the construction, agriculture, and on-road truck end markets in North America, and content (including the offsetting impact of product obsolescence,growth in our automotive business, primarily in the occupant weight sensing application). The growth in content wasChina, partially offset by price reductions of 1.9%, primarily the result of significant design wins on new business opportunities that are now in production, and reflect the ongoing evolution and impact of new regulations including the Corporate Average Fuel Economy ("CAFE") requirements in the U.S, "Euro VI" requirements in Europe, and "China 4" requirements in Asia. Organic revenue in 2014 also included a 1.7% reduction duerelated to pricing.automotive customers.
Net revenue - Sensing Solutions
Sensing Solutions net revenue for fiscal year 2015 decreased $25.22018 increased $47.8 million, or 3.9%5.7%, to $628.7$894.0 million from $653.9$846.1 million for fiscal year 2014. The decrease2017. Organic revenue growth of 4.2% in Sensing Solutions net revenuefiscal year 2018 was primarily composed of a 6.9% decline in organic revenue and a 1.2% decline due to changesgrowth in foreign currency exchange rates, particularly the Euro to U.S. dollar, partially offset by 4.2% growth due to the impact of the acquisition of Magnum in the second quarter of 2014our industrial sensing, aerospace, and CST in the fourth quarter of 2015. Significant drivers of the decline in organic revenue were broadly weaker markets in China and the industrial and appliance and heating, ventilation, and air-conditioning end-markets, including continued inventory destocking, resulting in lower volumes. Organic revenue during the year ended December 31, 2015 was also impacted by weakness in the semiconductor and communications markets. We expect weakness through 2016 in the industrial, semiconductor, and communications markets, as well as a continued unfavorable impact of foreign currency exchange rates, which we expect will represent a decline of approximately 1% to 2% compared to fiscal year 2015.businesses.
Sensing Solutions net revenue for fiscal year 20142017 increased $31.5$29.2 million, or 5.1%3.6%, to $653.9$846.1 million from $622.5$816.9 million for fiscal year 2013. The increase2016. Organic revenue growth of 4.1% in Sensing Solutions net revenuefiscal year 2017 was primarily composeddue to market strength across all of 2.7%our key end markets, particularly in China, as well as content growth in organic revenueour appliance and 2.6% growth due to the impact of the acquisition of Magnum in the second quarter of 2014. The growth in organic revenue was primarily driven by growth in the commercial aerospace,HVAC and industrial and European and Asian automotive end-markets, partially offset by a decline in the semiconductor manufacturing end-market.end markets.
Cost of revenue
Cost of revenue for fiscal years 2015, 2014,2018, 2017, and 20132016 was $1,977.8$2,266.9 million (66.5%(64.4% of net revenue), $1,567.3$2,138.9 million (65.0%(64.7% of net revenue), and $1,256.2$2,084.2 million (63.4%(65.1% of net revenue), respectively.
Cost of revenue as a percentage of net revenue increased in 2015 primarily due to the dilutive effect of acquisitions, the additional charges related to the settlement of the U.S. Automaker warranty claim ($4.0 million) and the Bridgestone intellectual property litigation ($6.0 million) recorded in the second and third quarters of 2015, respectively, and $5.0 million
related to the write-down of certain assets during the second quarter of 2015 in connection with the closing of our manufacturing facility in Brazil that was part of the Schrader acquisition. Regarding the dilutive effect of acquisitions, we anticipate that cost of revenue as a percentage of net revenue will decline towards levels more consistent with our historical results as we continue to integrate recently acquired businesses. We generally complete integration activities within 18 to 24 months after the related acquisition. However, the integrations of Schrader and CST are anticipated to take up to three years due to their size, scope, and complexity.
Refer to Note 14, "Commitments and Contingencies," and Note 17, "Restructuring and Special Charges," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K, for further discussion of the additional charges recorded related to the U.S. Automaker and Bridgestone settlement matters and the charges related to the closing of our manufacturing facility in Brazil, respectively.
Cost of revenue as a percentage of net revenue increaseddecreased in 2014fiscal year 2018 primarily due to the dilutive effectfavorable impact of acquisitions.foreign currency exchange rates, partially offset by higher trade tariffs.
Cost of revenue as a percentage of net revenue decreased in fiscal year 2017 primarily due to improved operating efficiencies and synergies from the continued integration of acquired businesses, partially offset by the negative impact of price reductions.
Research and development expense
R&D expense for fiscal years 2015, 2014,2018, 2017, and 20132016 was $123.7$147.3 million, (4.2% of net revenue), $82.2$130.1 million, (3.4% of net revenue), and $58.0$126.7 million, (2.9% of net revenue), respectively.
R&D expense has increased each year as a percentage of net revenueover the last three years due to continued investmentincreased design and development effort to support new platformdesign wins and technology developments, both infund development activities to intersect emerging "megatrends" that are shaping our recently acquired and existing businesses, in order to drive future revenue growth.end markets, as well as the unfavorable impact of foreign currency exchange rates, primarily the Euro.
Selling, general and administrative expense
SG&A expense for fiscal years 2015, 2014,2018, 2017, and 20132016 was $271.4$305.6 million, (9.1%$301.9 million, and $293.5 million, respectively.
SG&A increased in 2018 primarily due to the unfavorable impact of net revenue)foreign currency exchange rates, higher share-based compensation expense, transaction costs related to the acquisition of GIGAVAC, and higher selling costs, partially offset by lower variable compensation, lower costs related to the cross-border merger between Sensata N.V. and Sensata plc (the "Merger"), $220.1 million (9.1%lower integration costs, synergies from the integration of net revenue),acquired businesses, and $163.1 million (8.2% of net revenue), respectively.productivity improvements.
SG&A expense increased in 20152017 primarily due primarily to SG&A expense$6.6 million of acquired businesses of $57.1 million, integrationexpenses incurred in connection with the Merger and higher variable compensation costs, and increased compensation related to selling and administrative headcount, partially offset by the impact of favorable foreign currency exchange rates, particularly the Euro to U.S. dollar, and lower acquisition-related transactionintegration costs. Acquisition related transaction costs included in SG&A expense were $9.4 million in 2015.
SG&A expense increased in 2014 due primarily to SG&A of acquired businesses of $22.0 million, acquisition related transaction costs of $14.3 million, and increased compensation related to selling and administrative headcount.
Amortization of intangible assets
Amortization expense associated with definite-livedof intangible assets for fiscal years 2015, 2014,2018, 2017, and 20132016 was $186.6$139.3 million, $146.7$161.1 million, and $134.4$201.5 million, respectively. The decrease in amortization expense is due to the fact that a majority of our intangible assets are amortized using the economic benefit basis, which in effect concentrates amortization expense towards the beginning of that intangible asset's useful life, as well as the impact of certain intangible assets reaching the end of their useful lives.
AmortizationWe expect amortization expense has increased eachto increase to approximately $142.2 million in fiscal year 2019, due primarily to additional amortization of additionalexpense related to the intangible assets recognized as a result of recent acquisitions, partially offset by a difference in the pattern of economic benefits over which intangible assets were amortized (i.e. as intangible assets age, there is generally less economic benefit associated with them, and accordingly less amortization expense as compared to previous years).
the acquisition of GIGAVAC. Refer to Note 5,11, "Goodwill and Other Intangible Assets," and Note 6, "Acquisitions, Net," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-KFinancial Statements for additional information regarding intangible assets and the related amortization.
Restructuring and specialother charges, net
Restructuring and specialother charges, net for fiscal years 2015, 2014,2018, 2017, and 2013 were $21.9 million, $21.9 million, and $5.5 million, respectively.
Restructuring and special charges for fiscal year 2015 included $7.6 million2016 consisted of severance charges incurred in order to integrate acquired businesses with ours, $4.0 million of severance charges relatedthe following (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not sum due to the closingeffect of our manufacturing facility in Brazil that was part of the Schrader acquisition, and the remainder primarily associated with the termination of a limited number of employees in various locations throughout the world. Restructuring and special charges for fiscal year 2014 consisted primarily of $16.2 million of severance charges recorded in connection with acquired businesses, with the remainder relating to charges incurred in connection with the termination of a limited number of employees in various locationsrounding):
Table of Contents |
| | | | | | | | | | | | |
| | | For the year ended December 31, |
| (Dollars in millions) | | 2018 | | 2017 | | 2016 |
Severance costs, net (1) | | $ | 7.6 |
| | $ | 11.1 |
| | $ | 0.8 |
|
Facility and other exit costs (2) | | 0.9 |
| | 7.9 |
| | 3.3 |
|
Gain on sale of Valves Business (3) | | (64.4 | ) | | — |
| | — |
|
Other (4) | | 8.2 |
| | — |
| | — |
|
| Restructuring and other charges, net | | $ | (47.8 | ) | | $ | 19.0 |
| | $ | 4.1 |
|
throughout the world in order to align our structure with our strategy. Restructuring and special charges for fiscal year 2013 consisted primarily of actions attributable to the execution of the 2011 Plan.
The amounts included in restructuring and special charges are discussed in detail in Note 17, "Restructuring and Special Charges," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. | |
(1) | Severance costs for the year ended December 31, 2018 were attributable to limited workforce reductions of manufacturing, engineering, and administrative positions as well as the elimination of redundant roles in connection with site consolidations. Severance costs, net recognized during the year ended December 31, 2017 included $8.4 million of charges related to the closure of our facility in Minden, Germany, a site we obtained in connection with the acquisition of certain subsidiaries of Custom Sensors & Technologies Ltd. ("CST"). Severance costs for the year ended December 31, 2016 primarily related to charges recorded in connection with acquired businesses and the termination of a limited number of employees in various locations throughout the world. |
| |
(2) | Facility and other exit costs for the year ended December 31, 2017 included $3.2 million of costs related to the closure of our facility in Minden, Germany and the transfer of equipment to alternate operating sites as well as $3.1 million of costs associated with the consolidation of two other manufacturing sites in Europe. Facility and other exit costs for the year ended December 31, 2016 primarily related to the relocation of manufacturing lines from our facility in the Dominican Republic to a manufacturing facility in Mexico. We completed the cessation of manufacturing in our Dominican Republic facility in the third quarter of 2016. |
| |
(3) | In fiscal year 2018 we completed the sale of the Valves Business to Pacific. The gain on this sale is included in restructuring and other charges, net. Refer to Note 17, "Acquisitions and Divestitures," for further discussion of the sale of the Valves Business. |
| |
(4) | In the year ended December 31, 2018, we incurred $5.9 million of incremental direct costs in order to transact the sale of the Valves Business and $2.2 million of deferred compensation incurred in connection with the acquisition of GIGAVAC. Refer to Note 17, "Acquisitions and Divestitures," for further discussion. |
Interest expense, net
Interest expense, net for fiscal years 2015, 2014,2018, 2017, and 20132016 was $137.6$153.7 million, $106.1$159.8 million, and $93.9$165.8 million, respectively.
Interest expense, net increased in 2015has decreased primarily as a result of the issuance of new debt relatedan increase in interest income due to the acquisitions of Schrader and CSThigher average cash balances in the fourth quarters of 2014 and 2015, respectively,fiscal year 2018, partially offset by the impact of loweran increase in interest rates due to the refinancing of certain debt instruments in the first half of 2015. Interest expense net increased in 2014 primarily due to the issuance and sale of new debt related to the acquisition of Schrader in the fourth quarter of 2014. Refer to Note 8, "Debt," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more details on our financing transactions. Refer to Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," included elsewhere in this Annual Report on Form 10-K for an analysis of the sensitivity of our interest expense to changes inhigher variable interest rates.
Interest expense, net for fiscal years 2015, 2014, and 2013 consisted primarily of $123.8 million, $96.6 million, and $85.0 million, respectively, of interest on our outstanding debt, $6.5 million, $5.1 million, and $4.3 million, respectively, in amortization of deferred financing costs and original issue discounts, and $3.9 million, $4.1 million, and $4.1 million, respectively, associated with capital lease and other financing obligations.
Other, net
Other, net for fiscal years 2015, 2014,2018, 2017, and 20132016 consisted of net lossesthe following (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not sum due to the effect of $50.3 million, $12.1 million, and $35.6 million, respectively.rounding):
The increase in net losses recognized during fiscal year 2015 as compared to 2014 relate primarily to increased losses associated with our debt financing transactions and increased losses on commodity forward contracts. The decrease in net losses recognized during fiscal year 2014 as compared to 2013 relate primarily to lower losses on commodity forward contracts and lower losses associated with our debt financing transactions.Refer to Note 8, "Debt," and Note 16, "Derivative Instruments and Hedging Activities," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more details on the losses related to our debt financing transactions and commodity forward contracts, respectively. Refer to Note 2, "Significant Accounting Policies," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more details on the gains and losses included within Other, net. Refer to Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," included elsewhere in this Annual Report on Form 10-K for an analysis of the sensitivity of Other, net on changes in foreign currency exchange rates and commodity prices. |
| | | | | | | | | | | |
| | For the year ended December 31, |
| (Dollars in millions) | 2018 | | 2017 | | 2016 |
Currency remeasurement (loss)/gain on net monetary assets (1) | $ | (18.9 | ) | | $ | 18.0 |
| | $ | (10.6 | ) |
Gain/(loss) on foreign currency forward contracts (2) | 2.1 |
| | (15.6 | ) | | (1.9 | ) |
(Loss)/gain on commodity forward contracts (2) | (8.5 | ) | | 10.0 |
| | 7.4 |
|
| Loss on debt financing | (2.4 | ) | | (2.7 | ) | | — |
|
Net periodic benefit cost, excluding service cost (3) | (3.6 | ) | | (3.4 | ) | | (0.2 | ) |
| Other | 0.9 |
| | 0.1 |
| | 0.2 |
|
| Other, net | $ | (30.4 | ) | | $ | 6.4 |
| | $ | (5.1 | ) |
| |
(1) | Relates to the remeasurement of non-U.S. dollar denominated monetary assets and liabilities into U.S. dollars. |
| |
(2) | Relates to changes in the fair value of derivative financial instruments that are not designated as hedges. Refer to Note 19, "Derivative Instruments and Hedging Activities," of our Financial Statements for additional discussion of gains and losses related to our commodity and foreign exchange forward contracts. Refer to Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," included elsewhere in this Report for an analysis of the sensitivity of other, net to changes in foreign currency exchange rates and commodity prices. |
| |
(3) | On January 1, 2018, we adopted FASB ASU No. 2017-07, which requires the non-service cost components of net periodic benefit cost to be presented apart from the service cost component and outside of profit from operations. Refer to Note 2, "Significant Accounting Policies," and Note 13, "Pension and Other Post-Retirement Benefits," of our Financial Statements for additional details. |
(Benefit from)/provision for income taxes
(Benefit from)/provision for income taxes for fiscal years 2015, 2014,2018, 2017, and 20132016 was $(142.1)$(72.6) million, $(30.3)$(5.9) million, and $45.8$59.0 million, respectively. The (Benefit from)/provision for income taxes each year consistsrespectively, the components of current tax expense, which relates primarily to our profitable operationsare described in non-U.S. tax jurisdictions and withholding taxesmore detail in the table below (amounts have been calculated based on interest and royalty income, and deferred tax expense, which relates primarilyunrounded numbers, accordingly, certain amounts may not sum due to the amortization of tax deductible goodwill, utilization of net operating losses, withholding taxes on subsidiary earnings, and other temporary book to tax differences, net of a deferred tax benefit relating to a release of a portion of the U.S. valuation allowance.
Our income tax expense for fiscal years 2015, 2014, and 2013 was less than the amounts computed at the U.S. statutory rate of 35% by $214.0 million, $119.0 million, and $36.1 million, respectively. The most significant reconciling items are noted below.
Foreign tax rate differential. We operate in locations outside the U.S., including China, the U.K., the Netherlands, South Korea, Malaysia, and Bulgaria, that have statutory tax rates significantly lower than the U.S. statutory rate, resulting in an effective rate benefit. This benefit can change from year to year based upon the jurisdictional mix of earnings.
Release of valuation allowances. During the years ended December 31, 2015 and 2014, we released a portion of our U.S. valuation allowance and recognized a deferred tax benefit of $180.0 million and $71.1 million, respectively. These benefits
arose primarily in connection with the 2015 acquisition of CST, and the 2014 acquisitions of Wabash, DeltaTech, and Schrader. For each of these acquisitions, deferred tax liabilities were established and related primarily to the step-up of intangible assets for book purposes.
Losses not tax benefited. Losses incurred in the U.S. are not currently benefited, as it is not more likely than not that the associated deferred tax asset will be realized in foreseeable future. For the years ended December 31, 2015, 2014, and 2013, this resulted in a deferred tax expense of $56.8 million, $40.2 million, and $25.2 million, respectively.
Changes in tax law or rates. In December 2013, Mexico enacted a comprehensive tax reform package, which became effective January 1, 2014. As a result of this change, we adjusted our deferred taxes in that jurisdiction, resulting in the recognition of a tax benefit, which reduced deferred income tax expense by $4.7 million for fiscal year 2013.
Withholding taxes not creditable. Withholding taxes may apply to intercompany interest, royalty, management fees, and certain payments to third parties. Such taxes are expensed if they cannot be credited against the recipient’s tax liability in its country of residence. Additional consideration also has been given to the withholding taxes associated with the remittance of presently unremitted earnings and the recipient's ability to obtain a tax credit for such taxes. Earnings are not considered to be indefinitely reinvested in the jurisdictions in which they were earned.
In certain jurisdictions we record withholding and other taxes on intercompany payments, including dividends. For fiscal year 2013, this amount totaled $16.1 million.
Reserve for tax exposure. During fiscal year 2013, we closed income tax audits related to several subsidiaries in Asia and the Americas. As a result of negotiated settlements and final assessments, we recognized $4.1 million of tax benefit in the fourth quarter. Additionally, as a result of certain lapses of the applicable statute of limitations related to unrecognized tax benefits, we recognized $0.9 million of tax benefit. The benefit recorded in tax expense related to interest and penalties totaled $8.7 million. The net effect of these items on our provision for income taxes was a benefit of $13.7 million.rounding):
Refer to Note 9, “Income Taxes,” of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more details on the tax rate reconciliation. |
| | | | | | | | | | | |
| | For the year ended December 31, |
| (Dollars in millions) | 2018 | | 2017 | | 2016 |
Tax computed at statutory rate of 21% in 2018 and 35% in 2017 and 2016 (1) | $ | 110.5 |
| | $ | 140.9 |
| | $ | 112.5 |
|
Change in valuation allowances (2) | (123.4 | ) | | (3.4 | ) | | 30.6 |
|
Foreign tax rate differential (3) | (41.2 | ) | | (112.0 | ) | | (86.3 | ) |
| Change in tax laws or rates | (22.3 | ) | | 3.9 |
| | 2.5 |
|
Research and development incentives (4) | (19.5 | ) | | (5.9 | ) | | (11.0 | ) |
| Reserve for tax exposure | 10.8 |
| | 38.0 |
| | 11.2 |
|
U.S. Tax Reform impact (5) | — |
| | (73.7 | ) | | — |
|
Other (6) | 12.4 |
| | 6.3 |
| | (0.5 | ) |
| (Benefit from)/provision for income taxes | $ | (72.6 | ) | | $ | (5.9 | ) | | $ | 59.0 |
|
| |
(1) | Represents the product of the applicable statutory tax rate and income before taxes, as reported on our consolidated statements of operations. In fiscal year 2018 the statutory rate declined to 21% (i.e., compared to 35% in previous years) due to the effect of Tax Reform. |
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(2) | During the years ended December 31, 2018, 2017, and 2016, we released a portion of our valuation allowance and recognized a deferred tax benefit. The remaining valuation allowance as of December 31, 2018 and 2017 was $157.0 million and $277.3 million, respectively. The remaining valuation allowance mainly relates to foreign tax credit and capital loss carryforwards and suspended interest deductions. It is more likely than not that these attributes will not be utilized in the foreseeable future. However, any future release of all or a portion of this valuation allowance resulting from a change in this assessment will impact our future (benefit from)/provision for income taxes. |
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(3) | We operate in locations outside the U.S., including Bermuda, Bulgaria, China, Malaysia, the Netherlands, South Korea, and the U.K., that historically have had statutory tax rates different than the U.S. statutory rate. This can result in a foreign tax rate differential that may reflect a tax benefit or detriment. This foreign rate differential can change from year to year based upon the jurisdictional mix of earnings and changes in current and future enacted tax rates. Certain of our subsidiaries are currently eligible, or have been eligible, for tax exemptions or holidays in their respective jurisdictions. |
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(4) | Certain income of our U.K. subsidiaries is eligible for lower tax rates under the "patent box" regime, resulting in certain of our intellectual property income being taxed at a rate lower than the U.K. statutory tax rate. Certain R&D expenses are eligible for a bonus deduction under China’s R&D super deduction regime. In 2018, we substantially completed an assessment of our ability to claim an R&D credit in the U.S. As a result of this assessment, we recorded a tax benefit of $10.0 million. Prior to fiscal year 2018, the deferred tax asset related to these R&D credits would have been offset by the valuation allowance. |
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(5) | Relates to the enactment of Tax Reform during the fourth quarter of 2017, which required us to remeasure our U.S. deferred tax assets and liabilities associated with indefinite lived intangible assets, including goodwill, from a rate of 35% to 21%. Absent this deferred tax liability, the U.S. operation was in a net deferred tax asset position that was offset by a full valuation allowance at December 31, 2017. |
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(6) | Refer to Note 7, "Income Taxes," of our Financial Statements for more details regarding other components of our rate reconciliation. |
We do not believe that there are any known trends related to the reconciling items noted above that are reasonably likely to result in our liquidity increasing or decreasing in any material way.
The valuation allowance as of December 31, 2015Non-GAAP Financial Measures
This section provides additional information regarding certain non-GAAP financial measures, including organic revenue growth and 2014 was $296.9 million and $394.8 million. It is more likely than not that the relatedadjusted net operating losses will not be utilized in the foreseeable future. However, any future release of all or a portion of this valuation allowance resulting from a change in this assessment will impact our future (benefit from)/provision for income, taxes.
Other Important Performance Measures
Adjusted Net Income, which we believe is a useful performance measure, isare used by our management, Board of Directors, and investors. investors as further discussed below. Organic revenue growth and adjusted net income should be considered as supplemental in nature and are not intended to be considered in isolation or as a substitute for reported net revenue growth or net income, respectively, calculated in accordance with U.S. GAAP. In addition, our measures of organic revenue growth and adjusted net income may not be the same as, or comparable to, similar non-GAAP financial measures presented by other companies.
Organic revenue growth
Organic revenue growth is defined as the reported percentage change in net revenue calculated in accordance with U.S. GAAP, excluding the period-over-period impact of foreign exchange rate differences as well as the net impact of acquired and divested businesses for the first 12 months following the transaction date. Refer to the Net revenue - overall section above for a reconciliation of reported revenue growth to organic revenue growth.
We believe that organic revenue growth provides investors with helpful information with respect to our operating performance, and we use organic revenue growth to evaluate our ongoing operations as well as for internal planning and forecasting purposes. We believe that organic revenue growth provides useful information in evaluating the results of our business because it excludes items that we believe are not indicative of ongoing performance or that we believe impact comparability with the prior-year period.
Adjusted net income
We define adjusted net income as follows: net income, determined in accordance with U.S. GAAP, excluding certain non-GAAP adjustments, including:
Restructuring related and other - includes charges, net related to certain restructuring actions as well as other costs (or income) that we believe are either unique or unusual to the identified reporting period, and that we believe impact comparisons to prior period operating results. Such amounts are excluded from internal financial statements and analyses that management uses in connection with financial planning, and in its review and assessment of our operating and financial performance, including the performance of our segments. Restructuring related and other does not, however, include charges related to the integration of acquired businesses, including such charges that are recognized as restructuring and other charges, net in our consolidated statements of operations.
Financing and other transaction costs – includes losses/(gains) related to debt financing transactions and third-party transaction costs, including for legal, accounting, and other professional services that are directly related to equity transactions, acquisitions, or divestitures.
Deferred losses/(gains) on other hedges.
Depreciation and amortization expense related to the step-up in fair value of fixed and intangible assets and inventory.
Deferred income tax and other tax expense/(benefit) – includes adjustments for book-to-tax basis differences due primarily to the step-up in fair value of fixed and intangible assets and goodwill, the utilization of net operating losses, and adjustments to our U.S. valuation allowance. Other tax expense/(benefit) includes certain adjustments to unrecognized tax positions and withholding tax on repatriation of foreign earnings.
Amortization of debt issuance costs.
Management uses Adjusted Net Incomeadjusted net income as a measure of operating performance, for planning purposes (including the preparation of our annual operating budget), to allocate resources to enhance the financial performance of our business, to evaluate the effectiveness of our business strategies, and in communications with our Board of Directors and investors concerning our financial performance. We believe investors and securities analysts also use Adjusted Net Incomeadjusted net income in their evaluation of our performance and the performance of other similar companies. Adjusted Net Income is a non-GAAP financial measure, andnet income is not a measure of liquidity. The use of Adjusted Net Incomeadjusted net income has limitations, and this performance measure should not be considered in isolation from, or as an alternative to, U.S. GAAP measures such as net income.
We define Adjusted Net Income as follows:Our definition of adjusted net income before certain restructuring and special charges, costs associated with financingexcludes the deferred (benefit from)/provision for income taxes and other transactions,tax (benefit)/expense. Our deferred loss/(gain) on other hedges, depreciation and amortization expense related(benefit from)/provision for income taxes includes: adjustments for book-to-tax basis differences due primarily to the step-up in fair value of fixed and intangible assets and inventory, deferred incomegoodwill, changes in tax laws, the utilization of net operating losses, and otheradjustments to our U.S. valuation allowance. Other tax (benefit)/expense amortization of deferred financing costs, and other costs as outlined in the reconciliation below.
Our definition of Adjusted Net Income includes the currentcertain adjustments to unrecognized tax expense/(benefit) that will be payable/(realized) on our income tax return and excludes deferred income tax and other tax expense/(benefit).positions. As we treat deferred income tax and other tax expense/(benefit)taxes as an adjustment to compute Adjusted Net Income,adjusted net income, the deferred income tax effect associated with the reconciling items presented below would not change Adjusted Net Incomeadjusted net income for any period presented. Refer to note (g)(f) to the table below for the theoretical current income tax expense/(benefit) associated with the reconciling items indicated, which relate to jurisdictions where such items would provide tax expense/(benefit).
Many of these adjustments to net income relate to a series of strategic initiatives developed by our management aimed at better positioning us for future revenue growth and an improved cost structure. These initiatives have been modified from time to time to reflect changes in overall market conditions and the competitive environment facing our business. These initiatives include, among other items, acquisitions, divestitures, restructurings of certain operations, and various financing transactions. We describe these adjustments in more detail below.
The following unaudited table provides a reconciliation of adjusted net income to net income, the most directly comparable financial measure presented in accordance with U.S. GAAP (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not sum due to Adjusted Net Income for the periods presented:effect of rounding):
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| (Amounts in thousands) | 2015 | | 2014 | | 2013 |
| Net income | $ | 347,696 |
| | $ | 283,749 |
| | $ | 188,125 |
|
Restructuring and special charges(a)(g) | 42,332 |
| | 9,552 |
| | 8,309 |
|
Financing and other transaction costs(b) | 43,850 |
| | 18,594 |
| | 12,183 |
|
Deferred loss/(gain) on other hedges(c) | 11,864 |
| | (915 | ) | | 17,900 |
|
Depreciation and amortization expense related to the step-up in fair value of fixed and intangible assets and inventory(d)(g) | 193,370 |
| | 155,785 |
| | 136,245 |
|
Deferred income tax and other tax (benefit)/expense(e) | (173,550 | ) | | (61,588 | ) | | 17,756 |
|
Amortization of deferred financing costs(f) | 6,456 |
| | 5,118 |
| | 4,307 |
|
Total Adjustments(g) | 124,322 |
| | 126,546 |
| | 196,700 |
|
| Adjusted Net Income | $ | 472,018 |
| | $ | 410,295 |
| | $ | 384,825 |
|
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| (Dollars in millions) | 2018 | | 2017 | | 2016 |
| Net income | $ | 599.0 |
| | $ | 408.4 |
| | $ | 262.4 |
|
| Non-GAAP adjustments: | | | | | |
Restructuring related and other(a)(f) | 28.0 |
| | 21.3 |
| | 15.0 |
|
Financing and other transaction costs(b) | (40.3 | ) | | 9.3 |
| | 1.5 |
|
Loss/(gain) on commodity and other hedges(c) | 12.5 |
| | (7.4 | ) | | (19.3 | ) |
Depreciation and amortization expense related to the step-up in fair value of fixed and intangible assets and inventory(d)(f) | 141.2 |
| | 165.0 |
| | 210.8 |
|
Deferred income tax and other tax (benefit)/expense, net(e) | (128.3 | ) | | (55.2 | ) | | 17.1 |
|
| Amortization of debt issuance costs | 7.3 |
| | 7.2 |
| | 7.3 |
|
| Total adjustments | 20.4 |
| | 140.4 |
| | 232.4 |
|
| Adjusted net income | $ | 619.4 |
| | $ | 548.7 |
| | $ | 494.8 |
|
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| (a) | The following unaudited table provides a detail ofpresents the components of our restructuring related and special charges, the total of which is included as another non-GAAP adjustment to arrive at Adjusted Net Income for fiscal years 2015, 2014,2018, 2017, and 2013 as shown in2016 (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not sum due to the above table:effect of rounding): |
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| | | | | | | | | | | |
| | For the year ended December 31, |
| (Amounts in thousands) | 2015 | | 2014 | | 2013 |
Severance costs(i) | $ | 15,560 |
| | $ | 6,475 |
| | $ | (348 | ) |
Facility related costs(ii) | 11,353 |
| | — |
| | 6,984 |
|
Special charges and other(iii) | 15,419 |
| | 3,077 |
| | 1,673 |
|
| Total restructuring and special charges | $ | 42,332 |
| | $ | 9,552 |
| | $ | 8,309 |
|
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| | | | | | | | | | | |
| | For the year ended December 31, |
| (Dollars in millions) | 2018 | | 2017 | | 2016 |
Severance costs(i) | $ | 9.2 |
| | $ | 3.0 |
| | $ | 0.0 |
|
Facility related costs(ii) | 8.2 |
| | 14.0 |
| | 10.9 |
|
Other(iii) | 10.6 |
| | 4.3 |
| | 4.0 |
|
| Total non-GAAP restructuring related and other | $ | 28.0 |
| | $ | 21.3 |
| | $ | 15.0 |
|
__________________
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| i. | Fiscal year 2015 comprisesRepresents severance charges associated with our decision to close our Schrader Brazil manufacturing facility ($4.0 million)recognized and presented in restructuring and other employment related costscharges, net, other than those charges, net of reversals, associated with the terminationintegration of a limited number of employees in various locations throughout the world. Fiscal year 2014 includes severance costs incurred and accounted for as part of ongoing benefit arrangements, excluding those costs recorded in connection withan acquired businesses. Fiscal year 2013 includes severance costs (including pension settlement charges) related to the 2011 Plan, excluding the impact of foreign exchange.business. |
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| ii. | Consists primarily of costs associated with line moves and the closing or relocation of various facilities throughout the world. Fiscal year 2015 primarily comprises2018 includes $4.0 million of costs related to the consolidation of two manufacturing sites in Europe and $2.1 million of costs related to the move of a distribution center in Germany. Fiscal year 2017 includes $6.0 million of costs related to transitioning certain of our distribution centers within Europe, $3.7 million of costs related to the consolidation of two manufacturing sites in Europe, and $3.0 million of costs associated with the closing of our Schrader Brazil manufacturing facility. Fiscal year 2016 includes $3.7 million of costs associated with the relocation of manufacturing lines from our facility in the Dominican Republic to a manufacturing facility in Mexico, $1.1 million in non-severance related costs associated with our decision to closethe closing of our Schrader Brazil manufacturing facility, including a $5.0and $3.8 million charge to write-down certain assets, as well as net operating losses as we execute this plan. Refer to Note 17, "Restructuring and Special Charges," for additional information. Fiscal year 2013 includes facility exit andof costs associated with other costs related to the 2011 Plan.exited product lines. |
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| iii. | Consists of amounts that do not fall within one of the other specific categories. Fiscal year 20152018 primarily comprisesincludes $6.6 million of charges related to certain of our manufacturing facilities in Mexico and $1.9 million of losses associated with theupon settlement of certain preacquisition loss contingencies, including the U.S. Automaker warranty claim ($4.0 million) and the Bridgestone intellectual property litigation ($6.0 million). Refercontingencies. The charges related to Note 14, "Commitments and Contingencies," for additional information. Fiscal year 2014 and 2013 primarily represent costs incurred, offset by insurance proceeds recognized,certain of our manufacturing facilities in Mexico include operating inefficiencies, in part as a result of a fireline moves, and repositioning actions, which include settlement losses related to our pension plans in our South Korean facility, restructuring related charges, and certain other corporate related expenses..Mexico. |
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| (b) | Includes losses related to debt financing transactions, costs incurred in connection with secondary offering or other equity transactions, and costs associated with acquisition activity.activity, and gains, losses, and transaction costs related to the divestiture of businesses. In fiscal year 2018, includes a $64.4 million gain on the sale of the Valves Business, $5.9 million of transaction costs, and $2.3 million of deferred compensation incurred in connection with the acquisition of GIGAVAC, which were recorded in restructuring and other charges, net on our consolidated statements of operations. Costs associated with debt financing transactions, are generally recordedwhich include losses of $2.4 million and $2.7 million in either Other,fiscal years 2018 and 2017, respectively, were recognized in other, net or Interest expense, net, and costson our consolidated statements of operations. Costs associated with secondaryequity transactions, which include $4.1 million and $6.6 million of costs to complete the Merger in fiscal years 2018 and 2017, respectively, were recognized in SG&A expense on our consolidated statements of operations. Costs associated with acquisition activity, including $2.5 million of transaction costs related to the acquisition of GIGAVAC in fiscal year 2018, are generally recorded in SG&A expense. Refer to Note 8, "Debt," and Note 6, "Acquisitions,"expense on our consolidated statements of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.operations. |
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| (c) | Reflects primarily unrealized andIncludes deferred losses/(gains), net recognized on commodity and otherderivative instruments that are not designated as hedges. |
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| (d) | ReflectsRepresents depreciation and amortization expense related to the step-up in fair value of fixed and intangible assets and inventory related to acquisitions. |
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| (e) | Represents deferred income tax and other tax expense/(benefit)/expense,, including provisions for, and interest expense and penalties related to, certain unrecognized tax benefits. Fiscal year 2015benefits (or benefits from their release). Our deferred income tax includes a $180.0 million benefit from income taxesadjustments for measuring book-to-tax basis differences primarily related to the step-up in fair value of fixed and intangible assets and goodwill, utilization of net operating losses and adjustments to our U.S. valuation allowance in connection with certain acquisitions. Other tax expense/(benefit) includes certain adjustments to unrecognized tax positions. Fiscal year 2018 includes a $122.1 million deferred tax benefit related to the release of a portion of our U.S. valuation allowance as discussed in Note 7, "Income Taxes," of our Financial Statements. Also included in our fiscal year 2018 results is $10.0 million of current tax expense related to the repatriation of profits from certain subsidiaries in China to their parent companies in the Netherlands. The decision to repatriate these profits was the result of our goal to reduce our balance sheet exposure, and corresponding earnings volatility, related to the Chinese Renminbi as well as fund our deployment of capital. Fiscal year 2017 includes $73.7 million of income tax benefits related to the remeasurement of the deferred tax liabilities associated with indefinite-lived intangible assets due to the reduction of the U.S. corporate income tax rate from 35% to 21% as a part of Tax Reform. Fiscal year 2016 includes $1.9 million of deferred income tax benefits related to the release of a portion of our U.S. valuation allowance in connection with theour 2015 acquisition of CST, for whichCST. For this acquisition, deferred tax liabilities were established related primarily to the step-up of intangible assets for book purposes. Fiscal year 2014 includes a $71.1 million benefit from income taxes related to the release of our U.S. valuation allowance in connection with the Wabash, DeltaTech, and Schrader acquisitions, for which deferred tax liabilities were established related primarily to the step-up of intangible assets for book purposes. |
tax liabilities were established related primarily to the step-up of intangible assets for book purposes. Refer to Note 7, "Income Taxes," of our Financial Statements for more details.
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| (f) | Represents amortization expense related to deferred financing costs and original issue discounts. |
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(g) | The theoretical current income tax (benefit)/expense associated with the reconciling items presented above, which is included in adjusted net income, is shown below for each period presented. The theoretical current income tax (benefit)/expense was calculated by multiplyingapplying the relevant jurisdictional tax rate to the reconciling items whichthat relate to jurisdictions where such items would provide current tax (benefit)/expense, by the applicable tax rates.expense. |
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| | | | | | | | | | | |
| | For the year ended December 31, |
| (Amounts in thousands) | 2015 | | 2014 | | 2013 |
| Restructuring and special charges | $ | (2,119 | ) | | $ | (1,405 | ) | | $ | (1,476 | ) |
| Depreciation and amortization expense related to the step-up in fair value of fixed and intangible assets and inventory | $ | (595 | ) | | $ | (1,291 | ) | | $ | (1,036 | ) |
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| (Dollars in millions) | 2018 | | 2017 | | 2016 |
| Restructuring related and other | $ | (1.2 | ) | | $ | (0.5 | ) | | $ | (1.0 | ) |
| Depreciation and amortization expense related to the step-up in fair value of fixed and intangible assets and inventory | 0.0 |
| | 0.0 |
| | (0.1 | ) |
| Total current income tax (benefit)/expense associated with non-GAAP adjustments above | $ | (1.2 | ) | | $ | (0.5 | ) | | $ | (1.1 | ) |
Liquidity and Capital Resources
We heldThe following table presents the total cash and cash equivalents of $342.3 million and $211.3 million at December 31, 2015 and 2014, respectively, of which $124.6 million and $65.7 million, respectively, was held in the Netherlands, $33.4 million and $21.3 million, respectively, was held by U.S.Sensata plc and its subsidiaries and $184.3 million and $124.3 million, respectively, was helddisaggregated by other foreign subsidiaries. country of domicile.
|
| | | | | | | |
| | As of December 31, |
| (Dollars in millions) | 2018 | | 2017 |
| Cash and cash equivalents: | | | |
| U.K. | $ | 8.8 |
| | $ | 13.7 |
|
| U.S. | 4.6 |
| | 9.0 |
|
| Netherlands | 482.1 |
| | 260.9 |
|
| China | 125.2 |
| | 383.0 |
|
| Other | 109.1 |
| | 86.5 |
|
| Cash and cash equivalents | $ | 729.8 |
| | $ | 753.1 |
|
The amount of cash and cash equivalents held in the Netherlands and in our U.S. and other foreign subsidiariesthese locations fluctuates throughout the year due to a variety of factors, includingsuch as our use of intercompany loans and dividends and the timing of cash receipts and disbursements in the normal course of business. Our earnings are not considered to be permanently reinvested in certain jurisdictions in which they were earned. We record a deferred tax liability on these unremitted earnings to the extent the remittance of such earnings cannot be recovered in a tax free manner.
Cash Flows
The table below summarizes our primary sources and uses of cash for the years ended December 31, 20152018, 20142017, and 20132016. We have derived these summarized statements of cash flows from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.Financial Statements. Amounts in the table and discussion below have been calculated based on unrounded numbers. Accordingly, certain amounts may not addsum due to the effect of rounding.
| | | | For the year ended December 31, | For the year ended December 31, |
| (Amounts in millions) | 2015 | | 2014 | | 2013 | |
| (Dollars in millions) | | 2018 | | 2017 | | 2016 |
| Net cash provided by/(used in): | | | | | | | | | | |
| Operating activities: | | | | | | | | | | |
| Net income adjusted for non-cash items | $ | 508.7 |
| | $ | 466.3 |
| | $ | 421.8 |
| $ | 687.5 |
| | $ | 652.5 |
| | $ | 615.5 |
|
| Changes in operating assets and liabilities, net of effects of acquisitions | 24.4 |
| | (83.8 | ) | | (25.9 | ) | |
| Changes in operating assets and liabilities, net | | (66.9 | ) | | (94.8 | ) | | (93.9 | ) |
| Operating activities | 533.1 |
| | 382.6 |
| | 395.8 |
| 620.6 |
| | 557.6 |
| | 521.5 |
|
| Investing activities | (1,166.4 | ) | | (1,430.1 | ) | | (87.7 | ) | (237.6 | ) | | (140.7 | ) | | (174.8 | ) |
| Financing activities | 764.2 |
| | 940.9 |
| | (403.8 | ) | (406.2 | ) | | (15.3 | ) | | (337.6 | ) |
| Net change | $ | 130.9 |
| | $ | (106.6 | ) | | $ | (95.6 | ) | $ | (23.3 | ) | | $ | 401.7 |
| | $ | 9.2 |
|
Operating Activities
The increase in net cash provided by operating activities is primarily due to the cumulative effect of the following: (1) the positive cash flow impact in 2015 of improved inventory and supply chain management, (2) the negative cash flow impact in 2014 of a buildup in inventory (partially offset by the related increase in amounts due to suppliers) as discussed further below, (3) timing of customer receipts, and (4) growth in net income adjusted for non-cash items, primarily resulting from higher sales
and the resulting profit. In 2014, we built inventory to continue to ensure on-time delivery to our customers and in preparation for the implementation of our upgraded enterprise resource planning ("ERP") system.
The decrease in net cash provided by operating activities in 2014fiscal year 2018 compared to 2013 was duefiscal year 2017 relates primarily to an increase in cash used related to changes inimproved operating assetsprofitability and liabilities, nettiming of the effects of acquisitions, partially offset by an increase in net income adjusted for non-cash items. supplier payments and customer receipts.
The increase in cash usedprovided by operating activities in fiscal year 2017 compared to fiscal year 2016 relates primarily to improved operating profitability, partially offset by a build-up of inventory to support anticipated line moves, higher cash paid for interest, and higher cash paid related to changes in operating assets and liabilities, netseverance obligations. The higher cash paid for interest relates to the $750.0 million aggregate principal amount of effects of acquisitions was primarily6.25% senior notes due to an increase in our inventory balance as of December 31, 2014 compared to December 31, 2013. Other changes in operating assets and liabilities2026 (the "6.25% Senior Notes"), for which interest payments are due primarily to timingsemi-annually on February 15 and August 15 of payments to third parties.
As of December 31, 2015, we had commitments to purchase certain raw materials and components that contain various commodities, sucheach year. The payment made on February 15, 2016 did not represent payment for a full six-month period, as gold, silver, platinum, palladium, copper, nickel, aluminum, and zinc. In general, the prices for these products vary with the market price for the related commodity. In addition, when we place orders for materials, we do so in quantities that will satisfy our production demand for various periods of time. In general, we place these orders for quantities that will satisfy our production demand over a one-, two-, or three-month period. We do not have a significant number of long-term supply contracts that contain fixed-price commitments. Accordingly, we believe that our exposure to a decline in the spot prices for those commodities under contract is not material.6.25% Senior Notes were issued on November 27, 2015.
Investing Activities
NetInvesting activities include additions to property, plant and equipment and capitalized software, the acquisition or sale of a business, and the acquisition or sale of certain debt and equity investments.
In fiscal year 2018, net cash used in investing activities during 2015, 2014, and 2013 was $1,166.4primarily composed of $228.3 million $1,430.1 million, and $87.7 million, respectively. In 2015, weof cash used $996.9 million,to acquire GIGAVAC (i.e., net of cash received,received), $159.8 million of cash used to acquire CST,purchase PP&E and in 2014 we used $995.3capitalized software, and $149.8 million of cash provided from the sale of the Valves Business (i.e., net of cash received, to acquire Schrader. In addition, in 2014 we used $298.4 million, net of cash received, for the acquisitions of Wabash, Magnum, and DeltaTech. During 2015, 2014, and 2013, we also incurred $177.2 million, $144.2 million, and $82.8 million, respectively, in capital expenditures.
sold). Refer to Note 6,17, "Acquisitions and Divestitures," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further detailsdiscussion of the sale of the Valves Business and the acquisition of GIGAVAC.
In fiscal year 2017, net cash used in investing activities was primarily composed of $144.6 million of cash used to purchase PP&E and capitalized software.
In fiscal year 2016, net cash used in investing activities was primarily composed of $130.2 million of cash used to purchase PP&E and capitalized software and an investment of $50.0 million in preferred stock of Quanergy Systems, Inc ("Quanergy"). Refer to Note 18, "Fair Value Measures," for acquisitions.further discussion of this investment.
Capital expenditures primarily relate to investments associated with increasing our manufacturing capacity. In addition, capital expenditures in 2014 included costs to upgrade our existing ERP system. In 2016,fiscal year 2019, we anticipate capital expendituresadditions to property, plant and equipment and capitalized software of approximately $150$165.0 million to $175$185.0 million, which we anticipate willexpect to be funded with cash flows from operations.
Financing Activities
Net cash provided by/(used in)in financing activities during 2015, 2014, and 2013 was $764.2 million, $940.9 million, and $(403.8) million, respectively.
Net cash provided by financing activities during 2015in fiscal year 2018 consisted primarily of $2,795.1$399.4 million in payments to repurchase our ordinary shares related to our $400.0 million share repurchase program and $15.7 million in payments on debt.
Net cash used in financing activities in fiscal year 2017 consisted primarily of $943.6 million in payments on debt, partially offset by $927.8 million of proceeds from the issuance of debt, partially offset by $2,000.3 million in payments on debt.
These issuances and payments include amounts related to certain debt instruments that were refinanced in 2015, including $700.0 million aggregate principal amount of 6.5% senior notes due 2019 (the "6.5% Senior Notes") that were tendered and redeemed in March and April 2015 using the proceedscash flows result from the issuance and salerepricing of the 5.0% Senior Notes,term loan provided pursuant to the sixth amendment (the "Sixth Amendment") of the Credit Agreement, and $990.1 millionthe resulting issuance of Refinancedthe Term Loans (as defined inLoan pursuant to the Eighth Amendment. Refer to Debt Instruments-Term LoanInstruments section below), that were prepaid in May 2015 with the proceeds from the entry into the Term Loan.
In addition, proceeds from the issuance of debt include $750.0 million of proceeds from the issuancebelow and sale of the 6.25% Senior Notes in November 2015, and $355.0 million in total aggregate borrowings on the Revolving Credit Facility in 2015. Net cash payments on debt include $205.0 million in total aggregate payments on the Revolving Credit Facility in 2015, $75.0 million of payments on the Original Term Loan (as defined in the Debt Instruments-Senior Secured Credit Facilities section below) prior to its refinancing, and normal debt servicing activity. Refer to Note 8,14, "Debt," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-KFinancial Statements for further discussion of our normal debt servicing requirements.
Net cash provided by financing activities during 2014 consisted primarily of $1,190.5 million of proceeds from the issuance of debt, partially offset by $181.8 million used to repurchase ordinary shares (which includes $169.7 million paid to SCA), and $76.4 million in payments on debt.
The proceeds from the issuance of debt in 2014 relates primarily to $400.0 million in proceeds from the issuance and sale of the 5.625% Senior Notes, $595.5 million in proceeds from the entry into the Incremental Term Loan (as defined in the Debt Instruments-Incremental Term Loan section below) at an original issuance price of 99.25%, and the aggregate amount drawn on
the Revolving Credit Facility in 2014. Refer to the Indebtedness and Liquidity section below, and Note 8, "Debt," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussionterms of these transactions.
The payments to repurchase ordinary shares in 2014 are primarily associated with our $250.0 million share repurchase program, discussed further in the Capital Resources section below. The net cash payments on debt in 2014 primarily include the total aggregate amount paid on the Revolving Credit Facility in 2014, along with normal debt servicing activity.amendments.
Net cash used in financing activities during 2013in fiscal year 2016 consisted primarily of $305.1 million used to repurchase ordinary shares (which includes $172.1 million paid to SCA) and $200.0$336.3 million in net cash paid as a result ofpayments on debt, including $280.0 million in payments on the Revolving Credit Facility and $44.9 million in payments on our debt transactions in April 2013 (excluding transaction costs), partially offset by $100.0 million of proceeds received as a result of the December 2013 amendment to the Original Term Loan.then outstanding term loan.
Indebtedness and Liquidity
Our liquidity requirements are significant due to the highly leveraged nature of our company. As of December 31, 2015, we had $3,659.5 million in gross outstanding indebtedness, including our debt and outstanding capital lease and other financing obligations.
The following table outlinesdetails our gross outstanding indebtedness (net of discount) as of December 31, 20152018, and the associated interest expense for fiscal year 20152018 (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not sum due to the effect of rounding):
|
| | | | | | | |
| Description | Balance at December 31, 2015 | | Interest expense, net for fiscal year 2015 |
| (Amounts in thousands) | | | |
| Original Term Loan | $ | — |
| | $ | 5,240 |
|
| Incremental Term Loan | — |
| | 7,790 |
|
| Term Loan | 982,695 |
| | 19,018 |
|
| 6.5% Senior Notes | — |
| | 11,215 |
|
| 4.875% Senior Notes | 500,000 |
| | 24,375 |
|
| 5.625% Senior Notes | 400,000 |
| | 22,500 |
|
| 5.0% Senior Notes | 700,000 |
| | 26,739 |
|
| 6.25% Senior Notes | 750,000 |
| | 4,427 |
|
| Revolving Credit Facility | 280,000 |
| | 2,492 |
|
| Less: discount | (20,116 | ) | | — |
|
| Capital lease and other financing obligations | 46,757 |
| | 3,862 |
|
| Amortization of financing costs and original issue discounts | — |
| | 6,456 |
|
| Other | — |
| | 3,512 |
|
| Total | $ | 3,639,336 |
| | $ | 137,626 |
|
|
| | | | | | | |
| (Dollars in millions) | Balance as of December 31, 2018 | | Interest Expense, net for the year ended December 31, 2018 |
| Term Loan | $ | 917.8 |
| | $ | 34.8 |
|
| 4.875% Senior Notes | 500.0 |
| | 24.4 |
|
| 5.625% Senior Notes | 400.0 |
| | 22.5 |
|
| 5.0% Senior Notes | 700.0 |
| | 35.0 |
|
| 6.25% Senior Notes | 750.0 |
| | 46.9 |
|
| Capital lease and other financing obligations | 35.5 |
| | 2.9 |
|
| Total gross outstanding indebtedness | $ | 3,303.3 |
| |
|
|
Other interest expense, net (1) | | | (12.7 | ) |
| Interest expense, net |
|
| | $ | 153.7 |
|
| |
(1) | Other interest expense, net includes interest income, amortization of debt issuance costs, and interest costs capitalized in accordance with FASB Accounting Standards Codification ("ASC") Subtopic 835-20, Capitalization of Interest. |
Debt Instruments
Summarized information regarding our debt instruments is described below. Refer to Note 8, “Debt,”14, "Debt," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-KFinancial Statements for further details of the terms of the Senior Notes, the Senior Secured Credit Facilities (as defined below), and the amendments to the Credit Agreement.our Debt Instruments.
Senior Secured Credit Facilities
In May 2011, we completed a series of transactions designed to refinance our then existing indebtedness. These transactions included the execution of the Credit Agreement, which provided for senior secured credit facilities (the "Senior Secured Credit Facilities") consisting of a $1,100.0 million term loan facility (the "Original Term Loan") and the Revolving Credit Facility. The Senior Secured Credit Facilities also allowed for future additional borrowings under certain circumstances.
Original Term Loan
The Original Term Loan was offered under the Senior Secured Credit Facilities at an original issue price of 99.5%. The Original Term Loan was partially prepaid in April 2013 as discussed in the 4.875% Senior Notes section below. In December
2013, we entered into an amendment to the Credit Agreement to expand the Original Term Loan by $100.0 million. The remaining balance of the Original Term Loan was prepaid in May 2015, as described in the Term Loan section below.
Incremental Term Loan
In October 2014, we entered into an amendment to the Credit Agreement (the “Third Amendment”) that provided for a $600.0 million additional term loan (the “Incremental Term Loan”), which was offered at an original issue price of 99.25%. The remaining balance of the Incremental Term Loan was prepaid in May 2015, as described in the Term Loan section below.
Term Loan
On May 11, 2015, we entered into an amendment (the "Sixth Amendment") of the Credit Agreement. Pursuant to the Sixth Amendment, the Original Term Loan and the Incremental Term Loan (together, the "Refinanced Term Loans") were prepaid in full, and the Term Loan was entered into in an aggregate principal amount of $990.1 million, equal to the sum of the outstanding balances of the Refinanced Term Loans. The Term Loan was offered at 99.75% of par. The maturity datecurrently consists of the Term Loan, is October 14, 2021.the Revolving Credit Facility, and $1.0 billion incremental availability (the "Accordion") under which, subject to certain limitations as defined in the indentures under which the Senior Notes (as defined below) were issued (the "Senior Notes Indentures"), additional secured debt may be issued or the capacity of the Revolving Credit Facility may be increased.
Term Loan
The Term Loan may, at our option, be maintained from time to time as a Base Rate loan or a Eurodollar Rate loan (each as defined in the Credit Agreement), each with a different determination of interest rates. The principal amount of the Term Loan amortizes in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the term loan provided under the Sixth Amendment, with the balance due at maturity.
The applicable margins for the Term Loan accrues interest at a variable rate, based on a LIBOR index rate,as of December 31, 2018 were 0.75% and 1.75% for Base Rate loans and Eurodollar Rate loans, respectively, subject to floors of 1.00% and 0.00% for Base Rate loans and Eurodollar Rate loans, respectively. As of December 31, 2018, we maintained the Term Loan as a floorEurodollar Rate loan.
Revolving Credit Facility
As of 0.75% plus a spreadDecember 31, 2018, there was $416.1 million of 2.25%. availability under the Revolving Credit Facility, net of $3.9 million of letters of credit. Outstanding letters of credit are issued primarily for the benefit of certain operating activities. As of December 31, 2018, no amounts had been drawn against these outstanding letters of credit.
Senior Notes
At December 31, 2015,2018, we had various tranches of senior notes outstanding, including $500.0 million aggregate principal amount of 4.875% senior notes due 2023 (the "4.875% Senior Notes"), $400.0 million aggregate principal amount of 5.625% senior notes due 2024 (the "5.625% Senior Notes"), $700.0 million aggregate principal amount of 5.0% senior notes due 2025 (the "5.0% Senior Notes"), and the Term Loan accrued interest at a rate of 3.0%. The Term Loan is subject to a repricing prepayment premium of 1.0% if there is a repricing event that occurs prior to May 11, 2016.
6.5% Senior Notes
In May 2011, we completed the issuance and sale of the 6.5% Senior Notes. On March 26, 2015, we completed a series of financing transactions, including the settlement of $620.9 million of the 6.5%6.25% Senior Notes that was validly tendered in connection(collectively, with a cash tender offer that commenced on March 19, 2015. The remaining $79.1 million of the 6.5%4.875% Senior Notes, was redeemed on April 29, 2015.the 5.625% Senior Notes, and the 5.0% Senior Notes, the "Senior Notes").
4.875% Senior Notes
In April 2013, we completed the issuance and sale of the 4.875% Senior Notes. We used the proceeds from the issuance and sale of these notes, together with cash on hand, to, among other things, repay $700.0 million of the Original Term Loan. The 4.875% Senior Notes, which were offered at par, and mature on October 15, 2023. Interest on the 4.875% Senior Notes is payable semi-annually on April 15 and October 15 of each year.
5.625% Senior Notes
In October 2014, we completed the issuance and sale of the 5.625% Senior Notes. The 5.625% Senior Notes, which were offered at par, and mature on November 1, 2024. Interest on the 5.625% Senior Notes is payable semi-annually on May 1 and November 1 of each year, with the first payment made on May 1, 2015.year.
5.0% Senior Notes
In March 2015, we completed the issuance and sale of the 5.0% Senior Notes, in order to refinance the 6.5% Senior Notes as described in more detail above under the heading 6.5% Senior Notes. The 5.0% Senior Noteswhich were offered at par, and mature on October 1, 2025. Interest on the 5.0% Senior Notes is payable semi-annually on April 1 and October 1 of each year, with the first payment made on October 1, 2015.year.
6.25% Senior Notes
OnIn November 27, 2015, we completed the issuance and sale of the 6.25% Senior Notes. The 6.25% Senior Notes, which were offered at par, and mature on February 15, 2026. Interest on the 6.25% Senior Notes is payable semi-annually on February 15 and August 15 of each year, commencing on February 15, 2016.year.
Revolving Credit Facility
The original amount available for borrowing under the Revolving Credit Facility per the terms of the Credit Agreement was $250.0 million. On March 26, 2015, we entered into an amendment (the "Fifth Amendment") to the Credit Agreement, which increased the amount available for borrowing under the Revolving Credit Facility to $350.0 million. On September 29, 2015, we entered into an amendment (the "Seventh Amendment") to the Credit Agreement, which increased the amount available for borrowing under the Revolving Credit Facility to $420.0 million.
As of December 31, 2015, there was $134.5 million of availability under the Revolving Credit Facility (net of $5.5 million of letters of credit). Outstanding letters of credit are issued primarily for the benefit of certain operating activities. As of December 31, 2015, no amounts had been drawn against these outstanding letters of credit, which are scheduled to expire on various dates in 2016.
Capital Resources
Our sources of liquidity include cash on hand, cash flows from operations, and available capacity under the Revolving Credit Facility. In addition, the Senior Secured Credit Facilities provide for incremental facilities (the “Accordion”), under which additional term loans may be issued or the capacity of the Revolving Credit Facility may be increased. The Incremental Term Loan issued under the Third Amendment (which has been prepaid in full) and the increases to the Revolving Credit Facility provided by the Fifth Amendment and the Seventh Amendment were provided for by the Accordion. As of December 31, 2015, $230.0 million remained available for issuance under the Accordion.Legal Proceedings
We believe,are regularly involved in a number of claims and litigation matters in the ordinary course of business. Most of our litigation matters are third-party claims related to patent infringement allegations or for property damage allegedly caused by our products, but some involve allegations of personal injury or wrongful death. From time to time, we are also involved in disagreements with vendors and customers. Information on certain legal proceedings in which we are involved is included in Note 15, "Commitments and Contingencies," of our Financial Statements. Although it is not feasible to predict the outcome of these matters, based onupon our experience and current levelinformation known to us, we do not expect the outcome of operations as reflectedthese matters, either individually or in the aggregate, to have a material adverse effect on our results of operations, for the year ended December 31, 2015,financial position, or cash flows.
Results of Operations
Our discussion and taking into consideration the restrictions and covenants discussed below, thatanalysis of results of operations are based upon our Financial Statements. These Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these sources of liquidity will be sufficient to fund our operations, capital expenditures, ordinary share repurchases, and debt service for at least the next twelve months.
However, we cannot make assurances that our business will generate sufficient cash flows from operations or that future borrowings will be available to us in an amount sufficient to enableFinancial Statements requires us to paymake estimates and judgments that affect the amounts reported therein. We base our indebtedness, includingestimates on historical experience and assumptions believed to be reasonable under the Term Loan, the Revolving Credit Facility,circumstances, and we re-evaluate such estimates on an ongoing basis. Actual results could differ from our estimates under different assumptions or the Senior Notes, or to fundconditions. Our significant accounting policies and estimates are more fully described in Note 2, "Significant Accounting Policies," of our other liquidity needs. Further,Financial Statements, and Critical Accounting Policies and Estimates included elsewhere in this Management's Discussion and Analysis of Financial Condition and Results of Operations.
The table below presents our highly leveraged nature may limithistorical results of operations in millions of dollars and as a percentage of net revenue. We have derived these results of operations from our ability to procure additional financingFinancial Statements. Amounts and percentages in the future.table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not sum due to the effect of rounding.
|
| | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| (Dollars in millions) | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue |
| Net revenue: |
|
|
| | | | | | | | |
| Performance Sensing | $ | 2,627.7 |
|
| 74.6 | % | | $ | 2,460.6 |
| | 74.4 | % | | $ | 2,385.4 |
| | 74.5 | % |
| Sensing Solutions | 894.0 |
|
| 25.4 |
| | 846.1 |
| | 25.6 |
| | 816.9 |
| | 25.5 |
|
| Total net revenue | 3,521.6 |
|
| 100.0 | % | | 3,306.7 |
| | 100.0 | % | | 3,202.3 |
| | 100.0 | % |
| Operating costs and expenses: |
|
|
| | | | | | | | |
| Cost of revenue | 2,266.9 |
|
| 64.4 |
| | 2,138.9 |
| | 64.7 |
| | 2,084.2 |
| | 65.1 |
|
| Research and development | 147.3 |
|
| 4.2 |
| | 130.1 |
| | 3.9 |
| | 126.7 |
| | 4.0 |
|
| Selling, general and administrative | 305.6 |
|
| 8.7 |
| | 301.9 |
| | 9.1 |
| | 293.5 |
| | 9.2 |
|
| Amortization of intangible assets | 139.3 |
|
| 4.0 |
| | 161.1 |
| | 4.9 |
| | 201.5 |
| | 6.3 |
|
| Restructuring and other charges, net | (47.8 | ) |
| (1.4 | ) | | 19.0 |
| | 0.6 |
| | 4.1 |
| | 0.1 |
|
| Total operating costs and expenses | 2,811.2 |
|
| 79.8 |
| | 2,750.9 |
| | 83.2 |
| | 2,709.9 |
| | 84.6 |
|
| Profit from operations | 710.4 |
|
| 20.2 |
| | 555.8 |
| | 16.8 |
| | 492.4 |
| | 15.4 |
|
| Interest expense, net | (153.7 | ) |
| (4.4 | ) | | (159.8 | ) | | (4.8 | ) | | (165.8 | ) | | (5.2 | ) |
| Other, net | (30.4 | ) |
| (0.9 | ) | | 6.4 |
| | 0.2 |
| | (5.1 | ) | | (0.2 | ) |
| Income before taxes | 526.4 |
|
| 14.9 |
| | 402.4 |
| | 12.2 |
| | 321.4 |
| | 10.0 |
|
| (Benefit from)/provision for income taxes | (72.6 | ) |
| (2.1 | ) | | (5.9 | ) | | (0.2 | ) | | 59.0 |
| | 1.8 |
|
| Net income | $ | 599.0 |
|
| 17.0 | % | | $ | 408.4 |
| | 12.3 | % | | $ | 262.4 |
| | 8.2 | % |
Net revenue - Overall
Net revenue for fiscal year 2018 increased $214.9 million, or 6.5%, to $3,521.6 million from $3,306.7 million for fiscal year 2017. The Credit Agreement stipulates certain eventsincrease in net revenue was composed of a 6.8% increase in Performance Sensing and conditions that may require usa 5.7% increase in Sensing Solutions. Net revenue for fiscal year 2017 increased $104.4 million, or 3.3%, to $3,306.7 million from $3,202.3 million for fiscal year 2016. The increase in net revenue was composed of a 3.2% increase in Performance Sensing and a 3.6% increase in Sensing Solutions.
The following table reconciles reported net revenue growth, a GAAP financial measure, to organic revenue growth, a non-GAAP financial measure, for fiscal years 2018 and 2017. Refer to the section entitled Non-GAAP Financial Measures for further information on our use excess cash flow,of this measure.
|
| | | | | | | | | | | | | | | | | | |
| | | Fiscal Year 2018 Compared to Prior Year | | Fiscal Year 2017 Compared to Prior Year |
| | | Total | | Performance Sensing | | Sensing Solutions | | Total | | Performance Sensing | | Sensing Solutions |
| Reported net revenue growth | | 6.5 | % | | 6.8 | % | | 5.7 | % | | 3.3 | % | | 3.2 | % | | 3.6 | % |
| Percent impact of: | | | | | | | | | | | | |
Acquisition and divestiture, net (1) | | (0.8 | ) | | (1.3 | ) | | 0.7 |
| | — |
| | — |
| | — |
|
Foreign currency remeasurement (2) | | 1.3 |
| | 1.5 |
| | 0.8 |
| | (0.7 | ) | | (0.7 | ) | | (0.5 | ) |
| Organic revenue growth | | 6.0 | % | | 6.6 | % | | 4.2 | % | | 4.0 | % | | 3.9 | % | | 4.1 | % |
| |
(1) | Represents the percentage change in net revenue attributed to the effect of acquisitions and divestitures for the 12 months immediately following the respective transaction dates. The percentage amounts presented for fiscal year 2018 relate to the sale of the Valves Business and the acquisition of GIGAVAC, each of which is discussed in Note 17, "Acquisitions and Divestitures," of our Financial Statements. |
| |
(2) | Represents the percentage change in net revenue between the comparative periods attributed to differences in exchange rates used to remeasure foreign denominated revenue transactions into U.S. dollars, which is the functional currency of the |
Company and each of its subsidiaries. The percentage amounts presented above relate primarily to the Euro to U.S. dollar and U.S. dollar to Chinese Renminbi exchange rates.
Net revenue - Performance Sensing
Performance Sensing net revenue for fiscal year 2018 increased $167.1 million, or 6.8%, to $2,627.7 million from $2,460.6 million for fiscal year 2017. Organic revenue growth of 6.6% in fiscal year 2018 was primarily attributable to content growth in our automotive business, principally in China and North America, as definedwell as a combination of market and content growth in our HVOR business, partially offset by price reductions of 1.9%, primarily related to automotive customers, which are consistent with our expectations for future pricing pressures. Our HVOR business benefited from production growth in the construction, North American on-road truck, and agriculture markets, and we generated content growth from sales to on-road truck customers, particularly in China and Europe, as well as off-road customers in the agriculture industry.
Performance Sensing net revenue for fiscal year 2017 increased $75.2 million, or 3.2%, to $2,460.6 million from $2,385.4 million for fiscal year 2016. Organic revenue growth of 3.9% in fiscal year 2017 was primarily driven by our HVOR business, mainly as a result of the combination of stronger market and content growth in the construction, agriculture, and on-road truck end markets in North America, and content growth in our automotive business, primarily in China, partially offset by price reductions of 1.9%, primarily related to automotive customers.
Net revenue - Sensing Solutions
Sensing Solutions net revenue for fiscal year 2018 increased $47.8 million, or 5.7%, to $894.0 million from $846.1 million for fiscal year 2017. Organic revenue growth of 4.2% in fiscal year 2018 was primarily due to growth in our industrial sensing, aerospace, and semiconductor businesses.
Sensing Solutions net revenue for fiscal year 2017 increased $29.2 million, or 3.6%, to $846.1 million from $816.9 million for fiscal year 2016. Organic revenue growth of 4.1% in fiscal year 2017 was primarily due to market strength across all of our key end markets, particularly in China, as well as content growth in our appliance and HVAC and industrial end markets.
Cost of revenue
Cost of revenue for fiscal years 2018, 2017, and 2016 was $2,266.9 million (64.4% of net revenue), $2,138.9 million (64.7% of net revenue), and $2,084.2 million (65.1% of net revenue), respectively.
Cost of revenue as a percentage of net revenue decreased in fiscal year 2018 primarily due to the favorable impact of foreign currency exchange rates, partially offset by higher trade tariffs.
Cost of revenue as a percentage of net revenue decreased in fiscal year 2017 primarily due to improved operating efficiencies and synergies from the continued integration of acquired businesses, partially offset by the termsnegative impact of price reductions.
Research and development expense
R&D expense for fiscal years 2018, 2017, and 2016 was $147.3 million, $130.1 million, and $126.7 million, respectively.
R&D expense has increased over the last three years due to increased design and development effort to support new design wins and fund development activities to intersect emerging "megatrends" that are shaping our end markets, as well as the unfavorable impact of foreign currency exchange rates, primarily the Euro.
Selling, general and administrative expense
SG&A expense for fiscal years 2018, 2017, and 2016 was $305.6 million, $301.9 million, and $293.5 million, respectively.
SG&A increased in 2018 primarily due to the unfavorable impact of foreign currency exchange rates, higher share-based compensation expense, transaction costs related to the acquisition of GIGAVAC, and higher selling costs, partially offset by lower variable compensation, lower costs related to the cross-border merger between Sensata N.V. and Sensata plc (the "Merger"), lower integration costs, synergies from the integration of acquired businesses, and productivity improvements.
SG&A expense increased in 2017 primarily due to $6.6 million of expenses incurred in connection with the Merger and higher variable compensation costs, partially offset by lower integration costs.
Amortization of intangible assets
Amortization of intangible assets for fiscal years 2018, 2017, and 2016 was $139.3 million, $161.1 million, and $201.5 million, respectively. The decrease in amortization expense is due to the fact that a majority of our intangible assets are amortized using the economic benefit basis, which in effect concentrates amortization expense towards the beginning of that intangible asset's useful life, as well as the impact of certain intangible assets reaching the end of their useful lives.
We expect amortization expense to increase to approximately $142.2 million in fiscal year 2019, due primarily to additional amortization expense related to the intangible assets associated with the acquisition of GIGAVAC. Refer to Note 11, "Goodwill and Other Intangible Assets, Net," of our Financial Statements for additional information regarding intangible assets and the related amortization.
Restructuring and other charges, net
Restructuring and other charges, net for fiscal years 2018, 2017, and 2016 consisted of the Credit Agreement, generatedfollowing (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not sum due to the effect of rounding):
|
| | | | | | | | | | | | |
| | | For the year ended December 31, |
| (Dollars in millions) | | 2018 | | 2017 | | 2016 |
Severance costs, net (1) | | $ | 7.6 |
| | $ | 11.1 |
| | $ | 0.8 |
|
Facility and other exit costs (2) | | 0.9 |
| | 7.9 |
| | 3.3 |
|
Gain on sale of Valves Business (3) | | (64.4 | ) | | — |
| | — |
|
Other (4) | | 8.2 |
| | — |
| | — |
|
| Restructuring and other charges, net | | $ | (47.8 | ) | | $ | 19.0 |
| | $ | 4.1 |
|
| |
(1) | Severance costs for the year ended December 31, 2018 were attributable to limited workforce reductions of manufacturing, engineering, and administrative positions as well as the elimination of redundant roles in connection with site consolidations. Severance costs, net recognized during the year ended December 31, 2017 included $8.4 million of charges related to the closure of our facility in Minden, Germany, a site we obtained in connection with the acquisition of certain subsidiaries of Custom Sensors & Technologies Ltd. ("CST"). Severance costs for the year ended December 31, 2016 primarily related to charges recorded in connection with acquired businesses and the termination of a limited number of employees in various locations throughout the world. |
| |
(2) | Facility and other exit costs for the year ended December 31, 2017 included $3.2 million of costs related to the closure of our facility in Minden, Germany and the transfer of equipment to alternate operating sites as well as $3.1 million of costs associated with the consolidation of two other manufacturing sites in Europe. Facility and other exit costs for the year ended December 31, 2016 primarily related to the relocation of manufacturing lines from our facility in the Dominican Republic to a manufacturing facility in Mexico. We completed the cessation of manufacturing in our Dominican Republic facility in the third quarter of 2016. |
| |
(3) | In fiscal year 2018 we completed the sale of the Valves Business to Pacific. The gain on this sale is included in restructuring and other charges, net. Refer to Note 17, "Acquisitions and Divestitures," for further discussion of the sale of the Valves Business. |
| |
(4) | In the year ended December 31, 2018, we incurred $5.9 million of incremental direct costs in order to transact the sale of the Valves Business and $2.2 million of deferred compensation incurred in connection with the acquisition of GIGAVAC. Refer to Note 17, "Acquisitions and Divestitures," for further discussion. |
Interest expense, net
Interest expense, net for fiscal years 2018, 2017, and 2016 was $153.7 million, $159.8 million, and $165.8 million, respectively. Interest expense, net has decreased primarily as a result of an increase in interest income due to higher average cash balances in fiscal year 2018, partially offset by operating, investing, or financing activities,an increase in interest expense related to prepay some or allhigher variable interest rates.
Other, net
Other, net for fiscal years 2018, 2017, and 2016 consisted of the outstanding borrowings under the Senior Secured Credit Facilities. The Credit Agreement also requires mandatory prepayments of the outstanding borrowings under the Senior Secured Credit Facilities upon certain asset dispositions and casualty events, in each case subject to certain reinvestment rights, and the incurrence of certain indebtedness (excluding any permitted indebtedness). These provisions were not triggered during the year ended December 31, 2015.
Our ability to raise additional financing, and our borrowing costs, may be impacted by short-term and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on our performance as measured by certain credit metrics such as interest coverage and leverage ratios. In August 2015, Moody's Investors Service and Standard & Poor's each affirmed their respective long-term ratings for STBV and revised their outlook from stable to negative. The change in outlook by the credit rating agencies resulted from reviews initiated upon the announcement of our proposed acquisition of CST. In November 2015, Standard & Poor's downgraded STBV's corporate credit rating one notch and revised its outlook from negative to stable. As of January 28, 2016, Moody’s Investors Service’s corporate credit rating for STBV was Ba2 with a negative outlook and Standard & Poor’s corporate credit rating for STBV was BB with a stable outlook. Any future downgrades to STBV's credit ratings may increase our borrowing costs, but will not reduce availability under the Credit Agreement.
Wefollowing (amounts have a $250.0 million share repurchase program in place. Under this program, we may repurchase ordinary shares from time to time, at such times and in amounts to be determined by our management,been calculated based on market conditions, legal requirements,unrounded numbers, accordingly, certain amounts may not sum due to the effect of rounding):
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| (Dollars in millions) | 2018 | | 2017 | | 2016 |
Currency remeasurement (loss)/gain on net monetary assets (1) | $ | (18.9 | ) | | $ | 18.0 |
| | $ | (10.6 | ) |
Gain/(loss) on foreign currency forward contracts (2) | 2.1 |
| | (15.6 | ) | | (1.9 | ) |
(Loss)/gain on commodity forward contracts (2) | (8.5 | ) | | 10.0 |
| | 7.4 |
|
| Loss on debt financing | (2.4 | ) | | (2.7 | ) | | — |
|
Net periodic benefit cost, excluding service cost (3) | (3.6 | ) | | (3.4 | ) | | (0.2 | ) |
| Other | 0.9 |
| | 0.1 |
| | 0.2 |
|
| Other, net | $ | (30.4 | ) | | $ | 6.4 |
| | $ | (5.1 | ) |
| |
(1) | Relates to the remeasurement of non-U.S. dollar denominated monetary assets and liabilities into U.S. dollars. |
| |
(2) | Relates to changes in the fair value of derivative financial instruments that are not designated as hedges. Refer to Note 19, "Derivative Instruments and Hedging Activities," of our Financial Statements for additional discussion of gains and losses related to our commodity and foreign exchange forward contracts. Refer to Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," included elsewhere in this Report for an analysis of the sensitivity of other, net to changes in foreign currency exchange rates and commodity prices. |
| |
(3) | On January 1, 2018, we adopted FASB ASU No. 2017-07, which requires the non-service cost components of net periodic benefit cost to be presented apart from the service cost component and outside of profit from operations. Refer to Note 2, "Significant Accounting Policies," and Note 13, "Pension and Other Post-Retirement Benefits," of our Financial Statements for additional details. |
(Benefit from)/provision for income taxes
(Benefit from)/provision for income taxes for fiscal years 2018, 2017, and other corporate considerations, on the open market or in privately negotiated transactions. We expect that any future repurchases of ordinary shares will be funded by cash from operations. The share repurchase program may be modified or terminated by our Board of Directors at any time. We did not repurchase any ordinary shares under this program in 2015. During 2014 and 2013, we repurchased 4.32016 was $(72.6) million, $(5.9) million, and 8.6$59.0 million, ordinary shares, respectively, for an aggregate purchase pricethe components of $181.8 million and $305.1 million, respectively. At December 31, 2015, $74.7 million remained available for share repurchase under this program.
The Credit Agreement and the indentures under which the Senior Notes were issued (the "Senior Notes Indentures") contain restrictions and covenants that limit the ability of STBV and certain of its subsidiaries to, among other things, incur subsequent indebtedness, sell assets, make capital expenditures, pay dividends, and make other restricted payments. These restrictions and covenants, which are subject to important exceptions and qualifications set forth in the Credit Agreement and Senior Notes Indentures, and which are described in more detail in the table below and in Note 8, "Debt,"(amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not sum due to the effect of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K, were taken into consideration in establishing our share repurchase program, and are evaluated periodically with respect to future potential funding. rounding):
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| (Dollars in millions) | 2018 | | 2017 | | 2016 |
Tax computed at statutory rate of 21% in 2018 and 35% in 2017 and 2016 (1) | $ | 110.5 |
| | $ | 140.9 |
| | $ | 112.5 |
|
Change in valuation allowances (2) | (123.4 | ) | | (3.4 | ) | | 30.6 |
|
Foreign tax rate differential (3) | (41.2 | ) | | (112.0 | ) | | (86.3 | ) |
| Change in tax laws or rates | (22.3 | ) | | 3.9 |
| | 2.5 |
|
Research and development incentives (4) | (19.5 | ) | | (5.9 | ) | | (11.0 | ) |
| Reserve for tax exposure | 10.8 |
| | 38.0 |
| | 11.2 |
|
U.S. Tax Reform impact (5) | — |
| | (73.7 | ) | | — |
|
Other (6) | 12.4 |
| | 6.3 |
| | (0.5 | ) |
| (Benefit from)/provision for income taxes | $ | (72.6 | ) | | $ | (5.9 | ) | | $ | 59.0 |
|
| |
(1) | Represents the product of the applicable statutory tax rate and income before taxes, as reported on our consolidated statements of operations. In fiscal year 2018 the statutory rate declined to 21% (i.e., compared to 35% in previous years) due to the effect of Tax Reform. |
| |
(2) | During the years ended December 31, 2018, 2017, and 2016, we released a portion of our valuation allowance and recognized a deferred tax benefit. The remaining valuation allowance as of December 31, 2018 and 2017 was $157.0 million and $277.3 million, respectively. The remaining valuation allowance mainly relates to foreign tax credit and capital loss carryforwards and suspended interest deductions. It is more likely than not that these attributes will not be utilized in the foreseeable future. However, any future release of all or a portion of this valuation allowance resulting from a change in this assessment will impact our future (benefit from)/provision for income taxes. |
| |
(3) | We operate in locations outside the U.S., including Bermuda, Bulgaria, China, Malaysia, the Netherlands, South Korea, and the U.K., that historically have had statutory tax rates different than the U.S. statutory rate. This can result in a foreign tax rate differential that may reflect a tax benefit or detriment. This foreign rate differential can change from year to year based upon the jurisdictional mix of earnings and changes in current and future enacted tax rates. Certain of our subsidiaries are currently eligible, or have been eligible, for tax exemptions or holidays in their respective jurisdictions. |
| |
(4) | Certain income of our U.K. subsidiaries is eligible for lower tax rates under the "patent box" regime, resulting in certain of our intellectual property income being taxed at a rate lower than the U.K. statutory tax rate. Certain R&D expenses are eligible for a bonus deduction under China’s R&D super deduction regime. In 2018, we substantially completed an assessment of our ability to claim an R&D credit in the U.S. As a result of this assessment, we recorded a tax benefit of $10.0 million. Prior to fiscal year 2018, the deferred tax asset related to these R&D credits would have been offset by the valuation allowance. |
| |
(5) | Relates to the enactment of Tax Reform during the fourth quarter of 2017, which required us to remeasure our U.S. deferred tax assets and liabilities associated with indefinite lived intangible assets, including goodwill, from a rate of 35% to 21%. Absent this deferred tax liability, the U.S. operation was in a net deferred tax asset position that was offset by a full valuation allowance at December 31, 2017. |
| |
(6) | Refer to Note 7, "Income Taxes," of our Financial Statements for more details regarding other components of our rate reconciliation. |
We do not believe that there are any known trends related to the reconciling items noted above that are reasonably likely to result in our liquidity increasing or decreasing in any material way.
Non-GAAP Financial Measures
This section provides additional information regarding certain non-GAAP financial measures, including organic revenue growth and adjusted net income, which are used by our management, Board of Directors, and investors as further discussed below. Organic revenue growth and adjusted net income should be considered as supplemental in nature and are not intended to be considered in isolation or as a substitute for reported net revenue growth or net income, respectively, calculated in accordance with U.S. GAAP. In addition, our measures of organic revenue growth and adjusted net income may not be the same as, or comparable to, similar non-GAAP financial measures presented by other companies.
Organic revenue growth
Organic revenue growth is defined as the reported percentage change in net revenue calculated in accordance with U.S. GAAP, excluding the period-over-period impact of foreign exchange rate differences as well as the net impact of acquired and divested businesses for the first 12 months following the transaction date. Refer to the Net revenue - overall section above for a reconciliation of reported revenue growth to organic revenue growth.
We believe that organic revenue growth provides investors with helpful information with respect to our operating performance, and we use organic revenue growth to evaluate our ongoing operations as well as for internal planning and forecasting purposes. We believe that organic revenue growth provides useful information in evaluating the results of our business because it excludes items that we believe are not indicative of ongoing performance or that we believe impact comparability with the prior-year period.
Adjusted net income
We define adjusted net income as follows: net income, determined in accordance with U.S. GAAP, excluding certain non-GAAP adjustments, including:
Restructuring related and other - includes charges, net related to certain restructuring actions as well as other costs (or income) that we believe are either unique or unusual to the identified reporting period, and that we believe impact comparisons to prior period operating results. Such amounts are excluded from internal financial statements and analyses that management uses in connection with financial planning, and in its review and assessment of our operating and financial performance, including the performance of our segments. Restructuring related and other does not, however, include charges related to the integration of acquired businesses, including such charges that are recognized as restructuring and other charges, net in our consolidated statements of operations.
Financing and other transaction costs – includes losses/(gains) related to debt financing transactions and third-party transaction costs, including for legal, accounting, and other professional services that are directly related to equity transactions, acquisitions, or divestitures.
Deferred losses/(gains) on other hedges.
Depreciation and amortization expense related to the step-up in fair value of fixed and intangible assets and inventory.
Deferred income tax and other tax expense/(benefit) – includes adjustments for book-to-tax basis differences due primarily to the step-up in fair value of fixed and intangible assets and goodwill, the utilization of net operating losses, and adjustments to our U.S. valuation allowance. Other tax expense/(benefit) includes certain adjustments to unrecognized tax positions and withholding tax on repatriation of foreign earnings.
Amortization of debt issuance costs.
Management uses adjusted net income as a measure of operating performance, for planning purposes (including the preparation of our annual operating budget), to allocate resources to enhance the financial performance of our business, to evaluate the effectiveness of our business strategies, and in communications with our Board of Directors and investors concerning our financial performance. We believe investors and securities analysts also use adjusted net income in their evaluation of our performance and the performance of other similar companies. Adjusted net income is not a measure of liquidity. The use of adjusted net income has limitations, and this performance measure should not be considered in isolation from, or as an alternative to, U.S. GAAP measures such as net income.
Our definition of adjusted net income excludes the deferred (benefit from)/provision for income taxes and other tax (benefit)/expense. Our deferred (benefit from)/provision for income taxes includes: adjustments for book-to-tax basis differences due primarily to the step-up in fair value of fixed and intangible assets and goodwill, changes in tax laws, the utilization of net operating losses, and adjustments to our U.S. valuation allowance. Other tax (benefit)/expense includes certain adjustments to unrecognized tax positions. As we treat deferred income taxes as an adjustment to compute adjusted net income, the deferred income tax effect associated with the reconciling items presented below would not change adjusted net income for any period presented. Refer to note (f) to the table below for the theoretical current income tax expense/(benefit) associated with the reconciling items indicated, which relate to jurisdictions where such items would provide tax expense/(benefit).
Many of these restrictionsadjustments to net income relate to a series of strategic initiatives developed by our management aimed at better positioning us for future revenue growth and covenants will prevent usan improved cost structure. These initiatives have been modified from funding share repurchases undertime to time to reflect changes in overall market conditions and the competitive environment facing our share repurchase programbusiness. These initiatives include, among other items, acquisitions, divestitures, restructurings of certain operations, and various financing transactions. We describe these adjustments in more detail below.
The following table provides a reconciliation of adjusted net income to net income, the most directly comparable financial measure presented in accordance with availableU.S. GAAP (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not sum due to the effect of rounding):
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| (Dollars in millions) | 2018 | | 2017 | | 2016 |
| Net income | $ | 599.0 |
| | $ | 408.4 |
| | $ | 262.4 |
|
| Non-GAAP adjustments: | | | | | |
Restructuring related and other(a)(f) | 28.0 |
| | 21.3 |
| | 15.0 |
|
Financing and other transaction costs(b) | (40.3 | ) | | 9.3 |
| | 1.5 |
|
Loss/(gain) on commodity and other hedges(c) | 12.5 |
| | (7.4 | ) | | (19.3 | ) |
Depreciation and amortization expense related to the step-up in fair value of fixed and intangible assets and inventory(d)(f) | 141.2 |
| | 165.0 |
| | 210.8 |
|
Deferred income tax and other tax (benefit)/expense, net(e) | (128.3 | ) | | (55.2 | ) | | 17.1 |
|
| Amortization of debt issuance costs | 7.3 |
| | 7.2 |
| | 7.3 |
|
| Total adjustments | 20.4 |
| | 140.4 |
| | 232.4 |
|
| Adjusted net income | $ | 619.4 |
| | $ | 548.7 |
| | $ | 494.8 |
|
| |
| (a) | The following table presents the components of our restructuring related and other non-GAAP adjustment for fiscal years 2018, 2017, and 2016 (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not sum due to the effect of rounding): |
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| (Dollars in millions) | 2018 | | 2017 | | 2016 |
Severance costs(i) | $ | 9.2 |
| | $ | 3.0 |
| | $ | 0.0 |
|
Facility related costs(ii) | 8.2 |
| | 14.0 |
| | 10.9 |
|
Other(iii) | 10.6 |
| | 4.3 |
| | 4.0 |
|
| Total non-GAAP restructuring related and other | $ | 28.0 |
| | $ | 21.3 |
| | $ | 15.0 |
|
| |
| i. | Represents severance charges recognized and presented in restructuring and other charges, net, other than those charges, net of reversals, associated with the integration of an acquired business. |
| |
| ii. | Consists primarily of costs associated with line moves and the closing or relocation of various facilities throughout the world. Fiscal year 2018 includes $4.0 million of costs related to the consolidation of two manufacturing sites in Europe and $2.1 million of costs related to the move of a distribution center in Germany. Fiscal year 2017 includes $6.0 million of costs related to transitioning certain of our distribution centers within Europe, $3.7 million of costs related to the consolidation of two manufacturing sites in Europe, and $3.0 million of costs associated with the closing of our Schrader Brazil manufacturing facility. Fiscal year 2016 includes $3.7 million of costs associated with the relocation of manufacturing lines from our facility in the Dominican Republic to a manufacturing facility in Mexico, $1.1 million in non-severance related costs associated with the closing of our Schrader Brazil manufacturing facility, and $3.8 million of costs associated with other exited product lines. |
| |
| iii. | Consists of amounts that do not fall within one of the other specific categories. Fiscal year 2018 primarily includes $6.6 million of charges related to certain of our manufacturing facilities in Mexico and $1.9 million of losses upon settlement of certain preacquisition loss contingencies. The charges related to certain of our manufacturing facilities in Mexico include operating inefficiencies, in part as a result of line moves, and repositioning actions, which include settlement losses related to our pension plans in Mexico. |
| |
| (b) | Includes losses related to debt financing transactions, costs incurred in connection with secondary offering or other equity transactions, costs associated with acquisition activity, and gains, losses, and transaction costs related to the divestiture of businesses. In fiscal year 2018, includes a $64.4 million gain on the sale of the Valves Business, $5.9 million of transaction costs, and $2.3 million of deferred compensation incurred in connection with the acquisition of GIGAVAC, which were recorded in restructuring and other charges, net on our consolidated statements of operations. Costs associated with debt financing transactions, which include losses of $2.4 million and $2.7 million in fiscal years 2018 and 2017, respectively, were recognized in other, net on our consolidated statements of operations. Costs associated with equity transactions, which include $4.1 million and $6.6 million of costs to complete the Merger in fiscal years 2018 and 2017, respectively, were recognized in SG&A expense on our consolidated statements of operations. Costs associated with acquisition activity, including $2.5 million of transaction costs related to the acquisition of GIGAVAC in fiscal year 2018, are generally recorded in SG&A expense on our consolidated statements of operations. |
| |
| (c) | Includes deferred losses/(gains), net recognized on derivative instruments that are not designated as hedges. |
| |
| (d) | Represents depreciation and amortization expense related to the step-up in fair value of fixed and intangible assets and inventory related to acquisitions. |
| |
| (e) | Represents deferred income tax and other tax expense/(benefit), including provisions for, and interest expense and penalties related to, certain unrecognized tax benefits (or benefits from their release). Our deferred income tax includes adjustments for measuring book-to-tax basis differences primarily related to the step-up in fair value of fixed and intangible assets and goodwill, utilization of net operating losses and adjustments to our U.S. valuation allowance in connection with certain acquisitions. Other tax expense/(benefit) includes certain adjustments to unrecognized tax positions. Fiscal year 2018 includes a $122.1 million deferred tax benefit related to the release of a portion of our U.S. valuation allowance as discussed in Note 7, "Income Taxes," of our Financial Statements. Also included in our fiscal year 2018 results is $10.0 million of current tax expense related to the repatriation of profits from certain subsidiaries in China to their parent companies in the Netherlands. The decision to repatriate these profits was the result of our goal to reduce our balance sheet exposure, and corresponding earnings volatility, related to the Chinese Renminbi as well as fund our deployment of capital. Fiscal year 2017 includes $73.7 million of income tax benefits related to the remeasurement of the deferred tax liabilities associated with indefinite-lived intangible assets due to the reduction of the U.S. corporate income tax rate from 35% to 21% as a part of Tax Reform. Fiscal year 2016 includes $1.9 million of deferred income tax benefits related to the release of a portion of our U.S. valuation allowance in connection with our 2015 acquisition of CST. For this acquisition, deferred |
tax liabilities were established related primarily to the step-up of intangible assets for book purposes. Refer to Note 7, "Income Taxes," of our Financial Statements for more details.
| |
| (f) | The current income tax (benefit)/expense associated with the reconciling items presented above, which is included in adjusted net income, is shown below for each period presented. The current income tax (benefit)/expense was calculated by applying the relevant jurisdictional tax rate to the reconciling items that relate to jurisdictions where such items would provide current tax (benefit)/expense. |
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| (Dollars in millions) | 2018 | | 2017 | | 2016 |
| Restructuring related and other | $ | (1.2 | ) | | $ | (0.5 | ) | | $ | (1.0 | ) |
| Depreciation and amortization expense related to the step-up in fair value of fixed and intangible assets and inventory | 0.0 |
| | 0.0 |
| | (0.1 | ) |
| Total current income tax (benefit)/expense associated with non-GAAP adjustments above | $ | (1.2 | ) | | $ | (0.5 | ) | | $ | (1.1 | ) |
Liquidity and Capital Resources
The following table presents the total cash and cash flows from operations, should we decideequivalents held by Sensata plc and its subsidiaries disaggregated by country of domicile.
|
| | | | | | | |
| | As of December 31, |
| (Dollars in millions) | 2018 | | 2017 |
| Cash and cash equivalents: | | | |
| U.K. | $ | 8.8 |
| | $ | 13.7 |
|
| U.S. | 4.6 |
| | 9.0 |
|
| Netherlands | 482.1 |
| | 260.9 |
|
| China | 125.2 |
| | 383.0 |
|
| Other | 109.1 |
| | 86.5 |
|
| Cash and cash equivalents | $ | 729.8 |
| | $ | 753.1 |
|
The amount of cash and cash equivalents held in these locations fluctuates throughout the year due to do so.
STBV is limited in its ability to payfactors, such as our use of intercompany loans and dividends or otherwise make distributions to its immediate parent company and, ultimately, to us, under the Credit Agreement and the Senior Notes Indentures. Specifically, the Credit Agreement prohibits STBV from paying dividends or making any distributions to its parent companies except for limited purposes, including, but not limited to: (i) customarytiming of cash receipts and reasonable operating expenses, legal and accounting fees and expenses, and overhead of such parent companies incurreddisbursements in the ordinarynormal course of businessbusiness. Our earnings are not considered to be permanently reinvested in the aggregate not to exceed $10.0 millioncertain jurisdictions in any fiscal year, plus reasonable and customary indemnification claims made by our directors or officers attributable to the ownership of STBV and its Restricted Subsidiaries (currently all of the subsidiaries of STBV); (ii) franchise taxes, certain advisory fees, and customary compensation of officers and employees of such parent companieswhich they were earned. We record a deferred tax liability on these unremitted earnings to the extent the remittance of such compensation is attributable to the ownership or operations of STBV and its Restricted Subsidiaries; (iii) repurchase, retirement, or other acquisition of equity interest of the parent from certain present, future, and former employees, directors, managers, consultants of the parent companies, STBV, or its subsidiariesearnings cannot be recovered in an aggregate amount not to exceed $15.0 million in any fiscal year, plus the amount of cash proceeds from certain equity issuances to such persons, the amount of equity interests subject to a certain deferred compensation plan, and the amount of certain key-man life insurance proceeds; (iv) so long as no default or event of default exists and the senior secured net leverage ratio is less than 2.0:1.0 calculated on a pro forma basis, dividends and other distributions in an aggregate amount not to exceed $100.0 million, plus certain amounts, including the retained portion of excess cash flow; (v) dividends and other distributions in an aggregate amount not to exceed $40.0 million in any calendar year (subject to increase upon the achievement of certain ratios); and (vi) so long as no default or event of default exists, dividends and other distributions in an aggregate amount not to exceed $150.0 million.tax free manner.
As of December 31, 2015, we were in compliance with all the covenants and default provisions under the Credit Agreement. For more information on our indebtedness and related covenants and default provisions, refer to Note 8, "Debt," of our audited consolidated financial statements, and Item 1A, “Risk Factors,” each included elsewhere in this Annual Report on Form 10-K.
Contractual Obligations and Commercial CommitmentsCash Flows
The table below reflectssummarizes our contractual obligations asprimary sources and uses of cash for the years ended December 31, 20152018, 2017, and 2016. Amounts we pay in future periods may varyWe have derived these summarized statements of cash flows from those reflected in the table.our Financial Statements. Amounts in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not addsum due to the effect of rounding.
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (Amounts in millions) | Total | | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years |
Debt obligations principal(1) | $ | 3,612.7 |
| | $ | 289.9 |
| | $ | 19.8 |
| | $ | 19.8 |
| | $ | 3,283.2 |
|
Debt obligations interest(2) | 1,401.3 |
| | 147.8 |
| | 316.2 |
| | 315.1 |
| | 622.2 |
|
Capital lease obligations principal(3) | 33.7 |
| | 2.5 |
| | 5.4 |
| | 6.4 |
| | 19.4 |
|
Capital lease obligations interest(3) | 17.0 |
| | 2.7 |
| | 4.8 |
| | 4.0 |
| | 5.5 |
|
Other financing obligations principal(4) | 13.1 |
| | 8.0 |
| | 3.4 |
| | 1.7 |
| | — |
|
Other financing obligations interest(4) | 1.3 |
| | 0.4 |
| | 0.6 |
| | 0.3 |
| | — |
|
Operating lease obligations(5) | 41.6 |
| | 9.9 |
| | 13.9 |
| | 5.7 |
| | 12.1 |
|
Non-cancelable purchase obligations(6) | 22.6 |
| | 12.0 |
| | 9.7 |
| | 1.0 |
| | — |
|
Total(7)(8) | $ | 5,143.3 |
| | $ | 473.2 |
| | $ | 373.8 |
| | $ | 354.0 |
| | $ | 3,942.4 |
|
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| (Dollars in millions) | 2018 | | 2017 | | 2016 |
| Net cash provided by/(used in): | | | | | |
| Operating activities: | | | | | |
| Net income adjusted for non-cash items | $ | 687.5 |
| | $ | 652.5 |
| | $ | 615.5 |
|
| Changes in operating assets and liabilities, net | (66.9 | ) | | (94.8 | ) | | (93.9 | ) |
| Operating activities | 620.6 |
| | 557.6 |
| | 521.5 |
|
| Investing activities | (237.6 | ) | | (140.7 | ) | | (174.8 | ) |
| Financing activities | (406.2 | ) | | (15.3 | ) | | (337.6 | ) |
| Net change | $ | (23.3 | ) | | $ | 401.7 |
| | $ | 9.2 |
|
__________________
Operating Activities
The increase in cash provided by operating activities in fiscal year 2018 compared to fiscal year 2017 relates primarily to improved operating profitability and timing of supplier payments and customer receipts.
The increase in cash provided by operating activities in fiscal year 2017 compared to fiscal year 2016 relates primarily to improved operating profitability, partially offset by a build-up of inventory to support anticipated line moves, higher cash paid for interest, and higher cash paid related to severance obligations. The higher cash paid for interest relates to the $750.0 million aggregate principal amount of 6.25% senior notes due 2026 (the "6.25% Senior Notes"), for which interest payments are due semi-annually on February 15 and August 15 of each year. The payment made on February 15, 2016 did not represent payment for a full six-month period, as the 6.25% Senior Notes were issued on November 27, 2015.
Investing Activities
Investing activities include additions to property, plant and equipment and capitalized software, the acquisition or sale of a business, and the acquisition or sale of certain debt and equity investments.
In fiscal year 2018, net cash used in investing activities was primarily composed of $228.3 million of cash used to acquire GIGAVAC (i.e., net of cash received), $159.8 million of cash used to purchase PP&E and capitalized software, and $149.8 million of cash provided from the sale of the Valves Business (i.e., net of cash sold). Refer to Note 17, "Acquisitions and Divestitures," for further discussion of the sale of the Valves Business and the acquisition of GIGAVAC.
In fiscal year 2017, net cash used in investing activities was primarily composed of $144.6 million of cash used to purchase PP&E and capitalized software.
In fiscal year 2016, net cash used in investing activities was primarily composed of $130.2 million of cash used to purchase PP&E and capitalized software and an investment of $50.0 million in preferred stock of Quanergy Systems, Inc ("Quanergy"). Refer to Note 18, "Fair Value Measures," for further discussion of this investment.
In fiscal year 2019, we anticipate additions to property, plant and equipment and capitalized software of approximately $165.0 million to $185.0 million, which we expect to be funded with cash flows from operations.
Financing Activities
Net cash used in financing activities in fiscal year 2018 consisted primarily of $399.4 million in payments to repurchase our ordinary shares related to our $400.0 million share repurchase program and $15.7 million in payments on debt.
Net cash used in financing activities in fiscal year 2017 consisted primarily of $943.6 million in payments on debt, partially offset by $927.8 million of proceeds from the issuance of debt. These cash flows result from the repricing of the term loan provided pursuant to the sixth amendment (the "Sixth Amendment") of the Credit Agreement, and the resulting issuance of the Term Loan pursuant to the Eighth Amendment. Refer to Debt Instruments below and Note 14, "Debt," of our Financial Statements for further discussion of the terms of these amendments.
Net cash used in financing activities in fiscal year 2016 consisted primarily of $336.3 million in payments on debt, including $280.0 million in payments on the Revolving Credit Facility and $44.9 million in payments on our then outstanding term loan.
Indebtedness and Liquidity
The following table details our gross outstanding indebtedness as of December 31, 2018, and the associated interest expense for fiscal year 2018 (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not sum due to the effect of rounding):
|
| | | | | | | |
| (Dollars in millions) | Balance as of December 31, 2018 | | Interest Expense, net for the year ended December 31, 2018 |
| Term Loan | $ | 917.8 |
| | $ | 34.8 |
|
| 4.875% Senior Notes | 500.0 |
| | 24.4 |
|
| 5.625% Senior Notes | 400.0 |
| | 22.5 |
|
| 5.0% Senior Notes | 700.0 |
| | 35.0 |
|
| 6.25% Senior Notes | 750.0 |
| | 46.9 |
|
| Capital lease and other financing obligations | 35.5 |
| | 2.9 |
|
| Total gross outstanding indebtedness | $ | 3,303.3 |
| |
|
|
Other interest expense, net (1) | | | (12.7 | ) |
| Interest expense, net |
|
| | $ | 153.7 |
|
| |
(1) | Represents the contractually required principal payments under the Senior NotesOther interest expense, net includes interest income, amortization of debt issuance costs, and interest costs capitalized in accordance with FASB Accounting Standards Codification ("ASC") Subtopic 835-20, Capitalization of Interest.
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Debt Instruments
Summarized information regarding our debt instruments is described below. Refer to Note 14, "Debt," of our Financial Statements for further details of the terms of our Debt Instruments.
Senior Secured Credit Facilities
In May 2011, we completed a series of transactions designed to refinance our then existing indebtedness. These transactions included the execution of the Credit Agreement, which provided for senior secured credit facilities (the "Senior Secured Credit Facilities") which currently consists of the Term Loan, the Revolving Credit Facility, and $1.0 billion incremental availability (the "Accordion") under which, subject to certain limitations as defined in the indentures under which the Senior Notes (as defined below) were issued (the "Senior Notes Indentures"), additional secured debt may be issued or the capacity of the Revolving Credit Facility may be increased.
Term Loan
The Term Loan may, at our option, be maintained from time to time as a Base Rate loan or a Eurodollar Rate loan (each as defined in the Credit Agreement), each with a different determination of interest rates. The principal amount of the Term Loan amortizes in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the term loan provided under the Sixth Amendment, with the balance due at maturity.
The applicable margins for the Term Loan as of December 31, 2015 in accordance with the required payment schedule. Also represents full payment on the Revolving Credit Facility (which is not contractually due until March 26, 2020) within the next year, consistent with the presentation as current on the balance sheet.
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(2) | Represents the contractually required interest payments on our debt obligations in existence as of December 31, 2015 in accordance with the required payment schedule. Cash flows associated with the next interest payment to be made on our variable rate debt subsequent to December 31, 2015 were calculated using the interest rates in effect as of the latest interest rate reset date prior to December 31, 2015, plus the applicable spread.
|
| |
(3) | Represents the contractually required payments under our capital lease obligations in existence as of December 31, 2015 in accordance with the required payment schedule. No assumptions were made with respect to renewing the lease term at its expiration date.
|
| |
(4) | Represents the contractually required payments under our financing obligations in existence as of December 31, 2015 in accordance with the required payment schedule. In December 2015, we reached an agreement to reacquire our
|
manufacturing facility in Subang Jaya, Malaysia, which is accounted for as an "other financing obligation." This transaction is expected to close in 2016, and as a result, the remaining obligation is presented on our consolidated balance sheet as of December 31, 20152018 were 0.75% and 1.75% for Base Rate loans and Eurodollar Rate loans, respectively, subject to floors of 1.00% and 0.00% for Base Rate loans and Eurodollar Rate loans, respectively. As of December 31, 2018, we maintained the Term Loan as a current liability. Accordingly,Eurodollar Rate loan.
Revolving Credit Facility
As of December 31, 2018, there was $416.1 million of availability under the remaining obligation related to this facilityRevolving Credit Facility, net of $3.9 million of letters of credit. Outstanding letters of credit are issued primarily for the benefit of certain operating activities. As of December 31, 2018, no amounts had been drawn against these outstanding letters of credit.
Senior Notes
At December 31, 2018, we had various tranches of senior notes outstanding, including $500.0 million aggregate principal amount of 4.875% senior notes due 2023 (the "4.875% Senior Notes"), $400.0 million aggregate principal amount of 5.625% senior notes due 2024 (the "5.625% Senior Notes"), $700.0 million aggregate principal amount of 5.0% senior notes due 2025 (the "5.0% Senior Notes"), and the 6.25% Senior Notes (collectively, with the 4.875% Senior Notes, the 5.625% Senior Notes, and the 5.0% Senior Notes, the "Senior Notes").
4.875% Senior Notes
In April 2013, we completed the issuance and sale of the 4.875% Senior Notes, which were offered at par, and mature on October 15, 2023. Interest on the 4.875% Senior Notes is presented inpayable semi-annually on April 15 and October 15 of each year.
5.625% Senior Notes
In October 2014, we completed the table above as being due withinissuance and sale of the next5.625% Senior Notes, which were offered at par, and mature on November 1, 2024. Interest on the 5.625% Senior Notes is payable semi-annually on May 1 and November 1 of each year. No assumptions
5.0% Senior Notes
In March 2015, we completed the issuance and sale of the 5.0% Senior Notes, which were made with respect to renewingoffered at par, and mature on October 1, 2025. Interest on the financing arrangements5.0% Senior Notes is payable semi-annually on April 1 and October 1 of each year.
6.25% Senior Notes
In November 2015, we completed the issuance and sale of the 6.25% Senior Notes, which were offered at their expiration dates.par, and mature on February 15, 2026. Interest on the 6.25% Senior Notes is payable semi-annually on February 15 and August 15 of each year.
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(5) | Represents the contractually required payments under our operating lease obligations in existence as of December 31, 2015 in accordance with the required payment schedule. No assumptions were made with respect to renewing the lease obligations at the expiration date of their initial terms.
|
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(6) | Represents the contractually required payments under our various purchase obligations in existence as of December 31, 2015. No assumptions were made with respect to renewing the purchase obligations at the expiration date of their initial terms, and no amounts were assumed to be prepaid.
|
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(7) | Contractual obligations denominated in a foreign currency were calculated utilizing the U.S. dollar to local currency exchange rates in effect as of December 31, 2015.
|
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(8) | This table does not include the contractual obligations associated with our defined benefit and other post-retirement benefit plans. As of December 31, 2015, we had recognized a net benefit liability of $35.0 million, representing the net unfunded benefit obligations of the defined benefit and retiree healthcare plans. Refer to Note 10, "Pension and Other Post-Retirement Benefits," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information on pension and other post-retirement benefits, including expected benefit payments for the next 10 years. This table also does not include $38.1 million of unrecognized tax benefits as of December 31, 2015, as we are unable to make reasonably reliable estimates of when cash settlement, if any, will occur with a tax authority, as the timing of the examination and the ultimate resolution of the examination is uncertain. Refer to Note 9, "Income Taxes," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information on income taxes. |
Legal Proceedings
We accountare regularly involved in a number of claims and litigation matters in the ordinary course of business. Most of our litigation matters are third-party claims related to patent infringement allegations or for litigation and claims losses in accordance with Accounting Standards Codification ("ASC") Topic 450, Contingencies (“ASC 450”). Under ASC 450, loss contingency provisions are recorded for probable and estimable losses atproperty damage allegedly caused by our best estimateproducts, but some involve allegations of a losspersonal injury or when a best estimate cannot be made, at our estimate of the minimum loss. These estimates are often developed priorwrongful death. From time to knowing the amount of the ultimate loss, require the application of considerable judgment, and are refined each accounting period as additional information becomes known. Accordingly,time, we are often initially unable to develop a best estimate of lossalso involved in disagreements with vendors and therefore the minimum amount,customers. Information on certain legal proceedings in which could be an immaterial amount,we are involved is recorded. As information becomes known, either the minimum loss amount is increased, or a best estimate can be made, generally resultingincluded in additional loss provisions. A best estimate amount may be changed to a lower amount when events result in an expectation of a more favorable outcome than previously expected. There can be no assurances that our recorded provisions will be sufficient to cover the extent of our costs and potential liability. Refer to Note 14,15, "Commitments and Contingencies," of our audited consolidatedFinancial Statements. Although it is not feasible to predict the outcome of these matters, based upon our experience and current information known to us, we do not expect the outcome of these matters, either individually or in the aggregate, to have a material adverse effect on our results of operations, financial statementsposition, or cash flows.
Results of Operations
Our discussion and analysis of results of operations are based upon our Financial Statements. These Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these Financial Statements requires us to make estimates and judgments that affect the amounts reported therein. We base our estimates on historical experience and assumptions believed to be reasonable under the circumstances, and we re-evaluate such estimates on an ongoing basis. Actual results could differ from our estimates under different assumptions or conditions. Our significant accounting policies and estimates are more fully described in Note 2, "Significant Accounting Policies," of our Financial Statements, and Critical Accounting Policies and Estimates included elsewhere in this Annual ReportManagement's Discussion and Analysis of Financial Condition and Results of Operations.
The table below presents our historical results of operations in millions of dollars and as a percentage of net revenue. We have derived these results of operations from our Financial Statements. Amounts and percentages in the table below have been calculated based on Form 10-Kunrounded numbers. Accordingly, certain amounts may not sum due to the effect of rounding.
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| | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| (Dollars in millions) | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue |
| Net revenue: |
|
|
| | | | | | | | |
| Performance Sensing | $ | 2,627.7 |
|
| 74.6 | % | | $ | 2,460.6 |
| | 74.4 | % | | $ | 2,385.4 |
| | 74.5 | % |
| Sensing Solutions | 894.0 |
|
| 25.4 |
| | 846.1 |
| | 25.6 |
| | 816.9 |
| | 25.5 |
|
| Total net revenue | 3,521.6 |
|
| 100.0 | % | | 3,306.7 |
| | 100.0 | % | | 3,202.3 |
| | 100.0 | % |
| Operating costs and expenses: |
|
|
| | | | | | | | |
| Cost of revenue | 2,266.9 |
|
| 64.4 |
| | 2,138.9 |
| | 64.7 |
| | 2,084.2 |
| | 65.1 |
|
| Research and development | 147.3 |
|
| 4.2 |
| | 130.1 |
| | 3.9 |
| | 126.7 |
| | 4.0 |
|
| Selling, general and administrative | 305.6 |
|
| 8.7 |
| | 301.9 |
| | 9.1 |
| | 293.5 |
| | 9.2 |
|
| Amortization of intangible assets | 139.3 |
|
| 4.0 |
| | 161.1 |
| | 4.9 |
| | 201.5 |
| | 6.3 |
|
| Restructuring and other charges, net | (47.8 | ) |
| (1.4 | ) | | 19.0 |
| | 0.6 |
| | 4.1 |
| | 0.1 |
|
| Total operating costs and expenses | 2,811.2 |
|
| 79.8 |
| | 2,750.9 |
| | 83.2 |
| | 2,709.9 |
| | 84.6 |
|
| Profit from operations | 710.4 |
|
| 20.2 |
| | 555.8 |
| | 16.8 |
| | 492.4 |
| | 15.4 |
|
| Interest expense, net | (153.7 | ) |
| (4.4 | ) | | (159.8 | ) | | (4.8 | ) | | (165.8 | ) | | (5.2 | ) |
| Other, net | (30.4 | ) |
| (0.9 | ) | | 6.4 |
| | 0.2 |
| | (5.1 | ) | | (0.2 | ) |
| Income before taxes | 526.4 |
|
| 14.9 |
| | 402.4 |
| | 12.2 |
| | 321.4 |
| | 10.0 |
|
| (Benefit from)/provision for income taxes | (72.6 | ) |
| (2.1 | ) | | (5.9 | ) | | (0.2 | ) | | 59.0 |
| | 1.8 |
|
| Net income | $ | 599.0 |
|
| 17.0 | % | | $ | 408.4 |
| | 12.3 | % | | $ | 262.4 |
| | 8.2 | % |
Net revenue - Overall
Net revenue for discussionfiscal year 2018 increased $214.9 million, or 6.5%, to $3,521.6 million from $3,306.7 million for fiscal year 2017. The increase in net revenue was composed of material outstanding legal proceedings.a 6.8% increase in Performance Sensing and a 5.7% increase in Sensing Solutions. Net revenue for fiscal year 2017 increased $104.4 million, or 3.3%, to $3,306.7 million from $3,202.3 million for fiscal year 2016. The increase in net revenue was composed of a 3.2% increase in Performance Sensing and a 3.6% increase in Sensing Solutions.
The following table reconciles reported net revenue growth, a GAAP financial measure, to organic revenue growth, a non-GAAP financial measure, for fiscal years 2018 and 2017. Refer to the section entitled Non-GAAP Financial Measures for further information on our use of this measure.
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| | | | | | | | | | | | | | | | | | |
| | | Fiscal Year 2018 Compared to Prior Year | | Fiscal Year 2017 Compared to Prior Year |
| | | Total | | Performance Sensing | | Sensing Solutions | | Total | | Performance Sensing | | Sensing Solutions |
| Reported net revenue growth | | 6.5 | % | | 6.8 | % | | 5.7 | % | | 3.3 | % | | 3.2 | % | | 3.6 | % |
| Percent impact of: | | | | | | | | | | | | |
Acquisition and divestiture, net (1) | | (0.8 | ) | | (1.3 | ) | | 0.7 |
| | — |
| | — |
| | — |
|
Foreign currency remeasurement (2) | | 1.3 |
| | 1.5 |
| | 0.8 |
| | (0.7 | ) | | (0.7 | ) | | (0.5 | ) |
| Organic revenue growth | | 6.0 | % | | 6.6 | % | | 4.2 | % | | 4.0 | % | | 3.9 | % | | 4.1 | % |
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(1) | Represents the percentage change in net revenue attributed to the effect of acquisitions and divestitures for the 12 months immediately following the respective transaction dates. The percentage amounts presented for fiscal year 2018 relate to the sale of the Valves Business and the acquisition of GIGAVAC, each of which is discussed in Note 17, "Acquisitions and Divestitures," of our Financial Statements. |
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(2) | Represents the percentage change in net revenue between the comparative periods attributed to differences in exchange rates used to remeasure foreign denominated revenue transactions into U.S. dollars, which is the functional currency of the |
Company and each of its subsidiaries. The percentage amounts presented above relate primarily to the Euro to U.S. dollar and U.S. dollar to Chinese Renminbi exchange rates.
Net revenue - Performance Sensing
Performance Sensing net revenue for fiscal year 2018 increased $167.1 million, or 6.8%, to $2,627.7 million from $2,460.6 million for fiscal year 2017. Organic revenue growth of 6.6% in fiscal year 2018 was primarily attributable to content growth in our automotive business, principally in China and North America, as well as a combination of market and content growth in our HVOR business, partially offset by price reductions of 1.9%, primarily related to automotive customers, which are consistent with our expectations for future pricing pressures. Our HVOR business benefited from production growth in the construction, North American on-road truck, and agriculture markets, and we generated content growth from sales to on-road truck customers, particularly in China and Europe, as well as off-road customers in the agriculture industry.
Performance Sensing net revenue for fiscal year 2017 increased $75.2 million, or 3.2%, to $2,460.6 million from $2,385.4 million for fiscal year 2016. Organic revenue growth of 3.9% in fiscal year 2017 was primarily driven by our HVOR business, mainly as a result of the combination of stronger market and content growth in the construction, agriculture, and on-road truck end markets in North America, and content growth in our automotive business, primarily in China, partially offset by price reductions of 1.9%, primarily related to automotive customers.
Net revenue - Sensing Solutions
Sensing Solutions net revenue for fiscal year 2018 increased $47.8 million, or 5.7%, to $894.0 million from $846.1 million for fiscal year 2017. Organic revenue growth of 4.2% in fiscal year 2018 was primarily due to growth in our industrial sensing, aerospace, and semiconductor businesses.
Sensing Solutions net revenue for fiscal year 2017 increased $29.2 million, or 3.6%, to $846.1 million from $816.9 million for fiscal year 2016. Organic revenue growth of 4.1% in fiscal year 2017 was primarily due to market strength across all of our key end markets, particularly in China, as well as content growth in our appliance and HVAC and industrial end markets.
Cost of revenue
Cost of revenue for fiscal years 2018, 2017, and 2016 was $2,266.9 million (64.4% of net revenue), $2,138.9 million (64.7% of net revenue), and $2,084.2 million (65.1% of net revenue), respectively.
Cost of revenue as a percentage of net revenue decreased in fiscal year 2018 primarily due to the favorable impact of foreign currency exchange rates, partially offset by higher trade tariffs.
Cost of revenue as a percentage of net revenue decreased in fiscal year 2017 primarily due to improved operating efficiencies and synergies from the continued integration of acquired businesses, partially offset by the negative impact of price reductions.
Research and development expense
R&D expense for fiscal years 2018, 2017, and 2016 was $147.3 million, $130.1 million, and $126.7 million, respectively.
R&D expense has increased over the last three years due to increased design and development effort to support new design wins and fund development activities to intersect emerging "megatrends" that are shaping our end markets, as well as the unfavorable impact of foreign currency exchange rates, primarily the Euro.
Selling, general and administrative expense
SG&A expense for fiscal years 2018, 2017, and 2016 was $305.6 million, $301.9 million, and $293.5 million, respectively.
SG&A increased in 2018 primarily due to the unfavorable impact of foreign currency exchange rates, higher share-based compensation expense, transaction costs related to the acquisition of GIGAVAC, and higher selling costs, partially offset by lower variable compensation, lower costs related to the cross-border merger between Sensata N.V. and Sensata plc (the "Merger"), lower integration costs, synergies from the integration of acquired businesses, and productivity improvements.
SG&A expense increased in 2017 primarily due to $6.6 million of expenses incurred in connection with the Merger and higher variable compensation costs, partially offset by lower integration costs.
Amortization of intangible assets
Amortization of intangible assets for fiscal years 2018, 2017, and 2016 was $139.3 million, $161.1 million, and $201.5 million, respectively. The decrease in amortization expense is due to the fact that a majority of our intangible assets are amortized using the economic benefit basis, which in effect concentrates amortization expense towards the beginning of that intangible asset's useful life, as well as the impact of certain intangible assets reaching the end of their useful lives.
We expect amortization expense to increase to approximately $142.2 million in fiscal year 2019, due primarily to additional amortization expense related to the intangible assets associated with the acquisition of GIGAVAC. Refer to Note 11, "Goodwill and Other Intangible Assets, Net," of our Financial Statements for additional information regarding intangible assets and the related amortization.
Restructuring and other charges, net
Restructuring and other charges, net for fiscal years 2018, 2017, and 2016 consisted of the following (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not sum due to the effect of rounding):
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| | | | | | | | | | | | |
| | | For the year ended December 31, |
| (Dollars in millions) | | 2018 | | 2017 | | 2016 |
Severance costs, net (1) | | $ | 7.6 |
| | $ | 11.1 |
| | $ | 0.8 |
|
Facility and other exit costs (2) | | 0.9 |
| | 7.9 |
| | 3.3 |
|
Gain on sale of Valves Business (3) | | (64.4 | ) | | — |
| | — |
|
Other (4) | | 8.2 |
| | — |
| | — |
|
| Restructuring and other charges, net | | $ | (47.8 | ) | | $ | 19.0 |
| | $ | 4.1 |
|
| |
(1) | Severance costs for the year ended December 31, 2018 were attributable to limited workforce reductions of manufacturing, engineering, and administrative positions as well as the elimination of redundant roles in connection with site consolidations. Severance costs, net recognized during the year ended December 31, 2017 included $8.4 million of charges related to the closure of our facility in Minden, Germany, a site we obtained in connection with the acquisition of certain subsidiaries of Custom Sensors & Technologies Ltd. ("CST"). Severance costs for the year ended December 31, 2016 primarily related to charges recorded in connection with acquired businesses and the termination of a limited number of employees in various locations throughout the world. |
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(2) | Facility and other exit costs for the year ended December 31, 2017 included $3.2 million of costs related to the closure of our facility in Minden, Germany and the transfer of equipment to alternate operating sites as well as $3.1 million of costs associated with the consolidation of two other manufacturing sites in Europe. Facility and other exit costs for the year ended December 31, 2016 primarily related to the relocation of manufacturing lines from our facility in the Dominican Republic to a manufacturing facility in Mexico. We completed the cessation of manufacturing in our Dominican Republic facility in the third quarter of 2016. |
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(3) | In fiscal year 2018 we completed the sale of the Valves Business to Pacific. The gain on this sale is included in restructuring and other charges, net. Refer to Note 17, "Acquisitions and Divestitures," for further discussion of the sale of the Valves Business. |
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(4) | In the year ended December 31, 2018, we incurred $5.9 million of incremental direct costs in order to transact the sale of the Valves Business and $2.2 million of deferred compensation incurred in connection with the acquisition of GIGAVAC. Refer to Note 17, "Acquisitions and Divestitures," for further discussion. |
Interest expense, net
Interest expense, net for fiscal years 2018, 2017, and 2016 was $153.7 million, $159.8 million, and $165.8 million, respectively. Interest expense, net has decreased primarily as a result of an increase in interest income due to higher average cash balances in fiscal year 2018, partially offset by an increase in interest expense related to higher variable interest rates.
Other, net
Other, net for fiscal years 2018, 2017, and 2016 consisted of the following (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not sum due to the effect of rounding):
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| | | | | | | | | | | |
| | For the year ended December 31, |
| (Dollars in millions) | 2018 | | 2017 | | 2016 |
Currency remeasurement (loss)/gain on net monetary assets (1) | $ | (18.9 | ) | | $ | 18.0 |
| | $ | (10.6 | ) |
Gain/(loss) on foreign currency forward contracts (2) | 2.1 |
| | (15.6 | ) | | (1.9 | ) |
(Loss)/gain on commodity forward contracts (2) | (8.5 | ) | | 10.0 |
| | 7.4 |
|
| Loss on debt financing | (2.4 | ) | | (2.7 | ) | | — |
|
Net periodic benefit cost, excluding service cost (3) | (3.6 | ) | | (3.4 | ) | | (0.2 | ) |
| Other | 0.9 |
| | 0.1 |
| | 0.2 |
|
| Other, net | $ | (30.4 | ) | | $ | 6.4 |
| | $ | (5.1 | ) |
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(1) | Relates to the remeasurement of non-U.S. dollar denominated monetary assets and liabilities into U.S. dollars. |
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(2) | Relates to changes in the fair value of derivative financial instruments that are not designated as hedges. Refer to Note 19, "Derivative Instruments and Hedging Activities," of our Financial Statements for additional discussion of gains and losses related to our commodity and foreign exchange forward contracts. Refer to Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," included elsewhere in this Report for an analysis of the sensitivity of other, net to changes in foreign currency exchange rates and commodity prices. |
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(3) | On January 1, 2018, we adopted FASB ASU No. 2017-07, which requires the non-service cost components of net periodic benefit cost to be presented apart from the service cost component and outside of profit from operations. Refer to Note 2, "Significant Accounting Policies," and Note 13, "Pension and Other Post-Retirement Benefits," of our Financial Statements for additional details. |
(Benefit from)/provision for income taxes
(Benefit from)/provision for income taxes for fiscal years 2018, 2017, and 2016 was $(72.6) million, $(5.9) million, and $59.0 million, respectively, the components of which are described in more detail in the table below (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not sum due to the effect of rounding):
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| | | | | | | | | | | |
| | For the year ended December 31, |
| (Dollars in millions) | 2018 | | 2017 | | 2016 |
Tax computed at statutory rate of 21% in 2018 and 35% in 2017 and 2016 (1) | $ | 110.5 |
| | $ | 140.9 |
| | $ | 112.5 |
|
Change in valuation allowances (2) | (123.4 | ) | | (3.4 | ) | | 30.6 |
|
Foreign tax rate differential (3) | (41.2 | ) | | (112.0 | ) | | (86.3 | ) |
| Change in tax laws or rates | (22.3 | ) | | 3.9 |
| | 2.5 |
|
Research and development incentives (4) | (19.5 | ) | | (5.9 | ) | | (11.0 | ) |
| Reserve for tax exposure | 10.8 |
| | 38.0 |
| | 11.2 |
|
U.S. Tax Reform impact (5) | — |
| | (73.7 | ) | | — |
|
Other (6) | 12.4 |
| | 6.3 |
| | (0.5 | ) |
| (Benefit from)/provision for income taxes | $ | (72.6 | ) | | $ | (5.9 | ) | | $ | 59.0 |
|
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(1) | Represents the product of the applicable statutory tax rate and income before taxes, as reported on our consolidated statements of operations. In fiscal year 2018 the statutory rate declined to 21% (i.e., compared to 35% in previous years) due to the effect of Tax Reform. |
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(2) | During the years ended December 31, 2018, 2017, and 2016, we released a portion of our valuation allowance and recognized a deferred tax benefit. The remaining valuation allowance as of December 31, 2018 and 2017 was $157.0 million and $277.3 million, respectively. The remaining valuation allowance mainly relates to foreign tax credit and capital loss carryforwards and suspended interest deductions. It is more likely than not that these attributes will not be utilized in the foreseeable future. However, any future release of all or a portion of this valuation allowance resulting from a change in this assessment will impact our future (benefit from)/provision for income taxes. |
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(3) | We operate in locations outside the U.S., including Bermuda, Bulgaria, China, Malaysia, the Netherlands, South Korea, and the U.K., that historically have had statutory tax rates different than the U.S. statutory rate. This can result in a foreign tax rate differential that may reflect a tax benefit or detriment. This foreign rate differential can change from year to year based upon the jurisdictional mix of earnings and changes in current and future enacted tax rates. Certain of our subsidiaries are currently eligible, or have been eligible, for tax exemptions or holidays in their respective jurisdictions. |
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(4) | Certain income of our U.K. subsidiaries is eligible for lower tax rates under the "patent box" regime, resulting in certain of our intellectual property income being taxed at a rate lower than the U.K. statutory tax rate. Certain R&D expenses are eligible for a bonus deduction under China’s R&D super deduction regime. In 2018, we substantially completed an assessment of our ability to claim an R&D credit in the U.S. As a result of this assessment, we recorded a tax benefit of $10.0 million. Prior to fiscal year 2018, the deferred tax asset related to these R&D credits would have been offset by the valuation allowance. |
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(5) | Relates to the enactment of Tax Reform during the fourth quarter of 2017, which required us to remeasure our U.S. deferred tax assets and liabilities associated with indefinite lived intangible assets, including goodwill, from a rate of 35% to 21%. Absent this deferred tax liability, the U.S. operation was in a net deferred tax asset position that was offset by a full valuation allowance at December 31, 2017. |
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(6) | Refer to Note 7, "Income Taxes," of our Financial Statements for more details regarding other components of our rate reconciliation. |
We do not believe that inflationthere are any known trends related to the reconciling items noted above that are reasonably likely to result in our liquidity increasing or decreasing in any material way.
Non-GAAP Financial Measures
This section provides additional information regarding certain non-GAAP financial measures, including organic revenue growth and adjusted net income, which are used by our management, Board of Directors, and investors as further discussed below. Organic revenue growth and adjusted net income should be considered as supplemental in nature and are not intended to be considered in isolation or as a substitute for reported net revenue growth or net income, respectively, calculated in accordance with U.S. GAAP. In addition, our measures of organic revenue growth and adjusted net income may not be the same as, or comparable to, similar non-GAAP financial measures presented by other companies.
Organic revenue growth
Organic revenue growth is defined as the reported percentage change in net revenue calculated in accordance with U.S. GAAP, excluding the period-over-period impact of foreign exchange rate differences as well as the net impact of acquired and divested businesses for the first 12 months following the transaction date. Refer to the Net revenue - overall section above for a reconciliation of reported revenue growth to organic revenue growth.
We believe that organic revenue growth provides investors with helpful information with respect to our operating performance, and we use organic revenue growth to evaluate our ongoing operations as well as for internal planning and forecasting purposes. We believe that organic revenue growth provides useful information in evaluating the results of our business because it excludes items that we believe are not indicative of ongoing performance or that we believe impact comparability with the prior-year period.
Adjusted net income
We define adjusted net income as follows: net income, determined in accordance with U.S. GAAP, excluding certain non-GAAP adjustments, including:
Restructuring related and other - includes charges, net related to certain restructuring actions as well as other costs (or income) that we believe are either unique or unusual to the identified reporting period, and that we believe impact comparisons to prior period operating results. Such amounts are excluded from internal financial statements and analyses that management uses in connection with financial planning, and in its review and assessment of our operating and financial performance, including the performance of our segments. Restructuring related and other does not, however, include charges related to the integration of acquired businesses, including such charges that are recognized as restructuring and other charges, net in our consolidated statements of operations.
Financing and other transaction costs – includes losses/(gains) related to debt financing transactions and third-party transaction costs, including for legal, accounting, and other professional services that are directly related to equity transactions, acquisitions, or divestitures.
Deferred losses/(gains) on other hedges.
Depreciation and amortization expense related to the step-up in fair value of fixed and intangible assets and inventory.
Deferred income tax and other tax expense/(benefit) – includes adjustments for book-to-tax basis differences due primarily to the step-up in fair value of fixed and intangible assets and goodwill, the utilization of net operating losses, and adjustments to our U.S. valuation allowance. Other tax expense/(benefit) includes certain adjustments to unrecognized tax positions and withholding tax on repatriation of foreign earnings.
Amortization of debt issuance costs.
Management uses adjusted net income as a measure of operating performance, for planning purposes (including the preparation of our annual operating budget), to allocate resources to enhance the financial performance of our business, to evaluate the effectiveness of our business strategies, and in communications with our Board of Directors and investors concerning our financial performance. We believe investors and securities analysts also use adjusted net income in their evaluation of our performance and the performance of other similar companies. Adjusted net income is not a measure of liquidity. The use of adjusted net income has hadlimitations, and this performance measure should not be considered in isolation from, or as an alternative to, U.S. GAAP measures such as net income.
Our definition of adjusted net income excludes the deferred (benefit from)/provision for income taxes and other tax (benefit)/expense. Our deferred (benefit from)/provision for income taxes includes: adjustments for book-to-tax basis differences due primarily to the step-up in fair value of fixed and intangible assets and goodwill, changes in tax laws, the utilization of net operating losses, and adjustments to our U.S. valuation allowance. Other tax (benefit)/expense includes certain adjustments to unrecognized tax positions. As we treat deferred income taxes as an adjustment to compute adjusted net income, the deferred income tax effect associated with the reconciling items presented below would not change adjusted net income for any period presented. Refer to note (f) to the table below for the theoretical current income tax expense/(benefit) associated with the reconciling items indicated, which relate to jurisdictions where such items would provide tax expense/(benefit).
Many of these adjustments to net income relate to a materialseries of strategic initiatives developed by our management aimed at better positioning us for future revenue growth and an improved cost structure. These initiatives have been modified from time to time to reflect changes in overall market conditions and the competitive environment facing our business. These initiatives include, among other items, acquisitions, divestitures, restructurings of certain operations, and various financing transactions. We describe these adjustments in more detail below.
The following table provides a reconciliation of adjusted net income to net income, the most directly comparable financial measure presented in accordance with U.S. GAAP (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not sum due to the effect of rounding):
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| (Dollars in millions) | 2018 | | 2017 | | 2016 |
| Net income | $ | 599.0 |
| | $ | 408.4 |
| | $ | 262.4 |
|
| Non-GAAP adjustments: | | | | | |
Restructuring related and other(a)(f) | 28.0 |
| | 21.3 |
| | 15.0 |
|
Financing and other transaction costs(b) | (40.3 | ) | | 9.3 |
| | 1.5 |
|
Loss/(gain) on commodity and other hedges(c) | 12.5 |
| | (7.4 | ) | | (19.3 | ) |
Depreciation and amortization expense related to the step-up in fair value of fixed and intangible assets and inventory(d)(f) | 141.2 |
| | 165.0 |
| | 210.8 |
|
Deferred income tax and other tax (benefit)/expense, net(e) | (128.3 | ) | | (55.2 | ) | | 17.1 |
|
| Amortization of debt issuance costs | 7.3 |
| | 7.2 |
| | 7.3 |
|
| Total adjustments | 20.4 |
| | 140.4 |
| | 232.4 |
|
| Adjusted net income | $ | 619.4 |
| | $ | 548.7 |
| | $ | 494.8 |
|
| |
| (a) | The following table presents the components of our restructuring related and other non-GAAP adjustment for fiscal years 2018, 2017, and 2016 (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not sum due to the effect of rounding): |
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| (Dollars in millions) | 2018 | | 2017 | | 2016 |
Severance costs(i) | $ | 9.2 |
| | $ | 3.0 |
| | $ | 0.0 |
|
Facility related costs(ii) | 8.2 |
| | 14.0 |
| | 10.9 |
|
Other(iii) | 10.6 |
| | 4.3 |
| | 4.0 |
|
| Total non-GAAP restructuring related and other | $ | 28.0 |
| | $ | 21.3 |
| | $ | 15.0 |
|
| |
| i. | Represents severance charges recognized and presented in restructuring and other charges, net, other than those charges, net of reversals, associated with the integration of an acquired business. |
| |
| ii. | Consists primarily of costs associated with line moves and the closing or relocation of various facilities throughout the world. Fiscal year 2018 includes $4.0 million of costs related to the consolidation of two manufacturing sites in Europe and $2.1 million of costs related to the move of a distribution center in Germany. Fiscal year 2017 includes $6.0 million of costs related to transitioning certain of our distribution centers within Europe, $3.7 million of costs related to the consolidation of two manufacturing sites in Europe, and $3.0 million of costs associated with the closing of our Schrader Brazil manufacturing facility. Fiscal year 2016 includes $3.7 million of costs associated with the relocation of manufacturing lines from our facility in the Dominican Republic to a manufacturing facility in Mexico, $1.1 million in non-severance related costs associated with the closing of our Schrader Brazil manufacturing facility, and $3.8 million of costs associated with other exited product lines. |
| |
| iii. | Consists of amounts that do not fall within one of the other specific categories. Fiscal year 2018 primarily includes $6.6 million of charges related to certain of our manufacturing facilities in Mexico and $1.9 million of losses upon settlement of certain preacquisition loss contingencies. The charges related to certain of our manufacturing facilities in Mexico include operating inefficiencies, in part as a result of line moves, and repositioning actions, which include settlement losses related to our pension plans in Mexico. |
| |
| (b) | Includes losses related to debt financing transactions, costs incurred in connection with secondary offering or other equity transactions, costs associated with acquisition activity, and gains, losses, and transaction costs related to the divestiture of businesses. In fiscal year 2018, includes a $64.4 million gain on the sale of the Valves Business, $5.9 million of transaction costs, and $2.3 million of deferred compensation incurred in connection with the acquisition of GIGAVAC, which were recorded in restructuring and other charges, net on our consolidated statements of operations. Costs associated with debt financing transactions, which include losses of $2.4 million and $2.7 million in fiscal years 2018 and 2017, respectively, were recognized in other, net on our consolidated statements of operations. Costs associated with equity transactions, which include $4.1 million and $6.6 million of costs to complete the Merger in fiscal years 2018 and 2017, respectively, were recognized in SG&A expense on our consolidated statements of operations. Costs associated with acquisition activity, including $2.5 million of transaction costs related to the acquisition of GIGAVAC in fiscal year 2018, are generally recorded in SG&A expense on our consolidated statements of operations. |
| |
| (c) | Includes deferred losses/(gains), net recognized on derivative instruments that are not designated as hedges. |
| |
| (d) | Represents depreciation and amortization expense related to the step-up in fair value of fixed and intangible assets and inventory related to acquisitions. |
| |
| (e) | Represents deferred income tax and other tax expense/(benefit), including provisions for, and interest expense and penalties related to, certain unrecognized tax benefits (or benefits from their release). Our deferred income tax includes adjustments for measuring book-to-tax basis differences primarily related to the step-up in fair value of fixed and intangible assets and goodwill, utilization of net operating losses and adjustments to our U.S. valuation allowance in connection with certain acquisitions. Other tax expense/(benefit) includes certain adjustments to unrecognized tax positions. Fiscal year 2018 includes a $122.1 million deferred tax benefit related to the release of a portion of our U.S. valuation allowance as discussed in Note 7, "Income Taxes," of our Financial Statements. Also included in our fiscal year 2018 results is $10.0 million of current tax expense related to the repatriation of profits from certain subsidiaries in China to their parent companies in the Netherlands. The decision to repatriate these profits was the result of our goal to reduce our balance sheet exposure, and corresponding earnings volatility, related to the Chinese Renminbi as well as fund our deployment of capital. Fiscal year 2017 includes $73.7 million of income tax benefits related to the remeasurement of the deferred tax liabilities associated with indefinite-lived intangible assets due to the reduction of the U.S. corporate income tax rate from 35% to 21% as a part of Tax Reform. Fiscal year 2016 includes $1.9 million of deferred income tax benefits related to the release of a portion of our U.S. valuation allowance in connection with our 2015 acquisition of CST. For this acquisition, deferred |
tax liabilities were established related primarily to the step-up of intangible assets for book purposes. Refer to Note 7, "Income Taxes," of our Financial Statements for more details.
| |
| (f) | The current income tax (benefit)/expense associated with the reconciling items presented above, which is included in adjusted net income, is shown below for each period presented. The current income tax (benefit)/expense was calculated by applying the relevant jurisdictional tax rate to the reconciling items that relate to jurisdictions where such items would provide current tax (benefit)/expense. |
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| (Dollars in millions) | 2018 | | 2017 | | 2016 |
| Restructuring related and other | $ | (1.2 | ) | | $ | (0.5 | ) | | $ | (1.0 | ) |
| Depreciation and amortization expense related to the step-up in fair value of fixed and intangible assets and inventory | 0.0 |
| | 0.0 |
| | (0.1 | ) |
| Total current income tax (benefit)/expense associated with non-GAAP adjustments above | $ | (1.2 | ) | | $ | (0.5 | ) | | $ | (1.1 | ) |
Liquidity and Capital Resources
The following table presents the total cash and cash equivalents held by Sensata plc and its subsidiaries disaggregated by country of domicile.
|
| | | | | | | |
| | As of December 31, |
| (Dollars in millions) | 2018 | | 2017 |
| Cash and cash equivalents: | | | |
| U.K. | $ | 8.8 |
| | $ | 13.7 |
|
| U.S. | 4.6 |
| | 9.0 |
|
| Netherlands | 482.1 |
| | 260.9 |
|
| China | 125.2 |
| | 383.0 |
|
| Other | 109.1 |
| | 86.5 |
|
| Cash and cash equivalents | $ | 729.8 |
| | $ | 753.1 |
|
The amount of cash and cash equivalents held in these locations fluctuates throughout the year due to a variety of factors, such as our use of intercompany loans and dividends and the timing of cash receipts and disbursements in the normal course of business. Our earnings are not considered to be permanently reinvested in certain jurisdictions in which they were earned. We record a deferred tax liability on these unremitted earnings to the extent the remittance of such earnings cannot be recovered in a tax free manner.
Cash Flows
The table below summarizes our primary sources and uses of cash for the years ended December 31, 2018, 2017, and 2016. We have derived these summarized statements of cash flows from our Financial Statements. Amounts in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not sum due to the effect of rounding.
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| (Dollars in millions) | 2018 | | 2017 | | 2016 |
| Net cash provided by/(used in): | | | | | |
| Operating activities: | | | | | |
| Net income adjusted for non-cash items | $ | 687.5 |
| | $ | 652.5 |
| | $ | 615.5 |
|
| Changes in operating assets and liabilities, net | (66.9 | ) | | (94.8 | ) | | (93.9 | ) |
| Operating activities | 620.6 |
| | 557.6 |
| | 521.5 |
|
| Investing activities | (237.6 | ) | | (140.7 | ) | | (174.8 | ) |
| Financing activities | (406.2 | ) | | (15.3 | ) | | (337.6 | ) |
| Net change | $ | (23.3 | ) | | $ | 401.7 |
| | $ | 9.2 |
|
Operating Activities
The increase in cash provided by operating activities in fiscal year 2018 compared to fiscal year 2017 relates primarily to improved operating profitability and timing of supplier payments and customer receipts.
The increase in cash provided by operating activities in fiscal year 2017 compared to fiscal year 2016 relates primarily to improved operating profitability, partially offset by a build-up of inventory to support anticipated line moves, higher cash paid for interest, and higher cash paid related to severance obligations. The higher cash paid for interest relates to the $750.0 million aggregate principal amount of 6.25% senior notes due 2026 (the "6.25% Senior Notes"), for which interest payments are due semi-annually on February 15 and August 15 of each year. The payment made on February 15, 2016 did not represent payment for a full six-month period, as the 6.25% Senior Notes were issued on November 27, 2015.
Investing Activities
Investing activities include additions to property, plant and equipment and capitalized software, the acquisition or sale of a business, and the acquisition or sale of certain debt and equity investments.
In fiscal year 2018, net cash used in investing activities was primarily composed of $228.3 million of cash used to acquire GIGAVAC (i.e., net of cash received), $159.8 million of cash used to purchase PP&E and capitalized software, and $149.8 million of cash provided from the sale of the Valves Business (i.e., net of cash sold). Refer to Note 17, "Acquisitions and Divestitures," for further discussion of the sale of the Valves Business and the acquisition of GIGAVAC.
In fiscal year 2017, net cash used in investing activities was primarily composed of $144.6 million of cash used to purchase PP&E and capitalized software.
In fiscal year 2016, net cash used in investing activities was primarily composed of $130.2 million of cash used to purchase PP&E and capitalized software and an investment of $50.0 million in preferred stock of Quanergy Systems, Inc ("Quanergy"). Refer to Note 18, "Fair Value Measures," for further discussion of this investment.
In fiscal year 2019, we anticipate additions to property, plant and equipment and capitalized software of approximately $165.0 million to $185.0 million, which we expect to be funded with cash flows from operations.
Financing Activities
Net cash used in financing activities in fiscal year 2018 consisted primarily of $399.4 million in payments to repurchase our ordinary shares related to our $400.0 million share repurchase program and $15.7 million in payments on debt.
Net cash used in financing activities in fiscal year 2017 consisted primarily of $943.6 million in payments on debt, partially offset by $927.8 million of proceeds from the issuance of debt. These cash flows result from the repricing of the term loan provided pursuant to the sixth amendment (the "Sixth Amendment") of the Credit Agreement, and the resulting issuance of the Term Loan pursuant to the Eighth Amendment. Refer to Debt Instruments below and Note 14, "Debt," of our Financial Statements for further discussion of the terms of these amendments.
Net cash used in financing activities in fiscal year 2016 consisted primarily of $336.3 million in payments on debt, including $280.0 million in payments on the Revolving Credit Facility and $44.9 million in payments on our financial conditionthen outstanding term loan.
Indebtedness and Liquidity
The following table details our gross outstanding indebtedness as of December 31, 2018, and the associated interest expense for fiscal year 2018 (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not sum due to the effect of rounding):
|
| | | | | | | |
| (Dollars in millions) | Balance as of December 31, 2018 | | Interest Expense, net for the year ended December 31, 2018 |
| Term Loan | $ | 917.8 |
| | $ | 34.8 |
|
| 4.875% Senior Notes | 500.0 |
| | 24.4 |
|
| 5.625% Senior Notes | 400.0 |
| | 22.5 |
|
| 5.0% Senior Notes | 700.0 |
| | 35.0 |
|
| 6.25% Senior Notes | 750.0 |
| | 46.9 |
|
| Capital lease and other financing obligations | 35.5 |
| | 2.9 |
|
| Total gross outstanding indebtedness | $ | 3,303.3 |
| |
|
|
Other interest expense, net (1) | | | (12.7 | ) |
| Interest expense, net |
|
| | $ | 153.7 |
|
| |
(1) | Other interest expense, net includes interest income, amortization of debt issuance costs, and interest costs capitalized in accordance with FASB Accounting Standards Codification ("ASC") Subtopic 835-20, Capitalization of Interest. |
Debt Instruments
Summarized information regarding our debt instruments is described below. Refer to Note 14, "Debt," of our Financial Statements for further details of the terms of our Debt Instruments.
Senior Secured Credit Facilities
In May 2011, we completed a series of transactions designed to refinance our then existing indebtedness. These transactions included the execution of the Credit Agreement, which provided for senior secured credit facilities (the "Senior Secured Credit Facilities") which currently consists of the Term Loan, the Revolving Credit Facility, and $1.0 billion incremental availability (the "Accordion") under which, subject to certain limitations as defined in the indentures under which the Senior Notes (as defined below) were issued (the "Senior Notes Indentures"), additional secured debt may be issued or the capacity of the Revolving Credit Facility may be increased.
Term Loan
The Term Loan may, at our option, be maintained from time to time as a Base Rate loan or a Eurodollar Rate loan (each as defined in the Credit Agreement), each with a different determination of interest rates. The principal amount of the Term Loan amortizes in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the term loan provided under the Sixth Amendment, with the balance due at maturity.
The applicable margins for the Term Loan as of December 31, 2018 were 0.75% and 1.75% for Base Rate loans and Eurodollar Rate loans, respectively, subject to floors of 1.00% and 0.00% for Base Rate loans and Eurodollar Rate loans, respectively. As of December 31, 2018, we maintained the Term Loan as a Eurodollar Rate loan.
Revolving Credit Facility
As of December 31, 2018, there was $416.1 million of availability under the Revolving Credit Facility, net of $3.9 million of letters of credit. Outstanding letters of credit are issued primarily for the benefit of certain operating activities. As of December 31, 2018, no amounts had been drawn against these outstanding letters of credit.
Senior Notes
At December 31, 2018, we had various tranches of senior notes outstanding, including $500.0 million aggregate principal amount of 4.875% senior notes due 2023 (the "4.875% Senior Notes"), $400.0 million aggregate principal amount of 5.625% senior notes due 2024 (the "5.625% Senior Notes"), $700.0 million aggregate principal amount of 5.0% senior notes due 2025 (the "5.0% Senior Notes"), and the 6.25% Senior Notes (collectively, with the 4.875% Senior Notes, the 5.625% Senior Notes, and the 5.0% Senior Notes, the "Senior Notes").
4.875% Senior Notes
In April 2013, we completed the issuance and sale of the 4.875% Senior Notes, which were offered at par, and mature on October 15, 2023. Interest on the 4.875% Senior Notes is payable semi-annually on April 15 and October 15 of each year.
5.625% Senior Notes
In October 2014, we completed the issuance and sale of the 5.625% Senior Notes, which were offered at par, and mature on November 1, 2024. Interest on the 5.625% Senior Notes is payable semi-annually on May 1 and November 1 of each year.
5.0% Senior Notes
In March 2015, we completed the issuance and sale of the 5.0% Senior Notes, which were offered at par, and mature on October 1, 2025. Interest on the 5.0% Senior Notes is payable semi-annually on April 1 and October 1 of each year.
6.25% Senior Notes
In November 2015, we completed the issuance and sale of the 6.25% Senior Notes, which were offered at par, and mature on February 15, 2026. Interest on the 6.25% Senior Notes is payable semi-annually on February 15 and August 15 of each year.
Capital Resources
Our sources of liquidity include cash on hand, cash flows from operations, and available capacity under the Revolving Credit Facility and the Accordion. We believe, based on our current level of operations as reflected in our results of operations for the year ended December 31, 2018, and taking into consideration the restrictions and covenants discussed below and in recent years.Note 14, "Debt," of our Financial Statements, that these sources of liquidity will be sufficient to fund our operations, capital expenditures, ordinary share repurchases, and debt service for at least the next twelve months. However, we cannot make assurances that our business will generate sufficient cash flows from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay or refinance our indebtedness or to fund our other liquidity needs. Further, our highly-leveraged nature may limit our ability to procure additional financing in the future.
Seasonality
BecauseThe Credit Agreement stipulates certain events and conditions that may require us to use excess cash flow, as defined by the terms of the diverse natureCredit Agreement, generated by operating, investing, or financing activities, to prepay some or all of the marketsoutstanding borrowings under the Senior Secured Credit Facilities. The Credit Agreement also requires mandatory prepayments of the outstanding borrowings under the Senior Secured Credit Facilities upon certain asset dispositions and casualty events, in which we operate,each case subject to certain reinvestment rights, and the incurrence of certain indebtedness (excluding any permitted indebtedness). These provisions were not triggered during the year ended December 31, 2018.
All obligations under the Senior Secured Credit Facilities are unconditionally guaranteed by certain of our revenue is only moderatelysubsidiaries (the "Guarantors"). The collateral for such borrowings under the Senior Secured Credit Facilities consists of substantially all present and future property and assets of Sensata Technologies B.V. ("STBV"), Sensata Technologies Finance Company, LLC, and the Guarantors.
Our ability to raise additional financing, and our borrowing costs, may be impacted by seasonality. However,short- and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on our Sensing Solutions business has some seasonal elements, specificallyperformance as measured by certain credit metrics such as interest coverage and leverage ratios. As of January 25, 2019, Moody’s Investors Service’s corporate credit rating for STBV was Ba2 with a stable outlook and Standard & Poor’s corporate credit rating for STBV was BB+ with a stable outlook. Any future downgrades to STBV's credit ratings may increase our borrowing costs, but will not reduce availability under the Credit Agreement.
The Credit Agreement and the Senior Notes Indentures contain restrictions and covenants (described in more detail in Note 14, "Debt," of our Financial Statements) that limit the ability of STBV and certain of its air conditioningsubsidiaries to, among other things, incur subsequent indebtedness, sell assets, make capital expenditures, pay dividends, and refrigeration products,make other restricted payments. These restrictions and covenants, which tendare subject to peakimportant exceptions and qualifications set forth in the first two quartersCredit Agreement and Senior Notes Indentures, were taken into consideration in establishing our share repurchase programs, and are evaluated periodically with respect to future potential funding. We do not believe that these restrictions and covenants will prevent us from funding share repurchases under our share repurchase programs with available cash and cash flows from operations, should we decide to do so. As of December 31, 2018, we believe that we were in compliance with all the covenants and default provisions under the Credit Agreement.
Share repurchase program
Upon completion of the Merger, the $250.0 million share repurchase program previously authorized by the Board of Directors of Sensata N.V. lapsed, and our ability to repurchase shares as a company incorporated in England and Wales became contingent upon the completion of certain court proceedings in the U.K. (which were completed in the second quarter of 2018), approval of our shareholders (which occurred at our May 31, 2018 annual general meeting of shareholders), and authorization by our Board of Directors.
On May 31, 2018, we announced that our Board of Directors had authorized a $400.0 million share repurchase program. Under this program, we could repurchase ordinary shares at such times and in amounts to be determined by our management, based on market conditions, legal requirements, and other corporate considerations, on the open market or in privately negotiated transactions, provided that such transactions were completed pursuant to an agreement and with a third party approved by our shareholders at the annual general meeting. The authorized amount of our share repurchase program could be modified or terminated by our Board of Directors at any time. During the year ended December 31, 2018, we repurchased approximately 7.6 million ordinary shares, which are now held as end-market inventory is built up for springtreasury shares, at a weighted-average price of $52.75 per share.
In October 2018, our Board of Directors authorized a new $250.0 million share repurchase program, subject to the same conditions that applied to the previously authorized $400.0 million share repurchase program. During the year ended December 31, 2018, we have not repurchased any ordinary shares under this new share repurchase program.
Contractual Obligations and summer sales.Commercial Commitments
The table below reflects our contractual obligations as of December 31, 2018. Amounts we pay in future periods may vary from those reflected in the table. Amounts in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not sum due to the effect of rounding.
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (Dollars in millions) | Total | | One Year or Less | | One to Three Years | | Three to Five Years | | More than Five Years |
Debt obligations principal(1) | $ | 3,267.8 |
| | $ | 9.7 |
| | $ | 908.1 |
| | $ | 500.0 |
| | $ | 1,850.0 |
|
Debt obligations interest(2) | 966.4 |
| | 171.0 |
| | 328.1 |
| | 257.4 |
| | 209.9 |
|
Capital lease obligations principal(3) | 32.7 |
| | 2.6 |
| | 3.6 |
| | 3.0 |
| | 23.5 |
|
Capital lease obligations interest(3) | 24.4 |
| | 2.1 |
| | 5.0 |
| | 4.5 |
| | 12.7 |
|
Other financing obligations principal(4) | 2.8 |
| | 2.2 |
| | 0.5 |
| | — |
| | — |
|
Other financing obligations interest(4) | 0.4 |
| | 0.3 |
| | 0.1 |
| | — |
| | — |
|
Operating lease obligations(5) | 79.4 |
| | 16.6 |
| | 22.0 |
| | 14.2 |
| | 26.6 |
|
Non-cancelable purchase obligations(6) | 79.8 |
| | 24.0 |
| | 42.7 |
| | 13.0 |
| | 0.0 |
|
Total contractual obligations(7)(8) | $ | 4,453.7 |
| | $ | 228.5 |
| | $ | 1,310.1 |
| | $ | 792.1 |
| | $ | 2,122.7 |
|
| |
(1) | Represents the contractually required principal payments, in accordance with the required payment schedule, on our debt obligations in existence as of December 31, 2018. |
| |
(2) | Represents the contractually required interest payments, in accordance with the required payment schedule, on our debt obligations in existence as of December 31, 2018. Cash flows associated with the next interest payment to be made on our variable rate debt subsequent to December 31, 2018 were calculated using the interest rates in effect as of the latest interest rate reset date prior to December 31, 2018, plus the applicable spread. |
| |
(3) | Represents the contractually required payments, in accordance with the required payment schedule, under our capital lease obligations in existence as of December 31, 2018. Certain leases were assumed to extend beyond their current terms because it was probable that such an extension would occur. |
| |
(4) | Represents the contractually required payments, in accordance with the required payment schedule, under our financing obligations in existence as of December 31, 2018. No assumptions were made with respect to renewing these financing arrangements beyond their current terms. |
| |
(5) | Represents the contractually required payments, in accordance with the required payment schedule, under our operating lease obligations in existence as of December 31, 2018. No assumptions were made with respect to renewing these leases beyond their current terms. |
| |
(6) | Represents the contractually required payments under our various purchase obligations in existence as of December 31, 2018. No assumptions were made with respect to renewing the purchase obligations at the expiration date of their initial terms, and no amounts were assumed to be prepaid. |
| |
(7) | Contractual obligations denominated in a foreign currency were calculated utilizing the U.S. dollar to local currency exchange rates in effect as of December 31, 2018. |
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(8) | This table does not include the contractual obligations associated with our defined benefit and other post-retirement benefit plans. As of December 31, 2018, we had recognized a net benefit liability of $37.1 million, representing the net unfunded benefit obligations of the defined benefit and retiree healthcare plans. Refer to Note 13, "Pension and Other Post-Retirement Benefits," of our Financial Statements for additional information on pension and other post-retirement benefits, including expected benefit payments for the next 10 years. This table also does not include $11.5 million of unrecognized tax benefits as of December 31, 2018, as we are unable to make reasonably reliable estimates of when cash settlement, if any, will occur with a tax authority, as the timing and the ultimate resolution of the examination is uncertain. Refer to Note 7, "Income Taxes," of our Financial Statements for additional information on our unrecognized tax benefits. |
Critical Accounting Policies and Estimates
To prepareAs discussed in Note 2, "Significant Accounting Policies," of our Financial Statements, which more fully describes our significant accounting policies, the preparation of consolidated financial statements in conformityaccordance with generally accepted accounting principles, we must make complex and subjective judgmentsGAAP requires us to exercise our judgment in the selectionprocess of applying our accounting policies. It also requires that we make estimates and application of accounting policies.assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. The accounting policies and estimates that we believe are most critical to the portrayal of our financial position and results of operations are listed below. We believe these policies require our most difficult, subjective, and complex judgments in estimating the effect of inherent uncertainties. This section should be read in conjunction with Note 2, "Significant Accounting Policies," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K, which includes other significant accounting policies.
Revenue Recognition
We recognizeThe discussion below details the most significant judgments and estimates we make regarding recognition of revenue in accordance with FASB ASC Topic 606, Revenue from Contracts with Customers. We adopted FASB ASC Topic 606 on January 1, 2018. Periods presented prior to January 1, 2018 are presented under the previous revenue recognition guidance, including FASB ASC Topic 605, Revenue Recognition. The adoption of FASB ASC Topic 606 did not have a material effect on our financial statements or results of operations, and no cumulative catch-up adjustment was recorded.
In accordance with FASB ASC Topic 606, we recognize revenue to depict the transfer of promised goods to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods using a five step model. The most critical judgments and estimates we make in the implementation of this model relate to identifying the contract with the customer and determination of the transaction price associated with the performance obligation(s) in the contract, specifically related to variable consideration.
While many of the agreements with our customers specify certain terms and conditions that apply to any transaction between the parties, many of which are in effect for a defined term, the vast majority of these agreements do not result in contracts (as defined in FASB ASC Topic 606) because they do not create enforceable rights and obligations on the parties. Specifically, (1) the parties are not committed to perform any obligations in accordance with the specified terms and conditions until a customer purchase order ("P.O.") is received and accepted by us and (2) there is a unilateral right of each party to terminate the agreement at any time without compensating the other party. For this reason, the vast majority of our contracts (as defined in FASB ASC 605"). Revenue and related cost of revenue from product salesTopic 606) are recognized when the significant risks and rewards of ownership have been transferred, titlecustomer P.O.s. If this assessment were to change, it could result in a material change to the productamount of net revenue recognized in a period.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. In determining the transaction price related to a contract, we determine whether the amount promised in a contract includes a variable amount (variable consideration). Variable consideration may be specified in the customer P.O., in another agreement that identifies terms and riskconditions of loss transfersthe transaction, or based on our customary practices. We have identified certain types of variable consideration that may be included in the transaction price related to our customers, and collection of sales proceeds is reasonably assured. Based on the above criteria, revenue is generally recognized when the product is shipped from our warehouse or, in limited instances, when it is received by the customer, depending on the specific terms of the arrangement. Product sales are recorded net of trade discounts (including volume and early payment incentives),contracts, including sales returns value-added tax, and similar taxes. Sales to customers(which generally include a right of return for defective or non-conforming product. Sales returns haveproduct) and trade discounts (including retrospective volume discounts and early payment incentives). Such variable consideration has not historically been significantmaterial. However, should our judgments and estimates regarding variable consideration change, it could result in relationa material change to ourthe amount of net revenue and have been within our estimates.recognized in a period.
Goodwill, Intangible Assets, and Long-Lived Assets
Businesses acquired are recorded at their fair value on the date of acquisition, with the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed recognized as goodwill. Assets acquired may include either definite-lived or indefinite-lived intangible assets, or both. AsIn accordance with the requirements of December 31, 2015,FASB ASC Topic 350, Intangibles—Goodwill and Other, goodwill and other intangible assets net totaled $3,019.7 milliondetermined to have an indefinite useful life are not amortized. Instead these assets are evaluated for impairment on an annual basis, and $1,262.6 million, respectively,whenever events or approximately 48% and 20%, respectively,business conditions change that could indicate that the asset is impaired.
Goodwill
Our judgments regarding the existence of indicators of goodwill impairment are based on several factors, including the performance of the end markets served by our customers, as well as the actual financial performance of our total assets.reporting units and their respective financial forecasts over the long-term. We evaluate goodwill and indefinite-lived intangible assets for impairment in the fourth quarter of each fiscal year, unless events occur which trigger the need for an earlier impairment review.
Identification of reporting units
We have fiveidentified six reporting units: Performance Sensing, Electrical Protection, Industrial Sensing, Aerospace, Power Management, Industrial Sensing, and Interconnection. These reporting units have been identified based on the definitions and guidance provided in FASB ASC Topic 350, Intangibles—Goodwill and Other (“ASC 350”).350. Identification of reporting units includes an analysis of the components that comprise each of our operating segments, which considers, among other things, the manner in which we operate our business and the availability of discrete financial information. Components of an operating segment are aggregated to form one reporting unit if the components have similar economic characteristics. We periodically review these reporting units to ensure that they continue to reflect the manner in which the business is operated.
Assignment of assets, liabilities, and goodwill to reporting units
In the event we reorganize our business, we reassign the assets (including goodwill) and liabilities among the affected reporting units using a reasonable and supportable methodology. As businesses are acquired, we assign assets acquired (including goodwill) and liabilities assumed to an existing reporting unit or create a new reporting unit, as of the date of acquisition. Some assets and liabilities relate to the operations of multiple reporting units. We allocate these assets and liabilities to the reporting units based on methods that we believe are reasonable and supportable. We apply that allocation method on a consistent basis from year to year. We view some assets and liabilities, such as cash and cash equivalents, property, plant and equipment associated with our corporate offices, debt, and deferred financing costs,debt, as being corporate in nature. Accordingly, we do not assign these assets and liabilities to our reporting units.
In the event we reorganize our business, we reassign the assets (including goodwill) and liabilities among the affected reporting units using a reasonable and supportable methodology. As businesses are acquired, we assign assets acquired (including goodwill) and liabilities assumed to a new or existing reporting unit as of the date of the acquisition. In the event a disposal group meets the definition of a business, goodwill is allocated to the disposal group based on the relative fair value of the disposal group to the related reporting unit.
Evaluation of goodwill for impairment
In accordance with the requirements of ASC 350, goodwill and intangible assets determined to have an indefinite useful life are not amortized. Instead, these assets are evaluated for impairment on an annual basis and whenever events or business conditions change that could more likely than not reduce the fair value of a reporting unit below its net book value. Our judgments regarding the existence of impairment indicators are based on several factors, including the performance of the end-markets served by our customers, as well as the actual financial performance of our reporting units and their respective financial forecasts over the long-term. We evaluate goodwill and indefinite-lived intangible assets for impairment in the fourth quarter of each fiscal year, unless events occur which trigger the need for an earlier impairment review.
We have the option to first assess qualitative factors to determine whether a quantitative analysis must be performed. The objective of a qualitative analysis is to determine whether it is more likely than not that the fair value of a reporting unit is less than its net book value.
If we elect not to not use this option, or if we determine using the qualitative method, that it is more likely than not that the fair value of a reporting unit is less than its net book value, then we then perform the two-step goodwill impairment test.
In the first step of the two-step goodwill impairment test,quantitative analysis prescribed by FASB ASC Topic 350. In this step we compare the estimated fair values of our reporting units to their respective net book values, including goodwill, to determine whether there is an indicator of potential impairment. If the net book value of a reporting unit exceeds its estimated fair value, we conduct a second step in which we calculate the implied fair value of goodwill. If the carrying value of the reporting unit’s goodwill exceeds theits calculated implied fair value, of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of theits identifiable assets and liabilities of that reporting unit (including any unrecognized intangible assets) based on their
fair values, as if the reporting unit had been acquired in a business combination at the date of assessment, and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the sum of the fair values of each of its componentsidentifiable assets and liabilities is the implied fair value of goodwill.
2015 assessment of goodwill.
We evaluated ourthe goodwill of each reporting unit for impairment as of October 1, 2015.2018. All reporting units except Performance Sensing were evaluated using the quantitative method. In connection with the sale of the Valves Business, as required by FASB ASC Topic 350, we evaluated the goodwill of the retained portion of the Performance Sensing reporting unit for impairment using the quantitative method. To test this evaluation,reporting unit as of October 1, 2018 we used the qualitative method of assessing goodwill,goodwill; in performing this assessment, we considered the change in forecasted cash flows and net assets attributed to the reporting unit between the assessment performed in connection with the sale of the Valves Business and as of the October 1, 2018 assessment date, noting no significant changes. Therefore, we determined that it was not more likely than not that the fair values of each of our Performance Sensing, Electrical Protection, Power Management, Industrial Sensing, and Interconnection reporting units were less than their net book values. In making this determination, we considered several factors, including the following:
the amount by which the fair value of the Performance Sensing reporting unit was less than its net book value.
We estimated the fair values of the Electrical Protection, Industrial Sensing, Aerospace, Power Management, and Interconnection reporting units exceeded their carrying values (301%, 273%, 206%, and 328%, respectively) as of October 1, 2013, and the amount by which the Industrial Sensing reporting unit exceeded its carrying value (340%) as of December 1, 2014, indicating that there would need to be substantial negative developments in the markets in which these reporting units operate in order for there to be a potential impairment;
the carrying values of these reporting units as of October 1, 2015 compared to the previously calculated fair values as of October 1, 2013 (or December 1, 2014 in the case of Industrial Sensing);
public information from competitors and other industry information to determine if there were any significant adverse trends in our competitors' businesses, such as significant declines in market capitalization or significant goodwill impairment charges that could be an indication that the goodwill of our reporting units was potentially impaired;
demand in the debt markets for our senior notes, the strength of which indicates a view by investors of our strength as a company;
changes in the value of major U.S. stock indices that could suggest declines in overall market stability that could impact the valuation of our reporting units;
changes in our market capitalization and overall enterprise valuation to determine if there were any significant decreases that could be an indication that the valuation of our reporting units had significantly decreased; and
whether there had been any significant increases to the weighted-average cost of capital ("WACC") rates for each reporting unit, which could materially lower our prior valuation conclusions under a discounted cash flow approach.
Changes to the factors considered above could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period. We may be unaware of one or more significant factors that, if we had been aware of, would cause our conclusion that it is not more likely than not that the fair values of our reporting units are less than their carrying values to change, which could result in a goodwill impairment charge in a future period.
We did not prepare updated goodwill impairment analyses as of December 31, 2015 for any reporting unit, as we did not become aware of any indicators after October 1, 2015 that would have required such analysis.
Assessment of fair value in prior years. In 2013 (and in 2014 for Industrial Sensing), we estimated the fair value of our reporting units using the discounted cash flow method. For this method, we prepared detailed annual projections of future cash flows for each reporting unit for the followingsubsequent five fiscal years (the “Discrete"Discrete Projection Period”Period"). We estimated the value of the cash flows beyond the fifth fiscal year (the “Terminal Year”"Terminal Year"), by applying a multiple to the projected Terminal Year net earnings before interest, taxes, depreciation, and amortization ("EBITDA"). The cash flows from the Discrete Projection Period and the Terminal Year were discounted at an estimated WACC appropriate for each reporting unit. The estimated WACC was derived, in part, from comparable companies appropriate to each reporting unit. We believe that our procedures for estimating discounted future cash flows, including the Terminal Year valuation, were reasonable and consistent with accepted valuation practices.
We alsoThe preparation of forecasts of revenue growth and profitability for use in the long-range forecasts, the selection of the discount rates, and the estimation of the multiples used in valuing the Terminal Year involve significant judgments. Changes to these assumptions could affect the estimated the fair value of one or more of our reporting units using the guideline company method. Under this method, we performed an analysis to identifyand could result in a group of publicly-traded companies that were comparable to each reporting unit. We calculated an implied EBITDA multiple (e.g., invested capital/EBITDA) for each of the guideline companies and selected either the high, low, or average multiple, depending on various facts and circumstances surrounding the reporting unit, and applied it to that reporting unit's trailing twelve month EBITDA. Although we estimated the fair value of our reporting units using the guideline method, we did so for corroborative purposes and placed primary weight on the discounted cash flow method.goodwill impairment charge in a future period.
Types of events that could result in a goodwill impairment.
As noted above, the assumptions used in the quantitative calculation of fair value of our reporting units, in prior years, including the long-range forecasts, the selection of the discount rates, and the estimation of the multiples or long-term growth rates used in valuing the Terminal Year involve significant judgments. Changes to these assumptions could affect the estimated fair valuevalues of our reporting units calculated in prior years and could result in a goodwill impairment charge in a future period. We believe that certain factors, such as a future recession, any material adverse conditions in the autoautomotive industry and other industries in which we operate, and other factors identified in Item 1A, "Risk Factors," included elsewhere in this Annual Report on Form 10-K could require us to revise our long-term projections and could reduce the multiples appliedused to thedetermine Terminal Year value. Such revisions could result in a goodwill impairment charge in the future.
However, we do not consider any of our reporting units to be at risk of failing Step 1 of the goodwill impairment test.
Evaluation of other intangible assets for impairment
2015 assessment of indefinite-livedIndefinite-lived intangible assets. Similar to goodwill, we perform an annual impairment review of our indefinite-lived intangible assets in the fourth quarter of each fiscal year, unless events occur that trigger the need for an earlier impairment review. We have the option to first assess qualitative factors in determining whether it is more likely than not that an indefinite-lived intangible asset is impaired. If we elect not to not use this option, or we determine that it is more likely than not that the asset is impaired, we perform a quantitative impairment review in which we estimate the fair value of the indefinite-lived intangible asset and compare that requires usamount to its carrying value.
In performing the quantitative impairment review, we estimate the fair value by using the relief-from-royalty method, in which we make assumptions about future conditions impacting the fair value of theour indefinite-lived intangible assets, including projected growth rates, cost of capital, effective tax rates, and royalty rates, market share, and other conditions.rates. Impairment, if any, is based on the excess of the carrying value over the fair value of these assets. We determine fair value by using the appropriate income approach valuation methodology.
We evaluated our indefinite-lived intangible assets for impairment as of October 1, 20152018 (using the quantitative method) and determined that the estimated fair values of these assets exceeded their carrying values at that date. Should certain assumptions used in the development of the fair valuevalues of our indefinite-lived intangible assets change, we may be required to recognize impairments of these intangible assets.an impairment charge in the future.
Impairment of definite-livedDefinite-lived intangible assets. Reviews are regularly performed to determine whether facts or circumstances exist that indicate that the carrying values of our definite-lived intangible assets to be held and used are impaired. TheIf we determine that such facts or circumstances exist, we estimate the recoverability of these assets is assessed by comparing the projected undiscounted net cash flows associated with these assets to their respective carrying values. If the sum of the projected undiscounted net cash
flows falls below the carrying value of the assets,an asset, the impairment charge is based onmeasured as the excess of the carrying value over the fair value of those assets.that asset. We determine fair value by using the appropriate income approach valuation methodology depending on the nature of the intangible asset.
Evaluation of long-lived assets for impairment
We periodically re-evaluate the carrying values and estimated useful lives of long-lived assets whenever events or changes in circumstances indicate that the carrying valuevalues of the relatedthese assets may not be recoverable. We use estimates of undiscounted cash flows from long-lived assets to determine whether the carrying valuevalues of such assets isare recoverable over the assets’ remaining useful lives. These estimates include assumptions about our future performance and the performance of the industry.end markets we serve. If an asset is determined to be impaired, the impairment is the amount by which theits carrying value of the asset exceeds its fair value. These evaluations are performed at a level where discrete cash flows may be attributed to either an individual asset or a group of assets.
Income Taxes
As part of the process of preparing our financial statements, we are required to estimate our provision for income taxes in each of the jurisdictions in which we operate. This involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and record a valuation allowance to reduce the deferred tax assets to an amount that, in our judgment, is more likely than not to be recovered.
Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. The
Our most difficult and subjective judgments and estimates relate to the assessment of the need for a valuation allowance against our deferred tax assets. In measuring our deferred tax assets, we consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is based on our estimatesneeded for all or some portion of future taxable incomethe deferred tax assets. Significant judgment is required in considering the relative impact of the negative and positive evidence, and weight given to each category of evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary, and the period over whichmore difficult it is to support a conclusion that a valuation allowance is not needed. Additionally, we expectutilize the "more likely than not" criteria established in FASB ASC Topic 740 to determine whether the future tax benefit from the deferred tax assets should be recognized.
We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be recovered. Ourrealized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations in various jurisdictions. Because our assessment of future taxable income is based on historical experience and current and anticipated market and economic conditions and trends. Inestimated projected results, in the event that actual results differ from these estimates, or we adjust our estimates in the future, we may need to adjust our valuation allowance assessment, which could materially impact our consolidated financial position and results of operations.
Pension and Other Post-Retirement Benefit PlansBenefits
We sponsor various pension and other post-retirement benefit plans covering our current and former employees in several countries.
The funded status of pension and other post-retirement benefit plans is measured as the difference between the fair value of plan assets and the benefit obligation at the measurement date. Changes in the funded status of a pension or other post-retirement benefit plan are recognized in the year in which they occur by adjusting the recognized (net) liability or asset with an offsetting adjustment to either net income or other comprehensive income.
Our most difficult and subjective judgments and estimates relate to the valuation of our benefit obligations. Benefit obligations represent the actuarial present value of all benefits attributed by the pension formula as of the measurement date to employee service rendered before that date, and can be categorized as projected benefit obligations or accumulated benefit obligations. The value of projected benefit obligations take into consideration various actuarial assumptions including future compensation levels, the time value of money, and related expensethe probability of these plans recordedpayment (by means of assumptions for events such as death, disability, withdrawal, or retirement) between the measurement date and the expected date of payment. Accumulated benefit obligations differ from projected benefit obligations only in the financial statements are based on certain assumptions. that they include no assumptions about future compensation levels.
The most significant assumptions used to determine a plan's funded status and net periodic benefit cost relate to discount rate, expected return on plan assets, and rate of increase in healthcare costs. These assumptions are reviewed annually. Refer to
Note 13, "Pension and Other assumptions used include employee demographic factors such as compensation rate increases, retirement patterns, employee turnover rates, and mortality rates. We reviewPost-Retirement Benefit Plans," of our Financial Statements for details on the values determined for each of these assumptions annually. Our review of demographic assumptions includes analyzing historical patterns and/or referencing industry standard tables, combined with our expectations around future compensation and staffing strategies. The difference between these assumptions and our actual experience results in the recognition of an actuarial gain or loss. Actuarial gains or losses are recorded directly to accumulated other comprehensive loss. If the total net actuarial gain or loss included in accumulated other comprehensive loss exceeds a threshold of 10% of the greater of the projected benefit obligation or the market related value of plan assets, it is subject to amortization and recorded as a component of net periodic pension cost over the average remaining service lives of the employees participating in the pension or post-retirement benefit plan.last three fiscal years.
The discount rate reflects the current rate at which the pension and other post-retirement liabilities could be effectively settled, considering the timing of expected payments for plan participants. It is used to discount the estimated future obligations of the plans to the present value of the liability reflected in the financial statements. In estimating this rate in countries that have a market of high-quality fixed-income investments, we consideredconsider rates of return on these investments included in various bond indices, adjusted to eliminate the effecteffects of call provisions and differences in the timing and amounts of cash outflows related to the bonds. In other countries where a market of high-quality fixed-income investments dodoes not exist, we estimate the discount rate using government bond yields or long-term inflation rates.
The expected return on plan assets reflects the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. To determine the expected return on plan assets, we consider the historical returns earned by similarly invested assets, the rates of return expected on plan assets in the future, and our investment strategy and asset mix with respect to the plans’ funds.
The rate of increase of healthcare costs directly impacts the estimate of our future obligations in connection with our post-retirement medical benefits. Our estimate of healthcare cost trends is based on historical increases in healthcare costs under similarly designed plans, the level of increase in healthcare costs expected in the future, and the design features of the underlying plan.
We have adopted useOther assumptions used include employee demographic factors such as compensation rate increases, retirement patterns, employee turnover rates, and mortality rates. Our review of demographic assumptions includes analyzing historical patterns and/or referencing industry standard tables, combined with our expectations around future compensation and staffing strategies. The difference between these assumptions and our actual experience results in the Retirement Plan ("RP") 2014 mortality tables with the updated Mortality Projection ("MP") 2015 mortality improvement scale as issued by the Societyrecognition of Actuaries in 2015 for our U.S. defined benefit plans. The updated MP 2015 mortality improvement scale reflects improvements in longevity as compared to the MP 2014 mortality improvement scale the Society of Actuaries issued in 2014, primarily because it includes actual Social Security mortality data for 2010 and 2011. The MP projection scale is used to factor in projected mortality improvements over time, based on age and date of birth (i.e., two-dimension generational).an actuarial gain or loss.
Future changes to assumptions, or differences between actual and expected outcomes, can significantly affect our future net periodic pension cost, projected benefit obligations, and accumulated other comprehensive loss.
Share-Based Payment PlansCompensation
FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”), requires that a company measure at fair value any new or modified share-based compensation arrangements with employees, such as stock options and restricted stock units, and recognize as compensation expense that fair value over the requisite service period.
We estimate the fair value of options on the date of grant using the Black-Scholes-Merton option-pricing model. Key assumptions used in estimating the grant-date fair value of these optionsthis model are as follows:(1) the fair value of the underlying ordinary shares, (2) the time period for which we expect the options will be outstanding (the expected term,term), (3) the expected volatility of our stock price, (4) the risk-free interest rate, and (5) the expected dividend yield. Material changes to any of these assumptions may have a significant effect on our valuation of options,Expected term and ultimatelyexpected volatility are the judgments that we believe are the most critical and subjective in estimating fair value (and related share-based compensation expense recorded in the consolidated statements of operations. Significant factors used in determining these assumptions are detailed below.
We use the closing priceexpense) of our ordinary shares on the New York Stock Exchange (the "NYSE") on the date of the grant as the fair value of ordinary shares in the Black-Scholes-Merton option-pricing model.option awards.
The expected term which is a key factor in measuring the fair value and related compensation cost of share-based payments, has historically been based on the “simplified” methodology originally prescribed by Staff Accounting Bulletin
(“SAB”) No. 107, in which the expected term is determined by computing the mathematical meanbased upon our own historical average term of the average vesting periodexercised and the contractual life of theoutstanding options. While the widespread use of the simplified method under SAB No. 107 expired on December 31, 2007, the U.S. Securities and Exchange Commission issued SAB No. 110 in December 2007, which allowed the simplified method to continue to be used in certain circumstances. These circumstances include when a company does not have sufficient historical data surrounding option exercises to provide a reasonable basis upon which to estimate expected term and during periods prior to its equity shares being publicly traded.
We utilized the simplified method for options granted during 2013 due to the lack of historical exercise data necessary to provide a reasonable basis upon which to estimate the expected term. During 2015 and 2014, rather than using the simplified method, we benchmarked the terms of our options granted against those of publicly-traded companies within our industry in order to estimate our expected term.
Also, because of our lack of history as a public company, during 2013 we considered the historical and implied volatilities of publicly-traded companies within our industry when selecting the expected volatility assumption to apply to the options granted in those years. Implied volatility provides a forward-looking indication and may offer insight into expected industry volatility. During 2015 and 2014, with additional historical data available, we consideredconsider our own historical volatility, as well as the historical and implied volatilities of publicly-traded companies within our industry, in estimating expected volatility for options granted in 2015options. Implied volatility provides a forward-looking indication and 2014.may offer insight into expected industry volatility.
Other assumptions used include risk free interest rate and expected dividend yield. The risk-freerisk free interest rate is based on the yield for a U.S. Treasury security having a maturity similar to the expected term of the related option grant.
This assumption is dependent on the assumed expected term. The dividend yield of 0% is based on our history of having never declared or paid any dividends on our ordinary shares, and our current intention of not declaring any such dividends in the foreseeable future. See Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities," included elsewhere in this Annual Report on Form 10-K for further discussion of limitations on our ability to pay dividends.
Restricted securities are valued using the closing price of our ordinary shares on the NYSE on the date of the grant. Certain of our restricted securities include performance conditions that require us to estimate the probable outcome of the performance condition. This assessment is based on management's judgment using internally developed forecasts and is assessed at each reporting period. Compensation cost is recorded if it is probable that the performance condition will be achieved.
Under the fair value recognition provisions of FASB ASC Topic 718, we recognize share-based compensation net of estimated forfeitures and, therefore, only recognize compensation cost for those sharesawards expected to vest over the requisite service period. The forfeiture rate is based on our estimate of forfeitures by plan participants after consideration of historical forfeiture rates. Compensation expense recognized for each award ultimately reflects the number of sharesunits that actually vest.
Material changes to any of these assumptions may have a significant effect on our valuation of options, and, ultimately, the share-based compensation expense recorded in the consolidated statements of operations.
Off-Balance Sheet Arrangements
From time to time, we execute contracts that require us to indemnify the other parties to the contracts. These indemnification obligations generally arise in two contexts. First, in connection with certain transactions, such as the sale of a business or the issuance of debt or equity securities, the agreement typically contains standard provisions requiring us to indemnify the purchaser against breaches by us of representations and warranties contained in the agreement. These indemnities are generally subject to time and liability limitations. Second, we enter into agreements in the ordinary course of business, such as customer contracts, whichthat might contain indemnification provisions relating to product quality, intellectual property infringement, governmental regulations and employment related matters, and other typical indemnities. In certain cases, indemnification obligations arise by law.
We believe that our indemnification obligations are consistent with other companies in the markets in which we compete. Performance under any of these indemnification obligations would generally be triggered by a breach of the terms of the contract or by a third-party claim. Historically, we have experienced only immaterial and irregular losses associated with these indemnifications. Consequently, any future liabilities brought about by these indemnifications cannot reasonably be estimated or accrued.
Refer to Note 14,15, "Commitments and Contingencies," of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-KFinancial Statements for further discussion of specific indemnifications.off-balance sheet arrangements.
Recent Accounting Pronouncements
Recently issued accounting standards adopted in the current period:
Refer to Recently issued accounting standards adopted in the current period in Note 2, "Significant Accounting Policies," of our Financial Statements for discussion of recently issued accounting standards adopted in the current period. None of these standards had a material impact on our consolidated financial position or results of operations, or are reasonably likely to have a material effect on our future consolidated financial position or results of operations.
Recently issued accounting standards to be adopted in a future period:
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which modifies how all entities recognize revenue, and consolidates into one ASC Topic (ASC Topic 606, Revenue from Contracts with Customers), the current guidance
found in ASC 605, and various other revenue accounting standards for specialized transactions and industries. The core principle of the guidance is that “an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” In achieving this objective, an entity must perform five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations of the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 also clarifies how an entity should account for costs of obtaining or fulfilling a contract in a new ASC Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers.
In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date, which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15,February 2016, including interim reporting periods within that reporting period.
ASU 2014-09 may be applied using either a full retrospective approach, under which all years included in the financial statements will be presented under the revised guidance, or a modified retrospective approach, under which financial statements will be prepared under the revised guidance for the year of adoption, but not for prior years. Under the latter method, entities will recognize a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for contracts that still require performance by the entity, and disclose all line items in the year of adoption as if they were prepared under the old revenue guidance. We will adopt ASU 2014-09 on January 1, 2018 and are currently evaluating the impact that this adoption will have on our consolidated financial statements. At this time, we have not determined the transition method that will be used.
In April 2015, the FASB issued ASU No. 2015-03,2016-02, Interest - Imputation of Interest (Subtopic 835-30)Leases (Topic 842) (“ASU 2015-03”), which simplifies the presentation of debt issuance costs.establishes new accounting and disclosure requirements for leases. We will adopt FASB ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presentedNo. 2016-02 on January 1, 2019, which will result in the balance sheet asrecognition of a direct deduction from the carrying amount oflease liability and right-of-use asset for certain operating leases that debt liability, consistent with debt discounts. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015 (and interim periods within those fiscal years) with early adoption permitted and retrospective application required. As of December 31, 2015 and December 31, 2014, we had recorded deferred financing costs of $38.3 million and $29.1 million, respectively, which would have been classified as a reduction of long-term debt inare currently not recognized on our condensed consolidated balance sheets, hadwhich we adopted this standardexpect to be recorded using an incremental borrowing rate. At December 31, 2018, we were contractually obligated to make future payments of $79.4 million under our operating lease obligations in the fourth quarterexistence as of 2015. There willthat date, primarily related to long-term facility leases. We do not expect there to be a material impact on our results of operations upon adoption of ASU 2015-03.operations.
Refer to Recently issued accounting standards to be adopted in the current period:
a future periodIn November 2015, the in Note 2, "Significant Accounting Policies," of our Financial Statements for further discussion of certain accounting standards to be adopted in a future period, including FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“2016-02. Other than FASB ASU 2015-17”), which simplifies the presentation of deferred income taxes. ASU 2015-17 requires that deferred tax assets and liabilitiesNo. 2016-02, recently issued accounting standards to be classified as noncurrentadopted in a classified statement of financial position. ASU 2015-17 is effective for financial statements issued for fiscal years beginning after December 15, 2016 (and interim periods within those fiscal years) with early adoption permitted. ASU 2015-17 may be either applied prospectivelyfuture period are not expected to all deferred tax assets and liabilities or retrospectively to all periods presented. We have elected to early adopt ASU 2015-17 prospectively in the fourth quarter of 2015. As a result, we have presented all deferred tax assets and liabilities as noncurrentmaterial impact on our consolidated balance sheet as of December 31, 2015, but have not reclassified current deferred tax assets and liabilities on our consolidated balance sheet as of December 31, 2014. There was no impact on ourfinancial position or results of operations as a result of the adoption of ASU 2015-17.operations.
| |
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to changes in interest rates and foreign currency exchange rates because we finance certain operations through fixed and variable rate debt instruments and denominate our transactionstransact in a variety of foreign currencies. We are also exposed to changes in the prices of certain commodities (primarily metals) that we use in production. Changes in these foreign currency exchange rates and commodity prices may have an impact on future cash flows and earnings. We generally managemonitor our exposure to these risks, through the use of derivative financial instruments. We do not enter intoand may employ derivative financial instruments to limit the volatility to earnings and cash flows generated by these exposures. We employ derivative contracts that may or may not be designated for trading or speculative purposes.hedge accounting treatment under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 815, Derivatives and Hedging, which can result in volatility to earnings depending upon fluctuations in the underlying markets.
By using derivative instruments, we are subject to credit and market risk. The fair market valuevalues of these derivative instruments isare based upon valuation models whose inputs are derived using market observable inputs, including foreign currency exchange and commodity spot and forward rates, and reflectsreflect the asset orand liability positionpositions as of the end of each reporting period. When the fair value of a derivative contract is positive, the counterparty is liable to us, thus creating a receivable risk for us. We are exposed to counterparty credit (or repayment) risk in the event of non-performance by counterparties to our derivative agreements. We attempt to minimize counterparty credit (or repayment)this risk by entering into transactions with major financial institutions of investment grade credit rating.
Interest Rate Risk
Given the leveraged nature ofExcluding capital lease and other financing obligations, our company, we have exposure to changes in interest rates. From time to time, we may execute a variety of interest rate derivative instruments to manage interest rate risk. For example, in the past, we have entered into interest rate collars and interest rate caps to reduce exposure to variability in cash flows relating to interest payments on our outstanding debt. These derivatives are accounted for in accordance with Accounting Standards Codification Topic 815, Derivatives and Hedging (“ASC 815”).
In August 2011, we purchased an interest rate cap in order to hedge the risk of changes in cash flows attributable to changes in interest rates above the cap rates on a portion of our U.S. dollar denominated term loans. In August 2014 this interest rate cap matured, andgross debt as of December 31, 2015, we do not have any remaining interest rate caps.
The significant components2018 and 2017 was $3,267.8 million and $3,277.8 million, respectively. A portion of our debtthis indebtedness relates to the term loan (the "Term Loan") provided pursuant to the eighth amendment to the credit agreement dated as of December 31, 2015May 12, 2011 (as amended, the "Credit Agreement"). The Term Loan accrues interest at a variable rate calculated on the basis of a three hundred and 2014 are shownsixty day year and actual days elapsed (which results in more interest, as applicable, being paid than if computed on the following tables (definitionsbasis of a three hundred and descriptionssixty-five day year). The variable rate is currently based on LIBOR, subject to a floor and spread, in accordance with the terms of all components of our debt can be found inthe Credit Agreement.
Refer to Note 8,14, "Debt," of our audited consolidated financial statements and accompanying notes thereto (our "Financial Statements") included elsewhere in this Annual Report on Form 10-K):10-K (this "Report") for details regarding our debt instruments.
|
| | | | | | | | | | | | |
| (Dollars in millions) | Maturity date | | Interest rate as of December 31, 2015 | | Outstanding balance as of December 31, 2015 (1) | | Fair value as of December 31, 2015 |
Term Loan (3) | October 14, 2021 | | 3.00 | % | | $ | 982.7 |
| | $ | 963.0 |
|
| 4.875% Senior Notes | October 15, 2023 | | 4.875 | % | | 500.0 |
| | 484.7 |
|
| 5.625% Senior Notes | November 1, 2024 | | 5.625 | % | | 400.0 |
| | 409.3 |
|
| 5.0% Senior Notes | October 1, 2025 | | 5.00 | % | | 700.0 |
| | 675.9 |
|
| 6.25% Senior Notes | February 15, 2026 | | 6.25 | % | | 750.0 |
| | 781.4 |
|
Revolving Credit Facility(3) | March 26, 2020 | | 2.17 | % | | 280.0 |
| | 266.9 |
|
Total(2) | | | | | $ | 3,612.7 |
| | $ | 3,581.2 |
|
_________________
| |
(1) | Outstanding balance is presented excluding discount. |
| |
(2) | Total outstanding balance excludes capital leases and other financing obligations of $46.8 million.
|
| |
(3) | This component of our debt accrues interest at a variable rate. |
|
| | | | | | | | | | |
| (Dollars in millions) | Interest Rate as of December 31, 2014 | | Outstanding balance as of December 31, 2014 (1) | | Fair value as of December 31, 2014 |
Original Term Loan(3) | 3.25 | % | | $ | 469.3 |
| | $ | 467.0 |
|
Incremental Term Loan(3) | 3.50 | % | | 598.5 |
| | 595.5 |
|
| 6.5% Senior Notes | 6.50 | % | | 700.0 |
| | 730.7 |
|
| 4.875% Senior Notes | 4.875 | % | | 500.0 |
| | 495.7 |
|
| 5.625% Senior Notes | 5.625 | % | | 400.0 |
| | 415.0 |
|
Revolving Credit facility (3) | 2.41 | % | | 130.0 |
| | 128.3 |
|
Other debt (4) | 15.27 | % | | 2.2 |
| | 2.2 |
|
Total(2) | | | $ | 2,800.0 |
| | $ | 2,834.4 |
|
_________________
| |
(1) | Outstanding balance is presented excluding discount. |
| |
(2) | Total outstanding balance excludes capital leases and other financing obligations of $48.2 million.
|
| |
(3) | This component of our debt accrues interest at a variable rate. |
| |
(4) | Other debt consists of multiple instruments that accrue interest at various rates. Interest rate shown is a weighted average interest rate at December 31, 2014. |
Sensitivity Analysis
As of December 31, 2015,2018, we had total variable rate debt with an outstanding balance of $1,262.7 million issued underon the Term Loan (excluding discount and the Revolving Credit Facility. Considering the impactdeferred financing costs) of our$917.8 million. The applicable interest rate floor, anassociated with the Term Loan at December 31, 2018 was 4.21%. An increase of 100 basis points in the applicable interestthis rate would result in additional annual interest expense of $11.3 million.$9.3 million in fiscal year 2019. The next 100 basis point increase in the applicable interestthis rate would result in incremental annual interest expense of $12.6 million.$9.3 million in fiscal year 2019.
As of December 31, 2014,2017, we had total variable rate debt with an outstanding balance of $1,197.8 million issued underon the Original Term Loan (excluding discount and deferred financing costs) of $927.8 million. The applicable interest rate associated with the Incremental Term Loan and the Revolving Credit Facility. Considering the impact of our interest rate floor, anat December 31, 2017 was 3.21%. An increase of 100 basis points in the applicable interestthis rate would have resulted in additional annual interest expense of $6.7 million.$9.4 million in fiscal year 2018. The next 100 basis point increase in the applicable interestthis rate would have resulted in incremental annual interest expense of $12.0 million.$9.4 million in fiscal year 2018.
Foreign Currency RisksRisk
We are exposed to market risk from changes in foreign currency exchange rates, which could affect operating results as well as our financial position and cash flows. We monitor our exposures to these market risks and may employ derivative financial instruments, such as swaps, collars, forwards, options, or other instruments, to limit the volatility to earnings and cash flows generated by these exposures. We employ derivative contracts that may or may not be designated for hedge accounting treatment under ASC 815, which can result in volatility to earnings depending upon fluctuations in the underlying markets. Derivative financial instruments are executed solely as risk management tools and not for trading or speculative purposes.
Our foreign currency exposures include the Euro, Japanese yen, Mexican peso, Chinese renminbi, Korean won, Malaysian ringgit, Dominican Republic peso, British pound sterling, Brazilian real, Singapore dollar, Polish zloty, and Bulgarian lev. However, the primary foreign currency exposure relates to the U.S. dollar to Euro exchange rate.
Consistent with our risk management objective and strategy to reduce exposure to variability in cash flows and variability in earnings, and for non-trading purposes, we enteredenter into foreign currency exchange rate derivatives during the year ended December 31, 2015that qualify as cash flow hedges, and that are intended to offset the effect of exchange rate fluctuations on forecasted sales and certain manufacturing costs. The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive loss and is subsequently reclassified into earnings in the period in which the hedged forecasted transaction affects earnings. During 2015, weWe also enteredenter into foreign currency forward contracts that wereare not designated for hedge accounting purposes. In accordance with ASC 815, we recognizedRefer to Note 19, "Derivative Instruments and Hedging Activities," of our Financial Statements for details of the change in the fair value of these non-designated derivatives in the consolidated statements of operations.
The following foreign currency forward contracts were outstanding as of December 31, 2015:2018.
|
| | | | | | | | | | |
Notional
(in millions) | | Effective Date | | Maturity Date | | Index | | Weighted- Average Strike Rate | | Hedge Designation |
535.3 EUR | | Various from September 2014 to December 2015 | | Various from February 2016 to December 2017 | | Euro to U.S. Dollar Exchange Rate | | 1.15 USD | | Designated |
92.0 EUR | | Various from September 2014 to December 2015 | | January 29, 2016 | | Euro to U.S. Dollar Exchange Rate | | 1.11 USD | | Non-designated |
89.0 CNY | | December 17, 2015 | | January 29, 2016 | | U.S. Dollar to Chinese Renminbi Exchange Rate | | 6.57 CNY | | Non-designated |
48,640.0 KRW | | Various from September 2014 to December 2015 | | Various from February 2016 to December 2017 | | U.S. Dollar to Korean Won Exchange Rate | | 1,132.34 KRW | | Designated |
33,700.0 KRW | | Various from September 2014 to December 2015 | | January 29, 2016 | | U.S. Dollar to Korean Won Exchange Rate | | 1,180.22 KRW | | Non-designated |
98.5 MYR | | Various from September 2014 to December 2015 | | Various from February 2016 to December 2017 | | U.S. Dollar to Malaysian Ringgit Exchange Rate | | 3.89 MYR | | Designated |
34.7 MYR | | Various from September 2014 to December 2015 | | January 29, 2016 | | U.S. Dollar to Malaysian Ringgit Exchange Rate | | 4.19 MYR | | Non-designated |
2,095.4 MXN | | Various from September 2014 to December 2015 | | Various from February 2016 to December 2017 | | U.S. Dollar to Mexican Peso Exchange Rate | | 16.45 MXN | | Designated |
197.9 MXN | | Various from September 2014 to December 2015 | | January 29, 2016 | | U.S. Dollar to Mexican Peso Exchange Rate | | 15.90 MXN | | Non-designated |
57.1 GBP | | Various from October 2014 to December 2015 | | Various from February 2016 to December 2017 | | British Pound Sterling to U.S. Dollar Exchange Rate | | 1.53 USD | | Designated |
9.2 GBP | | Various from October 2014 to December 2015 | | January 29, 2016 | | British Pound Sterling to U.S. Dollar Exchange Rate | | 1.51 USD | | Non-designated |
The following foreign currency forward contracts were outstanding as of December 31, 2014:
|
| | | | | | | | | | |
Notional
(in millions) | | Effective Date | | Maturity Date | | Index | | Weighted- Average Strike Rate | | Hedge Designation |
287.8 EUR | | Various from October 2013 to December 2014 | | Various from February 2015 to November 2016 | | Euro to U.S. Dollar Exchange Rate | | 1.31 USD | | Designated |
58.1 EUR | | Various from October 2013 to December 2014 | | January 30, 2015 | | Euro to U.S. Dollar Exchange Rate | | 1.25 USD | | Non-designated |
87.0 CNY | | December 23, 2014 | | January 30, 2015 | | U.S. Dollar to Chinese Renminbi Exchange Rate | | 6.18 CNY | | Non-designated |
264.0 JPY | | December 23, 2014 | | January 30, 2015 | | U.S. Dollar to Japanese Yen Exchange Rate | | 120.54 JPY | | Non-designated |
51,750.0 KRW | | Various from March 2014 to December 2014 | | Various from February 2015 to November 2016 | | U.S. Dollar to Korean Won Exchange Rate | | 1,063.28 KRW | | Designated |
37,800.0 KRW | | Various from March 2014 to December 2014 | | January 30, 2015 | | U.S. Dollar to Korean Won Exchange Rate | | 1,105.21 KRW | | Non-designated |
85.7 MYR | | Various from January 2014 to December 2014 | | Various from February 2015 to November 2016 | | U.S. Dollar to Malaysian Ringgit Exchange Rate | | 3.36 MYR | | Designated |
26.7 MYR | | Various from January 2014 to December 2014 | | January 30, 2015 | | U.S. Dollar to Malaysian Ringgit Exchange Rate | | 3.47 MYR | | Non-designated |
1,222.2 MXN | | Various from January 2014 to December 2014 | | Various from February 2015 to November 2016 | | U.S. Dollar to Mexican Peso Exchange Rate | | 13.97 MXN | | Designated |
101.6 MXN | | Various from January 2014 to December 2014 | | January 30, 2015 | | U.S. Dollar to Mexican Peso Exchange Rate | | 13.95 MXN | | Non-designated |
42.4 GBP | | Various from October 2014 to December 2014 | | Various from February 2015 to November 2016 | | British Pound Sterling to U.S. Dollar Exchange Rate | | 1.58 USD | | Designated |
5.3 GBP | | Various from October 2014 to December 2014 | | January 30, 2015 | | British Pound Sterling to U.S. Dollar Exchange Rate | | 1.56 USD | | Non-designated |
Sensitivity Analysis
The tables below present our foreign currency forward contracts as of December 31, 20152018 and 20142017 and the estimated impact to future pre-tax earnings as a result of a 10% strengthening/weakening in the foreign currency exchange rate:
|
| | | | | | | | | | | | |
| | | | | (Decrease)/Increase to Future Pre-tax Earnings Due to: |
| (Dollars in millions) | | Net Asset/(Liability) Balance as of December 31, 2018 | | 10% Strengthening of the Value of the Foreign Currency Relative to the U.S. Dollar | | 10% Weakening of the Value of the Foreign Currency Relative to the U.S. Dollar |
| Euro | | $ | 14.5 |
| | $ | (45.1 | ) | | $ | 45.1 |
|
| Chinese Renminbi | | $ | (0.3 | ) | | $ | (4.1 | ) | | $ | 4.1 |
|
| Korean Won | | $ | 0.3 |
| | $ | (2.8 | ) | | $ | 2.8 |
|
| Malaysian Ringgit | | $ | 0.1 |
| | $ | 0.6 |
| | $ | (0.6 | ) |
| Mexican Peso | | $ | 0.7 |
| | $ | 14.2 |
| | $ | (14.2 | ) |
| British Pound Sterling | | $ | (2.6 | ) | | $ | 6.2 |
| | $ | (6.2 | ) |
|
| | | | | | | | | | | | |
| | | | | (Decrease)/Increase to Future Pre-tax Earnings Due to: |
| (Dollars in millions) | | Net (Liability)/Asset Balance as of December 31, 2017 | | 10% Strengthening of the Value of the Foreign Currency Relative to the U.S. Dollar | | 10% Weakening of the Value of the Foreign Currency Relative to the U.S. Dollar |
| Euro | | $ | (30.6 | ) | | $ | (61.5 | ) | | $ | 61.5 |
|
| Chinese Renminbi | | $ | (3.6 | ) | | $ | (24.4 | ) | | $ | 24.4 |
|
| Korean Won | | $ | (2.3 | ) | | $ | (3.9 | ) | | $ | 3.9 |
|
| Malaysian Ringgit | | $ | 0.2 |
| | $ | 0.5 |
| | $ | (0.5 | ) |
| Mexican Peso | | $ | (2.6 | ) | | $ | 13.4 |
| | $ | (13.4 | ) |
| British Pound Sterling | | $ | 2.0 |
| | $ | 4.8 |
| | $ | (4.8 | ) |
| Japanese Yen | | $ | 0.0 |
| | $ | 0.2 |
| | $ | (0.2 | ) |
|
| | | | | | | | | | | | |
| (Amounts in millions) | | | | Increase/(decrease) to pre-tax earnings due to |
| | | Net asset (liability) balance as of December 31, 2015 | | 10% strengthening of the value of the foreign currency relative to the U.S. dollar | | 10% weakening of the value of the foreign currency relative to the U.S. dollar |
| Euro to U.S. Dollar | | $ | 22.9 |
| | $ | (65.0 | ) | | $ | 65.0 |
|
| Chinese Renminbi to U.S. Dollar | | $ | (0.1 | ) | | $ | (1.3 | ) | | $ | 1.3 |
|
| British Pound Sterling to U.S. Dollar | | $ | (3.0 | ) | | $ | 6.3 |
| | $ | (6.3 | ) |
| Korean Won to U.S. Dollar | | $ | 1.7 |
| | $ | (7.3 | ) | | $ | 7.3 |
|
| Malaysian Ringgit to U.S. Dollar | | $ | (3.1 | ) | | $ | 3.1 |
| | $ | (3.1 | ) |
| Mexican Peso to U.S. Dollar | | $ | (10.5 | ) | | $ | 13.0 |
| | $ | (13.0 | ) |
|
| | | | | | | | | | | | |
| (Amounts in millions) | | | | Increase/(decrease) to pre-tax earnings due to |
| | | Asset (liability) balance as of December 31, 2014 | | 10% strengthening of the value of the foreign currency relative to the U.S. dollar | | 10% weakening of the value of the foreign currency relative to the U.S. dollar |
| Euro to U.S. Dollar | | $ | 29.9 |
| | $ | (37.6 | ) | | $ | 37.6 |
|
| Chinese Renminbi to U.S. Dollar | | $ | (0.1 | ) | | $ | (1.4 | ) | | $ | 1.4 |
|
| British Pound Sterling to U.S. Dollar | | $ | (0.9 | ) | | $ | 4.7 |
| | $ | (4.7 | ) |
| Japanese Yen to U.S. Dollar | | $ | (0.0 | ) | | $ | (0.2 | ) | | $ | 0.2 |
|
| Korean Won to U.S. Dollar | | $ | 1.3 |
| | $ | (8.4 | ) | | $ | 8.4 |
|
| Malaysian Ringgit to U.S. Dollar | | $ | (1.6 | ) | | $ | 3.2 |
| | $ | (3.2 | ) |
| Mexican Peso to U.S. Dollar | | $ | (6.5 | ) | | $ | 8.8 |
| | $ | (8.8 | ) |
The tables below present our Euro-denominated net monetary assets as of December 31, 2015 and 2014 and the estimated impact to pre-tax earnings as a result of revaluing these assets and liabilities associated with a 10% strengthening/weakening in the Euro to U.S. dollar currency exchange rate:
|
| | | | | | | | | | | | | | | |
| (Amounts in millions) | Net asset balance as of December 31, 2015 | | Increase/(decrease) to pre-tax earnings due to |
| Euro-denominated financial instruments | Euro | | $ Equivalent | | 10% weakening of the value of the
Euro relative to the U.S. dollar | | 10% strengthening of the value of the
Euro relative to the U.S. dollar |
Net monetary assets(1) | € | 64.4 |
| | $ | 70.3 |
| | $ | (7.0 | ) | | $ | 7.0 |
|
|
| | | | | | | | | | | | | | | |
| (Amounts in millions) | Net asset balance as of December 31, 2014 | | Increase/(decrease) to pre-tax earnings due to |
| Euro-denominated financial instruments | Euro | | $ Equivalent | | 10% weakening of the value of the
Euro relative to the U.S. dollar | | 10% strengthening of the value of the
Euro relative to the U.S. dollar |
Net monetary assets(1) | € | 38.3 |
| | $ | 46.6 |
| | $ | (4.7 | ) | | $ | 4.7 |
|
__________________
| |
(1) | Includes cash, accounts receivable, other current assets, accounts payable, accrued expenses, income taxes payable, deferred tax liabilities, pension obligations, and other long-term liabilities. |
Commodity Risk
We enter into forward contracts with third parties to offset a portion of our exposureare exposed to the potential change in prices associated with certain commodities including silver, gold, platinum, palladium, copper, aluminum, nickel, and zinc, used in the manufacturing of our products. The termsWe offset a portion of thesethis exposure by entering into forward contracts that fix the price at a future date for various notional amounts associated with these commodities. These derivativesforward contracts are not designated as accounting hedges. In accordance with ASC 815, we recognizeRefer to Note 19, "Derivative Instruments and Hedging Activities," of our Financial Statements for details of the change in fair valuecommodity forward contracts outstanding as of these derivatives in the consolidated statements of operations.December 31, 2018.
Sensitivity Analysis
The tables below present our commodity forward contracts as of December 31, 20152018 and 20142017 and the estimated impact to pre-tax earnings associated with a 10% increase/(decrease) in the related forward price for each commodity:
|
| | | | | | | | | | | | | | | | |
| | | Net (Liability)/Asset Balance as of December 31, 2018 | | Average Forward Price Per Unit as of December 31, 2018 | | Increase/(Decrease) to Pre-tax Earnings Due to |
| (Dollars in millions, except per unit amounts) | | | | 10% Increase in the Forward Price | | 10% Decrease in the Forward Price |
| Silver | | $ | (0.8 | ) | | $ | 15.72 |
| | $ | 1.7 |
| | $ | (1.7 | ) |
| Gold | | $ | (0.0 | ) | | $ | 1,303.51 |
| | $ | 1.3 |
| | $ | (1.3 | ) |
| Nickel | | $ | (0.2 | ) | | $ | 4.93 |
| | $ | 0.1 |
| | $ | (0.1 | ) |
| Aluminum | | $ | (0.3 | ) | | $ | 0.86 |
| | $ | 0.2 |
| | $ | (0.2 | ) |
| Copper | | $ | (1.3 | ) | | $ | 2.71 |
| | $ | 0.8 |
| | $ | (0.8 | ) |
| Platinum | | $ | (0.9 | ) | | $ | 805.38 |
| | $ | 0.7 |
| | $ | (0.7 | ) |
| Palladium | | $ | 0.2 |
| | $ | 1,175.96 |
| | $ | 0.1 |
| | $ | (0.1 | ) |
| | | (Amounts in millions, except price per unit and notional amounts) | | Increase/(decrease) to pre-tax earnings due to | |
| Commodity | | Net asset/(liability) balance as of December 31, 2015 | | Notional | | Weighted Average Contract Price Per Unit | | Average Forward Price Per Unit as of December 31, 2015 | | Expiration | | |
10% increase in the forward price | | 10% decrease in the forward price | |
| | | | Net (Liability)/Asset Balance as of December 31, 2017 | | Average Forward Price Per Unit as of December 31, 2017 | | Increase/(Decrease) to Pre-tax Earnings Due to |
| (Dollars in millions, except per unit amounts) | | | 10% Increase in the Forward Price | | 10% Decrease in the Forward Price |
| Silver | | $(4.0) | | 1,554,959 troy oz. | | $16.63 | | $13.98 | | Various dates during 2016 and 2017 | | $2.2 | | $(2.2) | | $ | (0.6 | ) | | $ | 17.20 |
| | $ | 1.9 |
| | $ | (1.9 | ) |
| Gold | | $(1.5) | | 13,940 troy oz. | | $1,177.94 | | $1,065.60 | | Various dates during 2016 and 2017 | | $1.5 | | $(1.5) | | $ | 0.4 |
| | $ | 1,322.24 |
| | $ | 1.6 |
| | $ | (1.6 | ) |
| Nickel | | $(1.1) | | 520,710 pounds | | $6.18 | | $4.03 | | Various dates during 2016 and 2017 | | $0.2 | | $(0.2) | | $ | 0.3 |
| | $ | 5.83 |
| | $ | 0.2 |
| | $ | (0.2 | ) |
| Aluminum | | $(0.7) | | 4,686,080 pounds | | $0.85 | | $0.69 | | Various dates during 2016 and 2017 | | $0.3 | | $(0.3) | | $ | 0.9 |
| | $ | 1.04 |
| | $ | 0.6 |
| | $ | (0.6 | ) |
| Copper | | $(4.2) | | 7,258,279 pounds | | $2.72 | | $2.13 | | Various dates during 2016 and 2017 | | $1.5 | | $(1.5) | | $ | 4.4 |
| | $ | 3.30 |
| | $ | 2.4 |
| | $ | (2.4 | ) |
| Platinum | | $(1.8) | | 6,730 troy oz. | | $1,154.61 | | $881.53 | | Various dates during 2016 and 2017 | | $0.6 | | $(0.6) | | $ | (0.3 | ) | | $ | 943.94 |
| | $ | 0.8 |
| | $ | (0.8 | ) |
| Palladium | | $(0.2) | | 2,139 troy oz. | | $647.71 | | $553.56 | | Various dates during 2016 and 2017 | | $0.1 | | $(0.1) | | $ | 0.4 |
| | $ | 1,022.19 |
| | $ | 0.2 |
| | $ | (0.2 | ) |
| Zinc | | $(0.2) | | 554,992 pounds | | $1.04 | | $0.73 | | Various dates during 2016 | | $0.0 | | $(0.0) | |
|
| | | | | | | | | | | | | | |
| (Amounts in millions, except price per unit and notional amounts) | | | | Increase/(decrease) to pre-tax earnings due to |
| Commodity | | Net asset/(liability) balance as of December 31, 2014 | | Notional | | Weighted Average Contract Price Per Unit | | Average Forward Price Per Unit as of December 31, 2014 | | Expiration | |
10% increase in the forward price | | 10% decrease in the forward price |
| Silver | | $(6.1) | | 2,095,639 troy oz. | | $19.07 | | $16.06 | | Various dates during 2015 and 2016 | | $3.4 | | $(3.4) |
| Gold | | $(1.5) | | 15,272 troy oz. | | $1,295.09 | | $1,194.13 | | Various dates during 2015 and 2016 | | $1.8 | | $(1.8) |
| Nickel | | $(0.2) | | 648,798 pounds | | $7.20 | | $6.90 | | Various dates during 2015 and 2016 | | $0.4 | | $(0.4) |
| Aluminum | | $(0.4) | | 5,989,386 pounds | | $0.92 | | $0.85 | | Various dates during 2015 and 2016 | | $0.5 | | $(0.5) |
| Copper | | $(2.3) | | 9,780,235 pounds | | $3.09 | | $2.84 | | Various dates during 2015 and 2016 | | $2.8 | | $(2.8) |
| Platinum | | $(1.4) | | 8,323 troy oz. | | $1,385.74 | | $1,214.44 | | Various dates during 2015 and 2016 | | $1.0 | | $(1.0) |
| Palladium | | $0.1 | | 1,293 troy oz. | | $772.86 | | $804.30 | | Various dates during 2015 and 2016 | | $0.1 | | $(0.1) |
| Zinc | | $(0.1) | | 1,755,012 troy oz. | | $1.04 | | $0.99 | | Various dates during 2015 and 2016 | | $0.2 | | $(0.2) |
| |
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The following audited consolidated financial statements of Sensata Technologies Holding N.V.plc are included in this Annual Report on Form 10-K:
| |
| 2. | Financial Statement Schedules |
The following schedules are included elsewhere in this Annual Report on Form 10-K.10-K:
Schedule I — Condensed Financial Information of the Registrant
Schedule II — Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted since the required information is not present, or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the audited consolidated financial statements or the notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
To the Shareholders and the Board of Directors and Shareholders of
Sensata Technologies Holding N.V.plc
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Sensata Technologies Holding N.V.plc (the Company) as of December 31, 20152018 and 2014, and2017, the related consolidated statements of operations, comprehensive income, cash flows, and changes in shareholders’ equity for each of the three years in the period ended December 31, 2015. Our audits also included2018, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the "financial statements"). TheseIn our opinion, the financial statements and schedules arepresent fairly, in all material respects, the responsibilityfinancial position of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statementsCompany at December 31, 2018 and schedules based on our audits.2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We conducted our auditsalso have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 6, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sensata Technologies Holding N.V. at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Sensata Technologies Holding N.V.'s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 2, 2016 expressed an unqualified opinion thereon.
We have served as the Company's auditor since 2005
Boston, Massachusetts
February 2, 20166, 2019
SENSATA TECHNOLOGIES HOLDING N.V.PLC
Consolidated Balance Sheets
(InAmounts in thousands, except per share amounts)
| | | | | | | As of December 31, |
| | December 31, 2015 | | December 31, 2014 | 2018 | | 2017 |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 342,263 |
| | $ | 211,329 |
| $ | 729,833 |
| | $ | 753,089 |
|
| Accounts receivable, net of allowances of $9,535 and $10,364 as of December 31, 2015 and 2014, respectively | 467,567 |
| | 444,852 |
| |
| Accounts receivable, net of allowances of $13,762 and $12,947 as of December 31, 2018 and 2017, respectively | | 581,769 |
| | 556,541 |
|
| Inventories | 358,701 |
| | 356,364 |
| 492,319 |
| | 446,129 |
|
| Deferred income tax assets | — |
| | 15,301 |
| |
| Prepaid expenses and other current assets | 109,392 |
| | 90,918 |
| 113,234 |
| | 92,532 |
|
| Total current assets | 1,277,923 |
| | 1,118,764 |
| 1,917,155 |
| | 1,848,291 |
|
| Property, plant and equipment, at cost | 1,168,667 |
| | 975,543 |
| |
| Accumulated depreciation | (474,512 | ) | | (386,059 | ) | |
| Property, plant and equipment, net | 694,155 |
| | 589,484 |
| 787,178 |
| | 750,049 |
|
| Goodwill | 3,019,743 |
| | 2,424,795 |
| 3,081,302 |
| | 3,005,464 |
|
| Other intangible assets, net | 1,262,572 |
| | 910,774 |
| 897,191 |
| | 920,124 |
|
| Deferred income tax assets | 26,417 |
| | 16,750 |
| 27,971 |
| | 33,003 |
|
| Deferred financing costs | 38,345 |
| | 29,102 |
| |
| Other assets | 18,100 |
| | 26,940 |
| 86,890 |
| | 84,594 |
|
| Total assets | $ | 6,337,255 |
| | $ | 5,116,609 |
| $ | 6,797,687 |
| | $ | 6,641,525 |
|
| Liabilities and shareholders’ equity | | | | | | |
| Current liabilities: | | | | | | |
| Current portion of long-term debt, capital lease and other financing obligations | $ | 300,439 |
| | $ | 145,979 |
| $ | 14,561 |
| | $ | 15,720 |
|
| Accounts payable | 290,779 |
| | 287,800 |
| 379,824 |
| | 322,671 |
|
| Income taxes payable | 21,968 |
| | 7,516 |
| 27,429 |
| | 31,544 |
|
| Accrued expenses and other current liabilities | 251,989 |
| | 222,781 |
| 218,130 |
| | 259,560 |
|
| Deferred income tax liabilities | — |
| | 13,430 |
| |
| Total current liabilities | 865,175 |
| | 677,506 |
| 639,944 |
| | 629,495 |
|
| Deferred income tax liabilities | 390,490 |
| | 362,738 |
| 225,694 |
| | 338,228 |
|
| Pension and post-retirement benefit obligations | 34,314 |
| | 35,799 |
| |
| Pension and other post-retirement benefit obligations | | 33,958 |
| | 40,055 |
|
| Capital lease and other financing obligations, less current portion | 36,219 |
| | 45,113 |
| 30,618 |
| | 28,739 |
|
| Long-term debt, net of discount, less current portion | 3,302,678 |
| | 2,650,744 |
| |
| Long-term debt, net | | 3,219,762 |
| | 3,225,810 |
|
| Other long-term liabilities | 39,803 |
| | 41,817 |
| 39,277 |
| | 33,572 |
|
| Commitments and contingencies |
|
| |
|
| |
| Total liabilities | 4,668,679 |
| | 3,813,717 |
| 4,189,253 |
| | 4,295,899 |
|
| Commitments and contingencies (Note 15) | |
| |
|
| Shareholders’ equity: | | | | | | |
| Ordinary shares, €0.01 nominal value per share, 400,000 shares authorized; 178,437 shares issued as of December 31, 2015 and 2014 | 2,289 |
| | 2,289 |
| |
| Treasury shares, at cost, 8,038 and 9,120 shares as of December 31, 2015 and 2014, respectively | (324,994 | ) | | (365,272 | ) | |
| Ordinary shares, €0.01 nominal value per share, 177,069 and 400,000 shares authorized and 171,719 and 178,437 shares issued as of December 31, 2018 and 2017, respectively | | 2,203 |
| | 2,289 |
|
| Treasury shares, at cost, 7,571 and 7,076 shares as of December 31, 2018 and 2017, respectively | | (399,417 | ) | | (288,478 | ) |
| Additional paid-in capital | 1,626,024 |
| | 1,610,390 |
| 1,691,190 |
| | 1,663,367 |
|
| Retained earnings | 391,247 |
| | 67,233 |
| 1,340,636 |
| | 1,031,612 |
|
| Accumulated other comprehensive loss | (25,990 | ) | | (11,748 | ) | (26,178 | ) | | (63,164 | ) |
| Total shareholders’ equity | 1,668,576 |
| | 1,302,892 |
| 2,608,434 |
| | 2,345,626 |
|
| Total liabilities and shareholders’ equity | $ | 6,337,255 |
| | $ | 5,116,609 |
| $ | 6,797,687 |
| | $ | 6,641,525 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING N.V.PLC
Consolidated Statements of Operations
(InDollars in thousands, except per share amounts)
| | | | For the year ended December 31, | For the year ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| Net revenue | $ | 2,974,961 |
| | $ | 2,409,803 |
| | $ | 1,980,732 |
| $ | 3,521,627 |
| | $ | 3,306,733 |
| | $ | 3,202,288 |
|
| Operating costs and expenses: | | | | | | | | | | |
| Cost of revenue | 1,977,799 |
| | 1,567,334 |
| | 1,256,249 |
| 2,266,863 |
| | 2,138,898 |
| | 2,084,159 |
|
| Research and development | 123,666 |
| | 82,178 |
| | 57,950 |
| 147,279 |
| | 130,127 |
| | 126,656 |
|
| Selling, general and administrative | 271,361 |
| | 220,105 |
| | 163,145 |
| 305,558 |
| | 301,896 |
| | 293,506 |
|
| Amortization of intangible assets | 186,632 |
| | 146,704 |
| | 134,387 |
| 139,326 |
| | 161,050 |
| | 201,498 |
|
| Restructuring and special charges | 21,919 |
| | 21,893 |
| | 5,520 |
| |
| Restructuring and other charges, net | | (47,818 | ) | | 18,975 |
| | 4,113 |
|
| Total operating costs and expenses | 2,581,377 |
| | 2,038,214 |
| | 1,617,251 |
| 2,811,208 |
| | 2,750,946 |
| | 2,709,932 |
|
| Profit from operations | 393,584 |
| | 371,589 |
| | 363,481 |
| 710,419 |
| | 555,787 |
| | 492,356 |
|
| Interest expense, net | (137,626 | ) | | (106,104 | ) | | (93,915 | ) | (153,679 | ) | | (159,761 | ) | | (165,818 | ) |
| Other, net | (50,329 | ) | | (12,059 | ) | | (35,629 | ) | (30,365 | ) | | 6,415 |
| | (5,093 | ) |
| Income before taxes | 205,629 |
| | 253,426 |
| | 233,937 |
| 526,375 |
| | 402,441 |
| | 321,445 |
|
| (Benefit from)/provision for income taxes | (142,067 | ) | | (30,323 | ) | | 45,812 |
| (72,620 | ) | | (5,916 | ) | | 59,011 |
|
| Net income | $ | 347,696 |
| | $ | 283,749 |
| | $ | 188,125 |
| $ | 598,995 |
| | $ | 408,357 |
| | $ | 262,434 |
|
| Basic net income per share: | $ | 2.05 |
| | $ | 1.67 |
| | $ | 1.07 |
| |
| Diluted net income per share: | $ | 2.03 |
| | $ | 1.65 |
| | $ | 1.05 |
| |
| Basic net income per share | | $ | 3.55 |
| | $ | 2.39 |
| | $ | 1.54 |
|
| Diluted net income per share | | $ | 3.53 |
| | $ | 2.37 |
| | $ | 1.53 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING N.V.PLC
Consolidated Statements of Comprehensive Income
(InDollars in thousands)
| | | | For the year ended December 31, | For the year ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| Net income | $ | 347,696 |
| | $ | 283,749 |
| | $ | 188,125 |
| $ | 598,995 |
| | $ | 408,357 |
| | $ | 262,434 |
|
| Other comprehensive (loss)/income, net of tax: | | | | | | |
| Net unrealized (loss)/gain on derivative instruments designated and qualifying as cash flow hedges | (13,726 | ) | | 25,190 |
| | (2,817 | ) | |
| Other comprehensive income/(loss), net of tax: | | | | | | |
| Cash flow hedges | | 37,363 |
| | (28,202 | ) | | (3,829 | ) |
| Defined benefit and retiree healthcare plans | (516 | ) | | (3,831 | ) | | 9,116 |
| (377 | ) | | (895 | ) | | (4,248 | ) |
| Other comprehensive (loss)/income | (14,242 | ) | | 21,359 |
| | 6,299 |
| |
| Other comprehensive income/(loss) | | 36,986 |
| | (29,097 | ) | | (8,077 | ) |
| Comprehensive income | $ | 333,454 |
| | $ | 305,108 |
| | $ | 194,424 |
| $ | 635,981 |
| | $ | 379,260 |
| | $ | 254,357 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING N.V.PLC
Consolidated Statements of Cash Flows
(InDollars in thousands)
| | | | For the year ended December 31, | For the year ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| Cash flows from operating activities: | | | | | | | | | | |
| Net income | $ | 347,696 |
| | $ | 283,749 |
| | $ | 188,125 |
| $ | 598,995 |
| | $ | 408,357 |
| | $ | 262,434 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
| Depreciation | 96,051 |
| | 65,804 |
| | 50,889 |
| 106,014 |
| | 109,321 |
| | 106,903 |
|
| Amortization of deferred financing costs and original issue discounts | 6,456 |
| | 5,118 |
| | 4,307 |
| |
| Currency remeasurement gain on debt | (1,924 | ) | | (771 | ) | | (457 | ) | |
| Amortization of debt issuance costs | | 7,317 |
| | 7,241 |
| | 7,334 |
|
| Gain on sale of business | | (64,423 | ) | | — |
| | — |
|
| Share-based compensation | 15,326 |
| | 12,985 |
| | 8,967 |
| 23,825 |
| | 19,819 |
| | 17,425 |
|
| Loss on debt financing | 34,335 |
| | 3,750 |
| | 9,010 |
| 2,350 |
| | 2,670 |
| | — |
|
| Amortization of inventory step-up to fair value | 1,820 |
| | 5,576 |
| | — |
| |
| Amortization of intangible assets | 186,632 |
| | 146,704 |
| | 134,387 |
| 139,326 |
| | 161,050 |
| | 201,498 |
|
| Deferred income taxes | (179,009 | ) | | (59,156 | ) | | 25,711 |
| (144,068 | ) | | (56,757 | ) | | 8,344 |
|
| Gains from insurance proceeds | — |
| | (2,417 | ) | | (7,500 | ) | |
| Unrealized loss on hedges and other non-cash items | 1,334 |
| | 5,003 |
| | 8,324 |
| |
| Increase/(decrease) from changes in operating assets and liabilities, net of effects of acquisitions: | | | | | | |
| Unrealized loss on hedges and other | | 18,176 |
| | 781 |
| | 11,517 |
|
| Changes in operating assets and liabilities, net of the effects of acquisitions and divestitures: | | | | | | |
| Accounts receivable, net | 18,618 |
| | (26,287 | ) | | (33,436 | ) | (34,877 | ) | | (56,330 | ) | | (33,013 | ) |
| Inventories | 40,526 |
| | (77,473 | ) | | (7,336 | ) | (55,445 | ) | | (57,119 | ) | | (37,500 | ) |
| Prepaid expenses and other current assets | (9,857 | ) | | 2,915 |
| | 1,214 |
| (11,891 | ) | | (12,412 | ) | | 6,956 |
|
| Accounts payable and accrued expenses | (38,034 | ) | | 19,189 |
| | 23,902 |
| 48,371 |
| | 23,841 |
| | (21,432 | ) |
| Income taxes payable | 14,452 |
| | 849 |
| | (3,099 | ) | (353 | ) | | 7,655 |
| | (1,938 | ) |
| Other | (1,291 | ) | | (2,970 | ) | | (7,170 | ) | (12,754 | ) | | (471 | ) | | (7,003 | ) |
| Net cash provided by operating activities | 533,131 |
| | 382,568 |
| | 395,838 |
| 620,563 |
| | 557,646 |
| | 521,525 |
|
| Cash flows from investing activities: | | | | | | | | | | |
| Acquisition of CST, net of cash received | (996,871 | ) | | — |
| | — |
| |
| Acquisition of Schrader, net of cash received | (958 | ) | | (995,315 | ) | | — |
| |
| Other acquisitions, net of cash received | 3,881 |
| | (298,423 | ) | | (15,470 | ) | |
| Acquisitions, net of cash received | | (228,307 | ) | | — |
| | 4,688 |
|
| Additions to property, plant and equipment and capitalized software | (177,196 | ) | | (144,211 | ) | | (82,784 | ) | (159,787 | ) | | (144,584 | ) | | (130,217 | ) |
| Insurance proceeds | — |
| | 2,417 |
| | 8,900 |
| |
| Proceeds from sale of assets | 4,775 |
| | 5,467 |
| | 1,704 |
| |
| Investment in equity securities | | — |
| | — |
| | (50,000 | ) |
| Proceeds from sale of business, net of cash sold | | 149,777 |
| | — |
| | — |
|
| Other | | 711 |
| | 3,862 |
| | 751 |
|
| Net cash used in investing activities | (1,166,369 | ) | | (1,430,065 | ) | | (87,650 | ) | (237,606 | ) | | (140,722 | ) | | (174,778 | ) |
| Cash flows from financing activities: | | | | | | | | | | |
| Proceeds from exercise of stock options and issuance of ordinary shares | 19,411 |
| | 24,909 |
| | 20,999 |
| 6,093 |
| | 7,450 |
| | 3,944 |
|
| Payment of employee restricted stock tax withholdings | | (3,674 | ) | | (2,910 | ) | | (4,752 | ) |
| Proceeds from issuance of debt | 2,795,120 |
| | 1,190,500 |
| | 600,000 |
| — |
| | 927,794 |
| | — |
|
| Payments on debt | (2,000,257 | ) | | (76,375 | ) | | (711,665 | ) | (15,653 | ) | | (943,554 | ) | | (336,256 | ) |
| Repurchase of ordinary shares from SCA | — |
| | (169,680 | ) | | (172,125 | ) | |
| Payments to repurchase ordinary shares | (50 | ) | | (12,094 | ) | | (132,971 | ) | (399,417 | ) | | — |
| | — |
|
| Payments of debt issuance cost | (50,052 | ) | | (16,330 | ) | | (8,069 | ) | |
| Net cash provided by/(used in) financing activities | 764,172 |
| | 940,930 |
| | (403,831 | ) | |
| Payments of debt and equity issuance costs | | (9,931 | ) | | (4,043 | ) | | (518 | ) |
| Other | | 16,369 |
| | — |
| | — |
|
| Net cash used in financing activities | | (406,213 | ) | | (15,263 | ) | | (337,582 | ) |
| Net change in cash and cash equivalents | 130,934 |
| | (106,567 | ) | | (95,643 | ) | (23,256 | ) | | 401,661 |
| | 9,165 |
|
| Cash and cash equivalents, beginning of year | 211,329 |
| | 317,896 |
| | 413,539 |
| 753,089 |
| | 351,428 |
| | 342,263 |
|
| Cash and cash equivalents, end of year | $ | 342,263 |
| | $ | 211,329 |
| | $ | 317,896 |
| $ | 729,833 |
| | $ | 753,089 |
| | $ | 351,428 |
|
| Supplemental cash flow items: | | | | | | | | | | |
| Cash paid for interest | $ | 125,370 |
| | $ | 87,774 |
| | $ | 84,714 |
| $ | 163,478 |
| | $ | 164,370 |
| | $ | 155,925 |
|
| Cash paid for income taxes | $ | 41,301 |
| | $ | 41,126 |
| | $ | 33,557 |
| $ | 72,924 |
| | $ | 48,482 |
| | $ | 43,152 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING N.V.PLC
Consolidated Statements of Changes in Shareholders’ Equity
(InAmounts in thousands)
| | | | Ordinary Shares |
| Treasury Shares |
| Additional
Paid-In
Capital |
| Retained Earnings/ (Accumulated
Deficit) |
| Accumulated
Other
Comprehensive
Loss |
| Total
Share-
holders’
Equity | Ordinary Shares |
| Treasury Shares |
| Additional
Paid-In
Capital |
| Retained Earnings |
| Accumulated
Other
Comprehensive
Loss |
| Total
Shareholders’
Equity |
| | Number |
| Amount |
| Number |
| Amount |
| Number |
| Amount |
| Number |
| Amount |
|
| Balance as of December 31, 2012 | 178,392 |
| | $ | 2,289 |
| | (381 | ) | | $ | (11,423 | ) | | $ | 1,587,202 |
| | $ | (316,368 | ) | | $ | (39,406 | ) | | $ | 1,222,294 |
| |
| Issuance of ordinary shares for employee stock plans | — |
| | — |
| | 7 |
| | 233 |
| | — |
| | (1 | ) | | — |
| | 232 |
| |
| Repurchase of ordinary shares | — |
| | — |
| | (8,582 | ) | | (305,096 | ) | | — |
| | — |
| | — |
| | (305,096 | ) | |
| Stock options exercised | 43 |
| | — |
| | 2,432 |
| | 77,911 |
| | 375 |
| | (57,519 | ) | | — |
| | 20,767 |
| |
| Vesting of restricted securities | 2 |
| | — |
| | 62 |
| | 2,029 |
| | — |
| | (2,029 | ) | | — |
| | — |
| |
| Share-based compensation | — |
| | — |
| | — |
| | — |
| | 8,967 |
| | — |
| | — |
| | 8,967 |
| |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 188,125 |
| | — |
| | 188,125 |
| |
| Other comprehensive income |
| | — |
| | — |
| | — |
| |
| |
| | 6,299 |
| | 6,299 |
| |
| Balance as of December 31, 2013 | 178,437 |
| | $ | 2,289 |
| | (6,462 | ) | | $ | (236,346 | ) | | $ | 1,596,544 |
| | $ | (187,792 | ) | | $ | (33,107 | ) | | $ | 1,141,588 |
| |
| Issuance of ordinary shares for employee stock plans | — |
| | — |
| | 9 |
| | 264 |
| | 128 |
| | — |
| | — |
| | 392 |
| |
| Repurchase of ordinary shares | — |
| | — |
| | (4,305 | ) | | (181,774 | ) | | — |
| | — |
| | — |
| | (181,774 | ) | |
| Stock options exercised | — |
| | — |
| | 1,589 |
| | 50,995 |
| | 657 |
| | (27,135 | ) | | — |
| | 24,517 |
| |
| Vesting of restricted securities | — |
| | — |
| | 49 |
| | 1,589 |
| | — |
| | (1,589 | ) | | — |
| | — |
| |
| Share-based compensation | — |
| | — |
| | — |
| | — |
| | 13,061 |
| | — |
| | — |
| | 13,061 |
| |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 283,749 |
| | — |
| | 283,749 |
| |
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 21,359 |
| | 21,359 |
| |
| Balance as of December 31, 2014 | 178,437 |
|
| $ | 2,289 |
|
| (9,120 | ) |
| $ | (365,272 | ) |
| $ | 1,610,390 |
|
| $ | 67,233 |
|
| $ | (11,748 | ) |
| $ | 1,302,892 |
| |
| Issuance of ordinary shares for employee stock plans | — |
|
| — |
|
| 5 |
|
| 195 |
|
| 72 |
|
| — |
|
| — |
|
| 267 |
| |
| Balance as of December 31, 2015 | | 178,437 |
| | $ | 2,289 |
| | (8,038 | ) | | $ | (324,994 | ) | | $ | 1,626,024 |
| | $ | 391,247 |
| | $ | (25,990 | ) | | $ | 1,668,576 |
|
| Surrender of shares for tax withholding | — |
|
| — |
|
| (54 | ) |
| (2,507 | ) |
| — |
|
| — |
|
| — |
|
| (2,507 | ) | — |
| | — |
| | (62 | ) | | (2,295 | ) | | — |
| | — |
| | — |
| | (2,295 | ) |
| Stock options exercised | — |
|
| — |
|
| 1,016 |
|
| 38,199 |
|
| 236 |
|
| (19,291 | ) |
| — |
|
| 19,144 |
| — |
| | — |
| | 358 |
| | 13,698 |
| | — |
| | (9,754 | ) | | — |
| | 3,944 |
|
| Vesting of restricted securities | — |
|
| — |
|
| 115 |
|
| 4,391 |
|
| — |
|
| (4,391 | ) |
| — |
|
| — |
| — |
| | — |
| | 185 |
| | 7,086 |
| | — |
| | (7,086 | ) | | — |
| | — |
|
| Share-based compensation | — |
|
| — |
|
| — |
|
| — |
|
| 15,326 |
|
| — |
|
| — |
|
| 15,326 |
| — |
| | — |
| | — |
| | — |
| | 17,425 |
| | — |
| | — |
| | 17,425 |
|
| Net income | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 347,696 |
|
| — |
|
| 347,696 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 262,434 |
| | — |
| | 262,434 |
|
| Other comprehensive loss | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (14,242 | ) |
| (14,242 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8,077 | ) | | (8,077 | ) |
| Balance as of December 31, 2015 | 178,437 |
|
| $ | 2,289 |
|
| (8,038 | ) |
| $ | (324,994 | ) |
| $ | 1,626,024 |
|
| $ | 391,247 |
|
| $ | (25,990 | ) |
| $ | 1,668,576 |
| |
| Balance as of December 31, 2016 | | 178,437 |
| | 2,289 |
| | (7,557 | ) | | (306,505 | ) |
| 1,643,449 |
| | 636,841 |
| | (34,067 | ) | | 1,942,007 |
|
| Surrender of shares for tax withholding | | — |
| | — |
| | (67 | ) | | (2,910 | ) |
| — |
| | — |
| | — |
| | (2,910 | ) |
| Stock options exercised | | — |
| | — |
| | 326 |
| | 12,465 |
|
| 99 |
| | (5,114 | ) | | — |
| | 7,450 |
|
| Vesting of restricted securities | | — |
| | — |
| | 222 |
| | 8,472 |
|
| — |
| | (8,472 | ) | | — |
| | — |
|
| Share-based compensation | | — |
| | — |
| | — |
| | — |
| | 19,819 |
| | — |
| | — |
| | 19,819 |
|
| Net income | | — |
| | — |
| | — |
| | — |
|
| — |
| | 408,357 |
| | — |
| | 408,357 |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
|
| — |
| | — |
| | (29,097 | ) | | (29,097 | ) |
| Balance as of December 31, 2017 | | 178,437 |
| | 2,289 |
| | (7,076 | ) | | (288,478 | ) |
| 1,663,367 |
| | 1,031,612 |
| | (63,164 | ) | | 2,345,626 |
|
| Surrender of shares for tax withholding | | — |
| | — |
| | (71 | ) | | (3,674 | ) | | — |
| | — |
| | — |
| | (3,674 | ) |
| Stock options exercised | | 114 |
| | 1 |
| | 58 |
| | 2,250 |
| | 3,998 |
| | (156 | ) | | — |
| | 6,093 |
|
| Vesting of restricted securities | | 257 |
| | 3 |
| | — |
| | — |
| | — |
| | (3 | ) | | — |
| | — |
|
| Retirement of treasury shares due to Merger | | (7,018 | ) | | (89 | ) | | 7,018 |
| | 286,228 |
| | — |
| | (286,139 | ) | | — |
| | — |
|
| Repurchase of ordinary shares | | — |
| | — |
| | (7,571 | ) | | (399,417 | ) | | — |
| | — |
| | — |
| | (399,417 | ) |
| Other retirements of treasury shares | | (71 | ) | | (1 | ) | | 71 |
| | 3,674 |
| | — |
| | (3,673 | ) | | — |
| | — |
|
| Share-based compensation | | — |
| | — |
| | — |
| | — |
| | 23,825 |
| | — |
| | — |
| | 23,825 |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 598,995 |
| | — |
| | 598,995 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 36,986 |
| | 36,986 |
|
| Balance as of December 31, 2018 | | 171,719 |
| | $ | 2,203 |
| | (7,571 | ) | | $ | (399,417 | ) | | $ | 1,691,190 |
| | $ | 1,340,636 |
| | $ | (26,178 | ) | | $ | 2,608,434 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING N.V.PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(InAmounts in thousands, except per share amounts, or unless otherwise noted)
1. Business Description and Basis of Presentation
Description of Business
The accompanying consolidated financial statements reflect the financial position, results of operations, comprehensive income, cash flows, and changes in shareholders' equity of Sensata Technologies Holding plc ("Sensata plc"), the successor issuer to Sensata Technologies Holding N.V. ("Sensata Technologies Holding"N.V."), and its wholly-owned subsidiaries, collectively referred to as the “Company,” “Sensata,” “we,” “our,”"Company," "Sensata," "we," "our," or “us.”"us."
On September 28, 2017, the Board of Directors of Sensata Technologies Holding isN.V. unanimously approved a plan to change our location of incorporation from the Netherlands to the United Kingdom (the "U.K."). To effect this change, on February 16, 2018 the shareholders of Sensata N.V. approved a cross-border merger between Sensata N.V. and Sensata plc, a newly formed, public limited company incorporated under the laws of England and Wales, with Sensata plc being the Netherlandssurviving entity (the "Merger").
We received approval of the Merger by the U.K. High Court of Justice, and conducts itsthe Merger was completed, on March 28, 2018. As a result thereof, Sensata plc became the publicly-traded parent of the subsidiary companies that were previously controlled by Sensata N.V., with no changes made to the business being conducted by us prior to the Merger. Due to the fact that the Merger was a business combination between entities under common control, the assets and liabilities exchanged were accounted for at their carrying values.
Sensata, a global industrial technology company, develops, manufactures, and sells a wide range of customized sensors and controls that address increasingly complex engineering requirements for specific customer applications and systems such as air conditioning, braking, exhaust, fuel oil, tire, operator controls, and transmission in automotive and heavy vehicle and off-road ("HVOR") systems, and temperature and electrical protection and control in numerous industrial applications, including aircraft, refrigeration, material handling, telecommunications, and heating, ventilation, and air conditioning ("HVAC") systems. Our sensors are devices that translate a physical phenomenon, such as pressure, temperature, or position, into electronic signals that microprocessors or computer-based control systems can act upon. Our controls are devices embedded within systems to protect them from excessive heat or current.
We conduct our operations through subsidiary companies that operate business and product development centers primarily in Belgium, Bulgaria, China, Germany, Japan, the Netherlands, South Korea, the U.K., and the United States (the "U.S."), the Netherlands, Belgium, China, Germany, Japan, South Korea, and the United Kingdom (the "U.K."); and manufacturing operations primarily in Bulgaria, China, Germany, Malaysia, Mexico, the Dominican Republic, Bulgaria, Poland, France, Brazil, Germany, the U.K., and the U.S. We organize our operationsbusiness into two businesses,segments, Performance Sensing (formerly referred to as "Sensors") and Sensing Solutions (formerly referredSolutions.
Refer to as "Controls").
Our Performance Sensing business isNote 20, "Segment Reporting," for a manufacturergeneral description of pressure, temperature, speed, and position sensors, and electromechanical products used in subsystemseach of automobiles (e.g., engine, air conditioning, and ride stabilization) and heavy on- and off-road vehicles ("HVOR"). These products help improve performance, for example by making an automobile's heating and air conditioning systems work more efficiently, thereby improving gas mileage. These products are also used in systems that address safety and environmental concerns, for example, by improving the stability control of the vehicle and reducing vehicle emissions.
Our Sensing Solutions business is a manufacturer of a variety of control products used in industrial, aerospace, military, commercial, medical device, and residential markets, and sensor products used in aerospace and industrial applications such as heating, ventilation, and air conditioning ("HVAC") systems and military and commercial aircraft. These products include motor and compressor protectors, circuit breakers, semiconductor burn-in test sockets, electronic HVAC sensors and controls, solid state relays, linear and rotary position sensors, precision switches, and thermostats. These products help prevent damage from overheating and fires in a wide variety of applications, including commercial HVAC systems, refrigerators, aircraft, automobiles, lighting, and other industrial applications, and help optimize performance by using sensors which provide feedback to control systems. The Sensing Solutions business also manufactures direct current ("DC") to alternating current ("AC") power inverters, which enable the operation of electronic equipment when grid power is not available.our segments.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“("U.S. GAAP”GAAP"). The accompanying consolidated financial statements present separately our financial position, results of operations, comprehensive income, cash flows, and changes in shareholders’ equity.
All intercompany balances and transactions have been eliminated.
All U.S. dollar and share amounts presented, except per share amounts, are stated in thousands, unless otherwise indicated.
Certain reclassifications have been made to prior periods to conform to current period presentation.
2. Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires us to exercise our judgment in the process of applying our accounting policies. It also requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies at the date of the financial statements and the reported amounts of net revenue and expense during the reporting periods.
Estimates are used when accounting for certain items such as allowances for doubtful accounts and sales returns, depreciation and amortization, inventory obsolescence, asset impairments (including goodwill and other intangible assets),
contingencies, the value of share-based compensation, the determination of accrued expenses, certain asset valuations including deferred tax asset valuations, the useful lives of propertyplant and equipment, post-retirement obligations, and the accounting for business combinations. The accounting estimates used in the preparation of the consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained, and/orand as the operating environment changes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash comprises cash on hand. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, are subject to an insignificant risk of change in value, and have original maturities of three months or less.
Revenue Recognition
We recognizeOn January 1, 2018, we adopted FASB ASC Topic 606, Revenue from Contracts with Customers. This standard replaced previous revenue in accordancerecognition rules with Accounting Standards Codification ("ASC")a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. Upon adoption, we applied the pertinent transition provisions to contracts that were not completed as of January 1, 2018 using the modified retrospective method. Accordingly, periods presented prior to January 1, 2018 are presented under the previous revenue recognition guidance (i.e., FASB ASC Topic 605, Revenue Recognition(").
We recognize revenue to depict the transfer of promised goods to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods. In order to achieve this, we use the five step model outlined in FASB ASC 605"). Revenue and related cost of revenue from product sales are recognized whenTopic 606. Specifically, we (1) identify the significant risks and rewards of ownership have been transferred, titlecontract with the customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the productperformance obligations in the contract, and risk(5) recognize revenue when (or as) we satisfy a performance obligation.
The vast majority of loss transfersour contracts (as defined in FASB ASC Topic 606) are customer purchase orders ("P.O.s"), which explicitly require that we transfer a specified quantity of products to our customers, and collection of sales proceeds is reasonably assured. Based on the above criteria, revenuefor which performance is generally recognizedsatisfied in a short amount of time. We do not consider there to be a significant financing component of our contracts, as our terms generally provide for payment in a short time (that is, less than a year) after shipment to the customer.
Our performance obligations are satisfied when control of the product is transferred to the customer (at a point in time), which is generally when the product is shipped from our warehouse or, in limited instances, when it is received by the customer, depending on the specific terms of the arrangement. Product sales are recorded net of trade discounts (including volume and early payment incentives), sales returns, value-added tax, and similar taxes. Amounts billed to our customers for shipping and handling are recorded in revenue. Shipping and handling costs are included in cost of revenue. Sales to customers generally include a right of return for defective or non-conforming product. Sales returns have not historically been significant in relation to our revenue and have been within our estimates.
Many of our products are designed and engineered to meet customer specifications. These activities, and the testing of our products to determine compliance with those specifications, occur prior to any revenue being recognized. Products are then manufactured and sold to customers. However, in certain cases, pre-production activities are a performance obligation in a customer P.O., and revenue is recognized when the performance obligation is satisfied. Customer arrangements do not involve post-installation or post-sale testing and acceptance.
In determining the transaction price related to a contract, we determine whether the amount promised in a contract includes a variable amount (variable consideration). Variable consideration may be specified in the customer P.O., in another agreement that identifies terms and conditions of the transaction, or based on our customary practices. We have identified certain types of variable consideration that are included in the transaction price related to our contracts, including sales returns (which generally include a right of return for defective or non-conforming product) and trade discounts (including retrospective volume discounts and early payment incentives). Such variable consideration has not historically been material in relation to our net revenue and have been within our estimates.
The transaction price excludes value-added tax and similar taxes. Amounts billed to our customers for shipping and handling are recognized as revenue, and the related costs that we incur are presented in cost of revenue.
We do not provide separately priced warranties to our customers. Our standard terms of sale provide our customers with a warranty against faulty workmanship and the use of defective materials, which is not considered a distinct performance obligation in accordance with FASB ASC Topic 606.
Refer to Note 3, "Revenue Recognition," for additional information on our net revenue recognized in the consolidated statements of operations.
Share-Based Compensation
FASB ASC Topic 718, Compensation—Stock Compensation, (“ASC 718”), requires that a company measure at fair value any new or modified share-based compensation arrangements with employees, such as stock options and restricted stock units,securities, and recognize as compensation expense that fair value over the requisite service period. Share-based compensation cost is generally recognized as a component of selling, general and administrative ("SG&A") expense, which is consistent with where the related employee costs are presented, however, such cost, or a portion thereof, may be capitalized provided certain criteria are met.
Share-based awards may be subject to either cliff vesting (i.e., the entire award vests on a particular date) or graded vesting (i.e., portions of the award vest at different points in time). In accordance with FASB ASC Topic 718, compensation cost associated with share-based awards subject to cliff vesting must be recognized on a straight-line basis. However, for awards subject to graded vesting, companies have the option to recognize compensation cost on either a straight–line or accelerated basis. We have elected to recognize compensation costs for these awards using the straight-line method.
We estimate the fair value of options on the grant date of grant using the Black-Scholes-Merton option-pricing model. Key inputs and assumptions used in estimating the grant-date fair value of these optionsthis model are as follows: the
The fair value of the underlying ordinary shares. This is determined as the closing price of our ordinary shares expected term, expected volatility, risk-free interest rate, and expected dividend yield. Significant factors used in determining these assumptions are detailed below.on the New York Stock Exchange (the "NYSE") on the grant date.
The expected term, which is a key factor in measuring the fair value and related compensation cost of share-based payments, has historically been based on the “simplified” methodology originally prescribed by Staff Accounting Bulletin (“SAB”) No. 107, in which the expected termterm. This is determined by computing the mathematical meanbased upon our own historical average term of the average vesting periodexercised and the contractual life of theoutstanding options. While the widespread use of the simplified method under SAB No. 107 expired on December 31, 2007, the U.S. Securities and Exchange Commission issued SAB No. 110 in December 2007, which allowed the simplified method to continue to be used in certain circumstances. These circumstances include when a company does not have sufficient historical data surrounding option exercises to provide a reasonable basis upon which to estimate expected term and during periods prior to its equity shares being publicly traded.
Expected volatility. We utilized the simplified method for options granted during 2013 due to the lack of historical exercise data necessary to provide a reasonable basis upon which to estimate the expected term. During 2015 and 2014, rather than using the simplified method, we benchmarked the terms of our options granted against those of publicly-traded companies within our industry in order to estimate our expected term.
Also, because of our lack of history as a public company, during 2013 we considered the historical and implied volatilities of publicly-traded companies within our industry when selecting the expected volatility assumption to apply to the options granted in those years. Implied volatility provides a forward-looking indication and may offer insight into expected industry volatility. During 2015 and 2014, with additional historical data available, we consideredconsider our own historical volatility, as well as the historical and implied volatilities of publicly-traded companies within our industry, in estimating expected volatility for options granted in 2015options. Implied volatility provides a forward-looking indication and 2014.may offer insight into expected industry volatility.
Risk-free interest rate. The risk-free interest rate is based on the yield for a U.S. Treasury security having a maturity similar to the expected term of the related option grant.
Expected dividend yield. The dividend yield of 0% is based on our history of having never declared or paid any dividends on our ordinary shares, and our current intention of not declaring any such dividends in the foreseeable future. See Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities," included elsewhere in this Annual Report on Form 10-K for further discussion of limitations on our ability to pay dividends.
Restricted securities are valued using the closing price of our ordinary shares on the New York Stock ExchangeNYSE on the date of the grant.grant date. Certain of our restricted securities include performance conditions that require us to estimate the probable outcome of the performance condition. This assessment is based on management's judgment using internally developed forecasts and is assessed at each reporting period. Compensation cost is recorded if it is probable that the performance condition will be achieved.
Under the fair value recognition provisions of FASB ASC Topic 718, we recognize share-based compensation net of estimated forfeitures and, therefore,forfeitures. Accordingly, we only recognize compensation cost for those awards expected to vest over the requisite service period. Compensation expense recognized for each award ultimately reflects the number of awardsunits that actually vest.
Share-based compensation expense is generally recognized as a component of Selling, general and administrative (“SG&A”) expense, which is consistent with where the related employee costs are recorded. Refer to further discussion of share-based payments in Note 11,4, "Share-Based Payment Plans.Plans," for additional information on share-based compensation.
FinancialDebt Instruments
Derivative financial instruments: We maintain derivative financialSummarized information regarding our debt instruments is described below. Refer to Note 14, "Debt," of our Financial Statements for further details of the terms of our Debt Instruments.
Senior Secured Credit Facilities
In May 2011, we completed a series of transactions designed to refinance our then existing indebtedness. These transactions included the execution of the Credit Agreement, which provided for senior secured credit facilities (the "Senior Secured Credit Facilities") which currently consists of the Term Loan, the Revolving Credit Facility, and $1.0 billion incremental availability (the "Accordion") under which, subject to certain limitations as defined in the indentures under which the Senior Notes (as defined below) were issued (the "Senior Notes Indentures"), additional secured debt may be issued or the capacity of the Revolving Credit Facility may be increased.
Term Loan
The Term Loan may, at our option, be maintained from time to time as a Base Rate loan or a Eurodollar Rate loan (each as defined in the Credit Agreement), each with major financial institutionsa different determination of investment grade credit rating and monitor theinterest rates. The principal amount of the Term Loan amortizes in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the term loan provided under the Sixth Amendment, with the balance due at maturity.
The applicable margins for the Term Loan as of December 31, 2018 were 0.75% and 1.75% for Base Rate loans and Eurodollar Rate loans, respectively, subject to floors of 1.00% and 0.00% for Base Rate loans and Eurodollar Rate loans, respectively. As of December 31, 2018, we maintained the Term Loan as a Eurodollar Rate loan.
Revolving Credit Facility
As of December 31, 2018, there was $416.1 million of availability under the Revolving Credit Facility, net of $3.9 million of letters of credit. Outstanding letters of credit exposure to any one issuer. We believe there are issued primarily for the benefit of certain operating activities. As of December 31, 2018, no significant concentrationsamounts had been drawn against these outstanding letters of risk associatedcredit.
Senior Notes
At December 31, 2018, we had various tranches of senior notes outstanding, including $500.0 million aggregate principal amount of 4.875% senior notes due 2023 (the "4.875% Senior Notes"), $400.0 million aggregate principal amount of 5.625% senior notes due 2024 (the "5.625% Senior Notes"), $700.0 million aggregate principal amount of 5.0% senior notes due 2025 (the "5.0% Senior Notes"), and the 6.25% Senior Notes (collectively, with our derivative financial instruments.the 4.875% Senior Notes, the 5.625% Senior Notes, and the 5.0% Senior Notes, the "Senior Notes").
We account for our derivative financial instruments in accordance with ASC Topic 820, Fair Value Measurements
4.875% Senior Notes
In April 2013, we completed the issuance and Disclosures (“ASC 820”)sale of the 4.875% Senior Notes, which were offered at par, and with ASC Topic 815, Derivatives and Hedging (“ASC 815”). In accordance with ASC 815, we record all derivativesmature on October 15, 2023. Interest on the balance sheet4.875% Senior Notes is payable semi-annually on April 15 and October 15 of each year.
5.625% Senior Notes
In October 2014, we completed the issuance and sale of the 5.625% Senior Notes, which were offered at fair value. The accounting for the change in the fair value of derivatives dependspar, and mature on November 1, 2024. Interest on the intended use5.625% Senior Notes is payable semi-annually on May 1 and November 1 of each year.
5.0% Senior Notes
In March 2015, we completed the issuance and sale of the derivative, whether5.0% Senior Notes, which were offered at par, and mature on October 1, 2025. Interest on the 5.0% Senior Notes is payable semi-annually on April 1 and October 1 of each year.
6.25% Senior Notes
In November 2015, we have elected to designate a derivative as a hedging instrument for accounting purposes,completed the issuance and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. In addition, ASC 815 provides that, for derivative instruments that qualify for hedge accounting, changes in the fair value are either (a) offset against the change in fair valuesale of the hedged assets, liabilities, or firm commitments through earnings or (b) recognized in equity until the hedged item is recognized in earnings, depending6.25% Senior Notes, which were offered at par, and mature on whether the derivative is being used to hedge changes in fair value or cash flows. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. We do not use derivative financial instruments for trading or speculation purposes.
We are exposed to fluctuations in various foreign currencies against our functional currency, the U.S. dollar. We enter into forward contracts for certain foreign currencies, including the Euro, Japanese yen, Mexican peso, Chinese renminbi, Korean won, Malaysian ringgit, and British pound sterling. The fair value of foreign currency forward contracts is determined using widely accepted valuation techniques, including discounted cash flow analysisFebruary 15, 2026. Interest on the expected cash flows6.25% Senior Notes is payable semi-annually on February 15 and August 15 of each instrument. These analyses utilize observable market-based inputs, including foreign exchange rates, and reflect the contractual termsyear.
Capital Resources
Our sources of these instruments, including the period to maturity. Certain of these contracts have not been designated as accounting hedges, and in accordance with ASC 815, we recognize the changes in the fair value of these contracts in the consolidated statments of operations. The specific contractual terms utilized as inputs in determining fair value, and a discussion of the nature of the risks being mitigated by these instruments, are detailed in Note 16, “Derivative Instruments and Hedging Activities,” under the caption Hedges of Foreign Currency Risk.
We enter into forward contracts for certain commodities, including silver, gold, nickel, aluminum, copper, platinum, palladium, and zinc used in the manufacturing of our products. The terms of these forward contracts fix the price at a future date for various notional amounts associated with these commodities. The fair value of our commodity forward contracts is determined using widely accepted valuation techniques, including discountedliquidity include cash flow analysis on the expected cash flows of each instrument. These analyses utilize observable market-based inputs, including commodity forward curves, and reflect the contractual terms of these instruments, including the period to maturity. These contracts have not been designated as accounting hedges. In accordance with ASC 815, we recognize changes in the fair value of these contracts in the consolidated statements of operations. The specific contractual terms utilized as inputs in determining fair value, and a discussion of the nature of the risks being mitigated by these instruments, are detailed in Note 16, “Derivative Instruments and Hedging Activities,” under the caption Hedges of Commodity Risk.
We incorporate credit valuation adjustments to appropriately reflect both our own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of non-performance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
We report cash flows arising from our derivative financial instruments consistent with the classification ofhand, cash flows from operations, and available capacity under the underlying hedged items.
Refer to further discussionRevolving Credit Facility and the Accordion. We believe, based on derivative instrumentsour current level of operations as reflected in Note 16, "Derivative Instruments and Hedging Activities."
Trade accounts receivable: Trade accounts receivable are recorded at invoiced amounts and do not bear interest. Trade accounts receivable are reduced by an allowance for losses on receivables, as described elsewhere in this Note. Concentrationsour results of risk with respect to trade accounts receivable are generally limited due to the large number of customers in various industries and their dispersion across several geographic areas. Although we do not foresee that credit risk associated with these receivables will deviate from historical experience, repayment is dependent upon the financial stability of these individual customers. Our largest customer accounted for approximately 9% of our Net revenueoperations for the year ended December 31, 2018, and taking into consideration the restrictions and covenants discussed below and in Note 14, "Debt," of our Financial Statements, that these sources of liquidity will be sufficient to fund our operations, capital expenditures, ordinary share repurchases, and debt service for at least the next twelve months. However, we cannot make assurances that our business will generate sufficient cash flows from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay or refinance our indebtedness or to fund our other liquidity needs. Further, our highly-leveraged nature may limit our ability to procure additional financing in the future.
The Credit Agreement stipulates certain events and conditions that may require us to use excess cash flow, as defined by the terms of the Credit Agreement, generated by operating, investing, or financing activities, to prepay some or all of the outstanding borrowings under the Senior Secured Credit Facilities. The Credit Agreement also requires mandatory prepayments of the outstanding borrowings under the Senior Secured Credit Facilities upon certain asset dispositions and casualty events, in each case subject to certain reinvestment rights, and the incurrence of certain indebtedness (excluding any permitted indebtedness). These provisions were not triggered during the year ended December 31, 2018.
All obligations under the Senior Secured Credit Facilities are unconditionally guaranteed by certain of our subsidiaries (the "Guarantors"). The collateral for such borrowings under the Senior Secured Credit Facilities consists of substantially all present and future property and assets of Sensata Technologies B.V. ("STBV"), Sensata Technologies Finance Company, LLC, and the Guarantors.
Our ability to raise additional financing, and our borrowing costs, may be impacted by short- and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on our performance as measured by certain credit metrics such as interest coverage and leverage ratios. As of January 25, 2019, Moody’s Investors Service’s corporate credit rating for STBV was Ba2 with a stable outlook and Standard & Poor’s corporate credit rating for STBV was BB+ with a stable outlook. Any future downgrades to STBV's credit ratings may increase our borrowing costs, but will not reduce availability under the Credit Agreement.
The Credit Agreement and the Senior Notes Indentures contain restrictions and covenants (described in more detail in Note 14, "Debt," of our Financial Statements) that limit the ability of STBV and certain of its subsidiaries to, among other things, incur subsequent indebtedness, sell assets, make capital expenditures, pay dividends, and make other restricted payments. These restrictions and covenants, which are subject to important exceptions and qualifications set forth in the Credit Agreement and Senior Notes Indentures, were taken into consideration in establishing our share repurchase programs, and are evaluated periodically with respect to future potential funding. We do not believe that these restrictions and covenants will prevent us from funding share repurchases under our share repurchase programs with available cash and cash flows from operations, should we decide to do so. As of December 31, 2018, we believe that we were in compliance with all the covenants and default provisions under the Credit Agreement.
Share repurchase program
Upon completion of the Merger, the $250.0 million share repurchase program previously authorized by the Board of Directors of Sensata N.V. lapsed, and our ability to repurchase shares as a company incorporated in England and Wales became contingent upon the completion of certain court proceedings in the U.K. (which were completed in the second quarter of 2018), approval of our shareholders (which occurred at our May 31, 2018 annual general meeting of shareholders), and authorization by our Board of Directors.
On May 31, 2018, we announced that our Board of Directors had authorized a $400.0 million share repurchase program. Under this program, we could repurchase ordinary shares at such times and in amounts to be determined by our management, based on market conditions, legal requirements, and other corporate considerations, on the open market or in privately negotiated transactions, provided that such transactions were completed pursuant to an agreement and with a third party approved by our shareholders at the annual general meeting. The authorized amount of our share repurchase program could be modified or terminated by our Board of Directors at any time. During the year ended December 31, 2018, we repurchased approximately 7.6 million ordinary shares, which are now held as treasury shares, at a weighted-average price of $52.75 per share.
In October 2018, our Board of Directors authorized a new $250.0 million share repurchase program, subject to the same conditions that applied to the previously authorized $400.0 million share repurchase program. During the year ended December 31, 2018, we have not repurchased any ordinary shares under this new share repurchase program.
Contractual Obligations and Commercial Commitments
The table below reflects our contractual obligations as of December 31, 20152018. Amounts we pay in future periods may vary from those reflected in the table. Amounts in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not sum due to the effect of rounding.
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| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (Dollars in millions) | Total | | One Year or Less | | One to Three Years | | Three to Five Years | | More than Five Years |
Debt obligations principal(1) | $ | 3,267.8 |
| | $ | 9.7 |
| | $ | 908.1 |
| | $ | 500.0 |
| | $ | 1,850.0 |
|
Debt obligations interest(2) | 966.4 |
| | 171.0 |
| | 328.1 |
| | 257.4 |
| | 209.9 |
|
Capital lease obligations principal(3) | 32.7 |
| | 2.6 |
| | 3.6 |
| | 3.0 |
| | 23.5 |
|
Capital lease obligations interest(3) | 24.4 |
| | 2.1 |
| | 5.0 |
| | 4.5 |
| | 12.7 |
|
Other financing obligations principal(4) | 2.8 |
| | 2.2 |
| | 0.5 |
| | — |
| | — |
|
Other financing obligations interest(4) | 0.4 |
| | 0.3 |
| | 0.1 |
| | — |
| | — |
|
Operating lease obligations(5) | 79.4 |
| | 16.6 |
| | 22.0 |
| | 14.2 |
| | 26.6 |
|
Non-cancelable purchase obligations(6) | 79.8 |
| | 24.0 |
| | 42.7 |
| | 13.0 |
| | 0.0 |
|
Total contractual obligations(7)(8) | $ | 4,453.7 |
| | $ | 228.5 |
| | $ | 1,310.1 |
| | $ | 792.1 |
| | $ | 2,122.7 |
|
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(1) | Represents the contractually required principal payments, in accordance with the required payment schedule, on our debt obligations in existence as of December 31, 2018. |
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(2) | Represents the contractually required interest payments, in accordance with the required payment schedule, on our debt obligations in existence as of December 31, 2018. Cash flows associated with the next interest payment to be made on our variable rate debt subsequent to December 31, 2018 were calculated using the interest rates in effect as of the latest interest rate reset date prior to December 31, 2018, plus the applicable spread. |
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(3) | Represents the contractually required payments, in accordance with the required payment schedule, under our capital lease obligations in existence as of December 31, 2018. Certain leases were assumed to extend beyond their current terms because it was probable that such an extension would occur. |
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(4) | Represents the contractually required payments, in accordance with the required payment schedule, under our financing obligations in existence as of December 31, 2018. No assumptions were made with respect to renewing these financing arrangements beyond their current terms. |
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(5) | Represents the contractually required payments, in accordance with the required payment schedule, under our operating lease obligations in existence as of December 31, 2018. No assumptions were made with respect to renewing these leases beyond their current terms. |
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(6) | Represents the contractually required payments under our various purchase obligations in existence as of December 31, 2018. No assumptions were made with respect to renewing the purchase obligations at the expiration date of their initial terms, and no amounts were assumed to be prepaid. |
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(7) | Contractual obligations denominated in a foreign currency were calculated utilizing the U.S. dollar to local currency exchange rates in effect as of December 31, 2018. |
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(8) | This table does not include the contractual obligations associated with our defined benefit and other post-retirement benefit plans. As of December 31, 2018, we had recognized a net benefit liability of $37.1 million, representing the net unfunded benefit obligations of the defined benefit and retiree healthcare plans. Refer to Note 13, "Pension and Other Post-Retirement Benefits," of our Financial Statements for additional information on pension and other post-retirement benefits, including expected benefit payments for the next 10 years. This table also does not include $11.5 million of unrecognized tax benefits as of December 31, 2018, as we are unable to make reasonably reliable estimates of when cash settlement, if any, will occur with a tax authority, as the timing and the ultimate resolution of the examination is uncertain. Refer to Note 7, "Income Taxes," of our Financial Statements for additional information on our unrecognized tax benefits. |
Critical Accounting Policies and Estimates
As discussed in Note 2, "Significant Accounting Policies," of our Financial Statements, which more fully describes our significant accounting policies, the preparation of consolidated financial statements in accordance with GAAP requires us to exercise our judgment in the process of applying our accounting policies. It also requires that we make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. The accounting policies and estimates that we believe are most critical to the portrayal of our financial position and results of operations are listed below. We believe these policies require our most difficult, subjective, and complex judgments in estimating the effect of inherent uncertainties.
Revenue Recognition
The discussion below details the most significant judgments and estimates we make regarding recognition of revenue in accordance with FASB ASC Topic 606, Revenue from Contracts with Customers. We adopted FASB ASC Topic 606 on January 1, 2018. Periods presented prior to January 1, 2018 are presented under the previous revenue recognition guidance, including FASB ASC Topic 605, Revenue Recognition. The adoption of FASB ASC Topic 606 did not have a material effect on our financial statements or results of operations, and no cumulative catch-up adjustment was recorded.
In accordance with FASB ASC Topic 606, we recognize revenue to depict the transfer of promised goods to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods using a five step model. The most critical judgments and estimates we make in the implementation of this model relate to identifying the contract with the customer and determination of the transaction price associated with the performance obligation(s) in the contract, specifically related to variable consideration.
While many of the agreements with our customers specify certain terms and conditions that apply to any transaction between the parties, many of which are in effect for a defined term, the vast majority of these agreements do not result in contracts (as defined in FASB ASC Topic 606) because they do not create enforceable rights and obligations on the parties. Specifically, (1) the parties are not committed to perform any obligations in accordance with the specified terms and conditions until a customer purchase order ("P.O.") is received and accepted by us and (2) there is a unilateral right of each party to terminate the agreement at any time without compensating the other party. For this reason, the vast majority of our contracts (as defined in FASB ASC Topic 606) are customer P.O.s. If this assessment were to change, it could result in a material change to the amount of net revenue recognized in a period.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. In determining the transaction price related to a contract, we determine whether the amount promised in a contract includes a variable amount (variable consideration). Variable consideration may be specified in the customer P.O., in another agreement that identifies terms and conditions of the transaction, or based on our customary practices. We have identified certain types of variable consideration that may be included in the transaction price related to our contracts, including sales returns (which generally include a right of return for defective or non-conforming product) and trade discounts (including retrospective volume discounts and early payment incentives). Such variable consideration has not historically been material. However, should our judgments and estimates regarding variable consideration change, it could result in a material change to the amount of net revenue recognized in a period.
Goodwill, Intangible Assets, and Other IntangibleLong-Lived Assets
Businesses acquired are recorded at their fair value on the date of acquisition, with the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed recognized as goodwill. Assets acquired may include either definite-lived or indefinite-lived intangible assets, or both. In accordance with the requirements of FASB ASC Topic 350, Intangibles—Goodwill and Other("ASC 350"), goodwill and intangible assets determined to have an indefinite useful life are not amortized. Instead these assets are evaluated for impairment on an annual basis, and whenever events or business conditions change that could more likely than not reduceindicate that the fair valueasset is impaired.
Goodwill
Our judgments regarding the existence of aindicators of goodwill impairment are based on several factors, including the performance of the end markets served by our customers, as well as the actual financial performance of our reporting unit below its net book value.units and their respective financial forecasts over the long-term. We evaluate goodwill and indefinite-lived intangible assets for impairment in the fourth quarter of each fiscal year, unless events occur which trigger the need for an earlier impairment review.
Goodwill:Identification of reporting units
We have fiveidentified six reporting units: Performance Sensing, Electrical Protection, Industrial Sensing, Aerospace, Power Management, Industrial Sensing, and Interconnection. These reporting units have been identified based on the definitions and guidance provided in FASB ASC Topic 350. Identification of reporting units includes an analysis of the components that comprise each of our operating segments, which considers, among other things, the manner in which we operate our business and the availability of discrete financial information. Components of an operating segment are aggregated to form one reporting unit if the components have similar economic characteristics. We periodically review these reporting units to ensure that they continue to reflect the manner in which the business is operated. As businesses are acquired, we assign them to an existing reporting unit or create a new reporting unit. Goodwill is assigned
Assignment of assets, liabilities, and goodwill to reporting units as
Some assets and liabilities relate to the operations of multiple reporting units. We allocate these assets and liabilities to the date of the related acquisition.reporting units based on methods that we believe are reasonable and supportable. We apply that allocation method on a consistent basis from year to year. We view some assets and liabilities, such as cash and cash equivalents, property, plant and equipment associated with our corporate offices, debt, and deferred financing costs,debt, as being corporate in nature. Accordingly, we do not assign these assets and liabilities to our reporting units.
In the event we reorganize our business, we reassign the assets (including goodwill) and liabilities among the affected reporting units using a reasonable and supportable methodology. As businesses are acquired, we assign assets acquired (including goodwill) and liabilities assumed to a new or existing reporting unit as of the date of the acquisition. In the event a disposal group meets the definition of a business, goodwill is allocated to the disposal group based on the relative fair value of the disposal group to the related reporting unit.
Evaluation of goodwill for impairment
We have the option to first assess qualitative factors to determine whether a quantitative analysis must be performed. The objective of a qualitative analysis is to determine whether it is more likely than not that the fair value of a reporting unit is less than its net book value.
If we elect not to not use this option, or if we determine using the qualitative method, that it is more likely than not that the fair value of a reporting unit is less than its net book value, then we perform the two-step goodwill impairment test.
In the first step of the two-step goodwill impairment test,quantitative analysis prescribed by FASB ASC Topic 350. In this step we compare the estimated fair values of our reporting units to their respective net book values, including goodwill, to determine whether there is an indicator of potential impairment. If the net book value of a reporting unit exceeds its estimated fair value, we conduct a second step in which we calculate the implied fair value of goodwill. If the carrying value of the reporting unit’s goodwill exceeds theits calculated implied fair value, of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of theits identifiable assets and liabilities of that reporting unit (including any unrecognized intangible assets) based on their fair values as if the reporting unit had been acquired in a business combination at the date of assessment, and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the sum of the fair values of each of its componentsidentifiable assets and liabilities is the implied fair value of goodwill.
We evaluated the goodwill of each reporting unit for impairment as of October 1, 2018. All reporting units except Performance Sensing were evaluated using the quantitative method. In connection with the sale of the Valves Business, as required by FASB ASC Topic 350, we evaluated the goodwill of the retained portion of the Performance Sensing reporting unit for impairment using the quantitative method. To test this reporting unit as of October 1, 2018 we used the qualitative method of assessing goodwill; in performing this assessment, we considered the change in forecasted cash flows and net assets attributed to the reporting unit between the assessment performed in connection with the sale of the Valves Business and as of the October 1, 2018 assessment date, noting no significant changes. Therefore, we determined that it was not more likely than not that the fair value of the Performance Sensing reporting unit was less than its net book value.
We estimated the fair values of the Electrical Protection, Industrial Sensing, Aerospace, Power Management, and Interconnection reporting units using the discounted cash flow method. For this method, we prepared detailed annual projections of future cash flows for each reporting unit for the subsequent five fiscal years (the "Discrete Projection Period"). We estimated the value of the cash flows beyond the fifth fiscal year (the "Terminal Year"), by applying a multiple to the projected Terminal Year net earnings before interest, taxes, depreciation, and amortization ("EBITDA"). The cash flows from the Discrete Projection Period and the Terminal Year were discounted at an estimated WACC appropriate for each reporting unit. The estimated WACC was derived, in part, from comparable companies appropriate to each reporting unit. We believe that our procedures for estimating discounted future cash flows, including the Terminal Year valuation, were reasonable and consistent with accepted valuation practices.
The preparation of forecasts of revenue growth and profitability for use in the long-range forecasts, the selection of the discount rates, and the estimation of the multiples used in valuing the Terminal Year involve significant judgments. Changes to these assumptions could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period.
Types of events that could result in a goodwill impairment.
As noted above, the assumptions used in the quantitative calculation of the fair value of our reporting units, is consideredincluding the long-range forecasts, the selection of the discount rates, and the estimation of the multiples or long-term growth rates used in valuing the Terminal Year involve significant judgments. Changes to these assumptions could affect the estimated fair values of our reporting units calculated in prior years and could result in a level 3 fair value measurement.goodwill impairment charge in a future period. We believe that certain factors, such as a future recession, any material adverse conditions in the automotive industry and other industries in which we operate, and other factors identified in Item 1A, "Risk Factors," included elsewhere in this Report could require us to revise our long-term projections and could reduce the multiples used to determine Terminal Year value. Such revisions could result in a goodwill impairment charge in the qualitative methodfuture.
However, we do not consider any of our reporting units to assessbe at risk of failing Step 1 of the goodwill impairment test.
Evaluation of other intangible assets for impairment at October 1, 2015.
Indefinite-lived intangible assets:assets. WeSimilar to goodwill, we perform an annual impairment review of our indefinite-lived intangible assets in the fourth quarter of each fiscal year, unless events occur that trigger the need for an earlier impairment review. We have the option to first assess qualitative factors in determining whether it is more likely than not that an indefinite-lived intangible asset is impaired. If we elect not to not use this option, or we determine that it is more likely than not that the asset is impaired, we perform a quantitative impairment review in which we estimate the fair value of the indefinite-lived intangible asset and compare that requires usamount to its carrying value.
In performing the quantitative impairment review, we estimate the fair value by using the relief-from-royalty method, in which we make assumptions about future conditions impacting the fair value of theour indefinite-lived intangible assets, including projected growth rates, cost of capital, effective tax rates, and royalty rates, market
share, and other conditions.rates. Impairment, if any, is based on the excess of the carrying value over the fair value of these assets.
We determineevaluated our indefinite-lived intangible assets for impairment as of October 1, 2018 (using the quantitative method) and determined that the estimated fair value by usingvalues of these assets exceeded their carrying values at that date. Should certain assumptions used in the appropriate income approach valuation methodology.development of the fair values of our indefinite-lived intangible assets change, we may be required to recognize an impairment charge in the future.
Definite-lived intangible assets:assets. Definite-lived intangible assets are amortized over the useful life of the asset, using a method of amortization that reflects the pattern in which the economic benefits of the intangible asset are consumed over its estimated useful life. If that pattern cannot be reliably determined, then we amortize the intangible asset using the straight-line method. Capitalized software is amortized on a straight-line basis over its estimated useful life. Capitalized software licenses are amortized on a straight-line basis over the lesser of the term of the license, or the useful life of the software.
Reviews are regularly performed to determine whether facts or circumstances exist that indicate that the carrying values of our definite-lived intangible assets to be held and used are impaired. TheIf we determine that such facts or circumstances exist, we estimate the recoverability of these assets is assessed by comparing the projected undiscounted net cash flows associated with these assets to their respective carrying values. If the sum of the projected undiscounted net cash
flows falls below the carrying value of the assets,an asset, the impairment charge is based onmeasured as the excess of the carrying value over the fair value of those assets.that asset. We determine fair value by using the appropriate income approach valuation methodology depending on the nature of the intangible asset.
Evaluation of long-lived assets for impairment
We periodically re-evaluate the carrying values and estimated useful lives of long-lived assets whenever events or changes in circumstances indicate that the carrying values of these assets may not be recoverable. We use estimates of undiscounted cash flows from long-lived assets to determine whether the carrying values of such assets are recoverable over the assets’ remaining useful lives. These estimates include assumptions about our future performance and the performance of the end markets we serve. If an asset is determined to be impaired, the impairment is the amount by which its carrying value exceeds its fair value. These evaluations are performed at a level where discrete cash flows may be attributed to either an individual asset or a group of assets.
Income Taxes
As part of the process of preparing our financial statements, we are required to estimate our provision for income taxes in each of the jurisdictions in which we operate. This involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets.
Our most difficult and subjective judgments and estimates relate to the assessment of the need for a valuation allowance against our deferred tax assets. In measuring our deferred tax assets, we consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed for all or some portion of the deferred tax assets. Significant judgment is required in considering the relative impact of the negative and positive evidence, and weight given to each category of evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary, and the more difficult it is to support a conclusion that a valuation allowance is not needed. Additionally, we utilize the "more likely than not" criteria established in FASB ASC Topic 740 to determine whether the future tax benefit from the deferred tax assets should be recognized.
We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations in various jurisdictions. Because our assessment of future taxable income is based on estimated projected results, in the event that actual results differ from these estimates, or we adjust our estimates in the future, we may need to adjust our valuation allowance assessment, which could materially impact our consolidated financial position and results of operations.
Pension and Other Post-Retirement Benefits
We sponsor various pension and other post-retirement benefit plans covering our current and former employees in several countries.
The funded status of pension and other post-retirement benefit plans is measured as the difference between the fair value of plan assets and the benefit obligation at the measurement date. Changes in the funded status of a pension or other post-retirement benefit plan are recognized in the year in which they occur by adjusting the recognized (net) liability or asset with an offsetting adjustment to either net income or other comprehensive income.
Our most difficult and subjective judgments and estimates relate to the valuation of our benefit obligations. Benefit obligations represent the actuarial present value of all benefits attributed by the pension formula as of the measurement date to employee service rendered before that date, and can be categorized as projected benefit obligations or accumulated benefit obligations. The value of projected benefit obligations take into consideration various actuarial assumptions including future compensation levels, the time value of money, and the probability of payment (by means of assumptions for events such as death, disability, withdrawal, or retirement) between the measurement date and the expected date of payment. Accumulated benefit obligations differ from projected benefit obligations only in that they include no assumptions about future compensation levels.
The most significant assumptions used to determine a plan's funded status and net periodic benefit cost relate to discount rate, expected return on plan assets, and rate of increase in healthcare costs. These assumptions are reviewed annually. Refer to
Note 13, "Pension and Other Post-Retirement Benefit Plans," of our Financial Statements for details on the values determined for each of these assumptions in the last three fiscal years.
The discount rate reflects the current rate at which the pension and other post-retirement liabilities could be effectively settled, considering the timing of expected payments for plan participants. It is used to discount the estimated future obligations of the plans to the present value of the liability reflected in the financial statements. In estimating this rate in countries that have a market of high-quality fixed-income investments, we consider rates of return on these investments included in various bond indices, adjusted to eliminate the effects of call provisions and differences in the timing and amounts of cash outflows related to the bonds. In other countries where a market of high-quality fixed-income investments does not exist, we estimate the discount rate using government bond yields or long-term inflation rates.
The expected return on plan assets reflects the average rate of earnings expected on the funds invested to provide for the benefits included in the projected benefit obligation. To determine the expected return on plan assets, we consider the historical returns earned by similarly invested assets, the rates of return expected on plan assets in the future, and our investment strategy and asset mix with respect to the plans’ funds.
The rate of increase of healthcare costs directly impacts the estimate of our future obligations in connection with our post-retirement medical benefits. Our estimate of healthcare cost trends is based on historical increases in healthcare costs under similarly designed plans, the level of increase in healthcare costs expected in the future, and the design features of the underlying plan.
Other assumptions used include employee demographic factors such as compensation rate increases, retirement patterns, employee turnover rates, and mortality rates. Our review of demographic assumptions includes analyzing historical patterns and/or referencing industry standard tables, combined with our expectations around future compensation and staffing strategies. The difference between these assumptions and our actual experience results in the recognition of an actuarial gain or loss.
Future changes to assumptions, or differences between actual and expected outcomes, can significantly affect our future net periodic pension cost, projected benefit obligations, and accumulated other comprehensive loss.
Share-Based Compensation
FASB ASC Topic 718, Compensation—Stock Compensation, requires that a company measure at fair value any new or modified share-based compensation arrangements with employees, such as stock options and restricted stock units, and recognize as compensation expense that fair value over the requisite service period.
We estimate the fair value of options on the date of grant using the Black-Scholes-Merton option-pricing model. Key assumptions used in this model are (1) the fair value of the underlying ordinary shares, (2) the time period for which we expect the options will be outstanding (the expected term), (3) the expected volatility of our stock price, (4) the risk-free interest rate, and (5) the expected dividend yield. Expected term and expected volatility are the judgments that we believe are the most critical and subjective in estimating fair value (and related share-based compensation expense) of our option awards.
The expected term is determined based upon our own historical average term of exercised and outstanding options. We consider our own historical volatility, as well as the historical and implied volatilities of publicly-traded companies within our industry, in estimating expected volatility for options. Implied volatility provides a forward-looking indication and may offer insight into expected industry volatility.
Other assumptions used include risk free interest rate and expected dividend yield. The risk free interest rate is based on the yield for a U.S. Treasury security having a maturity similar to the expected term of the related option grant. This assumption is dependent on the assumed expected term. The dividend yield of 0% is based on our history of having never declared or paid any dividends on our ordinary shares, and our current intention of not declaring any such dividends in the foreseeable future.
Certain of our restricted securities include performance conditions that require us to estimate the probable outcome of the performance condition. This assessment is based on management's judgment using internally developed forecasts and is assessed at each reporting period. Compensation cost is recorded if it is probable that the performance condition will be achieved.
Under the fair value recognition provisions of FASB ASC Topic 718, we recognize share-based compensation net of estimated forfeitures and, therefore, only recognize compensation cost for those awards expected to vest over the requisite service period. The forfeiture rate is based on our estimate of forfeitures by plan participants after consideration of historical forfeiture rates. Compensation expense recognized for each award ultimately reflects the number of units that actually vest.
Material changes to any of these assumptions may have a significant effect on our valuation of options, and, ultimately, the share-based compensation expense recorded in the consolidated statements of operations.
Off-Balance Sheet Arrangements
From time to time, we execute contracts that require us to indemnify the other parties to the contracts. These indemnification obligations generally arise in two contexts. First, in connection with certain transactions, such as the sale of a business or the issuance of debt or equity securities, the agreement typically contains standard provisions requiring us to indemnify the purchaser against breaches by us of representations and warranties contained in the agreement. These indemnities are generally subject to time and liability limitations. Second, we enter into agreements in the ordinary course of business, such as customer contracts, that might contain indemnification provisions relating to product quality, intellectual property infringement, governmental regulations and employment related matters, and other typical indemnities. In certain cases, indemnification obligations arise by law.
We believe that our indemnification obligations are consistent with other companies in the markets in which we compete. Performance under any of these indemnification obligations would generally be triggered by a breach of the terms of the contract or by a third-party claim. Historically, we have experienced only immaterial and irregular losses associated with these indemnifications. Consequently, any future liabilities brought about by these indemnifications cannot reasonably be estimated or accrued.
Refer to Note 5, "Goodwill15, "Commitments and Contingencies," of our Financial Statements for further discussion of off-balance sheet arrangements.
Recent Accounting Pronouncements
Recently issued accounting standards adopted in the current period:
Refer to Recently issued accounting standards adopted in the current period in Note 2, "Significant Accounting Policies," of our Financial Statements for discussion of recently issued accounting standards adopted in the current period. None of these standards had a material impact on our consolidated financial position or results of operations, or are reasonably likely to have a material effect on our future consolidated financial position or results of operations.
Recently issued accounting standards to be adopted in a future period:
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes new accounting and disclosure requirements for leases. We will adopt FASB ASU No. 2016-02 on January 1, 2019, which will result in the recognition of a lease liability and right-of-use asset for certain operating leases that are currently not recognized on our consolidated balance sheets, which we expect to be recorded using an incremental borrowing rate. At December 31, 2018, we were contractually obligated to make future payments of $79.4 million under our operating lease obligations in existence as of that date, primarily related to long-term facility leases. We do not expect there to be a material impact on our results of operations.
Refer to Recently issued accounting standards to be adopted in a future period in Note 2, "Significant Accounting Policies," of our Financial Statements for further discussion of certain accounting standards to be adopted in a future period, including FASB ASU No. 2016-02. Other Intangible Assets,than FASB ASU No. 2016-02, recently issued accounting standards to be adopted in a future period are not expected to have a material impact on our consolidated financial position or results of operations.
| |
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to changes in foreign currency exchange rates because we transact in a variety of foreign currencies. We are also exposed to changes in the prices of certain commodities (primarily metals) that we use in production. Changes in these foreign currency exchange rates and commodity prices may have an impact on future cash flows and earnings. We monitor our exposure to these risks, and may employ derivative financial instruments to limit the volatility to earnings and cash flows generated by these exposures. We employ derivative contracts that may or may not be designated for hedge accounting treatment under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 815, Derivatives and Hedging, which can result in volatility to earnings depending upon fluctuations in the underlying markets.
By using derivative instruments, we are subject to credit and market risk. The fair market values of these derivative instruments are based upon valuation models whose inputs are derived using market observable inputs, including foreign currency exchange and commodity spot and forward rates, and reflect the asset and liability positions as of the end of each reporting period. When the fair value of a derivative contract is positive, the counterparty is liable to us, thus creating a receivable risk for us. We are exposed to counterparty credit (or repayment) risk in the event of non-performance by counterparties to our derivative agreements. We attempt to minimize this risk by entering into transactions with major financial institutions of investment grade credit rating.
Interest Rate Risk
Excluding capital lease and other financing obligations, our gross debt as of December 31, 2018 and 2017 was $3,267.8 million and $3,277.8 million, respectively. A portion of this indebtedness relates to the term loan (the "Term Loan") provided pursuant to the eighth amendment to the credit agreement dated as of May 12, 2011 (as amended, the "Credit Agreement"). The Term Loan accrues interest at a variable rate calculated on the basis of a three hundred and sixty day year and actual days elapsed (which results in more interest, as applicable, being paid than if computed on the basis of a three hundred and sixty-five day year). The variable rate is currently based on LIBOR, subject to a floor and spread, in accordance with the terms of the Credit Agreement.
Refer to Note 14, "Debt," of our audited consolidated financial statements and accompanying notes thereto (our "Financial Statements") included elsewhere in this Annual Report on Form 10-K (this "Report") for details regarding our debt instruments.
Sensitivity Analysis
As of December 31, 2018, we had an outstanding balance on the Term Loan (excluding discount and deferred financing costs) of $917.8 million. The applicable interest rate associated with the Term Loan at December 31, 2018 was 4.21%. An increase of 100 basis points in this rate would result in additional interest expense of $9.3 million in fiscal year 2019. The next 100 basis point increase in this rate would result in incremental interest expense of $9.3 million in fiscal year 2019.
As of December 31, 2017, we had an outstanding balance on the Term Loan (excluding discount and deferred financing costs) of $927.8 million. The applicable interest rate associated with the Term Loan at December 31, 2017 was 3.21%. An increase of 100 basis points in this rate would have resulted in additional interest expense of $9.4 million in fiscal year 2018. The next 100 basis point increase in this rate would have resulted in incremental interest expense of $9.4 million in fiscal year 2018.
Foreign Currency Risk
Consistent with our risk management objective and strategy to reduce exposure to variability in cash flows and variability in earnings, and for non-trading purposes, we enter into foreign currency exchange rate derivatives that qualify as cash flow hedges, and that are intended to offset the effect of exchange rate fluctuations on forecasted sales and certain manufacturing costs. We also enter into foreign currency forward contracts that are not designated for hedge accounting purposes. Refer to Note 19, "Derivative Instruments and Hedging Activities," of our Financial Statements for details of the foreign currency forward contracts outstanding as of December 31, 2018.
Sensitivity Analysis
The tables below present our foreign currency forward contracts as of December 31, 2018 and 2017 and the estimated impact to future pre-tax earnings as a result of a 10% strengthening/weakening in the foreign currency exchange rate:
|
| | | | | | | | | | | | |
| | | | | (Decrease)/Increase to Future Pre-tax Earnings Due to: |
| (Dollars in millions) | | Net Asset/(Liability) Balance as of December 31, 2018 | | 10% Strengthening of the Value of the Foreign Currency Relative to the U.S. Dollar | | 10% Weakening of the Value of the Foreign Currency Relative to the U.S. Dollar |
| Euro | | $ | 14.5 |
| | $ | (45.1 | ) | | $ | 45.1 |
|
| Chinese Renminbi | | $ | (0.3 | ) | | $ | (4.1 | ) | | $ | 4.1 |
|
| Korean Won | | $ | 0.3 |
| | $ | (2.8 | ) | | $ | 2.8 |
|
| Malaysian Ringgit | | $ | 0.1 |
| | $ | 0.6 |
| | $ | (0.6 | ) |
| Mexican Peso | | $ | 0.7 |
| | $ | 14.2 |
| | $ | (14.2 | ) |
| British Pound Sterling | | $ | (2.6 | ) | | $ | 6.2 |
| | $ | (6.2 | ) |
|
| | | | | | | | | | | | |
| | | | | (Decrease)/Increase to Future Pre-tax Earnings Due to: |
| (Dollars in millions) | | Net (Liability)/Asset Balance as of December 31, 2017 | | 10% Strengthening of the Value of the Foreign Currency Relative to the U.S. Dollar | | 10% Weakening of the Value of the Foreign Currency Relative to the U.S. Dollar |
| Euro | | $ | (30.6 | ) | | $ | (61.5 | ) | | $ | 61.5 |
|
| Chinese Renminbi | | $ | (3.6 | ) | | $ | (24.4 | ) | | $ | 24.4 |
|
| Korean Won | | $ | (2.3 | ) | | $ | (3.9 | ) | | $ | 3.9 |
|
| Malaysian Ringgit | | $ | 0.2 |
| | $ | 0.5 |
| | $ | (0.5 | ) |
| Mexican Peso | | $ | (2.6 | ) | | $ | 13.4 |
| | $ | (13.4 | ) |
| British Pound Sterling | | $ | 2.0 |
| | $ | 4.8 |
| | $ | (4.8 | ) |
| Japanese Yen | | $ | 0.0 |
| | $ | 0.2 |
| | $ | (0.2 | ) |
Commodity Risk
We are exposed to the potential change in prices associated with certain commodities used in the manufacturing of our products. We offset a portion of this exposure by entering into forward contracts that fix the price at a future date for various notional amounts associated with these commodities. These forward contracts are not designated as accounting hedges. Refer to Note 19, "Derivative Instruments and Hedging Activities," of our Financial Statements for details of the commodity forward contracts outstanding as of December 31, 2018.
Sensitivity Analysis
The tables below present our commodity forward contracts as of December 31, 2018 and 2017 and the estimated impact to pre-tax earnings associated with a 10% increase/(decrease) in the related forward price for each commodity:
|
| | | | | | | | | | | | | | | | |
| | | Net (Liability)/Asset Balance as of December 31, 2018 | | Average Forward Price Per Unit as of December 31, 2018 | | Increase/(Decrease) to Pre-tax Earnings Due to |
| (Dollars in millions, except per unit amounts) | | | | 10% Increase in the Forward Price | | 10% Decrease in the Forward Price |
| Silver | | $ | (0.8 | ) | | $ | 15.72 |
| | $ | 1.7 |
| | $ | (1.7 | ) |
| Gold | | $ | (0.0 | ) | | $ | 1,303.51 |
| | $ | 1.3 |
| | $ | (1.3 | ) |
| Nickel | | $ | (0.2 | ) | | $ | 4.93 |
| | $ | 0.1 |
| | $ | (0.1 | ) |
| Aluminum | | $ | (0.3 | ) | | $ | 0.86 |
| | $ | 0.2 |
| | $ | (0.2 | ) |
| Copper | | $ | (1.3 | ) | | $ | 2.71 |
| | $ | 0.8 |
| | $ | (0.8 | ) |
| Platinum | | $ | (0.9 | ) | | $ | 805.38 |
| | $ | 0.7 |
| | $ | (0.7 | ) |
| Palladium | | $ | 0.2 |
| | $ | 1,175.96 |
| | $ | 0.1 |
| | $ | (0.1 | ) |
|
| | | | | | | | | | | | | | | | |
| | | Net (Liability)/Asset Balance as of December 31, 2017 | | Average Forward Price Per Unit as of December 31, 2017 | | Increase/(Decrease) to Pre-tax Earnings Due to |
| (Dollars in millions, except per unit amounts) | | | | 10% Increase in the Forward Price | | 10% Decrease in the Forward Price |
| Silver | | $ | (0.6 | ) | | $ | 17.20 |
| | $ | 1.9 |
| | $ | (1.9 | ) |
| Gold | | $ | 0.4 |
| | $ | 1,322.24 |
| | $ | 1.6 |
| | $ | (1.6 | ) |
| Nickel | | $ | 0.3 |
| | $ | 5.83 |
| | $ | 0.2 |
| | $ | (0.2 | ) |
| Aluminum | | $ | 0.9 |
| | $ | 1.04 |
| | $ | 0.6 |
| | $ | (0.6 | ) |
| Copper | | $ | 4.4 |
| | $ | 3.30 |
| | $ | 2.4 |
| | $ | (2.4 | ) |
| Platinum | | $ | (0.3 | ) | | $ | 943.94 |
| | $ | 0.8 |
| | $ | (0.8 | ) |
| Palladium | | $ | 0.4 |
| | $ | 1,022.19 |
| | $ | 0.2 |
| | $ | (0.2 | ) |
| |
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The following audited consolidated financial statements of Sensata Technologies Holding plc are included in this Annual Report on Form 10-K:
| |
| 2. | Financial Statement Schedules |
The following schedules are included elsewhere in this Annual Report on Form 10-K:
Schedule I — Condensed Financial Information of the Registrant
Schedule II — Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted since the required information is not present, or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the audited consolidated financial statements or the notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
Sensata Technologies Holding plc
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Sensata Technologies Holding plc (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, cash flows, and changes in shareholders’ equity for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 6, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2005
Boston, Massachusetts
February 6, 2019
SENSATA TECHNOLOGIES HOLDING PLC
Consolidated Balance Sheets
(Amounts in thousands, except per share amounts)
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 729,833 |
| | $ | 753,089 |
|
| Accounts receivable, net of allowances of $13,762 and $12,947 as of December 31, 2018 and 2017, respectively | 581,769 |
| | 556,541 |
|
| Inventories | 492,319 |
| | 446,129 |
|
| Prepaid expenses and other current assets | 113,234 |
| | 92,532 |
|
| Total current assets | 1,917,155 |
| | 1,848,291 |
|
| Property, plant and equipment, net | 787,178 |
| | 750,049 |
|
| Goodwill | 3,081,302 |
| | 3,005,464 |
|
| Other intangible assets, net | 897,191 |
| | 920,124 |
|
| Deferred income tax assets | 27,971 |
| | 33,003 |
|
| Other assets | 86,890 |
| | 84,594 |
|
| Total assets | $ | 6,797,687 |
| | $ | 6,641,525 |
|
| Liabilities and shareholders’ equity | | | |
| Current liabilities: | | | |
| Current portion of long-term debt, capital lease and other financing obligations | $ | 14,561 |
| | $ | 15,720 |
|
| Accounts payable | 379,824 |
| | 322,671 |
|
| Income taxes payable | 27,429 |
| | 31,544 |
|
| Accrued expenses and other current liabilities | 218,130 |
| | 259,560 |
|
| Total current liabilities | 639,944 |
| | 629,495 |
|
| Deferred income tax liabilities | 225,694 |
| | 338,228 |
|
| Pension and other post-retirement benefit obligations | 33,958 |
| | 40,055 |
|
| Capital lease and other financing obligations, less current portion | 30,618 |
| | 28,739 |
|
| Long-term debt, net | 3,219,762 |
| | 3,225,810 |
|
| Other long-term liabilities | 39,277 |
| | 33,572 |
|
| Total liabilities | 4,189,253 |
| | 4,295,899 |
|
| Commitments and contingencies (Note 15) |
| |
|
| Shareholders’ equity: | | | |
| Ordinary shares, €0.01 nominal value per share, 177,069 and 400,000 shares authorized and 171,719 and 178,437 shares issued as of December 31, 2018 and 2017, respectively | 2,203 |
| | 2,289 |
|
| Treasury shares, at cost, 7,571 and 7,076 shares as of December 31, 2018 and 2017, respectively | (399,417 | ) | | (288,478 | ) |
| Additional paid-in capital | 1,691,190 |
| | 1,663,367 |
|
| Retained earnings | 1,340,636 |
| | 1,031,612 |
|
| Accumulated other comprehensive loss | (26,178 | ) | | (63,164 | ) |
| Total shareholders’ equity | 2,608,434 |
| | 2,345,626 |
|
| Total liabilities and shareholders’ equity | $ | 6,797,687 |
| | $ | 6,641,525 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Net revenue | $ | 3,521,627 |
| | $ | 3,306,733 |
| | $ | 3,202,288 |
|
| Operating costs and expenses: | | | | | |
| Cost of revenue | 2,266,863 |
| | 2,138,898 |
| | 2,084,159 |
|
| Research and development | 147,279 |
| | 130,127 |
| | 126,656 |
|
| Selling, general and administrative | 305,558 |
| | 301,896 |
| | 293,506 |
|
| Amortization of intangible assets | 139,326 |
| | 161,050 |
| | 201,498 |
|
| Restructuring and other charges, net | (47,818 | ) | | 18,975 |
| | 4,113 |
|
| Total operating costs and expenses | 2,811,208 |
| | 2,750,946 |
| | 2,709,932 |
|
| Profit from operations | 710,419 |
| | 555,787 |
| | 492,356 |
|
| Interest expense, net | (153,679 | ) | | (159,761 | ) | | (165,818 | ) |
| Other, net | (30,365 | ) | | 6,415 |
| | (5,093 | ) |
| Income before taxes | 526,375 |
| | 402,441 |
| | 321,445 |
|
| (Benefit from)/provision for income taxes | (72,620 | ) | | (5,916 | ) | | 59,011 |
|
| Net income | $ | 598,995 |
| | $ | 408,357 |
| | $ | 262,434 |
|
| Basic net income per share | $ | 3.55 |
| | $ | 2.39 |
| | $ | 1.54 |
|
| Diluted net income per share | $ | 3.53 |
| | $ | 2.37 |
| | $ | 1.53 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Net income | $ | 598,995 |
| | $ | 408,357 |
| | $ | 262,434 |
|
| Other comprehensive income/(loss), net of tax: | | | | | |
| Cash flow hedges | 37,363 |
| | (28,202 | ) | | (3,829 | ) |
| Defined benefit and retiree healthcare plans | (377 | ) | | (895 | ) | | (4,248 | ) |
| Other comprehensive income/(loss) | 36,986 |
| | (29,097 | ) | | (8,077 | ) |
| Comprehensive income | $ | 635,981 |
| | $ | 379,260 |
| | $ | 254,357 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
Consolidated Statements of Cash Flows
(Dollars in thousands)
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 598,995 |
| | $ | 408,357 |
| | $ | 262,434 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation | 106,014 |
| | 109,321 |
| | 106,903 |
|
| Amortization of debt issuance costs | 7,317 |
| | 7,241 |
| | 7,334 |
|
| Gain on sale of business | (64,423 | ) | | — |
| | — |
|
| Share-based compensation | 23,825 |
| | 19,819 |
| | 17,425 |
|
| Loss on debt financing | 2,350 |
| | 2,670 |
| | — |
|
| Amortization of intangible assets | 139,326 |
| | 161,050 |
| | 201,498 |
|
| Deferred income taxes | (144,068 | ) | | (56,757 | ) | | 8,344 |
|
| Unrealized loss on hedges and other | 18,176 |
| | 781 |
| | 11,517 |
|
| Changes in operating assets and liabilities, net of the effects of acquisitions and divestitures: | | | | | |
| Accounts receivable, net | (34,877 | ) | | (56,330 | ) | | (33,013 | ) |
| Inventories | (55,445 | ) | | (57,119 | ) | | (37,500 | ) |
| Prepaid expenses and other current assets | (11,891 | ) | | (12,412 | ) | | 6,956 |
|
| Accounts payable and accrued expenses | 48,371 |
| | 23,841 |
| | (21,432 | ) |
| Income taxes payable | (353 | ) | | 7,655 |
| | (1,938 | ) |
| Other | (12,754 | ) | | (471 | ) | | (7,003 | ) |
| Net cash provided by operating activities | 620,563 |
| | 557,646 |
| | 521,525 |
|
| Cash flows from investing activities: | | | | | |
| Acquisitions, net of cash received | (228,307 | ) | | — |
| | 4,688 |
|
| Additions to property, plant and equipment and capitalized software | (159,787 | ) | | (144,584 | ) | | (130,217 | ) |
| Investment in equity securities | — |
| | — |
| | (50,000 | ) |
| Proceeds from sale of business, net of cash sold | 149,777 |
| | — |
| | — |
|
| Other | 711 |
| | 3,862 |
| | 751 |
|
| Net cash used in investing activities | (237,606 | ) | | (140,722 | ) | | (174,778 | ) |
| Cash flows from financing activities: | | | | | |
| Proceeds from exercise of stock options and issuance of ordinary shares | 6,093 |
| | 7,450 |
| | 3,944 |
|
| Payment of employee restricted stock tax withholdings | (3,674 | ) | | (2,910 | ) | | (4,752 | ) |
| Proceeds from issuance of debt | — |
| | 927,794 |
| | — |
|
| Payments on debt | (15,653 | ) | | (943,554 | ) | | (336,256 | ) |
| Payments to repurchase ordinary shares | (399,417 | ) | | — |
| | — |
|
| Payments of debt and equity issuance costs | (9,931 | ) | | (4,043 | ) | | (518 | ) |
| Other | 16,369 |
| | — |
| | — |
|
| Net cash used in financing activities | (406,213 | ) | | (15,263 | ) | | (337,582 | ) |
| Net change in cash and cash equivalents | (23,256 | ) | | 401,661 |
| | 9,165 |
|
| Cash and cash equivalents, beginning of year | 753,089 |
| | 351,428 |
| | 342,263 |
|
| Cash and cash equivalents, end of year | $ | 729,833 |
| | $ | 753,089 |
| | $ | 351,428 |
|
| Supplemental cash flow items: | | | | | |
| Cash paid for interest | $ | 163,478 |
| | $ | 164,370 |
| | $ | 155,925 |
|
| Cash paid for income taxes | $ | 72,924 |
| | $ | 48,482 |
| | $ | 43,152 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
Consolidated Statements of Changes in Shareholders’ Equity
(Amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Ordinary Shares |
| Treasury Shares |
| Additional
Paid-In
Capital |
| Retained Earnings |
| Accumulated
Other
Comprehensive
Loss |
| Total
Shareholders’
Equity |
| | Number |
| Amount |
| Number |
| Amount |
|
| Balance as of December 31, 2015 | 178,437 |
| | $ | 2,289 |
| | (8,038 | ) | | $ | (324,994 | ) | | $ | 1,626,024 |
| | $ | 391,247 |
| | $ | (25,990 | ) | | $ | 1,668,576 |
|
| Surrender of shares for tax withholding | — |
| | — |
| | (62 | ) | | (2,295 | ) | | — |
| | — |
| | — |
| | (2,295 | ) |
| Stock options exercised | — |
| | — |
| | 358 |
| | 13,698 |
| | — |
| | (9,754 | ) | | — |
| | 3,944 |
|
| Vesting of restricted securities | — |
| | — |
| | 185 |
| | 7,086 |
| | — |
| | (7,086 | ) | | — |
| | — |
|
| Share-based compensation | — |
| | — |
| | — |
| | — |
| | 17,425 |
| | — |
| | — |
| | 17,425 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 262,434 |
| | — |
| | 262,434 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8,077 | ) | | (8,077 | ) |
| Balance as of December 31, 2016 | 178,437 |
| | 2,289 |
| | (7,557 | ) | | (306,505 | ) |
| 1,643,449 |
| | 636,841 |
| | (34,067 | ) | | 1,942,007 |
|
| Surrender of shares for tax withholding | — |
| | — |
| | (67 | ) | | (2,910 | ) |
| — |
| | — |
| | — |
| | (2,910 | ) |
| Stock options exercised | — |
| | — |
| | 326 |
| | 12,465 |
|
| 99 |
| | (5,114 | ) | | — |
| | 7,450 |
|
| Vesting of restricted securities | — |
| | — |
| | 222 |
| | 8,472 |
|
| — |
| | (8,472 | ) | | — |
| | — |
|
| Share-based compensation | — |
| | — |
| | — |
| | — |
| | 19,819 |
| | — |
| | — |
| | 19,819 |
|
| Net income | — |
| | — |
| | — |
| | — |
|
| — |
| | 408,357 |
| | — |
| | 408,357 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
|
| — |
| | — |
| | (29,097 | ) | | (29,097 | ) |
| Balance as of December 31, 2017 | 178,437 |
| | 2,289 |
| | (7,076 | ) | | (288,478 | ) |
| 1,663,367 |
| | 1,031,612 |
| | (63,164 | ) | | 2,345,626 |
|
| Surrender of shares for tax withholding | — |
| | — |
| | (71 | ) | | (3,674 | ) | | — |
| | — |
| | — |
| | (3,674 | ) |
| Stock options exercised | 114 |
| | 1 |
| | 58 |
| | 2,250 |
| | 3,998 |
| | (156 | ) | | — |
| | 6,093 |
|
| Vesting of restricted securities | 257 |
| | 3 |
| | — |
| | — |
| | — |
| | (3 | ) | | — |
| | — |
|
| Retirement of treasury shares due to Merger | (7,018 | ) | | (89 | ) | | 7,018 |
| | 286,228 |
| | — |
| | (286,139 | ) | | — |
| | — |
|
| Repurchase of ordinary shares | — |
| | — |
| | (7,571 | ) | | (399,417 | ) | | — |
| | — |
| | — |
| | (399,417 | ) |
| Other retirements of treasury shares | (71 | ) | | (1 | ) | | 71 |
| | 3,674 |
| | — |
| | (3,673 | ) | | — |
| | — |
|
| Share-based compensation | — |
| | — |
| | — |
| | — |
| | 23,825 |
| | — |
| | — |
| | 23,825 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 598,995 |
| | — |
| | 598,995 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 36,986 |
| | 36,986 |
|
| Balance as of December 31, 2018 | 171,719 |
| | $ | 2,203 |
| | (7,571 | ) | | $ | (399,417 | ) | | $ | 1,691,190 |
| | $ | 1,340,636 |
| | $ | (26,178 | ) | | $ | 2,608,434 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts, or unless otherwise noted)
1. Business Description and Basis of Presentation
Description of Business
The accompanying consolidated financial statements reflect the financial position, results of operations, comprehensive income, cash flows, and changes in shareholders' equity of Sensata Technologies Holding plc ("Sensata plc"), the successor issuer to Sensata Technologies Holding N.V. ("Sensata N.V."), and its wholly-owned subsidiaries, collectively referred to as the "Company," "Sensata," "we," "our," or "us."
On September 28, 2017, the Board of Directors of Sensata N.V. unanimously approved a plan to change our location of incorporation from the Netherlands to the United Kingdom (the "U.K."). To effect this change, on February 16, 2018 the shareholders of Sensata N.V. approved a cross-border merger between Sensata N.V. and Sensata plc, a newly formed, public limited company incorporated under the laws of England and Wales, with Sensata plc being the surviving entity (the "Merger").
We received approval of the Merger by the U.K. High Court of Justice, and the Merger was completed, on March 28, 2018. As a result thereof, Sensata plc became the publicly-traded parent of the subsidiary companies that were previously controlled by Sensata N.V., with no changes made to the business being conducted by us prior to the Merger. Due to the fact that the Merger was a business combination between entities under common control, the assets and liabilities exchanged were accounted for at their carrying values.
Sensata, a global industrial technology company, develops, manufactures, and sells a wide range of customized sensors and controls that address increasingly complex engineering requirements for specific customer applications and systems such as air conditioning, braking, exhaust, fuel oil, tire, operator controls, and transmission in automotive and heavy vehicle and off-road ("HVOR") systems, and temperature and electrical protection and control in numerous industrial applications, including aircraft, refrigeration, material handling, telecommunications, and heating, ventilation, and air conditioning ("HVAC") systems. Our sensors are devices that translate a physical phenomenon, such as pressure, temperature, or position, into electronic signals that microprocessors or computer-based control systems can act upon. Our controls are devices embedded within systems to protect them from excessive heat or current.
We conduct our operations through subsidiary companies that operate business and product development centers primarily in Belgium, Bulgaria, China, Germany, Japan, the Netherlands, South Korea, the U.K., and the United States (the "U.S."); and manufacturing operations primarily in Bulgaria, China, Germany, Malaysia, Mexico, the U.K., and the U.S. We organize our business into two segments, Performance Sensing and Sensing Solutions.
Refer to Note 20, "Segment Reporting," for further detailsa general description of each of our segments.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). The accompanying consolidated financial statements present separately our financial position, results of operations, comprehensive income, cash flows, and changes in shareholders’ equity.
All intercompany balances and transactions have been eliminated. All U.S. dollar and share amounts presented, except per share amounts, are stated in thousands, unless otherwise indicated. Certain reclassifications have been made to prior periods to conform to current period presentation.
2. Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires us to exercise our judgment in the process of applying our accounting policies. It also requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies at the date of the financial statements and the reported amounts of net revenue and expense during the reporting periods.
Estimates are used when accounting for certain items such as allowances for doubtful accounts and sales returns, depreciation and amortization, inventory obsolescence, asset impairments (including goodwill and other intangible assets.assets), contingencies, the value of share-based compensation, the determination of accrued expenses, certain asset valuations including deferred tax asset valuations, the useful lives of plant and equipment, post-retirement obligations, and business combinations. The accounting estimates used in the preparation of the consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained, and as the operating environment changes. Actual results could differ from those estimates.
Revenue Recognition
On January 1, 2018, we adopted FASB ASC Topic 606, Revenue from Contracts with Customers. This standard replaced previous revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. Upon adoption, we applied the pertinent transition provisions to contracts that were not completed as of January 1, 2018 using the modified retrospective method. Accordingly, periods presented prior to January 1, 2018 are presented under the previous revenue recognition guidance (i.e., FASB ASC Topic 605, Revenue Recognition).
We recognize revenue to depict the transfer of promised goods to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods. In order to achieve this, we use the five step model outlined in FASB ASC Topic 606. Specifically, we (1) identify the contract with the customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) we satisfy a performance obligation.
The vast majority of our contracts (as defined in FASB ASC Topic 606) are customer purchase orders ("P.O.s"), which explicitly require that we transfer a specified quantity of products to our customers, for which performance is generally satisfied in a short amount of time. We do not consider there to be a significant financing component of our contracts, as our terms generally provide for payment in a short time (that is, less than a year) after shipment to the customer.
Our performance obligations are satisfied when control of the product is transferred to the customer (at a point in time), which is generally when the product is shipped from our warehouse or, in limited instances, when it is received by the customer, depending on the specific terms of the arrangement. Many of our products are designed and engineered to meet customer specifications. These activities, and the testing of our products to determine compliance with those specifications, occur prior to any revenue being recognized. Products are then manufactured and sold to customers. However, in certain cases, pre-production activities are a performance obligation in a customer P.O., and revenue is recognized when the performance obligation is satisfied. Customer arrangements do not involve post-installation or post-sale testing and acceptance.
In determining the transaction price related to a contract, we determine whether the amount promised in a contract includes a variable amount (variable consideration). Variable consideration may be specified in the customer P.O., in another agreement that identifies terms and conditions of the transaction, or based on our customary practices. We have identified certain types of variable consideration that are included in the transaction price related to our contracts, including sales returns (which generally include a right of return for defective or non-conforming product) and trade discounts (including retrospective volume discounts and early payment incentives). Such variable consideration has not historically been material in relation to our net revenue and have been within our estimates.
The transaction price excludes value-added tax and similar taxes. Amounts billed to our customers for shipping and handling are recognized as revenue, and the related costs that we incur are presented in cost of revenue.
We do not provide separately priced warranties to our customers. Our standard terms of sale provide our customers with a warranty against faulty workmanship and the use of defective materials, which is not considered a distinct performance obligation in accordance with FASB ASC Topic 606.
Refer to Note 3, "Revenue Recognition," for additional information on our net revenue recognized in the consolidated statements of operations.
Share-Based Compensation
FASB ASC Topic 718, Compensation—Stock Compensation, requires that a company measure at fair value any new or modified share-based compensation arrangements with employees, such as stock options and restricted securities, and recognize as compensation expense that fair value over the requisite service period. Share-based compensation cost is generally recognized as a component of selling, general and administrative ("SG&A") expense, which is consistent with where the related employee costs are presented, however, such cost, or a portion thereof, may be capitalized provided certain criteria are met.
Share-based awards may be subject to either cliff vesting (i.e., the entire award vests on a particular date) or graded vesting (i.e., portions of the award vest at different points in time). In accordance with FASB ASC Topic 718, compensation cost associated with share-based awards subject to cliff vesting must be recognized on a straight-line basis. However, for awards subject to graded vesting, companies have the option to recognize compensation cost on either a straight–line or accelerated basis. We have elected to recognize compensation costs for these awards using the straight-line method.
We estimate the fair value of options on the grant date using the Black-Scholes-Merton option-pricing model. Key inputs and assumptions used in this model are as follows:
The fair value of the underlying ordinary shares. This is determined as the closing price of our ordinary shares on the New York Stock Exchange (the "NYSE") on the grant date.
The expected term. This is determined based upon our own historical average term of exercised and outstanding options.
Expected volatility. We consider our own historical volatility, as well as the historical and implied volatilities of publicly-traded companies within our industry, in estimating expected volatility for options. Implied volatility provides a forward-looking indication and may offer insight into expected industry volatility.
Risk-free interest rate. The risk-free interest rate is based on the yield for a U.S. Treasury security having a maturity similar to the expected term of the related option grant.
Expected dividend yield. The dividend yield of 0% is based on our history of having never declared or paid any dividends on our ordinary shares, and our current intention of not declaring any such dividends in the foreseeable future. See Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities," included elsewhere in this Report for further discussion of limitations on our ability to pay dividends.
Restricted securities are valued using the closing price of our ordinary shares on the NYSE on the grant date. Certain of our restricted securities include performance conditions that require us to estimate the probable outcome of the performance condition. Compensation cost is recorded if it is probable that the performance condition will be achieved.
Under the fair value recognition provisions of FASB ASC Topic 718, we recognize share-based compensation net of estimated forfeitures. Accordingly, we only recognize compensation cost for those awards expected to vest over the requisite service period. Compensation expense recognized for each award ultimately reflects the number of units that actually vest.
Refer to Note 4, "Share-Based Payment Plans," for additional information on share-based compensation.
Debt Instruments
A premiumSummarized information regarding our debt instruments is described below. Refer to Note 14, "Debt," of our Financial Statements for further details of the terms of our Debt Instruments.
Senior Secured Credit Facilities
In May 2011, we completed a series of transactions designed to refinance our then existing indebtedness. These transactions included the execution of the Credit Agreement, which provided for senior secured credit facilities (the "Senior Secured Credit Facilities") which currently consists of the Term Loan, the Revolving Credit Facility, and $1.0 billion incremental availability (the "Accordion") under which, subject to certain limitations as defined in the indentures under which the Senior Notes (as defined below) were issued (the "Senior Notes Indentures"), additional secured debt may be issued or discount onthe capacity of the Revolving Credit Facility may be increased.
Term Loan
The Term Loan may, at our option, be maintained from time to time as a debt instrument is recorded onBase Rate loan or a Eurodollar Rate loan (each as defined in the balance sheet as an adjustment to the carryingCredit Agreement), each with a different determination of interest rates. The principal amount of the Term Loan amortizes in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the term loan provided under the Sixth Amendment, with the balance due at maturity.
The applicable margins for the Term Loan as of December 31, 2018 were 0.75% and 1.75% for Base Rate loans and Eurodollar Rate loans, respectively, subject to floors of 1.00% and 0.00% for Base Rate loans and Eurodollar Rate loans, respectively. As of December 31, 2018, we maintained the Term Loan as a Eurodollar Rate loan.
Revolving Credit Facility
As of December 31, 2018, there was $416.1 million of availability under the Revolving Credit Facility, net of $3.9 million of letters of credit. Outstanding letters of credit are issued primarily for the benefit of certain operating activities. As of December 31, 2018, no amounts had been drawn against these outstanding letters of credit.
Senior Notes
At December 31, 2018, we had various tranches of senior notes outstanding, including $500.0 million aggregate principal amount of 4.875% senior notes due 2023 (the "4.875% Senior Notes"), $400.0 million aggregate principal amount of 5.625% senior notes due 2024 (the "5.625% Senior Notes"), $700.0 million aggregate principal amount of 5.0% senior notes due 2025 (the "5.0% Senior Notes"), and the 6.25% Senior Notes (collectively, with the 4.875% Senior Notes, the 5.625% Senior Notes, and the 5.0% Senior Notes, the "Senior Notes").
4.875% Senior Notes
In April 2013, we completed the issuance and sale of the 4.875% Senior Notes, which were offered at par, and mature on October 15, 2023. Interest on the 4.875% Senior Notes is payable semi-annually on April 15 and October 15 of each year.
5.625% Senior Notes
In October 2014, we completed the issuance and sale of the 5.625% Senior Notes, which were offered at par, and mature on November 1, 2024. Interest on the 5.625% Senior Notes is payable semi-annually on May 1 and November 1 of each year.
5.0% Senior Notes
In March 2015, we completed the issuance and sale of the 5.0% Senior Notes, which were offered at par, and mature on October 1, 2025. Interest on the 5.0% Senior Notes is payable semi-annually on April 1 and October 1 of each year.
6.25% Senior Notes
In November 2015, we completed the issuance and sale of the 6.25% Senior Notes, which were offered at par, and mature on February 15, 2026. Interest on the 6.25% Senior Notes is payable semi-annually on February 15 and August 15 of each year.
Capital Resources
Our sources of liquidity include cash on hand, cash flows from operations, and available capacity under the Revolving Credit Facility and the Accordion. We believe, based on our current level of operations as reflected in our results of operations for the year ended December 31, 2018, and taking into consideration the restrictions and covenants discussed below and in Note 14, "Debt," of our Financial Statements, that these sources of liquidity will be sufficient to fund our operations, capital expenditures, ordinary share repurchases, and debt liability. In general, amounts paidservice for at least the next twelve months. However, we cannot make assurances that our business will generate sufficient cash flows from operations or that future borrowings will be available to creditors are considered a reductionus in an amount sufficient to enable us to pay or refinance our indebtedness or to fund our other liquidity needs. Further, our highly-leveraged nature may limit our ability to procure additional financing in the proceeds received from the issuance of the debtfuture.
The Credit Agreement stipulates certain events and are accounted forconditions that may require us to use excess cash flow, as a component of the premium or discount on the issuance, not as an issuance cost. Direct and incremental costs associated with the issuance of debt instruments such as legal fees, printing costs, and underwriters' fees, among others, paid to parties other than creditors, are capitalized and reported as deferred financing costs on the balance sheet. Such costs are amortized over the term of the respective financing arrangement using the effective interest method (periods ranging from 5 to 10 years). Amortization of these costs is included as a component of Interest expense, net in the consolidated statements of operations.
In accounting for debt refinancing transactions, we apply the provisions of ASC Subtopic 470-50, Modifications and Extinguishments (“ASC 470-50”). Our evaluation of the accounting under ASC 470-50 is done on a creditordefined by creditor basis in order to determine if the terms of the Credit Agreement, generated by operating, investing, or financing activities, to prepay some or all of the outstanding borrowings under the Senior Secured Credit Facilities. The Credit Agreement also requires mandatory prepayments of the outstanding borrowings under the Senior Secured Credit Facilities upon certain asset dispositions and casualty events, in each case subject to certain reinvestment rights, and the incurrence of certain indebtedness (excluding any permitted indebtedness). These provisions were not triggered during the year ended December 31, 2018.
All obligations under the Senior Secured Credit Facilities are unconditionally guaranteed by certain of our subsidiaries (the "Guarantors"). The collateral for such borrowings under the Senior Secured Credit Facilities consists of substantially all present and future property and assets of Sensata Technologies B.V. ("STBV"), Sensata Technologies Finance Company, LLC, and the Guarantors.
Our ability to raise additional financing, and our borrowing costs, may be impacted by short- and long-term debt ratings assigned by independent rating agencies, which are substantially differentbased, in significant part, on our performance as measured by certain credit metrics such as interest coverage and leverage ratios. As of January 25, 2019, Moody’s Investors Service’s corporate credit rating for STBV was Ba2 with a stable outlook and Standard & Poor’s corporate credit rating for STBV was BB+ with a stable outlook. Any future downgrades to STBV's credit ratings may increase our borrowing costs, but will not reduce availability under the Credit Agreement.
The Credit Agreement and the Senior Notes Indentures contain restrictions and covenants (described in more detail in Note 14, "Debt," of our Financial Statements) that limit the ability of STBV and certain of its subsidiaries to, among other things, incur subsequent indebtedness, sell assets, make capital expenditures, pay dividends, and make other restricted payments. These restrictions and covenants, which are subject to important exceptions and qualifications set forth in the Credit Agreement and Senior Notes Indentures, were taken into consideration in establishing our share repurchase programs, and are evaluated periodically with respect to future potential funding. We do not believe that these restrictions and covenants will prevent us from funding share repurchases under our share repurchase programs with available cash and cash flows from operations, should we decide to do so. As of December 31, 2018, we believe that we were in compliance with all the covenants and default provisions under the Credit Agreement.
Share repurchase program
Upon completion of the Merger, the $250.0 million share repurchase program previously authorized by the Board of Directors of Sensata N.V. lapsed, and our ability to repurchase shares as a company incorporated in England and Wales became contingent upon the completion of certain court proceedings in the U.K. (which were completed in the second quarter of 2018), approval of our shareholders (which occurred at our May 31, 2018 annual general meeting of shareholders), and authorization by our Board of Directors.
On May 31, 2018, we announced that our Board of Directors had authorized a $400.0 million share repurchase program. Under this program, we could repurchase ordinary shares at such times and in amounts to be determined by our management, based on market conditions, legal requirements, and other corporate considerations, on the open market or in privately negotiated transactions, provided that such transactions were completed pursuant to an agreement and with a third party approved by our shareholders at the annual general meeting. The authorized amount of our share repurchase program could be modified or terminated by our Board of Directors at any time. During the year ended December 31, 2018, we repurchased approximately 7.6 million ordinary shares, which are now held as treasury shares, at a weighted-average price of $52.75 per share.
In October 2018, our Board of Directors authorized a new $250.0 million share repurchase program, subject to the same conditions that applied to the previously authorized $400.0 million share repurchase program. During the year ended December 31, 2018, we have not repurchased any ordinary shares under this new share repurchase program.
Contractual Obligations and Commercial Commitments
The table below reflects our contractual obligations as of December 31, 2018. Amounts we pay in future periods may vary from those reflected in the table. Amounts in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not sum due to the effect of rounding.
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (Dollars in millions) | Total | | One Year or Less | | One to Three Years | | Three to Five Years | | More than Five Years |
Debt obligations principal(1) | $ | 3,267.8 |
| | $ | 9.7 |
| | $ | 908.1 |
| | $ | 500.0 |
| | $ | 1,850.0 |
|
Debt obligations interest(2) | 966.4 |
| | 171.0 |
| | 328.1 |
| | 257.4 |
| | 209.9 |
|
Capital lease obligations principal(3) | 32.7 |
| | 2.6 |
| | 3.6 |
| | 3.0 |
| | 23.5 |
|
Capital lease obligations interest(3) | 24.4 |
| | 2.1 |
| | 5.0 |
| | 4.5 |
| | 12.7 |
|
Other financing obligations principal(4) | 2.8 |
| | 2.2 |
| | 0.5 |
| | — |
| | — |
|
Other financing obligations interest(4) | 0.4 |
| | 0.3 |
| | 0.1 |
| | — |
| | — |
|
Operating lease obligations(5) | 79.4 |
| | 16.6 |
| | 22.0 |
| | 14.2 |
| | 26.6 |
|
Non-cancelable purchase obligations(6) | 79.8 |
| | 24.0 |
| | 42.7 |
| | 13.0 |
| | 0.0 |
|
Total contractual obligations(7)(8) | $ | 4,453.7 |
| | $ | 228.5 |
| | $ | 1,310.1 |
| | $ | 792.1 |
| | $ | 2,122.7 |
|
| |
(1) | Represents the contractually required principal payments, in accordance with the required payment schedule, on our debt obligations in existence as of December 31, 2018. |
| |
(2) | Represents the contractually required interest payments, in accordance with the required payment schedule, on our debt obligations in existence as of December 31, 2018. Cash flows associated with the next interest payment to be made on our variable rate debt subsequent to December 31, 2018 were calculated using the interest rates in effect as of the latest interest rate reset date prior to December 31, 2018, plus the applicable spread. |
| |
(3) | Represents the contractually required payments, in accordance with the required payment schedule, under our capital lease obligations in existence as of December 31, 2018. Certain leases were assumed to extend beyond their current terms because it was probable that such an extension would occur. |
| |
(4) | Represents the contractually required payments, in accordance with the required payment schedule, under our financing obligations in existence as of December 31, 2018. No assumptions were made with respect to renewing these financing arrangements beyond their current terms. |
| |
(5) | Represents the contractually required payments, in accordance with the required payment schedule, under our operating lease obligations in existence as of December 31, 2018. No assumptions were made with respect to renewing these leases beyond their current terms. |
| |
(6) | Represents the contractually required payments under our various purchase obligations in existence as of December 31, 2018. No assumptions were made with respect to renewing the purchase obligations at the expiration date of their initial terms, and no amounts were assumed to be prepaid. |
| |
(7) | Contractual obligations denominated in a foreign currency were calculated utilizing the U.S. dollar to local currency exchange rates in effect as of December 31, 2018. |
| |
(8) | This table does not include the contractual obligations associated with our defined benefit and other post-retirement benefit plans. As of December 31, 2018, we had recognized a net benefit liability of $37.1 million, representing the net unfunded benefit obligations of the defined benefit and retiree healthcare plans. Refer to Note 13, "Pension and Other Post-Retirement Benefits," of our Financial Statements for additional information on pension and other post-retirement benefits, including expected benefit payments for the next 10 years. This table also does not include $11.5 million of unrecognized tax benefits as of December 31, 2018, as we are unable to make reasonably reliable estimates of when cash settlement, if any, will occur with a tax authority, as the timing and the ultimate resolution of the examination is uncertain. Refer to Note 7, "Income Taxes," of our Financial Statements for additional information on our unrecognized tax benefits. |
Critical Accounting Policies and Estimates
As discussed in Note 2, "Significant Accounting Policies," of our Financial Statements, which more fully describes our significant accounting policies, the preparation of consolidated financial statements in accordance with GAAP requires us to exercise our judgment in the process of applying our accounting policies. It also requires that we make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. The accounting policies and estimates that we believe are most critical to the portrayal of our financial position and results of operations are listed below. We believe these policies require our most difficult, subjective, and complex judgments in estimating the effect of inherent uncertainties.
Revenue Recognition
The discussion below details the most significant judgments and estimates we make regarding recognition of revenue in accordance with FASB ASC Topic 606, Revenue from Contracts with Customers. We adopted FASB ASC Topic 606 on January 1, 2018. Periods presented prior to January 1, 2018 are presented under the previous revenue recognition guidance, including FASB ASC Topic 605, Revenue Recognition. The adoption of FASB ASC Topic 606 did not have a material effect on our financial statements or results of operations, and no cumulative catch-up adjustment was recorded.
In accordance with FASB ASC Topic 606, we recognize revenue to depict the transfer of promised goods to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods using a five step model. The most critical judgments and estimates we make in the implementation of this model relate to identifying the contract with the customer and determination of the transaction price associated with the performance obligation(s) in the contract, specifically related to variable consideration.
While many of the agreements with our customers specify certain terms and conditions that apply to any transaction between the parties, many of which are in effect for a defined term, the vast majority of these agreements do not result in contracts (as defined in FASB ASC Topic 606) because they do not create enforceable rights and obligations on the parties. Specifically, (1) the parties are not committed to perform any obligations in accordance with the specified terms and conditions until a customer purchase order ("P.O.") is received and accepted by us and (2) there is a unilateral right of each party to terminate the agreement at any time without compensating the other party. For this reason, the vast majority of our contracts (as defined in FASB ASC Topic 606) are customer P.O.s. If this assessment were to change, it could result in a material change to the amount of net revenue recognized in a period.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. In determining the transaction price related to a contract, we determine whether the amount promised in a contract includes a variable amount (variable consideration). Variable consideration may be specified in the customer P.O., in another agreement that identifies terms and conditions of the transaction, or based on our customary practices. We have identified certain types of variable consideration that may be included in the transaction price related to our contracts, including sales returns (which generally include a right of return for defective or non-conforming product) and trade discounts (including retrospective volume discounts and early payment incentives). Such variable consideration has not historically been material. However, should our judgments and estimates regarding variable consideration change, it could result in a material change to the amount of net revenue recognized in a period.
Goodwill, Intangible Assets, and Long-Lived Assets
Businesses acquired are recorded at their fair value on the date of acquisition, with the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed recognized as goodwill. Assets acquired may include either definite-lived or indefinite-lived intangible assets, or both. In accordance with the requirements of FASB ASC Topic 350, Intangibles—Goodwill and Other, goodwill and intangible assets determined to have an indefinite useful life are not amortized. Instead these assets are evaluated for impairment on an annual basis, and whenever events or business conditions change that could indicate that the asset is impaired.
Goodwill
Our judgments regarding the existence of indicators of goodwill impairment are based on several factors, including the performance of the end markets served by our customers, as well as the actual financial performance of our reporting units and their respective financial forecasts over the long-term. We evaluate goodwill and indefinite-lived intangible assets for impairment in the fourth quarter of each fiscal year, unless events occur which trigger the need for an earlier impairment review.
Identification of reporting units
We have identified six reporting units: Performance Sensing, Electrical Protection, Industrial Sensing, Aerospace, Power Management, and Interconnection. These reporting units have been identified based on the definitions and guidance provided in FASB ASC Topic 350. Identification of reporting units includes an analysis of the components that comprise each of our operating segments, which considers, among other things, the manner in which we operate our business and the availability of discrete financial information. Components of an operating segment are aggregated to form one reporting unit if the components have similar economic characteristics. We periodically review these reporting units to ensure that they continue to reflect the manner in which the business is operated.
Assignment of assets, liabilities, and goodwill to reporting units
Some assets and liabilities relate to the operations of multiple reporting units. We allocate these assets and liabilities to the reporting units based on methods that we believe are reasonable and supportable. We apply modification or extinguishment accounting. that allocation method on a consistent basis from year to year. We view some assets and liabilities, such as cash and cash equivalents, property, plant and equipment associated with our corporate offices, and debt, as being corporate in nature. Accordingly, we do not assign these assets and liabilities to our reporting units.
In the event that an individual holderwe reorganize our business, we reassign the assets (including goodwill) and liabilities among the affected reporting units using a reasonable and supportable methodology. As businesses are acquired, we assign assets acquired (including goodwill) and liabilities assumed to a new or existing reporting unit as of existing debt did not invest in new debt, we apply extinguishment accounting. Borrowings associated with individual holdersthe date of new debt that are not holdersthe acquisition. In the event a disposal group meets the definition of existing debt are accounteda business, goodwill is allocated to the disposal group based on the relative fair value of the disposal group to the related reporting unit.
Evaluation of goodwill for as new issuances.
Refer to Note 8, "Debt," for further details of our debt instruments and transactions.
Income Taxesimpairment
We provide for income taxes utilizinghave the asset and liability method. Under this method, deferred income taxes are recordedoption to reflect the tax consequences in future yearsfirst assess qualitative factors to determine whether a quantitative analysis must be performed. The objective of differences between the tax bases of assets and liabilities and their financial reporting amounts at each balance sheet date, based on enacted tax laws and statutory tax rates applicablea qualitative analysis is to the periods in which the differences are expected to reverse or settle. Ifdetermine whether it is determinedmore likely than not that the fair value of a reporting unit is less than its net book value.
If we elect not to use this option, or if we determine that it is more likely than not that the fair value of a reporting unit is less than its net book value, then we perform the first step of the quantitative analysis prescribed by FASB ASC Topic 350. In this step we compare the estimated fair values of our reporting units to their respective net book values, including goodwill, to determine whether there is an indicator of potential impairment. If the net book value of a reporting unit exceeds its estimated fair value, we conduct a second step in which we calculate the implied fair value of goodwill. If the carrying value of the reporting unit’s goodwill exceeds its calculated implied fair value, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of its identifiable assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination at the date of assessment, and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the sum of the fair values of each of its identifiable assets and liabilities is the implied fair value of goodwill.
We evaluated the goodwill of each reporting unit for impairment as of October 1, 2018. All reporting units except Performance Sensing were evaluated using the quantitative method. In connection with the sale of the Valves Business, as required by FASB ASC Topic 350, we evaluated the goodwill of the retained portion of the Performance Sensing reporting unit for impairment using the quantitative method. To test this reporting unit as of October 1, 2018 we used the qualitative method of assessing goodwill; in performing this assessment, we considered the change in forecasted cash flows and net assets attributed to the reporting unit between the assessment performed in connection with the sale of the Valves Business and as of the October 1, 2018 assessment date, noting no significant changes. Therefore, we determined that it was not more likely than not that the fair value of the Performance Sensing reporting unit was less than its net book value.
We estimated the fair values of the Electrical Protection, Industrial Sensing, Aerospace, Power Management, and Interconnection reporting units using the discounted cash flow method. For this method, we prepared detailed annual projections of future cash flows for each reporting unit for the subsequent five fiscal years (the "Discrete Projection Period"). We estimated the value of the cash flows beyond the fifth fiscal year (the "Terminal Year"), by applying a multiple to the projected Terminal Year net earnings before interest, taxes, depreciation, and amortization ("EBITDA"). The cash flows from the Discrete Projection Period and the Terminal Year were discounted at an estimated WACC appropriate for each reporting unit. The estimated WACC was derived, in part, from comparable companies appropriate to each reporting unit. We believe that our procedures for estimating discounted future cash flows, including the Terminal Year valuation, were reasonable and consistent with accepted valuation practices.
The preparation of forecasts of revenue growth and profitability for use in the long-range forecasts, the selection of the discount rates, and the estimation of the multiples used in valuing the Terminal Year involve significant judgments. Changes to these assumptions could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period.
Types of events that could result in a goodwill impairment.
As noted above, the assumptions used in the quantitative calculation of fair value of our reporting units, including the long-range forecasts, the selection of the discount rates, and the estimation of the multiples or long-term growth rates used in valuing the Terminal Year involve significant judgments. Changes to these assumptions could affect the estimated fair values of our reporting units calculated in prior years and could result in a goodwill impairment charge in a future period. We believe that certain factors, such as a future recession, any material adverse conditions in the automotive industry and other industries in which we operate, and other factors identified in Item 1A, "Risk Factors," included elsewhere in this Report could require us to revise our long-term projections and could reduce the multiples used to determine Terminal Year value. Such revisions could result in a goodwill impairment charge in the future.
However, we do not consider any of our reporting units to be at risk of failing Step 1 of the goodwill impairment test.
Evaluation of other intangible assets for impairment
Indefinite-lived intangible assets. Similar to goodwill, we perform an annual impairment review of our indefinite-lived intangible assets in the fourth quarter of each fiscal year, unless events occur that trigger the need for an earlier impairment review. We have the option to first assess qualitative factors in determining whether it is more likely than not that an indefinite-lived intangible asset is impaired. If we elect not to use this option, or we determine that it is more likely than not that the asset is impaired, we perform a quantitative impairment review in which we estimate the fair value of the indefinite-lived intangible asset and compare that amount to its carrying value.
In performing the quantitative impairment review, we estimate the fair value by using the relief-from-royalty method, in which we make assumptions about future conditions impacting the fair value of our indefinite-lived intangible assets, including projected growth rates, cost of capital, effective tax benefitsrates, and royalty rates. Impairment, if any, is based on the excess of the carrying value over the fair value of these assets.
We evaluated our indefinite-lived intangible assets for impairment as of October 1, 2018 (using the quantitative method) and determined that the estimated fair values of these assets exceeded their carrying values at that date. Should certain assumptions used in the development of the fair values of our indefinite-lived intangible assets change, we may be required to recognize an impairment charge in the future.
Definite-lived intangible assets. Reviews are regularly performed to determine whether facts or circumstances exist that indicate that the carrying values of our definite-lived intangible assets to be held and used are impaired. If we determine that such facts or circumstances exist, we estimate the recoverability of these assets by comparing the projected undiscounted net cash flows associated with these assets to their respective carrying values. If the sum of the projected undiscounted net cash
flows falls below the carrying value of an asset, the impairment charge is measured as the excess of the carrying value over the fair value of that asset. We determine fair value by using the appropriate income approach valuation methodology depending on the nature of the intangible asset.
Evaluation of long-lived assets for impairment
We periodically re-evaluate the carrying values and estimated useful lives of long-lived assets whenever events or changes in circumstances indicate that the carrying values of these assets may not be recoverable. We use estimates of undiscounted cash flows from long-lived assets to determine whether the carrying values of such assets are recoverable over the assets’ remaining useful lives. These estimates include assumptions about our future performance and the performance of the end markets we serve. If an asset is determined to be impaired, the impairment is the amount by which its carrying value exceeds its fair value. These evaluations are performed at a level where discrete cash flows may be attributed to either an individual asset or a group of assets.
Income Taxes
As part of the process of preparing our financial statements, we are required to estimate our provision for income taxes in each of the jurisdictions in which we operate. This involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax asset will not be realized, a valuation allowanceassets and liabilities. Management judgment is provided. The effect onrequired in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets.
Our most difficult and subjective judgments and estimates relate to the assessment of the need for a changevaluation allowance against our deferred tax assets. In measuring our deferred tax assets, we consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed for all or some portion of the deferred tax assets. Significant judgment is required in statutory tax ratesconsidering the relative impact of the negative and positive evidence, and weight given to each category of evidence is recognizedcommensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary, and the more difficult it is to support a conclusion that a valuation allowance is not needed. Additionally, we utilize the "more likely than not" criteria established in the consolidated statements of operations as an adjustment to income tax expense in the period that includes the enactment date.
In accordance withFASB ASC Topic 740 Income Taxes ("ASC 740"), penaltiesto determine whether the future tax benefit from the deferred tax assets should be recognized.
We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and interest related to unrecognized tax benefits may be classified as eithernegative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, taxes or another expense line itemtax-planning strategies, and results of recent operations in various jurisdictions. Because our assessment of future taxable income is based on estimated projected results, in the event that actual results differ from these estimates, or we adjust our estimates in the future, we may need to adjust our valuation allowance assessment, which could materially impact our consolidated statementsfinancial position and results of operations. We classify interest and penalties related to unrecognized tax benefits within our (Benefit from)/provision for income taxes line of our consolidated statements of operations.
Refer to Note 9, "Income Taxes," for further details on our income taxes.
Pension and Other Post-Retirement Benefit PlansBenefits
We sponsor various pension and other post-retirement benefit plans covering our current and former employees in several countries.
The funded status of pension and other post-retirement benefit plans is measured as the difference between the fair value of plan assets and the benefit obligation at the measurement date. Changes in the funded status of a pension or other post-retirement benefit plan are recognized in the year in which they occur by adjusting the recognized (net) liability or asset with an offsetting adjustment to either net income or other comprehensive income.
Our most difficult and subjective judgments and estimates relate to the valuation of our benefit obligations. Benefit obligations represent the actuarial present value of all benefits attributed by the pension formula as of the measurement date to employee service rendered before that date, and can be categorized as projected benefit obligations or accumulated benefit obligations. The value of projected benefit obligations take into consideration various actuarial assumptions including future compensation levels, the time value of money, and related expensethe probability of these plans recordedpayment (by means of assumptions for events such as death, disability, withdrawal, or retirement) between the measurement date and the expected date of payment. Accumulated benefit obligations differ from projected benefit obligations only in the financial statements are based on certain assumptions. that they include no assumptions about future compensation levels.
The most significant assumptions used to determine a plan's funded status and net periodic benefit cost relate to discount rate, expected return on plan assets, and rate of
increase in healthcare costs. These assumptions are reviewed annually. Refer to
Note 13, "Pension and Other assumptions used include employee demographic factors such as compensation rate increases, retirement patterns, employee turnover rates, and mortality rates. We reviewPost-Retirement Benefit Plans," of our Financial Statements for details on the values determined for each of these assumptions annually.
Our review of demographic assumptions includes analyzing historical patterns and/or referencing industry standard tables, combined with our expectations around future compensation and staffing strategies. The difference between these assumptions and our actual experience results in the recognition of an actuarial gain or loss. Actuarial gains and losses are recorded directly to Accumulated other comprehensive loss. If the total net actuarial gain or loss included in Accumulated other comprehensive loss exceeds a threshold of 10% of the greater of the projected benefit obligation or the market related value of plan assets, it is subject to amortization and recorded as a component of net periodic pension cost over the average remaining service lives of the employees participating in the pension or post-retirement benefit plan.last three fiscal years.
The discount rate reflects the current rate at which the pension and other post-retirement liabilities could be effectively settled, considering the timing of expected payments for plan participants. It is used to discount the estimated future obligations of the plans to the present value of the liability reflected in the financial statements. In estimating this rate in countries that have a market of high-quality fixed-income investments, we consider rates of return on these investments included in various bond indices, adjusted to eliminate the effecteffects of call provisions and differences in the timing and amounts of cash outflows related to the bonds. In other countries where a market of high-quality fixed-income investments does not exist, we estimate the discount rate using government bond yields or long-term inflation rates.
The expected return on plan assets reflects the average rate of earnings expected on the funds invested to provide for the benefits included in the projected benefit obligation. To determine the expected return on plan assets, we consider the historical returns earned by similarly invested assets, the rates of return expected on plan assets in the future, and our investment strategy and asset mix with respect to the plans’ funds.
The rate of increase of healthcare costs directly impacts the estimate of our future obligations in connection with our post-retirement medical benefits. Our estimate of healthcare cost trends is based on historical increases in healthcare costs under similarly designed plans, the level of increase in healthcare costs expected in the future, and the design features of the underlying plan.
Other assumptions used include employee demographic factors such as compensation rate increases, retirement patterns, employee turnover rates, and mortality rates. Our review of demographic assumptions includes analyzing historical patterns and/or referencing industry standard tables, combined with our expectations around future compensation and staffing strategies. The difference between these assumptions and our actual experience results in the recognition of an actuarial gain or loss.
Future changes to assumptions, or differences between actual and expected outcomes, can significantly affect our future net periodic pension cost, projected benefit obligations, and accumulated other comprehensive loss.
Share-Based Compensation
FASB ASC Topic 718, Compensation—Stock Compensation, requires that a company measure at fair value any new or modified share-based compensation arrangements with employees, such as stock options and restricted stock units, and recognize as compensation expense that fair value over the requisite service period.
We have adopted useestimate the fair value of options on the date of grant using the Black-Scholes-Merton option-pricing model. Key assumptions used in this model are (1) the fair value of the Retirement Plan ("RP") 2014 mortality tables withunderlying ordinary shares, (2) the updated Mortality Projection ("MP") 2015 mortality improvement scaletime period for which we expect the options will be outstanding (the expected term), (3) the expected volatility of our stock price, (4) the risk-free interest rate, and (5) the expected dividend yield. Expected term and expected volatility are the judgments that we believe are the most critical and subjective in estimating fair value (and related share-based compensation expense) of our option awards.
The expected term is determined based upon our own historical average term of exercised and outstanding options. We consider our own historical volatility, as issued bywell as the Societyhistorical and implied volatilities of Actuariespublicly-traded companies within our industry, in 2015estimating expected volatility for ouroptions. Implied volatility provides a forward-looking indication and may offer insight into expected industry volatility.
Other assumptions used include risk free interest rate and expected dividend yield. The risk free interest rate is based on the yield for a U.S. defined benefit plans. The updated MP 2015 mortality improvement scale reflects improvements in longevity as comparedTreasury security having a maturity similar to the MP 2014 mortality improvement scaleexpected term of the Societyrelated option grant. This assumption is dependent on the assumed expected term. The dividend yield of Actuaries issued in 2014, primarily because it includes actual Social Security mortality data for 2010 and 2011. The MP projection scale0% is used to factor in projected mortality improvements over time, based on ageour history of having never declared or paid any dividends on our ordinary shares, and dateour current intention of birth (i.e., two-dimension generational).not declaring any such dividends in the foreseeable future.
Certain of our restricted securities include performance conditions that require us to estimate the probable outcome of the performance condition. This assessment is based on management's judgment using internally developed forecasts and is assessed at each reporting period. Compensation cost is recorded if it is probable that the performance condition will be achieved.
Under the fair value recognition provisions of FASB ASC Topic 718, we recognize share-based compensation net of estimated forfeitures and, therefore, only recognize compensation cost for those awards expected to vest over the requisite service period. The forfeiture rate is based on our estimate of forfeitures by plan participants after consideration of historical forfeiture rates. Compensation expense recognized for each award ultimately reflects the number of units that actually vest.
Material changes to any of these assumptions may have a significant effect on our valuation of options, and, ultimately, the share-based compensation expense recorded in the consolidated statements of operations.
Off-Balance Sheet Arrangements
From time to time, we execute contracts that require us to indemnify the other parties to the contracts. These indemnification obligations generally arise in two contexts. First, in connection with certain transactions, such as the sale of a business or the issuance of debt or equity securities, the agreement typically contains standard provisions requiring us to indemnify the purchaser against breaches by us of representations and warranties contained in the agreement. These indemnities are generally subject to time and liability limitations. Second, we enter into agreements in the ordinary course of business, such as customer contracts, that might contain indemnification provisions relating to product quality, intellectual property infringement, governmental regulations and employment related matters, and other typical indemnities. In certain cases, indemnification obligations arise by law.
We believe that our indemnification obligations are consistent with other companies in the markets in which we compete. Performance under any of these indemnification obligations would generally be triggered by a breach of the terms of the contract or by a third-party claim. Historically, we have experienced only immaterial and irregular losses associated with these indemnifications. Consequently, any future liabilities brought about by these indemnifications cannot reasonably be estimated or accrued.
Refer to Note 10, "Pension15, "Commitments and Contingencies," of our Financial Statements for further discussion of off-balance sheet arrangements.
Recent Accounting Pronouncements
Recently issued accounting standards adopted in the current period:
Refer to Recently issued accounting standards adopted in the current period in Note 2, "Significant Accounting Policies," of our Financial Statements for discussion of recently issued accounting standards adopted in the current period. None of these standards had a material impact on our consolidated financial position or results of operations, or are reasonably likely to have a material effect on our future consolidated financial position or results of operations.
Recently issued accounting standards to be adopted in a future period:
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes new accounting and disclosure requirements for leases. We will adopt FASB ASU No. 2016-02 on January 1, 2019, which will result in the recognition of a lease liability and right-of-use asset for certain operating leases that are currently not recognized on our consolidated balance sheets, which we expect to be recorded using an incremental borrowing rate. At December 31, 2018, we were contractually obligated to make future payments of $79.4 million under our operating lease obligations in existence as of that date, primarily related to long-term facility leases. We do not expect there to be a material impact on our results of operations.
Refer to Recently issued accounting standards to be adopted in a future period in Note 2, "Significant Accounting Policies," of our Financial Statements for further discussion of certain accounting standards to be adopted in a future period, including FASB ASU No. 2016-02. Other Post-Retirement Benefits,than FASB ASU No. 2016-02, recently issued accounting standards to be adopted in a future period are not expected to have a material impact on our consolidated financial position or results of operations.
| |
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to changes in foreign currency exchange rates because we transact in a variety of foreign currencies. We are also exposed to changes in the prices of certain commodities (primarily metals) that we use in production. Changes in these foreign currency exchange rates and commodity prices may have an impact on future cash flows and earnings. We monitor our exposure to these risks, and may employ derivative financial instruments to limit the volatility to earnings and cash flows generated by these exposures. We employ derivative contracts that may or may not be designated for hedge accounting treatment under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 815, Derivatives and Hedging, which can result in volatility to earnings depending upon fluctuations in the underlying markets.
By using derivative instruments, we are subject to credit and market risk. The fair market values of these derivative instruments are based upon valuation models whose inputs are derived using market observable inputs, including foreign currency exchange and commodity spot and forward rates, and reflect the asset and liability positions as of the end of each reporting period. When the fair value of a derivative contract is positive, the counterparty is liable to us, thus creating a receivable risk for us. We are exposed to counterparty credit (or repayment) risk in the event of non-performance by counterparties to our derivative agreements. We attempt to minimize this risk by entering into transactions with major financial institutions of investment grade credit rating.
Interest Rate Risk
Excluding capital lease and other financing obligations, our gross debt as of December 31, 2018 and 2017 was $3,267.8 million and $3,277.8 million, respectively. A portion of this indebtedness relates to the term loan (the "Term Loan") provided pursuant to the eighth amendment to the credit agreement dated as of May 12, 2011 (as amended, the "Credit Agreement"). The Term Loan accrues interest at a variable rate calculated on the basis of a three hundred and sixty day year and actual days elapsed (which results in more interest, as applicable, being paid than if computed on the basis of a three hundred and sixty-five day year). The variable rate is currently based on LIBOR, subject to a floor and spread, in accordance with the terms of the Credit Agreement.
Refer to Note 14, "Debt," of our audited consolidated financial statements and accompanying notes thereto (our "Financial Statements") included elsewhere in this Annual Report on Form 10-K (this "Report") for details regarding our debt instruments.
Sensitivity Analysis
As of December 31, 2018, we had an outstanding balance on the Term Loan (excluding discount and deferred financing costs) of $917.8 million. The applicable interest rate associated with the Term Loan at December 31, 2018 was 4.21%. An increase of 100 basis points in this rate would result in additional interest expense of $9.3 million in fiscal year 2019. The next 100 basis point increase in this rate would result in incremental interest expense of $9.3 million in fiscal year 2019.
As of December 31, 2017, we had an outstanding balance on the Term Loan (excluding discount and deferred financing costs) of $927.8 million. The applicable interest rate associated with the Term Loan at December 31, 2017 was 3.21%. An increase of 100 basis points in this rate would have resulted in additional interest expense of $9.4 million in fiscal year 2018. The next 100 basis point increase in this rate would have resulted in incremental interest expense of $9.4 million in fiscal year 2018.
Foreign Currency Risk
Consistent with our risk management objective and strategy to reduce exposure to variability in cash flows and variability in earnings, and for non-trading purposes, we enter into foreign currency exchange rate derivatives that qualify as cash flow hedges, and that are intended to offset the effect of exchange rate fluctuations on forecasted sales and certain manufacturing costs. We also enter into foreign currency forward contracts that are not designated for hedge accounting purposes. Refer to Note 19, "Derivative Instruments and Hedging Activities," of our Financial Statements for details of the foreign currency forward contracts outstanding as of December 31, 2018.
Sensitivity Analysis
The tables below present our foreign currency forward contracts as of December 31, 2018 and 2017 and the estimated impact to future pre-tax earnings as a result of a 10% strengthening/weakening in the foreign currency exchange rate:
|
| | | | | | | | | | | | |
| | | | | (Decrease)/Increase to Future Pre-tax Earnings Due to: |
| (Dollars in millions) | | Net Asset/(Liability) Balance as of December 31, 2018 | | 10% Strengthening of the Value of the Foreign Currency Relative to the U.S. Dollar | | 10% Weakening of the Value of the Foreign Currency Relative to the U.S. Dollar |
| Euro | | $ | 14.5 |
| | $ | (45.1 | ) | | $ | 45.1 |
|
| Chinese Renminbi | | $ | (0.3 | ) | | $ | (4.1 | ) | | $ | 4.1 |
|
| Korean Won | | $ | 0.3 |
| | $ | (2.8 | ) | | $ | 2.8 |
|
| Malaysian Ringgit | | $ | 0.1 |
| | $ | 0.6 |
| | $ | (0.6 | ) |
| Mexican Peso | | $ | 0.7 |
| | $ | 14.2 |
| | $ | (14.2 | ) |
| British Pound Sterling | | $ | (2.6 | ) | | $ | 6.2 |
| | $ | (6.2 | ) |
|
| | | | | | | | | | | | |
| | | | | (Decrease)/Increase to Future Pre-tax Earnings Due to: |
| (Dollars in millions) | | Net (Liability)/Asset Balance as of December 31, 2017 | | 10% Strengthening of the Value of the Foreign Currency Relative to the U.S. Dollar | | 10% Weakening of the Value of the Foreign Currency Relative to the U.S. Dollar |
| Euro | | $ | (30.6 | ) | | $ | (61.5 | ) | | $ | 61.5 |
|
| Chinese Renminbi | | $ | (3.6 | ) | | $ | (24.4 | ) | | $ | 24.4 |
|
| Korean Won | | $ | (2.3 | ) | | $ | (3.9 | ) | | $ | 3.9 |
|
| Malaysian Ringgit | | $ | 0.2 |
| | $ | 0.5 |
| | $ | (0.5 | ) |
| Mexican Peso | | $ | (2.6 | ) | | $ | 13.4 |
| | $ | (13.4 | ) |
| British Pound Sterling | | $ | 2.0 |
| | $ | 4.8 |
| | $ | (4.8 | ) |
| Japanese Yen | | $ | 0.0 |
| | $ | 0.2 |
| | $ | (0.2 | ) |
Commodity Risk
We are exposed to the potential change in prices associated with certain commodities used in the manufacturing of our products. We offset a portion of this exposure by entering into forward contracts that fix the price at a future date for various notional amounts associated with these commodities. These forward contracts are not designated as accounting hedges. Refer to Note 19, "Derivative Instruments and Hedging Activities," of our Financial Statements for details of the commodity forward contracts outstanding as of December 31, 2018.
Sensitivity Analysis
The tables below present our commodity forward contracts as of December 31, 2018 and 2017 and the estimated impact to pre-tax earnings associated with a 10% increase/(decrease) in the related forward price for each commodity:
|
| | | | | | | | | | | | | | | | |
| | | Net (Liability)/Asset Balance as of December 31, 2018 | | Average Forward Price Per Unit as of December 31, 2018 | | Increase/(Decrease) to Pre-tax Earnings Due to |
| (Dollars in millions, except per unit amounts) | | | | 10% Increase in the Forward Price | | 10% Decrease in the Forward Price |
| Silver | | $ | (0.8 | ) | | $ | 15.72 |
| | $ | 1.7 |
| | $ | (1.7 | ) |
| Gold | | $ | (0.0 | ) | | $ | 1,303.51 |
| | $ | 1.3 |
| | $ | (1.3 | ) |
| Nickel | | $ | (0.2 | ) | | $ | 4.93 |
| | $ | 0.1 |
| | $ | (0.1 | ) |
| Aluminum | | $ | (0.3 | ) | | $ | 0.86 |
| | $ | 0.2 |
| | $ | (0.2 | ) |
| Copper | | $ | (1.3 | ) | | $ | 2.71 |
| | $ | 0.8 |
| | $ | (0.8 | ) |
| Platinum | | $ | (0.9 | ) | | $ | 805.38 |
| | $ | 0.7 |
| | $ | (0.7 | ) |
| Palladium | | $ | 0.2 |
| | $ | 1,175.96 |
| | $ | 0.1 |
| | $ | (0.1 | ) |
|
| | | | | | | | | | | | | | | | |
| | | Net (Liability)/Asset Balance as of December 31, 2017 | | Average Forward Price Per Unit as of December 31, 2017 | | Increase/(Decrease) to Pre-tax Earnings Due to |
| (Dollars in millions, except per unit amounts) | | | | 10% Increase in the Forward Price | | 10% Decrease in the Forward Price |
| Silver | | $ | (0.6 | ) | | $ | 17.20 |
| | $ | 1.9 |
| | $ | (1.9 | ) |
| Gold | | $ | 0.4 |
| | $ | 1,322.24 |
| | $ | 1.6 |
| | $ | (1.6 | ) |
| Nickel | | $ | 0.3 |
| | $ | 5.83 |
| | $ | 0.2 |
| | $ | (0.2 | ) |
| Aluminum | | $ | 0.9 |
| | $ | 1.04 |
| | $ | 0.6 |
| | $ | (0.6 | ) |
| Copper | | $ | 4.4 |
| | $ | 3.30 |
| | $ | 2.4 |
| | $ | (2.4 | ) |
| Platinum | | $ | (0.3 | ) | | $ | 943.94 |
| | $ | 0.8 |
| | $ | (0.8 | ) |
| Palladium | | $ | 0.4 |
| | $ | 1,022.19 |
| | $ | 0.2 |
| | $ | (0.2 | ) |
| |
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The following audited consolidated financial statements of Sensata Technologies Holding plc are included in this Annual Report on Form 10-K:
| |
| 2. | Financial Statement Schedules |
The following schedules are included elsewhere in this Annual Report on Form 10-K:
Schedule I — Condensed Financial Information of the Registrant
Schedule II — Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted since the required information is not present, or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the audited consolidated financial statements or the notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
Sensata Technologies Holding plc
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Sensata Technologies Holding plc (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, cash flows, and changes in shareholders’ equity for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 6, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2005
Boston, Massachusetts
February 6, 2019
SENSATA TECHNOLOGIES HOLDING PLC
Consolidated Balance Sheets
(Amounts in thousands, except per share amounts)
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 729,833 |
| | $ | 753,089 |
|
| Accounts receivable, net of allowances of $13,762 and $12,947 as of December 31, 2018 and 2017, respectively | 581,769 |
| | 556,541 |
|
| Inventories | 492,319 |
| | 446,129 |
|
| Prepaid expenses and other current assets | 113,234 |
| | 92,532 |
|
| Total current assets | 1,917,155 |
| | 1,848,291 |
|
| Property, plant and equipment, net | 787,178 |
| | 750,049 |
|
| Goodwill | 3,081,302 |
| | 3,005,464 |
|
| Other intangible assets, net | 897,191 |
| | 920,124 |
|
| Deferred income tax assets | 27,971 |
| | 33,003 |
|
| Other assets | 86,890 |
| | 84,594 |
|
| Total assets | $ | 6,797,687 |
| | $ | 6,641,525 |
|
| Liabilities and shareholders’ equity | | | |
| Current liabilities: | | | |
| Current portion of long-term debt, capital lease and other financing obligations | $ | 14,561 |
| | $ | 15,720 |
|
| Accounts payable | 379,824 |
| | 322,671 |
|
| Income taxes payable | 27,429 |
| | 31,544 |
|
| Accrued expenses and other current liabilities | 218,130 |
| | 259,560 |
|
| Total current liabilities | 639,944 |
| | 629,495 |
|
| Deferred income tax liabilities | 225,694 |
| | 338,228 |
|
| Pension and other post-retirement benefit obligations | 33,958 |
| | 40,055 |
|
| Capital lease and other financing obligations, less current portion | 30,618 |
| | 28,739 |
|
| Long-term debt, net | 3,219,762 |
| | 3,225,810 |
|
| Other long-term liabilities | 39,277 |
| | 33,572 |
|
| Total liabilities | 4,189,253 |
| | 4,295,899 |
|
| Commitments and contingencies (Note 15) |
| |
|
| Shareholders’ equity: | | | |
| Ordinary shares, €0.01 nominal value per share, 177,069 and 400,000 shares authorized and 171,719 and 178,437 shares issued as of December 31, 2018 and 2017, respectively | 2,203 |
| | 2,289 |
|
| Treasury shares, at cost, 7,571 and 7,076 shares as of December 31, 2018 and 2017, respectively | (399,417 | ) | | (288,478 | ) |
| Additional paid-in capital | 1,691,190 |
| | 1,663,367 |
|
| Retained earnings | 1,340,636 |
| | 1,031,612 |
|
| Accumulated other comprehensive loss | (26,178 | ) | | (63,164 | ) |
| Total shareholders’ equity | 2,608,434 |
| | 2,345,626 |
|
| Total liabilities and shareholders’ equity | $ | 6,797,687 |
| | $ | 6,641,525 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Net revenue | $ | 3,521,627 |
| | $ | 3,306,733 |
| | $ | 3,202,288 |
|
| Operating costs and expenses: | | | | | |
| Cost of revenue | 2,266,863 |
| | 2,138,898 |
| | 2,084,159 |
|
| Research and development | 147,279 |
| | 130,127 |
| | 126,656 |
|
| Selling, general and administrative | 305,558 |
| | 301,896 |
| | 293,506 |
|
| Amortization of intangible assets | 139,326 |
| | 161,050 |
| | 201,498 |
|
| Restructuring and other charges, net | (47,818 | ) | | 18,975 |
| | 4,113 |
|
| Total operating costs and expenses | 2,811,208 |
| | 2,750,946 |
| | 2,709,932 |
|
| Profit from operations | 710,419 |
| | 555,787 |
| | 492,356 |
|
| Interest expense, net | (153,679 | ) | | (159,761 | ) | | (165,818 | ) |
| Other, net | (30,365 | ) | | 6,415 |
| | (5,093 | ) |
| Income before taxes | 526,375 |
| | 402,441 |
| | 321,445 |
|
| (Benefit from)/provision for income taxes | (72,620 | ) | | (5,916 | ) | | 59,011 |
|
| Net income | $ | 598,995 |
| | $ | 408,357 |
| | $ | 262,434 |
|
| Basic net income per share | $ | 3.55 |
| | $ | 2.39 |
| | $ | 1.54 |
|
| Diluted net income per share | $ | 3.53 |
| | $ | 2.37 |
| | $ | 1.53 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Net income | $ | 598,995 |
| | $ | 408,357 |
| | $ | 262,434 |
|
| Other comprehensive income/(loss), net of tax: | | | | | |
| Cash flow hedges | 37,363 |
| | (28,202 | ) | | (3,829 | ) |
| Defined benefit and retiree healthcare plans | (377 | ) | | (895 | ) | | (4,248 | ) |
| Other comprehensive income/(loss) | 36,986 |
| | (29,097 | ) | | (8,077 | ) |
| Comprehensive income | $ | 635,981 |
| | $ | 379,260 |
| | $ | 254,357 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
Consolidated Statements of Cash Flows
(Dollars in thousands)
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 598,995 |
| | $ | 408,357 |
| | $ | 262,434 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation | 106,014 |
| | 109,321 |
| | 106,903 |
|
| Amortization of debt issuance costs | 7,317 |
| | 7,241 |
| | 7,334 |
|
| Gain on sale of business | (64,423 | ) | | — |
| | — |
|
| Share-based compensation | 23,825 |
| | 19,819 |
| | 17,425 |
|
| Loss on debt financing | 2,350 |
| | 2,670 |
| | — |
|
| Amortization of intangible assets | 139,326 |
| | 161,050 |
| | 201,498 |
|
| Deferred income taxes | (144,068 | ) | | (56,757 | ) | | 8,344 |
|
| Unrealized loss on hedges and other | 18,176 |
| | 781 |
| | 11,517 |
|
| Changes in operating assets and liabilities, net of the effects of acquisitions and divestitures: | | | | | |
| Accounts receivable, net | (34,877 | ) | | (56,330 | ) | | (33,013 | ) |
| Inventories | (55,445 | ) | | (57,119 | ) | | (37,500 | ) |
| Prepaid expenses and other current assets | (11,891 | ) | | (12,412 | ) | | 6,956 |
|
| Accounts payable and accrued expenses | 48,371 |
| | 23,841 |
| | (21,432 | ) |
| Income taxes payable | (353 | ) | | 7,655 |
| | (1,938 | ) |
| Other | (12,754 | ) | | (471 | ) | | (7,003 | ) |
| Net cash provided by operating activities | 620,563 |
| | 557,646 |
| | 521,525 |
|
| Cash flows from investing activities: | | | | | |
| Acquisitions, net of cash received | (228,307 | ) | | — |
| | 4,688 |
|
| Additions to property, plant and equipment and capitalized software | (159,787 | ) | | (144,584 | ) | | (130,217 | ) |
| Investment in equity securities | — |
| | — |
| | (50,000 | ) |
| Proceeds from sale of business, net of cash sold | 149,777 |
| | — |
| | — |
|
| Other | 711 |
| | 3,862 |
| | 751 |
|
| Net cash used in investing activities | (237,606 | ) | | (140,722 | ) | | (174,778 | ) |
| Cash flows from financing activities: | | | | | |
| Proceeds from exercise of stock options and issuance of ordinary shares | 6,093 |
| | 7,450 |
| | 3,944 |
|
| Payment of employee restricted stock tax withholdings | (3,674 | ) | | (2,910 | ) | | (4,752 | ) |
| Proceeds from issuance of debt | — |
| | 927,794 |
| | — |
|
| Payments on debt | (15,653 | ) | | (943,554 | ) | | (336,256 | ) |
| Payments to repurchase ordinary shares | (399,417 | ) | | — |
| | — |
|
| Payments of debt and equity issuance costs | (9,931 | ) | | (4,043 | ) | | (518 | ) |
| Other | 16,369 |
| | — |
| | — |
|
| Net cash used in financing activities | (406,213 | ) | | (15,263 | ) | | (337,582 | ) |
| Net change in cash and cash equivalents | (23,256 | ) | | 401,661 |
| | 9,165 |
|
| Cash and cash equivalents, beginning of year | 753,089 |
| | 351,428 |
| | 342,263 |
|
| Cash and cash equivalents, end of year | $ | 729,833 |
| | $ | 753,089 |
| | $ | 351,428 |
|
| Supplemental cash flow items: | | | | | |
| Cash paid for interest | $ | 163,478 |
| | $ | 164,370 |
| | $ | 155,925 |
|
| Cash paid for income taxes | $ | 72,924 |
| | $ | 48,482 |
| | $ | 43,152 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
Consolidated Statements of Changes in Shareholders’ Equity
(Amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Ordinary Shares |
| Treasury Shares |
| Additional
Paid-In
Capital |
| Retained Earnings |
| Accumulated
Other
Comprehensive
Loss |
| Total
Shareholders’
Equity |
| | Number |
| Amount |
| Number |
| Amount |
|
| Balance as of December 31, 2015 | 178,437 |
| | $ | 2,289 |
| | (8,038 | ) | | $ | (324,994 | ) | | $ | 1,626,024 |
| | $ | 391,247 |
| | $ | (25,990 | ) | | $ | 1,668,576 |
|
| Surrender of shares for tax withholding | — |
| | — |
| | (62 | ) | | (2,295 | ) | | — |
| | — |
| | — |
| | (2,295 | ) |
| Stock options exercised | — |
| | — |
| | 358 |
| | 13,698 |
| | — |
| | (9,754 | ) | | — |
| | 3,944 |
|
| Vesting of restricted securities | — |
| | — |
| | 185 |
| | 7,086 |
| | — |
| | (7,086 | ) | | — |
| | — |
|
| Share-based compensation | — |
| | — |
| | — |
| | — |
| | 17,425 |
| | — |
| | — |
| | 17,425 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 262,434 |
| | — |
| | 262,434 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8,077 | ) | | (8,077 | ) |
| Balance as of December 31, 2016 | 178,437 |
| | 2,289 |
| | (7,557 | ) | | (306,505 | ) |
| 1,643,449 |
| | 636,841 |
| | (34,067 | ) | | 1,942,007 |
|
| Surrender of shares for tax withholding | — |
| | — |
| | (67 | ) | | (2,910 | ) |
| — |
| | — |
| | — |
| | (2,910 | ) |
| Stock options exercised | — |
| | — |
| | 326 |
| | 12,465 |
|
| 99 |
| | (5,114 | ) | | — |
| | 7,450 |
|
| Vesting of restricted securities | — |
| | — |
| | 222 |
| | 8,472 |
|
| — |
| | (8,472 | ) | | — |
| | — |
|
| Share-based compensation | — |
| | — |
| | — |
| | — |
| | 19,819 |
| | — |
| | — |
| | 19,819 |
|
| Net income | — |
| | — |
| | — |
| | — |
|
| — |
| | 408,357 |
| | — |
| | 408,357 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
|
| — |
| | — |
| | (29,097 | ) | | (29,097 | ) |
| Balance as of December 31, 2017 | 178,437 |
| | 2,289 |
| | (7,076 | ) | | (288,478 | ) |
| 1,663,367 |
| | 1,031,612 |
| | (63,164 | ) | | 2,345,626 |
|
| Surrender of shares for tax withholding | — |
| | — |
| | (71 | ) | | (3,674 | ) | | — |
| | — |
| | — |
| | (3,674 | ) |
| Stock options exercised | 114 |
| | 1 |
| | 58 |
| | 2,250 |
| | 3,998 |
| | (156 | ) | | — |
| | 6,093 |
|
| Vesting of restricted securities | 257 |
| | 3 |
| | — |
| | — |
| | — |
| | (3 | ) | | — |
| | — |
|
| Retirement of treasury shares due to Merger | (7,018 | ) | | (89 | ) | | 7,018 |
| | 286,228 |
| | — |
| | (286,139 | ) | | — |
| | — |
|
| Repurchase of ordinary shares | — |
| | — |
| | (7,571 | ) | | (399,417 | ) | | — |
| | — |
| | — |
| | (399,417 | ) |
| Other retirements of treasury shares | (71 | ) | | (1 | ) | | 71 |
| | 3,674 |
| | — |
| | (3,673 | ) | | — |
| | — |
|
| Share-based compensation | — |
| | — |
| | — |
| | — |
| | 23,825 |
| | — |
| | — |
| | 23,825 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 598,995 |
| | — |
| | 598,995 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 36,986 |
| | 36,986 |
|
| Balance as of December 31, 2018 | 171,719 |
| | $ | 2,203 |
| | (7,571 | ) | | $ | (399,417 | ) | | $ | 1,691,190 |
| | $ | 1,340,636 |
| | $ | (26,178 | ) | | $ | 2,608,434 |
|
The accompanying notes are an integral part of these financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts, or unless otherwise noted)
1. Business Description and Basis of Presentation
Description of Business
The accompanying consolidated financial statements reflect the financial position, results of operations, comprehensive income, cash flows, and changes in shareholders' equity of Sensata Technologies Holding plc ("Sensata plc"), the successor issuer to Sensata Technologies Holding N.V. ("Sensata N.V."), and its wholly-owned subsidiaries, collectively referred to as the "Company," "Sensata," "we," "our," or "us."
On September 28, 2017, the Board of Directors of Sensata N.V. unanimously approved a plan to change our location of incorporation from the Netherlands to the United Kingdom (the "U.K."). To effect this change, on February 16, 2018 the shareholders of Sensata N.V. approved a cross-border merger between Sensata N.V. and Sensata plc, a newly formed, public limited company incorporated under the laws of England and Wales, with Sensata plc being the surviving entity (the "Merger").
We received approval of the Merger by the U.K. High Court of Justice, and the Merger was completed, on March 28, 2018. As a result thereof, Sensata plc became the publicly-traded parent of the subsidiary companies that were previously controlled by Sensata N.V., with no changes made to the business being conducted by us prior to the Merger. Due to the fact that the Merger was a business combination between entities under common control, the assets and liabilities exchanged were accounted for at their carrying values.
Sensata, a global industrial technology company, develops, manufactures, and sells a wide range of customized sensors and controls that address increasingly complex engineering requirements for specific customer applications and systems such as air conditioning, braking, exhaust, fuel oil, tire, operator controls, and transmission in automotive and heavy vehicle and off-road ("HVOR") systems, and temperature and electrical protection and control in numerous industrial applications, including aircraft, refrigeration, material handling, telecommunications, and heating, ventilation, and air conditioning ("HVAC") systems. Our sensors are devices that translate a physical phenomenon, such as pressure, temperature, or position, into electronic signals that microprocessors or computer-based control systems can act upon. Our controls are devices embedded within systems to protect them from excessive heat or current.
We conduct our operations through subsidiary companies that operate business and product development centers primarily in Belgium, Bulgaria, China, Germany, Japan, the Netherlands, South Korea, the U.K., and the United States (the "U.S."); and manufacturing operations primarily in Bulgaria, China, Germany, Malaysia, Mexico, the U.K., and the U.S. We organize our business into two segments, Performance Sensing and Sensing Solutions.
Refer to Note 20, "Segment Reporting," for a general description of each of our segments.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). The accompanying consolidated financial statements present separately our financial position, results of operations, comprehensive income, cash flows, and changes in shareholders’ equity.
All intercompany balances and transactions have been eliminated. All U.S. dollar and share amounts presented, except per share amounts, are stated in thousands, unless otherwise indicated. Certain reclassifications have been made to prior periods to conform to current period presentation.
2. Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires us to exercise our judgment in the process of applying our accounting policies. It also requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies at the date of the financial statements and the reported amounts of net revenue and expense during the reporting periods.
Estimates are used when accounting for certain items such as allowances for doubtful accounts and sales returns, depreciation and amortization, inventory obsolescence, asset impairments (including goodwill and other intangible assets), contingencies, the value of share-based compensation, the determination of accrued expenses, certain asset valuations including deferred tax asset valuations, the useful lives of plant and equipment, post-retirement obligations, and business combinations. The accounting estimates used in the preparation of the consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained, and as the operating environment changes. Actual results could differ from those estimates.
Revenue Recognition
On January 1, 2018, we adopted FASB ASC Topic 606, Revenue from Contracts with Customers. This standard replaced previous revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. Upon adoption, we applied the pertinent transition provisions to contracts that were not completed as of January 1, 2018 using the modified retrospective method. Accordingly, periods presented prior to January 1, 2018 are presented under the previous revenue recognition guidance (i.e., FASB ASC Topic 605, Revenue Recognition).
We recognize revenue to depict the transfer of promised goods to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods. In order to achieve this, we use the five step model outlined in FASB ASC Topic 606. Specifically, we (1) identify the contract with the customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) we satisfy a performance obligation.
The vast majority of our contracts (as defined in FASB ASC Topic 606) are customer purchase orders ("P.O.s"), which explicitly require that we transfer a specified quantity of products to our customers, for which performance is generally satisfied in a short amount of time. We do not consider there to be a significant financing component of our contracts, as our terms generally provide for payment in a short time (that is, less than a year) after shipment to the customer.
Our performance obligations are satisfied when control of the product is transferred to the customer (at a point in time), which is generally when the product is shipped from our warehouse or, in limited instances, when it is received by the customer, depending on the specific terms of the arrangement. Many of our products are designed and engineered to meet customer specifications. These activities, and the testing of our products to determine compliance with those specifications, occur prior to any revenue being recognized. Products are then manufactured and sold to customers. However, in certain cases, pre-production activities are a performance obligation in a customer P.O., and revenue is recognized when the performance obligation is satisfied. Customer arrangements do not involve post-installation or post-sale testing and acceptance.
In determining the transaction price related to a contract, we determine whether the amount promised in a contract includes a variable amount (variable consideration). Variable consideration may be specified in the customer P.O., in another agreement that identifies terms and conditions of the transaction, or based on our customary practices. We have identified certain types of variable consideration that are included in the transaction price related to our contracts, including sales returns (which generally include a right of return for defective or non-conforming product) and trade discounts (including retrospective volume discounts and early payment incentives). Such variable consideration has not historically been material in relation to our net revenue and have been within our estimates.
The transaction price excludes value-added tax and similar taxes. Amounts billed to our customers for shipping and handling are recognized as revenue, and the related costs that we incur are presented in cost of revenue.
We do not provide separately priced warranties to our customers. Our standard terms of sale provide our customers with a warranty against faulty workmanship and the use of defective materials, which is not considered a distinct performance obligation in accordance with FASB ASC Topic 606.
Refer to Note 3, "Revenue Recognition," for additional information on our net revenue recognized in the consolidated statements of operations.
Share-Based Compensation
FASB ASC Topic 718, Compensation—Stock Compensation, requires that a company measure at fair value any new or modified share-based compensation arrangements with employees, such as stock options and restricted securities, and recognize as compensation expense that fair value over the requisite service period. Share-based compensation cost is generally recognized as a component of selling, general and administrative ("SG&A") expense, which is consistent with where the related employee costs are presented, however, such cost, or a portion thereof, may be capitalized provided certain criteria are met.
Share-based awards may be subject to either cliff vesting (i.e., the entire award vests on a particular date) or graded vesting (i.e., portions of the award vest at different points in time). In accordance with FASB ASC Topic 718, compensation cost associated with share-based awards subject to cliff vesting must be recognized on a straight-line basis. However, for awards subject to graded vesting, companies have the option to recognize compensation cost on either a straight–line or accelerated basis. We have elected to recognize compensation costs for these awards using the straight-line method.
We estimate the fair value of options on the grant date using the Black-Scholes-Merton option-pricing model. Key inputs and assumptions used in this model are as follows:
The fair value of the underlying ordinary shares. This is determined as the closing price of our ordinary shares on the New York Stock Exchange (the "NYSE") on the grant date.
The expected term. This is determined based upon our own historical average term of exercised and outstanding options.
Expected volatility. We consider our own historical volatility, as well as the historical and implied volatilities of publicly-traded companies within our industry, in estimating expected volatility for options. Implied volatility provides a forward-looking indication and may offer insight into expected industry volatility.
Risk-free interest rate. The risk-free interest rate is based on the yield for a U.S. Treasury security having a maturity similar to the expected term of the related option grant.
Expected dividend yield. The dividend yield of 0% is based on our history of having never declared or paid any dividends on our ordinary shares, and our current intention of not declaring any such dividends in the foreseeable future. See Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities," included elsewhere in this Report for further discussion of limitations on our ability to pay dividends.
Restricted securities are valued using the closing price of our ordinary shares on the NYSE on the grant date. Certain of our restricted securities include performance conditions that require us to estimate the probable outcome of the performance condition. Compensation cost is recorded if it is probable that the performance condition will be achieved.
Under the fair value recognition provisions of FASB ASC Topic 718, we recognize share-based compensation net of estimated forfeitures. Accordingly, we only recognize compensation cost for those awards expected to vest over the requisite service period. Compensation expense recognized for each award ultimately reflects the number of units that actually vest.
Refer to Note 4, "Share-Based Payment Plans," for additional information on share-based compensation.
Financial Instruments
Our financial instruments include derivative instruments, debt instruments, equity investments, and trade accounts receivable.
Derivative financial instruments: We account for our derivative financial instruments in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures and FASB ASC Topic 815, Derivatives and Hedging. In accordance with FASB ASC Topic 815, we recognize all derivatives on the balance sheet at fair value. The fair value of our derivative financial instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each instrument. These analyses utilize observable market-based inputs, including foreign currency exchange rates and commodity forward curves, and reflect the contractual terms of these instruments, including the period to maturity.
Derivative instruments that are designated and qualify as hedges of the exposure to changes in the fair value of an asset, liability, or commitment, and that are attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivative instruments that are designated and qualify as hedges of the exposure to variability in expected future cash flows are considered cash flow hedges. Derivative instruments may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Currently, our derivative instruments that are designated as accounting hedges are all cash flow hedges. We also hold derivative instruments that are not designated as accounting hedges.
The accounting for changes in the fair value of our cash flow hedges depends on whether we have elected to designate the derivative as a hedging instrument for accounting purposes and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. In accordance with FASB ASC Topic 815, the effective portion of changes in the fair value of cash flow hedges is recognized in accumulated other comprehensive loss and is subsequently reclassified into earnings
in the period in which the hedged forecasted transaction affects earnings. The ineffective portion of changes in the fair value of cash flow hedges is immediately recognized in earnings. Changes in the fair value of derivative instruments that are not designated as accounting hedges are recognized immediately in other, net.
We present the cash flows arising from our derivative financial instruments in a manner consistent with the presentation of cash flows that relate to the underlying hedged items.
We incorporate credit valuation adjustments to appropriately reflect both our own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of non-performance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. We do not offset the fair value amounts recognized for derivative instruments against fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral.
We maintain derivative instruments with major financial institutions of investment grade credit rating and monitor the amount of credit exposure to any one issuer. We believe there are no significant concentrations of risk associated with our derivative instruments.
Refer to Note 19, "Derivative Instruments and Hedging Activities," for further informationdiscussion of our derivative instruments.
Debt Instruments: A premium or discount on a debt instrument is recognized on the balance sheet as an adjustment to the carrying amount of the debt liability. In general, amounts paid to creditors are considered a reduction in the proceeds received from the issuance of the debt and are accounted for as a component of the premium or discount on the issuance, not as an issuance cost.
Direct and incremental costs associated with the issuance of debt instruments such as legal fees, printing costs, and underwriters' fees, among others, paid to parties other than creditors, are also reported and presented as a reduction of debt on the consolidated balance sheets.
Debt issuance costs and premiums or discounts are amortized over the term of the respective financing arrangement using the effective interest method. Amortization of these amounts is included as a component of interest expense, net in the consolidated statements of operations.
In accounting for debt refinancing transactions, we apply the provisions of FASB ASC Subtopic 470-50, Modifications and Extinguishments. Our evaluation of the accounting under FASB ASC Subtopic 470-50 is done on a creditor by creditor basis in order to determine if the terms of the debt are substantially different and, as a result, whether to apply modification or extinguishment accounting. In the event that an individual holder of existing debt did not invest in new debt, we apply extinguishment accounting. Borrowings associated with individual holders of new debt that are not holders of existing debt are accounted for as new issuances.
Refer to Note 14, "Debt," for further details of our pensiondebt instruments and transactions.
Equity Investments: On January 1, 2018, we adopted FASB Accounting Standards Update ("ASU") No. 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. In accordance with this guidance, we measure equity investments (other than those accounted for under the equity method, those that result in consolidation of the investee, and certain other post-retirement benefit plans.investments) either at fair value, with changes to fair value recognized in net income, or in certain instances, by use of a measurement alternative. Under the measurement alternative, such investments are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer.
Refer to Note 18, "Fair Value Measures," for further discussion of our measurement of financial instruments.
Trade accounts receivable: Trade accounts receivable are recognized at invoiced amounts and do not bear interest. Trade accounts receivable are reduced by an allowance for losses on receivables, as described elsewhere in this Note 2. Concentrations of risk with respect to trade accounts receivable are generally limited due to the large number of customers in various industries and their dispersion across several geographic areas. Although we do not foresee that credit risk associated with these receivables will deviate from historical experience, repayment is dependent upon the financial stability of these individual customers. Our largest customer accounted for approximately 8% of our net revenue for the year ended December 31, 2018.
Allowance for Losses on Receivables
The allowance for losses on receivables is used to provide for potential impairmentpresent accounts receivable, net at an amount that represents our estimate of receivables.the related transaction price recognized as revenue in accordance with FASB ASC Topic 606. The allowance represents an estimate of probable but unconfirmed losses in the receivable portfolio. We estimate the allowance on the basis of specifically identified receivables that are evaluated individually for impairment and a statistical analysis of the remaining receivables determined by reference to past default experience. Customers are generally not required to provide collateral for purchases. The allowance for losses on receivables also includes an allowance for sales returns.returns (variable consideration).
Management judgments are used to determine when to charge off uncollectible trade accounts receivable. We base these judgments on the age of the receivable, credit quality of the customer, current economic conditions, and other factors that may affect a customer’s ability and intent to pay.
Losses on receivables have not historically been significant.
Goodwill and Other Intangible Assets
Businesses acquired are recorded at their fair value on the date of acquisition, with the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed recognized as goodwill. Intangible assets acquired may include either definite-lived or indefinite-lived intangible assets, or both.
In accordance with the requirements of FASB ASC Topic 350, Intangibles—Goodwill and Other, goodwill and intangible assets determined to have an indefinite useful life are not amortized. Instead these assets are evaluated for impairment on an annual basis, and whenever events or business conditions change that could indicate that the asset is impaired. We evaluate goodwill and indefinite-lived intangible assets for impairment in the fourth quarter of each fiscal year, unless events occur which trigger the need for an earlier impairment review.
Goodwill: We have identified six reporting units: Performance Sensing, Electrical Protection, Industrial Sensing, Aerospace, Power Management, and Interconnection. These reporting units have been identified based on the definitions and guidance provided in FASB ASC Topic 350. We periodically review these reporting units to ensure that they continue to reflect the manner in which the business is operated.
Certain assets and liabilities relate to the operations of multiple reporting units. We allocate these assets and liabilities to the related reporting units based on methods that we believe are reasonable and supportable, and we apply that allocation method on a consistent basis from year to year. Other assets and liabilities, such as cash and cash equivalents, property, plant and equipment associated with our corporate offices, and debt, we view as being corporate in nature. Accordingly, we do not assign these assets and liabilities to our reporting units.
In the event we reorganize our business, we reassign the assets and liabilities among the affected reporting units using a reasonable and supportable methodology. As businesses are acquired, we assign assets acquired and liabilities assumed to a new or existing reporting unit as of the date of the acquisition. Goodwill generated by the acquisition of GIGAVAC, LLC ("GIGAVAC") in October 2018 has been allocated between our Performance Sensing and Industrial Sensing reporting units as of December 31, 2018, subject to changes prior to the end of the measurement period. Refer to Note 11, "Goodwill and Other Intangible Assets, Net," and Note 17, "Acquisitions and Divestitures," for additional information regarding the acquisition of GIGAVAC.
In the event a disposal group meets the definition of a business, goodwill is allocated to the disposal group based on the relative fair value of the disposal group to the retained portion of the related reporting unit.
We have the option to first assess qualitative factors to determine whether a quantitative analysis must be performed. The objective of a qualitative analysis is to determine whether it is more likely than not that the fair value of a reporting unit is less than its net book value.
If we elect not to use this option, or if we determine that it is more likely than not that the fair value of a reporting unit is less than its net book value, then we perform the first step of the quantitative analysis prescribed by FASB ASC Topic 350. In this step we compare the estimated fair values of our reporting units to their respective net book values, including goodwill, to determine whether there is an indicator of potential impairment. If the net book value of a reporting unit exceeds its estimated fair value, we conduct a second step in which we calculate the implied fair value of goodwill. If the carrying value of the reporting unit’s goodwill exceeds its calculated implied fair value, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of its identifiable assets and liabilities as if
the reporting unit had been acquired in a business combination at the date of assessment, and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the sum of the fair values of each of its identifiable assets and liabilities is the implied fair value of goodwill. The fair value measurements of our reporting units are categorized in level 3 of the fair value hierarchy.
Indefinite-lived intangible assets: Similar to goodwill, we perform an annual impairment review of our indefinite-lived intangible assets in the fourth quarter of each fiscal year, unless events occur that trigger the need for an earlier impairment review. We have the option to first assess qualitative factors in determining whether it is more likely than not that an indefinite-lived intangible asset is impaired. If we elect not to use this option, or we determine that it is more likely than not that the asset is impaired, we perform a quantitative impairment review that requires us to estimate the fair value of the indefinite-lived intangible asset and compare that amount to its carrying value. We estimate the fair value by using the relief-from-royalty method, which requires us to make assumptions about future conditions impacting the value of the indefinite-lived intangible assets, including projected growth rates, cost of capital, effective tax rates, and royalty rates. Impairment, if any, is based on the excess of the carrying value over the fair value of these assets.
Definite-lived intangible assets: Definite-lived, acquisition-related intangible assets are amortized on an economic-benefit basis according to the useful lives of the assets, or on a straight-line basis if a pattern of economic benefits cannot be reliably determined. Capitalized software and capitalized software licenses are presented on the consolidated balance sheets as intangible assets. Capitalized software licenses are amortized on a straight-line basis over the lesser of the term of the license or the estimated useful life of the software. Capitalized software is amortized on a straight-line basis over its estimated useful life.
Reviews are regularly performed to determine whether facts or circumstances exist that indicate that the carrying values of our definite-lived intangible assets are impaired. If we determine that such facts or circumstances exist, we estimate the recoverability of these assets by comparing the projected undiscounted net cash flows associated with these assets to their respective carrying values. If the sum of the projected undiscounted net cash flows is less than the carrying value of an asset, the impairment charge is measured as the excess of the carrying value over the fair value of that asset. We determine fair value by using the appropriate income approach valuation methodology, depending on the nature of the intangible asset.
Refer to Note 11, "Goodwill and Other Intangible Assets, Net," for further details of our goodwill and other intangible assets.
Income Taxes
We estimate our provision for income taxes in each of the jurisdictions in which we operate. The provision for income taxes includes both our current and deferred tax exposure. Our deferred tax exposure is measured using the asset and liability method, under which deferred income taxes are recorded to reflect the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts at each balance sheet date, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to reverse or settle. The effect on deferred tax assets and liabilities of a change in statutory tax rates is recognized in the consolidated statements of operations as an adjustment to income tax expense in the period that includes the enactment date.
In measuring our deferred tax assets, we consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed for all or some portion of the deferred tax assets. If it is determined that it is more likely than not that future tax benefits associated with a deferred tax asset will not be realized, a valuation allowance is provided. As a result, we maintain valuation allowances against the deferred tax assets in jurisdictions that have incurred losses in recent periods and in which it is more likely than not that such deferred tax assets will not be utilized in the foreseeable future.
The U.S. Tax Reform Act includes two new U.S. tax base erosion provisions, the global intangible low-taxed income ("GILTI") provisions and the base-erosion and anti-abuse tax ("BEAT") provisions. The GILTI provisions require our U.S. operations to include in our U.S. income tax return, earnings of subsidiaries held by our U.S. group to the extent that these subsidiaries have earnings in excess of an allowable return on their tangible assets. We have elected to account for GILTI in the period in which it is incurred, and therefore have not adjusted our deferred tax assets for any future impacts this provision may have. The Act subjects a U.S. taxpayer to pay a BEAT if it is greater than the taxpayer's regular tax liability. The BEAT provision eliminates the deduction of certain payments made to foreign affiliates (referred to as base erosion payments) but applies a lower tax rate on the resulting BEAT income. The FASB Staff Q&A, Topic 740, No. 4, Accounting for the Base Erosion Anti-Abuse Tax, states that the incremental effect of BEAT should be recognized in the year the BEAT is incurred as a period expense only, and an entity would not need to evaluate the effect of potentially paying the BEAT in future years on the realization of deferred tax assets recognized under the regular tax system, because the realization of the deferred tax asset
would reduce its regular tax liability, even when an incremental BEAT liability would be owed in that period. We have followed this guidance in our current tax calculation and evaluation of the realizability of our deferred tax assets.
In accordance with FASB ASC Topic 740, Income Taxes, penalties and interest related to unrecognized tax benefits may be classified as either income taxes or another expense line item in the consolidated statements of operations. We classify interest and penalties related to unrecognized tax benefits within the (benefit from)/provision for income taxes line of the consolidated statements of operations.
Refer to Note 7, "Income Taxes," for further details on our income taxes.
Pension and Other Post-Retirement Benefits
We sponsor various pension and other post-retirement benefit plans covering our current and former employees in several countries.
The funded status of pension and other post-retirement benefit plans, recognized on our consolidated balance sheets as an asset, current liability, or long-term liability, is measured as the difference between the fair value of plan assets and the benefit obligation at the measurement date. In general, the measurement date coincides with our fiscal year end, however, certain significant events, such as (1) plan amendments, (2) business combinations, (3) settlements or curtailments, or (4) plan mergers, may trigger the need for an interim measurement of both the plan assets and benefit obligations.
Benefit obligations represent the actuarial present value of all benefits attributed by the pension formula as of the measurement date to employee service rendered before that date. The value of benefit obligations takes into consideration various financial assumptions, including assumed discount rate and the rate of increase in healthcare costs, and demographic assumptions, including compensation rate increases, retirement patterns, employee turnover rates, and mortality rates. We review these assumptions annually.
Our review of demographic assumptions includes analyzing historical patterns and/or referencing industry standard tables, combined with our expectations around future compensation and staffing strategies. The difference between these assumptions and our actual experience results in the recognition of an actuarial gain or loss. Actuarial gains and losses are recorded directly to other comprehensive income or loss. If the total net actuarial gain or loss included in accumulated other comprehensive loss exceeds a threshold of 10% of the greater of the projected benefit obligation or the market related value of plan assets, it is subject to amortization and recorded as a component of net periodic pension cost over the average remaining service lives of the employees participating in the pension or post-retirement benefit plan.
The discount rate reflects the current rate at which the pension and other post-retirement liabilities could be effectively settled, considering the timing of expected payments for plan participants. It is used to discount the estimated future obligations of the plans to the present value of the liability reflected in the financial statements. In estimating this rate in countries that have a market of high-quality, fixed-income investments, we consider rates of return on these investments included in various bond indices, adjusted to eliminate the effects of call provisions and differences in the timing and amounts of cash outflows related to the bonds. In other countries where a market of high-quality, fixed-income investments does not exist, we estimate the discount rate using government bond yields or long-term inflation rates.
The expected return on plan assets reflects the average rate of earnings expected on the funds invested to provide for the benefits included in the projected benefit obligation. To determine the expected return on plan assets, we use the fair value of plan assets and consider the historical returns earned by similarly invested assets, the rates of return expected on plan assets in the future, and our investment strategy and asset mix with respect to the plans’ funds.
Changes to benefit obligations may also be initiated by a settlement or curtailment. A settlement of a defined benefit obligation is an irrevocable transaction that relieves us (or the plan) of primary responsibility for the defined benefit obligation and eliminates significant risks related to the obligation and the assets used to effect the settlement. The settlement of all or more than a minor portion of the pension obligation constitutes an event that requires recognition of all or part of the net actuarial gains (or) losses deferred in accumulated other comprehensive loss. Our policy is to apply settlement accounting to the extent our year-to date settlements for a given plan exceed the sum of our forecasted full year service cost and interest cost for that particular plan.
A curtailment is an event that significantly reduces the expected years of service of active employees or eliminates for a significant number of employees the accrual of defined benefits for some or all of their future service. The curtailment accounting provisions are applied on a plan-by-plan basis. The total gain or loss resulting from a curtailment is the sum of two distinct elements: (1) prior service cost write-off (see discussion in "amortization of net prior service cost/credit" above) and (2) curtailment gain or loss. Our policy is that a curtailment event represents one for which we expect a 10% (or greater) reduction
in future years of service or an elimination of the accrual of defined benefits for some or all of the future services of 10% (or greater) of the plan's participants.
Contributions made to pension and other post-retirement benefit plans are presented as cash used in operations within our consolidated statements of cash flows.
On January 1, 2018, we adopted FASB ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. FASB ASU No. 2017-07 requires that entities must present the service cost components of net periodic benefit cost in the same financial statement line item(s) as other compensation costs arising from services rendered by the related employees during the period, whereas the non-service components of net periodic benefit cost must be presented separately from the financial statement line item(s) that include service cost and outside of operating income. In accordance with this guidance, we present the service cost component of net periodic benefit cost in the cost of revenue, research and development ("R&D"), and SG&A expense line items, and we present the non–service components of net periodic benefit cost in other, net. Prior periods have been recast to reflect this implementation.
Refer to Note 13, "Pension and Other Post-Retirement Benefits," for further information on our pension and other post-retirement benefit plans.
Inventories
Inventories are stated at the lower of cost or estimated net realizable value. Cost forThe cost of raw materials, work-in-process, and finished goods is determined based on a first-in, first-out ("FIFO") basis and includes material, labor, and applicable manufacturing overhead, as well as transportation and handling costs.overhead. We conduct quarterly inventory reviews for salability and obsolescence, and inventory considered unlikely to be sold is adjusted to net realizable value.
Refer to Note 4,9, "Inventories," for details of our inventory balances.
Property, Plant and Equipment ("PP&E") and Other Capitalized Costs
PP&E is stated at cost, and in the case of plant and equipment, is depreciated on a straight-line basis over its estimated economic useful life. In general,The depreciable lives of plant and equipment are as follows:
|
| |
| Buildings and improvements | 2 – 40 years |
| Machinery and equipment | 2 – 1015 years |
Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term or the estimated economic useful lives of the improvements. Amortization of leasehold improvements is included in depreciation expense.
Assets held under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the leased asset at the inception of the lease. AmortizationDepreciation expense associated with capital leases is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the period of the related lease, unless ownership is transferred by the end of the lease or there is a bargain purchase option, in which case the asset is amortized,depreciated, normally on a straight-line basis, over the useful life that would be assigned if the asset were owned. Amortization expense associated with capital leases is included within depreciation expense.
Expenditures for maintenance and repairs are charged to expense as incurred, whereas major improvements that increase asset values and extend useful lives are capitalized.
PP&E is identified as held for sale when it meets the held for sale criteria of ASC Topic 360, Property, Plant, and Equipment. We cease recording depreciation on assets that are classified as held for sale. When an asset meets the held for sale criteria, its carrying value is reclassified out of PP&E and into Prepaid expenses and other current assets, where it remains until either it is sold or it no longer meets the held for sale criteria. In the year that an asset meets the held for sale criteria, its carrying value as of the end of the prior year is reclassified from PP&E to Other assets.
Refer to Note 3,10, "Property, Plant and Equipment," for details of our PP&E balances.
Foreign Currency
We derive a significant portion of our net revenue from markets outside of the U.S. For financial reporting purposes, the functional currency of all of our subsidiaries is the U.S. dollar because of the significant influence of the U.S. dollar on our operations. In certain instances, we enter into transactions that are denominated in a currency other than the U.S. dollar. At the date thethat such transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction is measured and recorded in U.S. dollars using the exchange rate in effect at that date. At each balance sheet date, recorded monetary balances denominated in a currency other than the U.S. dollar are adjusted to the U.S. dollardollars using the current exchange rate at the balance sheet date, with gains or losses recordedrecognized in Other,other, net in the consolidated statements of operations.
Other, net
Cash and Cash Equivalents
Cash comprises cash on hand. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, are subject to an insignificant risk of change in value, and have original maturities of three months or less.
Recently issued accounting standards adopted in the current period:
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which modifies how all entities recognize revenue, and consolidates into one FASB ASC Topic (that is FASB ASC Topic 606) the guidance found in FASB ASC Topic 605 and various other revenue accounting standards for specialized transactions and industries. Refer to the Revenue Recognition section of the significant accounting policies discussed elsewhere in this Note 2 for further discussion of this guidance. We adopted FASB ASC Topic 606 on January 1, 2018 using the modified retrospective transition method. Refer to Note 3, "Revenue Recognition," for additional details on this implementation.
In January 2016, the FASB issued ASU No. 2016-01, which addresses certain aspects of the recognition, measurement, presentation, and disclosure of financial instruments. Refer to the Financial Instruments section of the significant accounting policies discussed elsewhere in this Note 2 for further discussion of this guidance. We adopted FASB ASU No. 2016-01 on January 1, 2018, which resulted in no impact on our consolidated financial position or results of operations. Refer to Note 18, "Fair Value Measures," for further discussion of the application of the measurement alternative to our $50.0 million equity investment in Series B Preferred Stock of Quanergy, Inc ("Quanergy").
In March 2017, the FASB issued ASU No. 2017-07, which requires a change in the presentation of net periodic benefit cost on the consolidated statements of operations. Refer to the Pension and Other Post-Retirement Benefit Plans section of the significant accounting policies discussed elsewhere in this Note 2 for further discussion of this guidance. We adopted this guidance on January 1, 2018 and, as a result, we present the service cost component of net periodic benefit cost in the cost of revenue, R&D, and SG&A expense line items, and we present the non-service components of net periodic benefit cost in other, net. Refer to Note 6, "Other, Net," for the years ended December 31, 2015, 2014,total other components of net periodic benefit cost. All prior period amounts have been recast in our consolidated statements of operations to reflect the revised presentation, with the adjustments presented in Note 13, "Pension and Other Post-Retirement Benefits."2013 consisted
Other recently issued accounting standards adopted in the current period did not have a material impact on our consolidated financial position or results of the following:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Currency remeasurement (loss)/gain on net monetary assets | $ | (9,613 | ) | | $ | (6,912 | ) | | $ | 859 |
|
| Loss on debt financing | (25,538 | ) | | (1,875 | ) | | (9,010 | ) |
| Loss on commodity forward contracts | (18,468 | ) | | (9,017 | ) | | (23,218 | ) |
| Gain/(loss) on foreign currency forward contracts | 3,606 |
| | 5,469 |
| | (3,290 | ) |
| Loss on interest rate cap | — |
| | — |
| | (1,097 | ) |
| Other | (316 | ) | | 276 |
| | 127 |
|
| Total Other, net | $ | (50,329 | ) | | $ | (12,059 | ) | | $ | (35,629 | ) |
Recently issued accounting standards to be adopted in a future period:
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which modifies how all entities recognize revenue, and consolidates into one ASC Topic (ASC Topic 606, Revenue from Contracts with Customers), the current guidance found in ASC 605, and various other revenue accounting standards for specialized transactions and industries. The core principle of the guidance is that “an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services.” In achieving this objective, an entity must perform five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations of the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 also clarifies how an entity should account for costs of obtaining or fulfilling a contract in a new ASC Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers.
In August 2015,February 2016, the FASB issued ASU 2015-14,No. 2016-02, Revenue from Contracts with CustomersLeases (Topic 606): Deferral of Effective Date842), which defersestablishes new accounting and disclosure requirements for leases. FASB ASU No. 2016-02 requires lessees to classify most leases as either finance or operating leases and to initially recognize a lease liability and right-of-use asset. Entities may elect to account for certain short-term leases (with a term of one year or less) using a method similar to the effective datecurrent operating lease model. The statements of operations will include, for finance leases, separate recognition of interest on the lease liability and amortization of the right-of-use asset and for operating leases, a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a straight-line basis. FASB ASU 2014-09 by one year. ASU 2014-09No. 2016-02 is now effective for annual reporting periods beginning after December 15, 2017,2018, including interim periods withintherein, with early adoption permitted.
We have developed an implementation plan to adopt this new guidance, which included an assessment of the impact of the new guidance on our financial position and results of operation. Through our implementation efforts, we have decided that reporting period. Earlier application is permitted onlywe will elect to apply the package of practical expedients, and we will not elect to apply the hindsight practical expedient. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which creates an optional transition expedient that allows an entity to apply the transition provisions of the new standard, including its disclosure requirements, at its adoption date instead of at the beginning of the earliest comparative period presented as originally required by FASB ASU No. 2016-02. We adopted FASB ASU No. 2016-02 on January 1, 2019 using this transition expedient.
We have determined that adoption of this standard will result in the recognition of a lease liability and right-of-use asset for certain operating leases that are currently not recognized on our consolidated balance sheets, which we expect to be recorded using an incremental borrowing rate, however the amount recorded will not be material in relation to our consolidated balance sheets. At December 31, 2018, we are contractually obligated to make future payments of $79.4 million under our operating lease obligations in existence as of that date, primarily related to long-term facility leases.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), which changes both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results, in order to
better align an entity’s risk management activities and financial reporting for hedging relationships. The amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. FASB ASU No. 2017-12 is effective for annual reporting periods beginning after December 15, 2016,2018, including interim periods within those annual reporting periods, within that reporting period.
ASU 2014-09 may be applied using either a full retrospective approach, under which all years included in the financial statements will be presented under the revised guidance, or a modified retrospective approach, under which financial statements will be prepared under the revised guidance for the year ofwith early adoption but not for prior years. Under the latter method, entities will recognize a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for contracts that still require performance by the entity, and disclose all line items in the year of adoption as if they were prepared under the old revenue guidance.permitted. We will adopt FASB ASU 2014-09No. 2017-12 on January 1, 2019, which will not have a material impact on our consolidated financial position or results of operations.
Other recently issued accounting standards to be adopted in future periods are not expected to have a material impact on our consolidated financial position or results of operations.
3. Revenue Recognition
We adopted FASB ASC Topic 606 on January 1, 2018, and we applied the pertinent transition provisions to contracts that were not completed as of January 1, 2018 using the modified retrospective method. Accordingly, periods presented prior to January 1, 2018 are currently evaluatingpresented under the impactprevious revenue recognition guidance, including FASB ASC Topic 605. Refer to Note 2, "Significant Accounting Policies," for detailed discussion of the accounting policies related to revenue recognition.
Because (1) the vast majority of our revenue is derived from the sale of tangible products for which we recognize revenue at a point in time and (2) the contracts that thisrelate to these product shipments are purchase orders that have firm purchase commitments (generally over a short period of time), the adoption willof FASB ASC Topic 606 did not have a material effect on our consolidated financial statements. At this time, we have not determined the transition method that will be used.
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30) (“ASU 2015-03”), which simplifies the presentation of debt issuance costs. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015 (and interim periods within those fiscal years) with early adoption permitted and retrospective application required. As of December 31, 2015 and December 31, 2014, we had recorded deferred financing costs of $38.3 million and $29.1 million, respectively, which would have been classified as a reduction of long-term debt in our condensed consolidated balance sheets had we adopted this standard in the fourth quarter of 2015. There will not be a material impact on ouror results of operations, upon adoptionand no cumulative catch-up adjustment was required.
We are electing to apply certain practical expedients that allow for more limited disclosures than those that would otherwise be required by FASB ASC Topic 606, including (1) the disclosure of ASU 2015-03.transaction price allocated to the remaining unsatisfied performance obligations at the end of the period and (2) an explanation of when we expect to recognize the related revenue.
Recently issued accounting standards adoptedWe believe that our end markets are the categories that best depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The following table presents net revenue disaggregated by segment and end market for the years ended December 31, 2018, 2017, and 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Performance Sensing | | Sensing Solutions | | Total |
| | For the year ended December 31, | | For the year ended December 31, | | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| Net revenue: | | | | | | | | | | | | | | | | | |
| Automotive | $ | 2,076,834 |
| | $ | 1,989,152 |
| | $ | 1,973,264 |
| | $ | 49,961 |
| | $ | 50,463 |
| | $ | 47,972 |
| | $ | 2,126,795 |
| | $ | 2,039,615 |
| | $ | 2,021,236 |
|
| HVOR | 550,817 |
| | 471,448 |
| | 412,116 |
| | — |
| | — |
| | — |
| | 550,817 |
| | 471,448 |
| | 412,116 |
|
| Industrial | — |
| | — |
| | — |
| | 336,617 |
| | 312,137 |
| | 289,045 |
| | 336,617 |
| | 312,137 |
| | 289,045 |
|
| Appliance and HVAC | — |
| | — |
| | — |
| | 208,482 |
| | 209,958 |
| | 187,815 |
| | 208,482 |
| | 209,958 |
| | 187,815 |
|
| Aerospace | — |
| | — |
| | — |
| | 164,294 |
| | 150,782 |
| | 151,802 |
| | 164,294 |
| | 150,782 |
| | 151,802 |
|
| Other | — |
| | — |
| | — |
| | 134,622 |
| | 122,793 |
| | 140,274 |
| | 134,622 |
| | 122,793 |
| | 140,274 |
|
| Net revenue | $ | 2,627,651 |
| | $ | 2,460,600 |
| | $ | 2,385,380 |
| | $ | 893,976 |
| | $ | 846,133 |
| | $ | 816,908 |
| | $ | 3,521,627 |
| | $ | 3,306,733 |
| | $ | 3,202,288 |
|
In addition, refer to Note 20, "Segment Reporting," for a presentation of net revenue disaggregated by product category and geographic region.
Performance Obligations
Our net revenue and related cost of revenue are primarily the result of promises to transfer products to our customers. Revenue is recognized when control of the product is transferred to the customer, which is generally when the product is shipped from our warehouse or, in limited instances, when it is received by the customer, depending on the specific terms of the arrangement. Payment for products is generally due a short time (that is, less than a year) after shipment to the customer.
Sales to customers generally include a right of return for defective or non-conforming product. Sales returns have not historically been significant in relation to our net revenue and have been within our estimates. Product sales are recorded net of variable consideration, such as sales returns and trade discounts (including volume and early payment incentives), as well as value-added tax and similar taxes. Amounts billed to our customers for shipping and handling are recorded in net revenue. Shipping and handling costs are included in cost of revenue.
Warranties
Our standard terms of sale provide our customers with a warranty against faulty workmanship and the use of defective materials, which, depending on the product, generally exists for a period of twelve to eighteen months after the date we ship the product to our customer or for a period of twelve months after the date the customer resells our product, whichever comes first. Our liability associated with this warranty is, at our option, to repair the product, replace the product, or provide the customer with a credit. We do not offer separately priced extended warranty or product maintenance contracts.
We also sell products to customers under negotiated agreements or where we have accepted the customer’s terms of purchase. In these instances, we may provide additional warranties for longer durations, consistent with differing end market practices, and where our liability is not limited. In addition, many sales take place in situations where commercial or civil codes, or other laws, would imply various warranties and restrict limitations on liability.
Contract Assets and Liabilities
Our contract assets consist of accounts receivable. Contract liabilities, whereby we receive payment from customers related to our promise to satisfy performance obligations in the current period:future, are not material.
4. Share-Based Payment Plans
In November 2015,connection with the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet ClassificationMerger we adopted the Sensata Technologies Holding plc First Amended and Restated 2010 Equity Incentive Plan (the "2010 Equity Incentive Plan"). The purpose of Deferred Taxes (“ASU 2015-17”),the 2010 Equity Incentive Plan is to promote long-term growth and profitability by providing our present and future eligible directors, officers, and employees with incentives to contribute to, and participate in, our success. There are 10.0 million ordinary shares authorized for grants of awards under the 2010 Equity Incentive Plan, of which simplifies the presentation of deferred income taxes. ASU 2015-17 requires that deferred tax assets and liabilities be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for financial statements issued for fiscal years beginning after December 15, 2016 (and interim periods within those fiscal years) with early adoption permitted. ASU 2015-17 may be either applied prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. We have elected to early adopt ASU 2015-17 prospectively in the fourth quarter of 2015. As a result, we have presented all deferred tax assets and liabilities as noncurrent on our consolidated balance sheet3.3 million were available as of December 31, 2015, but have not reclassified current deferred tax assets2018.
Refer to Note 2, "Significant Accounting Policies," for detailed discussion of the accounting policies related to share-based compensation.
Share-Based Compensation Awards
We grant option, restricted stock unit ("RSU"), and liabilitiesperformance restricted stock unit ("PRSU") awards under the 2010 Equity Incentive Plan. For option and RSU awards vesting is typically subject only to continued employment and the passage of time. For PRSU awards vesting is also subject to continued employment and the passage of time, however the number of awarded units that ultimately vest also depends on our consolidated balance sheetthe attainment of certain predefined performance criteria. Throughout this Annual Report on Form 10–K RSU and PRSU awards are often referred to collectively as "restricted securities."
Options
A summary of stock option activity for the years ended December 31, 2014. There was no impact2018, 2017, and 2016 is presented in the table below (amounts have been calculated based on our results of operations as a resultunrounded shares):
|
| | | | | | | | | | | | |
| | Number of Options (thousands) | | Weighted-Average Exercise Price Per Option | | Weighted-Average Remaining Contractual Term (years) | | Aggregate Intrinsic Value |
| Balance as of December 31, 2015 | 3,361 |
| | $ | 32.89 |
| | 6.2 | | $ | 47,967 |
|
Granted (1) | 654 |
| | $ | 37.89 |
| | | | |
| Forfeited or expired | (111 | ) | | $ | 43.95 |
| | | | |
| Exercised | (358 | ) | | $ | 11.05 |
| | | | $ | 9,501 |
|
| Balance as of December 31, 2016 | 3,546 |
| | $ | 35.67 |
| | 6.3 | | $ | 19,844 |
|
| Granted | 387 |
| | $ | 43.67 |
| | | | |
| Forfeited or expired | (1 | ) | | $ | 32.03 |
| | | | |
| Exercised | (326 | ) | | $ | 22.86 |
| | | | $ | 7,175 |
|
| Balance as of December 31, 2017 | 3,606 |
| | $ | 37.69 |
| | 6.0 | | $ | 50,130 |
|
| Granted | 307 |
| | $ | 51.83 |
| | | | |
| Forfeited or expired | (39 | ) | | $ | 45.59 |
| | | | |
| Exercised | (172 | ) | | $ | 35.31 |
| | | | $ | 3,143 |
|
| Balance as of December 31, 2018 | 3,702 |
| | $ | 38.89 |
| | 5.3 | | $ | 27,846 |
|
| Options vested and exercisable as of December 31, 2018 | 2,625 |
| | $ | 36.75 |
| | 4.2 | | $ | 24,224 |
|
| Vested and expected to vest as of December 31, 2018 | 3,556 |
| | $ | 38.65 |
| | 5.2 | | $ | 27,407 |
|
| |
(1) | Includes 257 performance-based options. |
A summary of the adoptionstatus of ASU 2015-17.
3. Property, Plant and Equipment
PP&Eour unvested options as of December 31, 2015 and 2014 consisted of the following:
|
| | | | | | | | |
| | | December 31,
2015 | | December 31,
2014 |
| Land | | $ | 21,715 |
| | $ | 22,405 |
|
| Buildings and improvements | | 227,665 |
| | 190,646 |
|
| Machinery and equipment | | 919,287 |
| | 762,492 |
|
| | | 1,168,667 |
| | 975,543 |
|
| Accumulated depreciation | | (474,512 | ) | | (386,059 | ) |
| Total | | $ | 694,155 |
| | $ | 589,484 |
|
Depreciation expense for PP&E, including amortization of assets under capital leases, totaled $96.1 million, $65.8 million2018, and $50.9 million for the years ended December 31, 2015, 2014, and 2013, respectively.
PP&E as of December 31, 2015 and 2014 included the following assets under capital leases:
|
| | | | | | | |
| | December 31,
2015 | | December 31,
2014 |
| PP&E recognized under capital leases | $ | 44,259 |
| | $ | 39,397 |
|
| Accumulated amortization | (16,308 | ) | | (14,263 | ) |
| Net PP&E recognized under capital leases | $ | 27,951 |
| | $ | 25,134 |
|
4. Inventories
The components of inventories as of December 31, 2015 and 2014 were as follows:
|
| | | | | | | |
| | December 31,
2015 | | December 31,
2014 |
| Finished goods | $ | 154,827 |
| | $ | 127,407 |
|
| Work-in-process | 62,084 |
| | 69,218 |
|
| Raw materials | 141,790 |
| | 159,739 |
|
| Total | $ | 358,701 |
| | $ | 356,364 |
|
As of December 31, 2015 and 2014, inventories totaling $10.1 million and $11.1 million, respectively, had been consigned to customers.
5. Goodwill and Other Intangible Assets
The following table outlines the changes in goodwill, by segment:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Performance Sensing |
| Sensing Solutions |
| Total |
| | Gross
Goodwill |
| Accumulated
Impairment |
| Net
Goodwill |
| Gross
Goodwill |
| Accumulated
Impairment |
| Net
Goodwill |
| Gross
Goodwill |
| Accumulated
Impairment |
| Net
Goodwill |
| Balance at December 31, 2013 | $ | 1,338,645 |
|
| $ | — |
|
| $ | 1,338,645 |
|
| $ | 435,870 |
|
| $ | (18,466 | ) |
| $ | 417,404 |
|
| $ | 1,774,515 |
|
| $ | (18,466 | ) |
| $ | 1,756,049 |
|
| Wabash Acquisition | 18,807 |
|
| — |
|
| 18,807 |
|
| — |
|
| — |
|
| — |
|
| 18,807 |
|
| — |
|
| 18,807 |
|
| Magnum Acquisition | — |
|
| — |
|
| — |
|
| 12,768 |
|
| — |
|
| 12,768 |
|
| 12,768 |
|
| — |
|
| 12,768 |
|
| DeltaTech Acquisition | 99,254 |
|
| — |
|
| 99,254 |
|
| — |
|
| — |
|
| — |
|
| 99,254 |
|
| — |
|
| 99,254 |
|
| Schrader Acquisition | 538,019 |
|
| — |
|
| 538,019 |
|
| — |
|
| — |
|
| — |
|
| 538,019 |
|
| — |
|
| 538,019 |
|
| Other acquisitions - purchase accounting adjustment | (102 | ) |
| — |
|
| (102 | ) |
| — |
|
| — |
|
| — |
|
| (102 | ) |
| — |
|
| (102 | ) |
| Balance as of December 31, 2014 | 1,994,623 |
|
| — |
|
| 1,994,623 |
|
| 448,638 |
|
| (18,466 | ) |
| 430,172 |
|
| 2,443,261 |
|
| (18,466 | ) |
| 2,424,795 |
|
| CST Acquisition | 147,433 |
|
| — |
|
| 147,433 |
|
| 439,944 |
|
| — |
|
| 439,944 |
|
| 587,377 |
|
| — |
|
| 587,377 |
|
| DeltaTech - purchase accounting adjustment | 2,441 |
|
| — |
|
| 2,441 |
|
| — |
|
| — |
|
| — |
|
| 2,441 |
|
| — |
|
| 2,441 |
|
| Schrader - purchase accounting adjustment | 5,130 |
|
| — |
|
| 5,130 |
|
| — |
|
| — |
|
| — |
|
| 5,130 |
|
| — |
|
| 5,130 |
|
| Balance as of December 31, 2015 | $ | 2,149,627 |
|
| $ | — |
|
| $ | 2,149,627 |
|
| $ | 888,582 |
|
| $ | (18,466 | ) |
| $ | 870,116 |
|
| $ | 3,038,209 |
|
| $ | (18,466 | ) |
| $ | 3,019,743 |
|
Goodwill attributed to acquisitions reflects our allocation of purchase price toduring the estimated fair value of certain assets acquired and liabilities assumed. Preliminary goodwill attributed to the acquisition of CST (as defined in Note 6,
"Acquisitions") has been assigned to our segmentsyear then ended, is presented in the above table below (amounts have been calculated based on a methodology utilizing anticipated future earnings of the components of the business. This allocation is preliminary.
The purchase accounting adjustments above generally reflect revisions in fair value estimates of liabilities assumed and tangible and intangible assets acquired.
We have evaluated our goodwill for impairment as of October 1, 2015 using the qualitative method, and have determined that it was more likely than not that the fair values of our reporting units exceeded their carrying values on that date. We have evaluated our indefinite-lived intangible assets (other than goodwill) for impairment as of October 1, 2015 using the quantitative method, and have determined that the fair values of these indefinite-lived intangible assets exceeded their carrying values on that date. Should certain assumptions change that were used in the qualitative analysis of goodwill, or in the development of the fair value of our indefinite-lived intangible assets, we may be required to recognize goodwill or intangible asset impairments.
The following table outlines the components of definite-lived intangible assets, excluding goodwill, as of December 31, 2015 and 2014:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Weighted-
Average
Life (Years) | | December 31, 2015 | | December 31, 2014 |
Gross
Carrying
Amount | | Accumulated
Amortization | | Accumulated
Impairment | | Net
Carrying
Value | | Gross
Carrying
Amount | | Accumulated
Amortization | | Accumulated
Impairment | | Net
Carrying
Value |
| Completed technologies | 14 | | $ | 726,598 |
| | $ | (293,564 | ) | | $ | (2,430 | ) | | $ | 430,604 |
| | $ | 541,708 |
| | $ | (242,506 | ) | | $ | (2,430 | ) | | $ | 296,772 |
|
| Customer relationships | 11 | | 1,765,704 |
| | (1,070,460 | ) | | (12,144 | ) | | 683,100 |
| | 1,460,088 |
| | (943,375 | ) | | (12,144 | ) | | 504,569 |
|
| Non-compete agreements | 8 | | 23,400 |
| | (23,400 | ) | | — |
| | — |
| | 23,400 |
| | (23,400 | ) | | — |
| | — |
|
| Tradenames | 22 | | 50,754 |
| | (5,901 | ) | | — |
| | 44,853 |
| | 8,854 |
| | (4,259 | ) | | — |
| | 4,595 |
|
| Capitalized software | 7 | | 55,151 |
| | (19,606 | ) | | — |
| | 35,545 |
| | 49,127 |
| | (12,759 | ) | | — |
| | 36,368 |
|
| Total | 12 | | $ | 2,621,607 |
| | $ | (1,412,931 | ) | | $ | (14,574 | ) | | $ | 1,194,102 |
| | $ | 2,083,177 |
| | $ | (1,226,299 | ) | | $ | (14,574 | ) | | $ | 842,304 |
|
The following table outlines Amortization of intangible assets for the years ended December 31, 2015, 2014, and 2013unrounded shares):
|
| | | | | | | | | | | |
| | December 31, 2015 | | December 31, 2014 | | December 31, 2013 |
| Acquisition-related definite-lived intangible assets | $ | 179,785 |
| | $ | 143,604 |
| | $ | 132,984 |
|
| Capitalized software | 6,847 |
| | 3,100 |
| | 1,403 |
|
| Total Amortization of intangible assets | $ | 186,632 |
| | $ | 146,704 |
| | $ | 134,387 |
|
|
| | | | | | |
| | Number of Options (thousands) | | Weighted-Average Grant-Date Fair Value |
| Balance as of December 31, 2017 | 1,184 |
| | $ | 13.72 |
|
| Granted during the year | 307 |
| | $ | 15.70 |
|
| Vested during the year | (383 | ) | | $ | 14.49 |
|
| Forfeited or expired during the year | (31 | ) | | $ | 14.26 |
|
| Balance as of December 31, 2018 | 1,077 |
| | $ | 13.98 |
|
The table below presents estimated Amortizationfair value of intangible assets for the following future periods:
|
| | | |
| 2016 | $ | 200,454 |
|
| 2017 | $ | 159,086 |
|
| 2018 | $ | 135,494 |
|
| 2019 | $ | 126,389 |
|
| 2020 | $ | 110,049 |
|
In addition to the above, we own the Klixon® and Airpax® tradenames, which are indefinite-lived intangible assets, as they have each been in continuous use for over 65 years, and we have no plans to discontinue using them. We have recorded $59.1 million and $9.4 million, respectively, on the consolidated balance sheets related to these tradenames.
6. Acquisitions
The following discussion relates to our acquisitionsstock options that vested during the years ended December 31, 20152018, 2017, and 2014. Refer2016 was $5.5 million, $5.6 million, and $7.1 million, respectively.
Option awards granted to Note 5, "Goodwillemployees under the 2010 Equity Incentive Plan generally vest 25% per year over four years from the grant date.
We recognize compensation expense for options on a straight-line basis over the requisite service period, which is generally the same as the vesting period. The options expire ten years from the date of grant. Except as otherwise provided in specific option award agreements, if a participant ceases to be employed by us, options not yet vested expire and Other Intangible Assets," for further discussion of our consolidated Goodwillare forfeited at the termination date, and Other intangible assets, net balances.
CST
On December 1, 2015, we completed the acquisition of alloptions that are fully vested expire 60 days after termination of the outstanding sharesparticipant’s employment for any reason other than termination for cause (in which case the options expire on the participant’s termination date) or due to death or disability (in which case the options expire six months after the participant’s termination date).
The weighted-average grant-date fair value per option granted during the years ended December 31, 2018, 2017, and 2016 was $15.70, $14.50, and $12.08, respectively. The fair value of options was estimated on the date of grant using the Black-Scholes-Merton option-pricing model. The weighted-average key assumptions used in estimating the grant-date fair value of options for the years ended December 31, 2018, 2017, and 2016 are as follows:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Expected dividend yield | 0.00 | % | | 0.00 | % | | 0.00 | % |
| Expected volatility | 25.00 | % | | 30.00 | % | | 30.00 | % |
| Risk-free interest rate | 2.62 | % | | 2.08 | % | | 1.48 | % |
| Expected term (years) | 6.0 |
| | 6.0 |
| | 6.0 |
|
| Fair value per share of underlying ordinary shares | $ | 51.83 |
| | $ | 43.67 |
| | $ | 37.89 |
|
Restricted Securities
We grant RSU awards that cliff vest between one and three years from the grant date, and we grant PRSU awards that cliff vest three years after the grant date. For PRSU awards, the number of units that ultimately vest depends on the extent to which certain subsidiaries of Custom Sensors & Technologies Ltd.performance criteria are met, as described in the U.S., the U.K., and France, as well as certain assets in China (collectively, "CST"), for an aggregate purchase pricetable below.
A summary of $1,008.8 million, subject to customary post-closing adjustments. The acquisition included the Kavlico, BEI, Crydom, and Newall product lines and brands, and encompassed sales, engineering, and manufacturing sitesrestricted securities granted in the U.S., the U.K., Germany, France,years ended December 31, 2018, 2017, and Mexico. We acquired CST to further extend our sensing content beyond automotive markets and build scale in pressure sensing. Portions of CST are being integrated into each of our segments.2016 is presented below:
Kavlico is a provider of linear and rotary position sensors to aerospace original equipment manufacturers and Tier 1 suppliers and pressure sensors to the general industrial and HVOR markets. BEI provides harsh environment position sensors, optical and magnetic encoders, and motion control sensors to the industrial, aerospace, agricultural, and medical device markets. Crydom manufactures solid state relays for power control applications in industrial markets. Newall provides encoders and digital readouts to machinery and machine tool markets.Net revenue of CST included in our consolidated statement of operations |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Percentage Range of Units That May Vest (1) |
| | | | | | | 0.0% to 150.0% | 0.0% to 172.5% | | 0.0% to 200.0% |
| (Awards in thousands) | | RSU Awards Granted | | Weighted-Average
Grant-Date
Fair Value | | PRSU Awards Granted | | Weighted-Average Grant-Date Fair Value | PRSU Awards Granted | | Weighted-Average Grant-Date Fair Value | | PRSU Awards Granted | | Weighted-Average Grant-Date Fair Value |
| 2018 | | 218 |
| | $ | 51.05 |
| | 63 |
| | $ | 51.83 |
| 118 |
| | $ | 51.83 |
| | — |
| | $ | — |
|
| 2017 | | 182 |
| | $ | 43.24 |
| | — |
| | $ | — |
| 183 |
| | $ | 43.67 |
| | 53 |
| | $ | 43.33 |
|
| 2016 | | 319 |
| | $ | 38.33 |
| | — |
| | $ | — |
| 180 |
| | $ | 38.96 |
| | — |
| | $ | — |
|
| |
(1) | Represents the percentage range of PRSU award units granted that may vest according to the terms of the awards, The amounts presented within this table do not reflect our current assessment of the probable outcome of vesting based on the achievement or expected achievement of performance conditions. |
Compensation cost for the year ended December 31, 2015 was $19.9 million. Earnings2018 reflects our estimate of the probable outcome of the performance conditions associated with CST includedthe PRSU awards granted in our consolidated statementfiscal years 2018, 2017, and 2016.
A summary of operations for the year ended December 31, 2015, excluding integration costs, transaction costs, and interest expense recordedactivity related to outstanding restricted securities for fiscal years 2018, 2017, and 2016 is presented in the indebtedness incurred in order to finance the acquisition of CST, were not material.
The following table summarizes the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed:below (amounts have been calculated based on unrounded shares):
|
| | | | |
| Accounts receivable | | $ | 41,469 |
|
| Inventories | | 44,717 |
|
| Prepaid expenses and other current assets | | 14,808 |
|
| Property, plant and equipment | | 29,840 |
|
| Other intangible assets | | 533,004 |
|
| Goodwill | | 587,377 |
|
| Other assets | | 39 |
|
| Accounts payable | | (19,088 | ) |
| Accrued expenses and other current liabilities | | (26,004 | ) |
| Deferred income tax liabilities | | (203,144 | ) |
| Pension and post-retirement benefit obligations | | (3,232 | ) |
| Other long term liabilities | | (415 | ) |
| Fair value of net assets acquired, excluding cash and cash equivalents | | 999,371 |
|
| Cash and cash equivalents | | 9,472 |
|
| Fair value of net assets acquired | | $ | 1,008,843 |
|
|
| | | | | | |
| | Restricted Securities (thousands) | | Weighted-Average Grant-Date Fair Value |
| Balance as of December 31, 2015 | 654 |
| | $ | 45.87 |
|
| Granted | 499 |
| | $ | 38.56 |
|
| Forfeited | (48 | ) | | $ | 47.01 |
|
| Vested | (185 | ) | | $ | 33.41 |
|
| Balance as of December 31, 2016 | 920 |
| | $ | 44.35 |
|
| Granted | 418 |
| | $ | 43.44 |
|
| Forfeited | (35 | ) | | $ | 43.94 |
|
| Vested | (222 | ) | | $ | 42.24 |
|
| Balance as of December 31, 2017 | 1,081 |
| | $ | 44.43 |
|
| Granted | 399 |
| | $ | 51.40 |
|
| Forfeited | (121 | ) | | $ | 48.28 |
|
| Vested | (240 | ) | | $ | 53.01 |
|
| Balance as of December 31, 2018 | 1,119 |
| | $ | 44.66 |
|
The allocationAggregate intrinsic value information for restricted securities as of the purchase price related to this acquisitionDecember 31, 2018, 2017, and 2016 is preliminary and is based on management’s judgments after evaluating several factors, including preliminary valuation assessments of tangible and intangible assets, and preliminary estimates of the fair value of liabilities assumed. The final allocation of the purchase price to the assets acquired and liabilities assumed will be completed when the final valuation assessments of tangible and intangible assets are completed and estimates of the fair value of liabilities assumed are finalized. The preliminary goodwill of $587.4 million represents future economic benefits expected to arise from synergies from combining operations and the extension of existing customer relationships. None of the goodwill recorded is expected to be deductible for tax purposes.
In connection with the preliminary allocation of purchase price to the assets acquired and liabilities assumed, we identified certain definite-lived intangible assets. The following table presents the acquired intangible assets, their preliminary estimated fair values, and preliminary weighted-average lives:presented below:
|
| | | | | |
| | Acquisition Date Fair Value | | Weighted- Average Life (years) |
| Acquired definite-lived intangible assets: | | | |
| Completed technologies | $ | 184,890 |
| | 16 |
| Customer relationships | 305,616 |
| | 15 |
| Tradenames | 41,900 |
| | 25 |
| Computer software | 598 |
| | 2 |
| | $ | 533,004 |
| | 16 |
The definite-lived intangible assets were valued using the income approach. We used the relief-from-royalty and the multi-period excess earnings methods to value completed technologies. The customer relationships were valued using the multi-period excess earnings and distributor methods. Tradenames were valued using the relief-from-royalty method. These valuation methods incorporate assumptions including expected discounted future cash flows resulting from either the future estimated after-tax royalty payments avoided as a result of owning the completed technologies, or the future earnings related to existing customer relationships. The fair value of these assets is considered to be a Level 3 fair value measurement.
Schrader
On October 14, 2014, we completed the acquisition of all of the outstanding shares of August Cayman Company, Inc., an exempted company incorporated with limited liability under the laws of the Cayman Islands ("Schrader"), for an aggregate purchase price of $1,004.7 million. Schrader is a global manufacturer of sensing and valve solutions for automotive manufacturers, including tire pressure monitoring sensors ("TPMS"), and is being integrated into our Performance Sensing segment. We acquired Schrader to add TPMS and additional low pressure sensing capabilities to our current product portfolio. |
| | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 | | 2016 |
| Outstanding | $ | 50,161 |
| | $ | 55,271 |
| | $ | 35,845 |
|
| Expected to vest | $ | 44,203 |
| | $ | 42,106 |
| | $ | 26,937 |
|
The following table summarizesweighted-average remaining periods over which the allocationrestrictions will lapse as of the purchase price to the estimated fair values of the assets acquiredDecember 31, 2018, 2017, and liabilities assumed: |
| | | | |
| Accounts receivable | | $ | 96,675 |
|
| Inventories | | 72,118 |
|
| Prepaid expenses and other current assets | | 16,783 |
|
| Property, plant and equipment | | 149,475 |
|
| Other intangible assets | | 362,694 |
|
| Goodwill | | 543,149 |
|
| Other assets | | 4,814 |
|
| Accounts payable | | (66,461 | ) |
| Accrued expenses and other current liabilities | | (70,302 | ) |
| Deferred income tax liabilities | | (95,235 | ) |
| Other long term liabilities | | (17,437 | ) |
| Fair value of net assets acquired, excluding cash and cash equivalents | | 996,273 |
|
| Cash and cash equivalents | | 8,420 |
|
| Fair value of net assets acquired | | $ | 1,004,693 |
|
The allocation of the purchase price related to this acquisition was finalized in the fourth quarter of 2015 and was based on management’s judgments after evaluating several factors, including valuation assessments of tangible and intangible assets, and estimates of the fair values of liabilities assumed. The goodwill of $543.1 million represents future economic benefits expected to arise from synergies from combining operations and the extension of existing customer relationships. None of the goodwill recorded is expected to be deductible for tax purposes.
In connection with the allocation of purchase price to the assets acquired and liabilities assumed, we identified certain definite-lived intangible assets. The following table presents the acquired intangible assets, their estimated fair values, and weighted-average lives:2016 are as follows:
|
| | | | | |
| | Acquisition Date Fair Value | | Weighted- Average Life (years) |
| Acquired definite-lived intangible assets: | | | |
| Completed technologies | $ | 100,000 |
| | 10 |
| Customer relationships | 260,000 |
| | 10 |
| Computer software | 2,694 |
| | 3 |
| | $ | 362,694 |
| | 10 |
|
| | | | | |
| | As of December 31, |
| (Amounts in years) | 2018 | | 2017 | | 2016 |
| Outstanding | 1.2 | | 1.3 | | 1.5 |
| Expected to vest | 1.2 | | 1.4 | | 1.5 |
The definite-lived intangible assets were valued using the income approach. We used the relief-from-royalty methodexpected to value completed technologies. The customer relationships were valued using the multi-period excess earnings method. These valuation methods incorporate assumptions including expected discounted future cash flows resulting from either the future estimated after-tax royalty payments avoided as a result of owning the completed technologies, or the future earnings related to existing customer relationships. The fair value of these assets is considered to be a Level 3 fair value measurement.
The valuation of certain tangible assets acquired were determined using cost and market approaches. For personal property, we primarily used the cost approach to develop the estimated reproduction or replacement cost. For real property, we used a market approachvest restricted securities are calculated based on the useapplication of appraisals and input from market participants. The fair value of these assets is considereda forfeiture rate assumption to be a Level 3 fair value measurement.
Refer to Note 14, "Commitments and Contingencies," for discussion of pre-acquisition contingencies assumedall outstanding restricted securities as a result of this acquisition.
DeltaTech Controls
On August 4, 2014, we completed the acquisition of allwell as our assessment of the outstanding sharesprobability of CoActive US Holdings, Inc.,meeting the direct or indirect parent of companies comprisingrequired performance conditions that pertain to the DeltaTech Controls business ("DeltaTech"), from CoActive Holdings, LLC for an aggregate purchase price of $177.8 million. DeltaTech is a manufacturer of customized electronic operator controls based on magnetic position sensing technology for the construction, agriculture, and material handling industries, and is being integrated into our Performance Sensing segment. We acquired DeltaTech to expand our magnetic speed and position sensing business with new and existing customers in the HVOR market.PRSU awards.
Share-Based Compensation Expense
The following table summarizes the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed:
|
| | | | |
| Net working capital | | $ | 10,695 |
|
| Property, plant and equipment | | 8,421 |
|
| Other intangible assets | | 111,277 |
|
| Goodwill | | 101,695 |
|
| Other noncurrent assets | | 5,663 |
|
| Deferred income tax liabilities | | (39,586 | ) |
| Other long term liabilities | | (21,237 | ) |
| Fair value of net assets acquired, excluding cash and cash equivalents | | 176,928 |
|
| Cash and cash equivalents | | 919 |
|
| Fair value of net assets acquired | | $ | 177,847 |
|
The allocation of the purchase pricebelow presents non-cash compensation expense related to this acquisition was finalizedour equity awards, which is recorded within SG&A expense in the third quarter of 2015, and was based on management’s judgments after evaluating several factors, including valuation assessments of tangible and intangible assets, and estimates of the fair value of liabilities assumed. The goodwill of $101.7 million represents future economic benefits expected to arise from synergies from combining operations and the extension of existing customer relationships. None of the goodwill recorded is expected to be deductible for tax purposes.
In connection with the allocation of purchase price to the assets acquired and liabilities assumed, we identified certain definite-lived intangible assets. The following table presents the acquired intangible assets, their estimated fair values, and weighted-average lives:
|
| | | | | |
| | Acquisition Date Fair Value | | Weighted-Average Life (years) |
| Acquired definite-lived intangible assets: | | | |
| Completed technologies | $ | 26,139 |
| | 10 |
| Customer relationships | 82,420 |
| | 8 |
| Tradenames | 1,820 |
| | 5 |
| Computer software | 898 |
| | 7 |
| | $ | 111,277 |
| | 8 |
The definite-lived intangible assets were valued using the income approach. We used the relief-from-royalty method to value completed technologies and tradename intangibles. The customer relationships were valued using the multi-period excess earnings method. These valuation methods incorporate assumptions including expected discounted future cash flows resulting from either the future estimated after-tax royalty payments avoided as a result of owning the completed technologies and tradename intangibles, or the future earnings related to existing customer relationships. The fair value of these assets is considered to be a Level 3 fair value measurement.
The valuation of certain tangible assets acquired was determined using the cost approach to develop the estimated reproduction or replacement cost. The fair value of these assets is considered to be a Level 3 fair value measurement.
Magnum Energy
On May 29, 2014, we completed the acquisition of all of the outstanding shares of Magnum Energy Incorporated ("Magnum Energy" or "Magnum") for an aggregate purchase price of $60.6 million. Magnum is a supplier of pure sine, low-frequency inverters and inverter/chargers based in Everett, Washington. Magnum products are used in recreational vehicles and the solar/off-grid applications market. Magnum has been integrated into our Sensing Solutions segment. We acquired Magnum to complement our existing inverter business. The majority of the purchase price was allocated to intangible assets, including goodwill. The allocation of the purchase price related to this acquisition was finalized in the second quarter of 2015.
Wabash Technologies
On January 2, 2014, we completed the acquisition of all the outstanding shares of Wabash Worldwide Holding Corp. ("Wabash Technologies" or "Wabash") from an affiliate of Sun Capital Partners, Inc. for an aggregate purchase price of $59.6 million. Wabash develops, manufactures, and sells a broad range of custom-designed sensors and has operations in the U.S., Mexico, and the U.K. We acquired Wabash in order to complement our existing magnetic speed and position sensor product portfolio and to provide new capabilities in throttle position and transmission range sensing, while enabling additional entry points into the HVOR end-market. Wabash has been integrated into our Performance Sensing segment.
Aggregated Information on Business Combinations
Net revenue for DeltaTech, Magnum, and Wabash included in our consolidated statements of operations, forduring the year ended December 31, 2014 was $148.5 million. Net income for DeltaTech, Magnum, and Wabash included in our consolidated statements of operations for the year ended December 31, 2014 was not material to our consolidated results.
Pro Forma Results
CST
The following unaudited table presents the pro forma Net revenue and Net income for the following periods of the combined entity had we acquired CST on January 1, 2014. Results for the year ended December 31, 2014 only include actual results of Schrader from the acquisition date of October 14, 2014 through December 31, 2014.identified periods:
|
| | | | | | | | |
| | | (Unaudited) |
| | | For the year ended |
| | | December 31, 2015 | | December 31, 2014 |
| Pro forma net revenue | | $ | 3,261,515 |
| | $ | 2,747,403 |
|
| Pro forma net income | | $ | 345,229 |
| | $ | 255,819 |
|
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Options | $ | 5,739 |
| | $ | 6,046 |
| | $ | 7,094 |
|
| Restricted securities | 18,086 |
| | 13,773 |
| | 10,331 |
|
| Total share-based compensation expense | $ | 23,825 |
| | $ | 19,819 |
| | $ | 17,425 |
|
Pro forma netIn 2018, we recognized a $3.0 million income for thetax benefit associated with share-based compensation expense. We recognized no such tax benefit in either fiscal year ended 2017 or 2016.
The table below presents unrecognized compensation expense at December 31, 2014 includes nonrecurring charges2018 for each class of $4.1 million relatedaward, and the remaining expected term for this expense to the amortization of the step-up adjustment to record inventory at fair value and $9.3 million and $10.0 million of transaction costs and financing costs, respectively, incurred as a result of the acquisition.
Schrader
The following unaudited table presents the pro forma Net revenue and Net income for the following periods of the combined entity had we acquired Schrader on January 1, 2013:be recognized:
|
| | | | | | | | |
| | | (Unaudited) |
| | | For the year ended |
| | | December 31, 2014 | | December 31, 2013 |
| Pro forma net revenue | | $ | 2,849,547 |
| | $ | 2,436,159 |
|
| Pro forma net income | | $ | 264,907 |
| | $ | 117,885 |
|
|
| | | | | |
| | Unrecognized Compensation Expense | | Expected Recognition (years) |
| Options | $ | 9,329 |
| | 2.1 |
| Restricted securities | 23,168 |
| | 1.6 |
| Total unrecognized compensation expense | $ | 32,497 |
| | |
5. Restructuring and Other Charges, Net
Restructuring and other charges, net income for the year ended December 31, 2013 includes nonrecurring charges of $3.8 million related to the amortization of the step-up adjustment to record inventory at fair value and $9.0 million and $3.8 million of transaction costs and financing costs, respectively, incurred as a result of the acquisition.
Other Acquisitions
Had the DeltaTech, Magnum, and Wabash acquisitions closed at the beginning of 2013, Net revenue and Net income would not have been materially different from the amounts reported for the years ended December 31, 20142018, 2017, and 2013.2016 were as follows:
|
| | | | | | | | | | | | |
| | | For the year ended December 31, |
| | | 2018 | | 2017 | | 2016 |
Severance costs, net (1) | | $ | 7,566 |
| | $ | 11,125 |
| | $ | 813 |
|
Facility and other exit costs (2) | | 877 |
| | 7,850 |
| | 3,300 |
|
Gain on sale of Valves Business (3) | | (64,423 | ) | | — |
| | — |
|
Other (4) | | 8,162 |
| | — |
| | — |
|
| Restructuring and other charges, net | | $ | (47,818 | ) | | $ | 18,975 |
| | $ | 4,113 |
|
| |
(1) | Severance costs for the year ended December 31, 2018 were primarily related to limited workforce reductions of manufacturing, engineering, and administrative positions as well as the elimination of certain positions related to site consolidations. Severance costs, net recognized during the year ended December 31, 2017 included $8.4 million of charges related to the closure of our facility in Minden, Germany, a site we obtained in connection with the acquisition of certain subsidiaries of Custom Sensors & Technologies Ltd. ("CST"). Severance costs for the year ended December 31, 2016 primarily related to charges recorded in connection with acquired businesses and the termination of a limited number of employees in various locations throughout the world. |
| |
(2) | Facility and other exit costs for the year ended December 31, 2017 included $3.2 million of costs related to the closure of our facility in Minden, Germany and the transfer of equipment to alternate operating sites as well as $3.1 million of costs associated with the consolidation of two other manufacturing sites in Europe. Facility and other exit costs for the year ended December 31, 2016 primarily related to the relocation of manufacturing lines from our facility in the Dominican Republic to a manufacturing facility in Mexico. |
| |
(3) | In fiscal year 2018 we completed the sale of the the capital stock of Schrader Bridgeport International, Inc. and August France Holding Company SAS (collectively, the "Valves Business"). The gain on this sale is included in restructuring and other charges, net. Refer to Note 17, "Acquisitions and Divestitures," for further discussion of the sale of the Valves Business. |
| |
(4) | In the year ended December 31, 2018, we incurred $5.9 million of incremental direct costs in order to transact the sale of the Valves Business and $2.2 million of deferred compensation incurred in connection with the acquisition of GIGAVAC. Refer to Note 17, "Acquisitions and Divestitures," for further discussion. |
Changes to our severance liability during the years ended December 31, 2018 and Other Current Liabilities2017 were as follows:
|
| | | | |
| | | Severance |
| Balance as of December 31, 2016 | | $ | 17,350 |
|
| Charges, net of reversals | | 11,125 |
|
| Payments | | (22,511 | ) |
| Foreign currency remeasurement | | 1,619 |
|
| Balance as of December 31, 2017 | | 7,583 |
|
| Charges, net of reversals | | 7,566 |
|
| Payments | | (8,341 | ) |
| Foreign currency remeasurement | | (217 | ) |
| Balance as of December 31, 2018 | | $ | 6,591 |
|
Accrued expensesThe following table outlines the current and other current liabilitieslong-term components of our severance liability recognized in the consolidated balance sheets as of December 31, 20152018 and 20142017.
|
| | | | | | | | |
| | | As of December 31, |
| | | 2018 | | 2017 |
| Accrued expenses and other current liabilities | | $ | 6,591 |
| | $ | 4,184 |
|
| Other long-term liabilities | | — |
| | 3,399 |
|
| Total severance liability | | $ | 6,591 |
| | $ | 7,583 |
|
6. Other, Net
Other, net consisted of the following:
|
| | | | | | | |
| | December 31,
2015 | | December 31,
2014 |
| Accrued compensation and benefits | $ | 81,185 |
| | $ | 63,066 |
|
| Foreign currency and commodity forward contracts | 27,674 |
| | 18,037 |
|
| Accrued interest | 26,104 |
| | 22,587 |
|
| Accrued restructuring and severance | 14,089 |
| | 14,046 |
|
| Current portion of pension and post-retirement benefit obligations | 3,461 |
| | 2,360 |
|
| Other accrued expenses and current liabilities | 99,476 |
| | 102,685 |
|
| Total | $ | 251,989 |
| | $ | 222,781 |
|
8. Debt
Our long-term debt and capital lease and other financing obligations as of December 31, 2015 and 2014 consisted of the following:
|
| | | | | | | |
| | December 31, 2015 | | December 31, 2014 |
| Original Term Loan | $ | — |
| | $ | 469,308 |
|
| Incremental Term Loan | — |
| | 598,500 |
|
| Term Loan | 982,695 |
| | — |
|
| 6.5% Senior Notes | — |
| | 700,000 |
|
| 4.875% Senior Notes | 500,000 |
| | 500,000 |
|
| 5.625% Senior Notes | 400,000 |
| | 400,000 |
|
| 5.0% Senior Notes | 700,000 |
| | — |
|
| 6.25% Senior Notes | 750,000 |
| | — |
|
| Revolving Credit Facility | 280,000 |
| | 130,000 |
|
| Other debt | — |
| | 2,153 |
|
| Less: discount | (20,116 | ) | | (6,312 | ) |
| Less: current portion | (289,901 | ) | | (142,905 | ) |
| Long-term debt, net of discount, less current portion | $ | 3,302,678 |
| | $ | 2,650,744 |
|
| Capital lease and other financing obligations | $ | 46,757 |
| | $ | 48,187 |
|
| Less: current portion | (10,538 | ) | | (3,074 | ) |
| Capital lease and other financing obligations, less current portion | $ | 36,219 |
| | $ | 45,113 |
|
Debt Transactions
In May 2011, we completed a series of transactions designed to refinance our then existing indebtedness. These transactions included the issuance and sale of $700.0 million aggregate principal amount of 6.5% senior notes due 2019 (the "6.5% Senior Notes") and the execution of a credit agreement (the "Credit Agreement") providing for senior secured credit facilities (the "Senior Secured Credit Facilities"), consisting of a term loan facility (the "Original Term Loan"), which was offered at an original principal amount of $1,100.0 million and an original issue price of 99.5%, and a $250.0 million revolving credit facility (the "Revolving Credit Facility"). Refer to the section entitled Senior Secured Credit Facilities below for additional details on the Revolving Credit Facility.
In December 2012, we amended the Credit Agreement (the "First Amendment") to reduce the interest rate spread with respect to the Original Term Loan by 0.25%, to 1.75% and 2.75% for Base Rate loans and Eurodollar Rate loans, respectively (each as defined in the Credit Agreement).
In April 2013, we completed the issuance and sale of $500.0 million aggregate principal amount of 4.875% senior notes due 2023 (the "4.875% Senior Notes"). We used the proceeds from the issuance and sale of these notes, together with cash on hand, to (1) repay $700.0 million of the Original Term Loan, (2) pay all accrued interest on such indebtedness, and (3) pay all fees and expenses in connection with the issuance and sale of the 4.875% Senior Notes.
In December 2013, we amended the Credit Agreement (the "Second Amendment") to (1) expand the Original Term Loan by $100.0 million, (2) reduce the interest rate spread with respect to the Original Term Loan by 0.25%, to 1.50% and 2.50% for Base Rate loans and Eurodollar Rate loans, respectively, (3) reduce the interest rate floor with respect to term loans that are Eurodollar Rate loans from 1.00% to 0.75%, (4) extend the maturity date of the Original Term Loan from May 12, 2018 to May 12, 2019, and (5) modify two negative covenants under the Credit Agreement, specifically (i) the amount of investments that may be made by Loan Parties (as defined in the Credit Agreement) in Restricted Subsidiaries (as defined in the Credit Agreement) that are not Loan Parties was increased from $100.0 million to $300.0 million, and (ii) Loan Parties and their Restricted Subsidiaries may make an additional $150.0 million of restricted payments so long as no default or event of default has occurred and is continuing or would result therefrom.
In October 2014, we completed a series of financing transactions (the "2014 Financing Transactions") in order to fund the acquisition of Schrader. The 2014 Financing Transactions included the issuance and sale of $400.0 million in aggregate
principal amount of 5.625% senior notes due 2024 (the "5.625% Senior Notes") and the entry into a third amendment (the "Third Amendment") to the Credit Agreement that provided for a $600.0 million additional term loan (the "Incremental Term Loan"), which was offered at an original issue price of 99.25%. The net proceeds from the 2014 Financing Transactions, together with cash on hand, were used to (1) fund the acquisition of Schrader, (2) permanently repay all outstanding indebtedness under Schrader's existing credit facilities, and (3) pay all related fees and expenses in connection with the 2014 Financing Transactions and the acquisition of Schrader. Refer to Note 6, “Acquisitions,” for further discussion of the acquisition of Schrader.
In November 2014, we amended the Credit Agreement (the "Fourth Amendment") to revise the calculation used to determine the Revolving Credit Facility commitment fee to be equal to the Applicable Rate (as defined in the Credit Agreement) times the unused portion of the Revolving Credit Facility. Prior to the Fourth Amendment, the commitment fee was calculated as the Applicable Rate times the total amount available to be borrowed under the Revolving Credit Facility, regardless of the portion used. The commitment fee is subject to a pricing grid based on our leverage ratio. Pursuant to the terms of the Fourth Amendment, the spreads on the commitment fee ranged from 0.25% to 0.50%.
On March 26, 2015, we completed a series of financing transactions (the "2015 Financing Transactions"), including the settlement of $620.9 million of the 6.5% Senior Notes that was validly tendered in connection with a cash tender offer that commenced on March 19, 2015, the issuance and sale of $700.0 million aggregate principal amount of 5.0% senior notes due 2025 (the "5.0% Senior Notes"), and the entry into an amendment (the "Fifth Amendment") to the Credit Agreement. The Fifth Amendment (1) increased the amount available for borrowing under the Revolving Credit Facility by $100.0 million to $350.0 million in the aggregate, (2) extended the maturity date of the Revolving Credit Facility to March 26, 2020, (3) lowered the maximum commitment fee on the unused portion of the Revolving Credit Facility from 0.50% to 0.375%; and (4) revised certain index rate spreads and letter of credit fees on the Revolving Credit Facility (each of which depends on the achievement of certain senior secured net leverage ratios) as follows: (i) lower the index rate spread for Eurodollar Rate loans from 2.500%, 2.375%, or 2.250% to 1.75% or 1.50%; (ii) lower the index rate spread for Base Rate loans from 1.500%, 1.375%, or 1.250% to 0.75% or 0.50%; and (iii) lower the letter of credit fees from 2.500%, 2.375%, or 2.250% to 1.625% or 1.375%.
On April 29, 2015, we redeemed the remaining $79.1 million principal amount of 6.5% Senior Notes (the "Redemption").
On May 11, 2015, we entered into an amendment (the "Sixth Amendment") of the Credit Agreement. Pursuant to the Sixth Amendment, the Original Term Loan and the Incremental Term Loan (together, the "Refinanced Term Loans") were prepaid in full, and a new term loan (the "Term Loan") was entered into in an aggregate principal amount equal to the sum of the outstanding balances of the Refinanced Term Loans. Refer to the section entitled Senior Secured Credit Facilities below for additional details on the Term Loan.
On September 29, 2015, we entered into an amendment (the “Seventh Amendment") of the Credit Agreement. The Seventh Amendment increased the amount available for borrowing on the Revolving Credit Facility by $70.0 million to $420.0 million.
On November 27, 2015, we completed the issuance and sale of $750.0 million aggregate principal amount of 6.25% senior notes due 2026 (the “6.25% Senior Notes”). We used the proceeds from the issuance and sale of these notes, together with $250.0 million in borrowings on the Revolving Credit Facility and cash on hand, to fund the acquisition of CST and pay related expenses. Refer to Note 6, “Acquisitions,” for further discussion of the acquisition of CST.
Senior Secured Credit Facilities
All obligations under the Senior Secured Credit Facilities are unconditionally guaranteed by certain of our subsidiaries in the U.S., the Netherlands, Mexico, Japan, Belgium, Bulgaria, Malaysia, Bermuda, Luxembourg, France, Ireland, and the U.K. (collectively, the "Guarantors"). The collateral for such borrowings under the Senior Secured Credit Facilities consists of substantially all present and future property and assets of STBV, Sensata Technologies Finance Company, LLC, and the Guarantors.
The Credit Agreement stipulates certain events and conditions that may require us to use excess cash flow, as defined by the terms of the Credit Agreement, generated by operating, investing, or financing activities, to prepay some or all of the outstanding borrowings under the Senior Secured Credit Facilities. The Credit Agreement also requires mandatory prepayments of the outstanding borrowings under the Senior Secured Credit Facilities upon certain asset dispositions and casualty events, in each case subject to certain reinvestment rights, and the incurrence of certain indebtedness (excluding any permitted indebtedness). These provisions were not triggered during the year ended December 31, 2015.
We have amended the Credit Agreement on seven occasions since its initial execution. The terms presented herein reflect
the changes as a result of these various amendments. Refer to the Debt Transactions section above for additional details of the terms of these amendments.
Term Loan
The Term Loan, which was entered into in May 2015 in order to prepay the Refinanced Term Loans, was offered at 99.75% of par. The principal amount of the Term Loan amortizes in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount, with the balance due at maturity. At our option, under the terms of the Sixth Amendment, the Term Loan may be maintained from time to time as a Base Rate loan or a Eurodollar Rate loan (each as defined in the Sixth Amendment), each with a different determination of interest rates. Pursuant to the terms of the Sixth Amendment, the applicable margins for the Term Loan are 1.25% and 2.25% for Base Rate loans and Eurodollar Rate loans, respectively, subject to floors of 1.75% and 0.75% for Base Rate loans and Eurodollar Rate loans, respectively. As of December 31, 2015, we maintained the Term Loan as a Eurodollar Rate loan, which accrued interest at a rate of 3.0%. The Term Loan is subject to a repricing prepayment premium of 1.0% if there is a repricing event that occurs prior to May 11, 2016.
Refinanced Term Loans
The Original Term Loan and the Incremental Term Loan each bore interest at variable rates, as defined in the Second Amendment and Third Amendment, respectively. At December 31, 2014, the interest rate on the Original Term Loan and the Incremental Term Loan was 3.25% and 3.50%, respectively.
Revolving Credit Facility
At our option, the Revolving Credit Facility may be maintained from time to time as a Base Rate loan or a Eurodollar Rate loan (each as defined in the Credit Agreement), each with a different determination of interest rates. Pursuant to the terms of the Fifth Amendment, interest rates and fees on the Revolving Credit Facility were as follows (each depending on the achievement of certain senior secured net leverage ratios) (i) the index rate spread for Eurodollar Rate loans was 1.75% or 1.50%; (ii) the index rate spread for Base Rate loans was 0.75% or 0.50%; and (iii) the letter of credit fees were 1.625% or 1.375%. We currently maintain the Revolving Credit Facility as a Eurodollar Rate loan. The weighted-average interest rate on the Revolving Credit Facility for the year ended December 31, 2015 was 2.05%.
The original amount available for borrowing under the Revolving Credit Facility per the terms of the Credit Agreement was $250.0 million. On March 26, 2015, we executed the Fifth Amendment, which increased the amount available for borrowing under the Revolving Credit Facility to $350.0 million. On September 29, 2015, we executed the Seventh Amendment, which increased the amount available for borrowing under the Revolving Credit Facility to $420.0 million. We are required to pay to our revolving credit lenders, on a quarterly basis, a commitment fee on the unused portion of the Revolving Credit Facility. The commitment fee is subject to a pricing grid based on our leverage ratio. The spreads on the commitment fee currently range from 0.25% to 0.375%.
As of December 31, 2015, there was $134.5 million of availability under the Revolving Credit Facility (net of $5.5 million in letters of credit). Outstanding letters of credit are issued primarily for the benefit of certain operating activities. As of December 31, 2015, no amounts had been drawn against these outstanding letters of credit, which are scheduled to expire on various dates through 2016.
Revolving loans may be borrowed, repaid, and re-borrowed to fund our working capital needs and for other general corporate purposes. No amounts under the Term Loan, once repaid, may be re-borrowed.
Senior Notes
At various times during 2015 and 2014, we had various tranches of senior notes outstanding, including the 6.5% Senior Notes, the 4.875% Senior Notes, the 5.625% Senior Notes, the 5.0% Senior Notes, and the 6.25% Senior Notes (collectively, the “Senior Notes”).
At any time, we may redeem the Senior Notes (with the exception of the 6.5% Senior Notes, which were redeemed in April 2015, and the 6.25% Senior Notes, the redemption terms of which are discussed in more detail below), in whole or in part, at a redemption price equal to 100% of the principal amount of the Senior Notes redeemed, plus accrued and unpaid interest, if any, to the date of redemption, plus the Applicable Premium (also known as the "make-whole premium") set forth in the indentures under which the Senior Notes were issued (the “Senior Notes Indentures”). Upon the occurrence of certain change in control events, we will be required to make an offer to purchase the Senior Notes then outstanding at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of repurchase. In addition, if certain changes in the law of any relevant taxing jurisdiction become effective that would impose withholding taxes or other
deductions on the payments of the Senior Notes or the guarantees, we may redeem the Senior Notes in whole, but not in part, at any time, at a redemption price of 100% of the principal amount, plus accrued and unpaid interest, if any, and additional amounts, if any, to the date of redemption.
The Senior Notes Indentures provide for events of default (subject in certain cases to customary grace and cure periods) that include, among others, nonpayment of principal or interest when due, breach of covenants or other agreements in the Senior Notes Indentures, defaults in payment of certain other indebtedness, certain events of bankruptcy or insolvency, failure to pay certain judgments, and when the guarantees of significant subsidiaries cease to be in full force and effect. Generally, if an event of default occurs, the trustee or the holders of at least 25% in principal amount of the then outstanding Senior Notes may declare the principal of, and accrued but unpaid interest on, all of the Senior Notes to be due and payable immediately. All provisions regarding remedies in an event of default are subject to the Senior Notes Indentures.
6.5% Senior Notes
The 6.5% Senior Notes were issued under an indenture dated May 12, 2011 (the "6.5% Senior Notes Indenture") among STBV, as issuer, The Bank of New York Mellon, as trustee, and the Guarantors. The 6.5% Senior Notes were offered at par. Interest on the 6.5% Senior Notes was payable semi-annually on May 15 and November 15 of each year.
On March 26, 2015, we completed the 2015 Financing Transactions, which included the settlement of $620.9 million of the 6.5% Senior Notes that was validly tendered in connection with a cash tender offer that commenced on March 19, 2015. On April 29, 2015, we completed the Redemption.
4.875% Senior Notes
The 4.875% Senior Notes were issued under an indenture dated April 17, 2013 (the "4.875% Senior Notes Indenture") among STBV, as issuer, The Bank of New York Mellon, as trustee, and the Guarantors. The 4.875% Senior Notes were offered at par. Interest on the 4.875% Senior Notes is payable semi-annually on April 15 and October 15 of each year.
Our obligations under the 4.875% Senior Notes are guaranteed by all of STBV’s existing and future wholly-owned subsidiaries that guarantee our obligations under the Senior Secured Credit Facilities. The 4.875% Senior Notes and the related guarantees are the senior unsecured obligations of STBV and the Guarantors, respectively. The 4.875% Senior Notes and the guarantees rank equally in right of payment to all existing and future senior unsecured indebtedness of STBV or the Guarantors.
5.625% Senior Notes
The 5.625% Senior Notes were issued under an indenture dated October 14, 2014 (the "5.625% Senior Notes Indenture") among STBV, as issuer, The Bank of New York Mellon, as trustee, and the Guarantors. The 5.625% Senior Notes were offered at par. Interest on the 5.625% Senior Notes is payable semi-annually on May 1 and November 1 of each year, with the first payment made on May 1, 2015.
Our obligations under the 5.625% Senior Notes are guaranteed by all of STBV’s existing and future wholly-owned subsidiaries that guarantee our obligations under the Senior Secured Credit Facilities. The 5.625% Senior Notes and the related guarantees are the senior unsecured obligations of STBV and the Guarantors, respectively. The 5.625% Senior Notes and the guarantees rank equally in right of payment to all existing and future senior unsecured indebtedness of STBV or the Guarantors.
5.0% Senior Notes
The 5.0% Senior Notes were issued under an indenture dated March 26, 2015 (the "5.0% Senior Notes Indenture") among STBV, as issuer, The Bank of New York Mellon, as trustee, and the Guarantors. The 5.0% Senior Notes were offered at par. Interest on the 5.0% Senior Notes is payable semi-annually on April 1 and October 1 of each year, with the first payment made on October 1, 2015.
Our obligations under the 5.0% Senior Notes are guaranteed by all of STBV’s existing and future wholly-owned subsidiaries that guarantee our obligations under the Senior Secured Credit Facilities. The 5.0% Senior Notes and the related guarantees are the senior unsecured obligations of STBV and the Guarantors, respectively. The 5.0% Senior Notes and the guarantees rank equally in right of payment to all existing and future senior unsecured indebtedness of STBV or the Guarantors.
6.25% Senior Notes
The 6.25% Senior Notes were issued by Sensata Technologies UK Financing Co. plc ("STUK") under an indenture dated November 27, 2015 (the "6.25% Senior Notes Indenture") among STUK, as issuer, The Bank of New York Mellon, as trustee,
and the Guarantors. The 6.25% Senior Notes were offered at par. Interest on the 6.25% Senior Notes is payable semi-annually on February 15 and August 15 of each year, with the first payment to be made on February 15, 2016.
We may redeem the 6.25% Senior Notes, in whole or in part, at any time prior to February 15, 2021, at a redemption price equal to 100% of the principal amount of the 6.25% Senior Notes redeemed, plus accrued and unpaid interest, if any, to the date of redemption, plus the Applicable Premium (also known as the “make-whole” premium) set forth in the 6.25% Senior Notes Indenture. Thereafter, we may redeem the 6.25% Senior Notes, in whole or in part, at the following prices (plus accrued and unpaid interest, if any, to the date of redemption):
|
| |
| |
| Period beginning February 15, | Price |
| 2021 | 103.125% |
| 2022 | 102.083% |
| 2023 | 101.042% |
| 2024 and thereafter | 100.000% |
In addition, at any time prior to November 15, 2018, we may redeem up to 40% of the aggregate principal amount of the 6.25% Senior Notes with the net cash proceeds from certain equity offerings at the redemption price of 106.25% plus accrued and unpaid interest, if any, to the date of redemption, provided that at least 60% of the aggregate principal amount of the 6.25% Senior Notes remains outstanding immediately after each such redemption.
Our obligations under the 6.25% Senior Notes are guaranteed by STBV and certain of STBV’s existing and future wholly-owned subsidiaries (other than STUK) that guarantee our obligations under the Senior Secured Credit Facilities. The 6.25% Senior Notes and the related guarantees are the senior unsecured obligations of STUK and the Guarantors, respectively. The 6.25% Senior Notes and the guarantees rank equally in right of payment to all existing and future senior unsecured indebtedness of STUK, STBV, or the Guarantors.
Restrictions
As of December 31, 2015, for purposes of the Senior Notes and the Term Loan, all of the subsidiaries of STBV were "Restricted Subsidiaries." Under certain circumstances, STBV will be permitted to designate subsidiaries as "Unrestricted Subsidiaries." As per the terms of the Senior Notes Indentures and the Credit Agreement, Restricted Subsidiaries are subject to restrictive covenants. Unrestricted Subsidiaries will not be subject to the restrictive covenants of the Credit Agreement and will not guarantee any of the Senior Notes.
Under the Revolving Credit Facility, STBV and its Restricted Subsidiaries are required to maintain a senior secured net leverage ratio not to exceed 5.0:1.0 at the conclusion of certain periods when outstanding loans and letters of credit that are not cash collateralized for the full face amount thereof exceed 10% of the commitments under the Revolving Credit Facility. In addition, STBV and its Restricted Subsidiaries are required to satisfy this covenant, on a pro forma basis, in connection with any new borrowings (including any letter of credit issuances) under the Revolving Credit Facility as of the time of such borrowings.
The Credit Agreement also contains non-financial covenants that limit our ability to incur subsequent indebtedness, incur liens, prepay subordinated debt, make loans and investments (including acquisitions), merge, consolidate, dissolve or liquidate, sell assets, enter into affiliate transactions, change our business, change our accounting policies, make capital expenditures, amend the terms of our subordinated debt and our organizational documents, pay dividends and make other restricted payments, and enter into certain burdensome contractual obligations. These covenants are subject to important exceptions and qualifications set forth in the Credit Agreement.
The Senior Notes Indentures contain restrictive covenants that limit the ability of STBV and its Restricted Subsidiaries to, among other things: incur additional debt or issue preferred stock; create liens; create restrictions on STBV's subsidiaries' ability to make payments to STBV; pay dividends and make other distributions in respect of STBV's and its Restricted Subsidiaries' capital stock; redeem or repurchase STBV's capital stock, our capital stock, or the capital stock of any other direct or indirect parent company of STBV or prepay subordinated indebtedness; make certain investments or certain other restricted payments; guarantee indebtedness; designate unrestricted subsidiaries; sell certain kinds of assets; enter into certain types of transactions with affiliates; and effect mergers or consolidations. These covenants are subject to important exceptions and qualifications set forth in the Senior Notes Indentures. Certain of these covenants will be suspended if the Senior Notes are assigned an investment grade rating by Standard & Poor's Rating Services or Moody's Investors Service, Inc. and no default has occurred and is continuing at such time. The suspended covenants will be reinstated if the Senior Notes are no longer rated
investment grade by either rating agency and an event of default has occurred and is continuing at such time. As of December 31, 2015, the Senior Notes were not rated investment grade by either rating agency.
The Guarantors under the Credit Agreement and the Senior Notes Indentures are generally not restricted in their ability to pay dividends or otherwise distribute funds to STBV, except for restrictions imposed under applicable corporate law.
STBV, however, is limited in its ability to pay dividends or otherwise make distributions to its immediate parent company and, ultimately, to us, under the Credit Agreement and the Senior Notes Indentures. Specifically, the Credit Agreement prohibits STBV from paying dividends or making any distributions to its parent companies except for limited purposes, including, but not limited to: (i) customary and reasonable operating expenses, legal and accounting fees and expenses, and overhead of such parent companies incurred in the ordinary course of business in the aggregate not to exceed $10.0 million in any fiscal year, plus reasonable and customary indemnification claims made by our directors or officers attributable to the ownership of STBV and its Restricted Subsidiaries; (ii) franchise taxes, certain advisory fees, and customary compensation of officers and employees of such parent companies to the extent such compensation is attributable to the ownership or operations of STBV and its Restricted Subsidiaries; (iii) repurchase, retirement, or other acquisition of equity interest of the parent from certain present, future, and former employees, directors, managers, consultants of the parent companies, STBV, or its subsidiaries in an aggregate amount not to exceed $15.0 million in any fiscal year, plus the amount of cash proceeds from certain equity issuances to such persons, the amount of equity interests subject to a certain deferred compensation plan, and the amount of certain key-man life insurance proceeds; (iv) so long as no default or event of default exists and the senior secured net leverage ratio is less than 2.0:1.0 calculated on a pro forma basis, dividends and other distributions in an aggregate amount not to exceed $100.0 million, plus certain amounts, including the retained portion of excess cash flow; (v) dividends and other distributions in an aggregate amount not to exceed $40.0 million in any calendar year (subject to increase upon the achievement of certain ratios); and (vi) so long as no default or event of default exists, dividends and other distributions in an aggregate amount not to exceed $150.0 million.
The Senior Notes Indentures generally provide that STBV can pay dividends and make other distributions to its parent companies upon the achievement of certain conditions and in an amount as determined in accordance with the Senior Notes Indentures.
The net assets of STBV subject to these restrictions totaled $1,592.3 million at December 31, 2015.
Accounting for Debt Financing Transactions
During the years ended December 31, 2015, 2014 and 2013, we recorded losses of $25.5 million, $1.9 million, and $9.0 million, respectively, in Other, net related to our debt financing transactions. These amounts primarily represent charges on extinguishment or modification of existing debt, accounted for in accordance with ASC 470-50, and include, upon extinguishment of debt, fees paid to creditors and the write-off of unamortized deferred financing costs and original issue discount, and upon modification of debt, fees paid to third parties.
In 2015, the 2015 Financing Transactions, the Redemption, and the entry into the Sixth Amendment and the Seventh Amendment were accounted for in accordance with ASC 470-50. As a result, during the year ended December 31, 2015, we recorded transaction costs of approximately $19.2 million in Other, net. The remaining losses recorded in Other, net primarily relate to the write-off of unamortized deferred financing costs and original issue discount. The issuance and sale of the 6.25% Senior Notes was accounted for as a new issuance and as a result, $12.5 million was capitalized as debt issuance costs. In addition, $8.8 million was recorded in Interest expense, net, which relates to fees associated with bridge financing that was not utilized.
In 2014, in connection with the 2014 Financing Transactions , we incurred $17.7 million of financing costs, of which $13.9 million was recorded as deferred financing costs, $1.9 million was recorded in Other, net, and $1.9 million was recorded in Interest expense.
In 2013, the issuance and sale of the 4.875% Senior Notes, the related repayment of $700.0 million of the Original Term Loan, and the entry into the Second Amendment were accounted for in accordance with ASC 470-50. As a result, during the year ended December 31, 2013, we recorded losses in Other, net of $9.0 million, which consisted of $4.6 million related to transaction costs and $4.4 million related to the write-off of unamortized deferred financing costs and original issue discount. In addition, $3.9 million was recorded as deferred financing costs.
Leases
We operate in leased facilities with initial terms ranging up to 20 years. The lease agreements frequently include options to renew for additional periods or to purchase the leased assets and generally require that we pay taxes, insurance, and
maintenance costs. Depending on the specific terms of the leases, our obligations are in two forms: capital leases and operating leases. Rent expense for the years ended December 31, 2015, 2014,2018, 2017, and 2013 was $14.1 million, $7.5 million, and $6.5 million, respectively.
In 2011, we entered into a capital lease for a facility in Baoying, China. As of December 31, 2015 and 2014, the capital lease obligation outstanding for this facility was $6.4 million and $7.1 million, respectively.
In 2005, we entered into a capital lease, which matures in 2025, for a facility in Attleboro, Massachusetts. As of December 31, 2015 and 2014, the capital lease obligation outstanding for this facility was $23.5 million and $24.7 million, respectively.
Other Financing Obligations
In 2013, we entered into an agreement with one of our suppliers, Measurement Specialties, Inc., under which we acquired the rights to certain intellectual property in exchange for quarterly royalty payments through the fourth quarter of 2019. As of December 31, 2015 and 2014, we had recognized a liability related to this agreement of $6.4 million and $7.6 million, respectively, within Capital lease and other financing obligations.
In 2008, we entered into a series of agreements to sell and leaseback the land, building, and certain equipment associated with our manufacturing facility in Subang Jaya, Malaysia. The transaction, which was valued at RM41.0 million (or $12.6 million based on the closing date exchange rate), was accounted for as a financing transaction. Accordingly, the land, building, and equipment remains on the consolidated balance sheets, and the cash received was recorded as a liability as a component of Capital lease and other financing obligations. As of December 31, 2015 and 2014, the outstanding liability recorded was $6.8 million and $8.4 million, respectively. In December 2015, we reached an agreement to reacquire this facility. This transaction is expected to close in 2016, and as a result, this liability is presented as a current obligation as of December 31, 2015.
Debt Maturities
The final maturity of the Revolving Credit Facility is March 26, 2020. Loans made pursuant to the Revolving Credit Facility must be repaid in full on or prior to such date and are pre-payable at our option at par. All letters of credit issued thereunder will terminate at the final maturity of the Revolving Credit Facility unless cash collateralized prior to such time. The final maturity of the Term Loan is October 14, 2021. The Term Loan must be repaid in full on or prior to this date. The 4.875% Senior Notes, the 5.625% Senior Notes, the 5.0% Senior Notes, and the 6.25% Senior Notes mature on October 15, 2023, November 1, 2024, October 1, 2025, and February 15, 2026, respectively.
The following table presents the remaining mandatory principal repayments of long-term debt, excluding capital lease payments, other financing obligations, and discretionary repurchases of debt, in each of the years ended December 31, 2016 through 2020 and thereafter. The full balance due on the Revolving Credit Facility (which does not contractually mature until March 26, 2020) is presented as a repayment in 2016, consistent with its presentation as a current liability on the consolidated balance sheet.2016:
|
| | | | |
| For the year ended December 31, | | Aggregate Maturities |
| 2016 | | $ | 289,901 |
|
| 2017 | | 9,901 |
|
| 2018 | | 9,901 |
|
| 2019 | | 9,901 |
|
| 2020 | | 9,901 |
|
| Thereafter | | 3,283,190 |
|
| Total long-term debt principal payments | | $ | 3,612,695 |
|
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
Currency remeasurement (loss)/gain on net monetary assets(1) | $ | (18,905 | ) | | $ | 18,041 |
| | $ | (10,621 | ) |
Gain/(loss) on foreign currency forward contracts(2) | 2,070 |
| | (15,618 | ) | | (1,850 | ) |
(Loss)/gain on commodity forward contracts(2) | (8,481 | ) | | 9,989 |
| | 7,399 |
|
Loss on debt financing(3) | (2,350 | ) | | (2,670 | ) | | — |
|
Net periodic benefit cost, excluding service cost(4) | (3,585 | ) | | (3,402 | ) | | (192 | ) |
| Other | 886 |
| | 75 |
| | 171 |
|
| Other, net | $ | (30,365 | ) | | $ | 6,415 |
| | $ | (5,093 | ) |
| |
(1) | Relates to the remeasurement of non-U.S. dollar denominated net monetary assets and liabilities into U.S. dollars. Refer to the Foreign Currency section of Note 2, "Significant Accounting Policies," for discussion. |
| |
(2) | Relates to changes in the fair value of derivative financial instruments not designated as cash flow hedges. Refer to Note 19, "Derivative Instruments and Hedging Activities," for a more detailed discussion. |
| |
(3) | Refer to Note 14, "Debt," for a more detailed discussion of our debt financing transactions. |
| |
(4) | On January 1, 2018, we adopted FASB ASU No. 2017-07, which requires the non-service cost components to be presented apart from the service cost component and outside of profit from operations. Refer to the Pension and Other Post-Retirement Benefits section of Note 2, "Significant Accounting Policies," and Note 13, "Pension and Other Post-Retirement Benefits," for additional details. |
Compliance with Financial and Non-Financial Covenants
As of, and for the year ended, December 31, 2015, we were in compliance with all of the covenants and default provisions associated with our indebtedness.
9.7. Income Taxes
Effective April 27, 2006 (inception), and concurrent with the completion of the acquisition of the Sensors & Controls business ("S&C") of Texas Instruments Incorporated ("TI") (the "2006 Acquisition"), we commenced filing tax returns in the Netherlands as a stand-alone entity. On March 28, 2018, the Company reincorporated its headquarters in the U.K. Several of our Dutch resident subsidiaries arecontinue to be taxable entities in the Netherlands and file tax
returns under Dutch fiscal unity (i.e., consolidation). Prior to April 30, 2008, we filed one consolidated tax return in the U.S. On April 30, 2008, our U.S. subsidiaries executed a separation and distribution agreement that divided our U.S. businesses, resulting in two separate U.S. consolidated federal income tax returns. Prior to April 30, 2008, we filed one consolidated tax return in the U.S. Beginning onOn January 1, 2016, our U.S. subsidiaries will resumeresumed filing one consolidated tax return. Our remaining subsidiaries will file income tax returns in the countries in which they are incorporated and/or operate, including Belgium, Bulgaria, China, France, Germany, Japan, Malaysia, Mexico, the Netherlands, Japan, China, Germany, Belgium, Bulgaria, South Korea, Malaysia,and the U.K., France, and Mexico. The 2006 Acquisition purchase accounting and the related debt and equity capitalization of the various subsidiaries of the consolidated company, and the realignment of the functions performed and risks assumed by the various subsidiaries, are of significant consequence to the determination of future book and taxable income of the respective subsidiaries and Sensata as a whole.
Refer to Note 2, "Significant Accounting Policies," for detailed discussion of the accounting policies related to income taxes.
Effects of the Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 ("Tax Reform" or "the Act") was signed into law. The Act reduced the U.S. federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and created new taxes on certain foreign sourced earnings. Given the significance of the legislation, the U.S. Securities and Exchange Commission staff issued Staff Accounting Bulletin
No. 118 ("SAB 118"). In fiscal year 2017 and the first nine months of 2018, we recorded provisional amounts for certain enactment-date effects of the Act by applying the guidance in SAB 118 because we had not yet completed our enactment-date accounting for these effects.
In fiscal years 2018 and 2017 we recorded tax expense related to the enactment-date effects of the Act that included recording the one-time transition tax liability related to undistributed earnings of certain foreign subsidiaries which were not previously taxed, and adjusting deferred tax assets and liabilities. We applied the guidance in SAB 118 when accounting for the enactment-date effects of the Act in 2017 and throughout 2018. At December 31, 2017, we had not completed our accounting for all of the enactment-date income tax effects of the Act under FASB ASC Topic 740 for the following aspects: impact on assessment on the measurement of deferred tax assets and liabilities, including the potential impact of the tax on global intangible low-taxed income, and the one-time transition tax. As of December 31, 2018, we have completed our accounting for all of the enactment-date income tax effects of the Act. As further discussed below, during fiscal year 2018 we did not record an adjustment to the provisional amounts recorded as of December 31, 2017.
Deferred tax assets and liabilities
In the year ended December 31, 2017, we remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%, by recording a tax benefit of $73.7 million, which was principally associated with indefinite lived intangible assets. Absent this deferred tax liability, we would have been in a net deferred tax asset position that was offset by a valuation allowance at December 31, 2017. Upon further analysis of certain aspects of the Act and refinement of our calculations during the year ended December 31, 2018, we determined that no further adjustment was necessary.
One-time transition tax
The one-time transition tax is based on our total post-1986 earnings and profits (E&P) of subsidiaries held by our U.S. companies that we previously deferred from U.S. income taxes. Due to tax attributes available, which had a full valuation allowance, to offset the anticipated transition tax, we provisionally did not record an income tax expense related to this tax at December 31, 2017.
Upon further analyses of the Act and Notices and regulations issued and proposed by the U.S. Department of the Treasury and the Internal Revenue Service, we finalized our calculations of the transition tax liability during 2018. The transition tax was fully offset by tax losses incurred in 2017, resulting in no additional tax liability.
Global intangible low-taxed income (GILTI)
The Act subjects a U.S. shareholder to tax on global intangible low-taxed income (GILTI) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. We have elected to account for GILTI in the year the tax is incurred.
Income before taxes
Income/(loss) before taxes for the years ended December 31, 20152018, 20142017, and 20132016 was categorized by jurisdiction as follows:
|
| | | | | | | | | | | |
| | U.S. | | Non-U.S. | | Total |
| For the year ended December 31, | | | | | |
| 2015 | $ | (60,707 | ) | | $ | 266,336 |
| | $ | 205,629 |
|
| 2014 | $ | (92,632 | ) | | $ | 346,058 |
| | $ | 253,426 |
|
| 2013 | $ | (80,426 | ) | | $ | 314,363 |
| | $ | 233,937 |
|
|
| | | | | | | | | | | |
| | U.S. | | Non-U.S. | | Total |
| 2018 | $ | 68,027 |
| | $ | 458,348 |
| | $ | 526,375 |
|
| 2017 | $ | (11,425 | ) | | $ | 413,866 |
| | $ | 402,441 |
|
| 2016 | $ | (43,842 | ) | | $ | 365,287 |
| | $ | 321,445 |
|
(Benefit from)/provision for income taxes
(Benefit from)/provision for income taxes for the years ended December 31, 20152018, 20142017, and 20132016 was categorized by jurisdiction as follows:
| | | | U.S. Federal | | Non-U.S. | | U.S. State | | Total | U.S. Federal | | Non-U.S. | | U.S. State | | Total |
| For the year ended December 31, | | | | | | | | |
| 2015 | | | | | | | | |
| 2018 | | | | | | | | |
| Current | $ | (8,187 | ) | | $ | 45,326 |
| | $ | (197 | ) | | $ | 36,942 |
| $ | 5,700 |
| | $ | 64,666 |
| | $ | 1,082 |
| | $ | 71,448 |
|
| Deferred | (168,855 | ) | | (361 | ) | | (9,793 | ) | | (179,009 | ) | (109,663 | ) | | (18,770 | ) | | (15,635 | ) | | (144,068 | ) |
| Total | $ | (177,042 | ) | | $ | 44,965 |
| | $ | (9,990 | ) | | $ | (142,067 | ) | $ | (103,963 | ) | | $ | 45,896 |
| | $ | (14,553 | ) | | $ | (72,620 | ) |
| 2014: | | | | | | | | |
| 2017 | | | | | | | | |
| Current | $ | — |
| | $ | 28,438 |
| | $ | 395 |
| | $ | 28,833 |
| $ | — |
| | $ | 50,601 |
| | $ | 240 |
| | $ | 50,841 |
|
| Deferred | (51,564 | ) | | (6,280 | ) | | (1,312 | ) | | (59,156 | ) | (56,956 | ) | | (1,104 | ) | | 1,303 |
| | (56,757 | ) |
| Total | $ | (51,564 | ) | | $ | 22,158 |
| | $ | (917 | ) | | $ | (30,323 | ) | $ | (56,956 | ) | | $ | 49,497 |
| | $ | 1,543 |
| | $ | (5,916 | ) |
| 2013: | | | | | | | | |
| 2016 | | | | | | | | |
| Current | $ | — |
| | $ | 19,826 |
| | $ | 275 |
| | $ | 20,101 |
| $ | 464 |
| | $ | 49,977 |
| | $ | 226 |
| | $ | 50,667 |
|
| Deferred | 11,857 |
| | 13,919 |
| | (65 | ) | | 25,711 |
| 10,036 |
| | 2,010 |
| | (3,702 | ) | | 8,344 |
|
| Total | $ | 11,857 |
| | $ | 33,745 |
| | $ | 210 |
| | $ | 45,812 |
| $ | 10,500 |
| | $ | 51,987 |
| | $ | (3,476 | ) | | $ | 59,011 |
|
Effective tax rate reconciliation
The principal reconciling items from income tax computed at the U.S. statutory tax rate for the years ended December 31, 20152018, 20142017, and 20132016 were as follows:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Tax computed at statutory rate of 35% | $ | 71,970 |
| | $ | 88,700 |
| | $ | 81,878 |
|
| Foreign tax rate differential | (66,367 | ) | | (70,090 | ) | | (66,835 | ) |
| Release of valuation allowances, net | (180,001 | ) | | (71,111 | ) | | — |
|
| Losses not tax benefited | 56,778 |
| | 40,200 |
| | 25,192 |
|
| Unrealized foreign exchange (gains) and losses, net | (12,120 | ) | | (15,195 | ) | | (4,029 | ) |
| Change in tax law or rates | (10,290 | ) | | (12,017 | ) | | (4,402 | ) |
| Withholding taxes not creditable | 4,346 |
| | 4,940 |
| | 16,101 |
|
| Reserve for tax exposure | (2,949 | ) | | 308 |
| | (13,674 | ) |
| Other | (3,434 | ) | | 3,942 |
| | 11,581 |
|
| | $ | (142,067 | ) | | $ | (30,323 | ) | | $ | 45,812 |
|
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Tax computed at statutory rate of 21% in 2018 and 35% in 2017 and 2016 | $ | 110,539 |
| | $ | 140,854 |
| | $ | 112,506 |
|
| Change in valuation allowances | (123,426 | ) | | (3,368 | ) | | 30,565 |
|
| Foreign tax rate differential | (41,200 | ) | | (111,990 | ) | | (86,339 | ) |
| Change in tax laws or rates | (22,264 | ) | | 3,912 |
| | 2,542 |
|
| Research and development incentives | (19,475 | ) | | (5,922 | ) | | (10,961 | ) |
| U.S. state taxes, net of federal benefit | (11,499 | ) | | 1,087 |
| | (2,166 | ) |
| Unrealized foreign exchange losses, net | 11,346 |
| | 830 |
| | 3,829 |
|
| Reserve for tax exposure | 10,775 |
| | 38,013 |
| | 11,227 |
|
| Withholding taxes not creditable | 8,734 |
| | 3,896 |
| | 6,014 |
|
| U.S. Tax Reform impact | — |
| | (73,668 | ) | | — |
|
| Other | 3,850 |
| | 440 |
| | (8,206 | ) |
| (Benefit from)/provision for income taxes | $ | (72,620 | ) | | $ | (5,916 | ) | | $ | 59,011 |
|
Change in valuation allowances
During the years ended December 31, 2018, 2017, and 2016 we released a portion of our valuation allowance, recognizing a deferred tax benefit. Refer to the discussion below related to the release of the valuation allowance.
U.S. Tax Reform Impact
As a result of Tax Reform, the U.S. statutory tax rate was lowered from 35% to 21%, effective on January 1, 2018. We were required to remeasure our U.S. deferred tax assets and liabilities to the new tax rate. For the year ended December 31, 2017 we recorded $73.7 million of income tax benefit for the remeasurement of the deferred tax liabilities associated with indefinite-lived intangible assets that will reverse at the new 21% rate. Absent this deferred tax liability, the U.S. operation was in a net deferred tax asset position that was offset by a full valuation allowance at December 31, 2017. We reduced our net deferred tax assets excluding the indefinite-lived intangible assets and the corresponding valuation allowance by $120.0 million.
Foreign tax rate differential
We operate in locations outside the U.S., including Bermuda, Bulgaria, China, the U.K.,Malaysia, the Netherlands, South Korea, Malaysia, and Bulgaria,the U.K., that historically have had statutory tax rates significantly lowerdifferent than the U.S. statutory rate. This can result in a foreign tax rate resulting in an effectivedifferential that may reflect a tax benefit or detriment. This foreign rate benefit. This benefitdifferential can change from year to year based upon the jurisdictional mix of earnings.earnings and changes in current and future enacted tax rates.
Certain of our subsidiaries are currently eligible, or have been eligible, for tax exemptions or holidays in their respective jurisdictions. From 20132016 through 2015, our2018, a subsidiary in Changzhou, China was eligible for a reduced tax rate of 15%. Our operations in the U.K. qualify for a favorableThe impact on current tax regime applicable to intellectual property revenues. The impactexpense of the tax holidays and exemptions on our effective rate is included in the foreign tax rate differential line in the reconciliation of the statutory rate to effective rate. The remeasurement of the deferred tax assets and liabilities is included in the change in tax laws or rates line.
Release of valuation allowancesResearch and development incentives
During the years ended December 31, 2015 and 2014, we released a portionCertain income of our U.S. valuation allowance and recognizedU.K. subsidiaries is eligible for lower tax rates under the "patent box" regime, resulting in certain of our intellectual property income being taxed at a deferredrate lower than the U.K. statutory tax benefitrate. Certain R&D expenses are eligible for a bonus deduction under China’s R&D super deduction regime. In 2018, we substantially completed an assessment of $180.0 million and $71.1 million, respectively. These benefits arose primarily in connection with our 2015 acquisition of CST, and our 2014 acquisitions of Wabash, DeltaTech, and Schrader. For each of these acquisitions, deferred tax liabilities were established and related primarilyability to the step-up of intangible assets for book purposes.
Losses not tax benefited
Losses incurredclaim an R&D credit in the U.S are not currently benefited, as it is not more likely than not that the associated deferred tax asset will be realized in foreseeable future. For the years ended December 31, 2015, 2014, and 2013, this resulted in a deferred tax expense of $56.8 million, $40.2 million, and $25.2 million, respectively.
Change in tax law or rates
In December 2013, Mexico enacted a comprehensive tax reform package, which was effective January 1, 2014.U.S. As a result of this change,assessment, we adjusted our deferred taxes in that jurisdiction, resulting in the recognition ofrecorded a tax benefit which reduced deferred income tax expense by $4.7of $10.0 million. Annually, we expect our R&D credit to result in a net benefit of approximately $2.5 million forper year. Prior to fiscal year 2013.2018, the deferred tax asset related to these R&D credits would have been offset by the valuation allowance.
Withholding taxes not creditable
Withholding taxes may apply to intercompany interest, royalty, management fees, and certain payments to third parties. Such taxes are expensed if they cannot be credited against the recipient’s tax liability in its country of residence. Additional consideration also has been given to the withholding taxes associated with the remittance of presently unremitted earnings and the recipient's ability to obtain a tax credit for such taxes. Earnings are not considered to be indefinitely reinvested in the jurisdictions in which they were earned.
In certain jurisdictions we record withholding and other taxes on intercompany payments including dividends. During the years ended December 31, 2015, 2014, and 2013, this amount totaled $4.3 million, $4.9 million, and $16.1 million.
Deferred income tax assets and liabilities
The primary components of deferred income tax assets and liabilities as of December 31, 20152018 and 20142017 were as follows:
| | | | | | | As of December 31, |
| | December 31,
2015 | | December 31,
2014 | 2018 | | 2017 |
| Deferred tax assets: | | | | | | |
| Inventories and related reserves | $ | 12,013 |
| | $ | 9,781 |
| $ | 14,171 |
| | $ | 17,287 |
|
| Accrued expenses | 76,834 |
| | 36,613 |
| |
| Prepaid and accrued expenses | | 71,004 |
| | 25,920 |
|
| Property, plant and equipment | 20,008 |
| | 15,685 |
| 14,571 |
| | 13,396 |
|
| Intangible assets | 88,524 |
| | 48,747 |
| 27,122 |
| | 22,050 |
|
| Unrealized exchange loss | | 4,255 |
| | 12,265 |
|
| Net operating loss, interest expense, and other carryforwards | 435,980 |
| | 401,803 |
| 296,255 |
| | 349,244 |
|
| Pension liability and other | 8,279 |
| | 10,106 |
| 8,701 |
| | 8,880 |
|
| Share-based compensation | 11,315 |
| | 11,633 |
| 11,332 |
| | 12,195 |
|
| Other | 2,694 |
| | 8,596 |
| 10,151 |
| | 7,028 |
|
| Total deferred tax assets | 655,647 |
| | 542,964 |
| 457,562 |
| | 468,265 |
|
| Valuation allowance | (296,922 | ) | | (394,838 | ) | (157,043 | ) | | (277,315 | ) |
| Net deferred tax asset | 358,725 |
| | 148,126 |
| 300,519 |
| | 190,950 |
|
| Deferred tax liabilities: | | | | | | |
| Property, plant and equipment | (25,810 | ) | | (31,208 | ) | (15,795 | ) | | (23,222 | ) |
| Intangible assets and goodwill | (636,366 | ) | | (411,320 | ) | (440,348 | ) | | (428,028 | ) |
| Unrealized exchange gain | (11,753 | ) | | (12,959 | ) | (6,912 | ) | | (6,031 | ) |
| Tax on undistributed earnings of subsidiaries | (44,078 | ) | | (31,210 | ) | (35,187 | ) | | (38,894 | ) |
| Other | (4,791 | ) | | (5,546 | ) | |
| Total deferred tax liabilities | (722,798 | ) | | (492,243 | ) | (498,242 | ) | | (496,175 | ) |
| Net deferred tax liability | $ | (364,073 | ) | | $ | (344,117 | ) | $ | (197,723 | ) | | $ | (305,225 | ) |
Valuation allowance and net operating loss carryforwards
Since our inception, we have incurred tax losses in the U.S., resulting in allowable tax net operating loss carryforwards. In measuring the relatedour deferred tax assets, we consideredconsider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed for all or some portion of the deferred tax assets. JudgmentSignificant judgment is required in considering the relative impact of the negative and positive evidence. Theevidence, and weight given to the potential effecteach category of negative and positive evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary, and the more difficult it is to support a conclusion that a valuation allowance is not needed. Additionally, we utilize the “more"more likely than not”not" criteria established in FASB ASC Topic 740 to determine whether the future tax benefit from the deferred tax assets should be recognized. As a result, we have established a full valuation allowanceallowances on the deferred tax assets in jurisdictions that have incurred net operating losses and in which it is more likely than not that such losses will not be utilized in the foreseeable future.
As of each reporting date, we consider new evidence, both positive and negative, that could impact our view with regard to future realization of deferred tax assets. In the fourth quarter of 2018, based on reversals of existing taxable differences, projections of future taxable income, and taxable income in the current year, we have determined that sufficient positive evidence exists as of December 31, 2018, to conclude that it is more likely than not the additional deferred taxes of $122.1 million are realizable, and therefore, reduced the valuation allowance accordingly.
One of the provisions of the Tax Act limits the deduction for net interest expense incurred by U.S. corporations to 30% of adjusted taxable income. As a result of this provision, we have determined that certain of our interest carryforwards may be subject to limitation, and as result, determined that it was appropriate to retain the valuation allowance on a significant portion of these carryforwards.
For tax purposes, certain goodwill and indefinite-lived intangible assets are generally amortizable over 6 to 20 years. For book purposes, goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment annually. The tax amortization of goodwill and indefinite-lived intangible assets will result in a taxable temporary difference, which will not
reverse unless the related book goodwill and/or intangible asset is impaired or written off. This liability may not be used to support deductible temporary differences, such as net operating loss carryforwards, which may expire within a definite period.
The total valuation allowance for the yearyears ended December 31, 20152018 and 2017 decreased $97.9$120.3 million and for the year ended December 31, 2014 increased $15.8 million.
$22.4 million, respectively. Subsequently reported tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 20152018 will be allocated to income tax benefit recognized in the consolidated statements of operations.
As of December 31, 2015,2018, we have U.S. federal net operating loss carryforwards of $542.9$416.0 million and suspended interest expense carryforwards of $527.8$460.2 million. Our U.S. federal net operating loss and interest carryforwards include $252.4 million related to excess tax deductions from share-based payments, the tax benefit of which will be recorded as an increase in additional paid-in capital when the deductions reduce current taxes payable. U.S. federal net operating loss carryforwards will expire from 20262027 to 2035,2037, state net operating loss carryforwards will expire from 20162019 to 2035,2037, and the interest carryovers have an unlimited life. It is more likely than not that these net operating losses will not be utilized in the foreseeable future. We also have non-U.S. net operating loss carryforwards of $166.2$238.0 million, which will begin to expire in 2016.
We believe a change of ownership within the meaning of Section 382 of the Internal Revenue Code occurred in the fourth quarter of 2012. As a result, our U.S. federal net operating loss utilization will be limited to an amount equal to the market capitalization of our U.S. subsidiaries at the time of the ownership change multiplied by the federal long-term tax exempt rate. A change of ownership under Section 382 of the Internal Revenue Code is defined as a cumulative change of fifty percentage points or more in the ownership positions of certain stockholders owning five percent or more of our common stock over a three year rolling period. We do not believe the resulting change will prohibit the utilization of our U.S. federal net operating loss.2019.
Unrecognized tax benefits
A reconciliation of the amount of unrecognized tax benefits is as follows:
|
| | | |
| Balance at December 31, 2012 | $ | 21,773 |
|
| Increases related to prior year tax positions | 456 |
|
| Increases related to current year tax positions | 9,694 |
|
| Decreases related to lapse of applicable statute of limitations | (905 | ) |
| Decreases related to settlements with tax authorities | (8,774 | ) |
| Balance at December 31, 2013 | 22,244 |
|
| Increases related to prior year tax positions | 7,540 |
|
| Increases related to current year tax positions | 4,204 |
|
| Decreases related to lapse of applicable statute of limitations | (3,025 | ) |
| Decreases related to settlements with tax authorities | (8,189 | ) |
| Balance at December 31, 2014 | 22,774 |
|
| Increases related to prior year tax positions | 5,467 |
|
| Increases related to current year tax positions | 18,382 |
|
| Decreases related to settlements with tax authorities | (8,566 | ) |
| Balance at December 31, 2015 | $ | 38,057 |
|
During the year ended December 31, 2015, we established a reserve of $16.0 million in connection with a capital restructuring transaction executed during the year. During the year ended December 31, 2013, we closed income tax audits related to several subsidiaries in Asia and the Americas. As a result of negotiated settlements and final assessments, we recognized $4.1 million of tax benefit in the fourth quarter. Additionally, as a result of certain lapses of the applicable statute of limitations related to unrecognized tax benefits, we recognized $0.9 million of tax benefit. The benefit recorded in tax expense related to interest and penalties totaled $8.7 million. The net effect of these items on our provision for income taxes was a benefit of $13.7 million. |
| | | |
| Balance as of December 31, 2015 | $ | 38,057 |
|
| Increases related to prior year tax positions | 6,390 |
|
| Increases related to current year tax positions | 8,462 |
|
| Decreases related to lapse of applicable statute of limitations | (256 | ) |
| Decreases related to settlements with tax authorities | (6,755 | ) |
| Balance as of December 31, 2016 | 45,898 |
|
| Increases related to prior year tax positions | 7,968 |
|
| Increases related to current year tax positions | 14,585 |
|
| Decreases related to lapse of applicable statute of limitations | (1,356 | ) |
| Decreases related to settlements with tax authorities | (7,211 | ) |
| Balance as of December 31, 2017 | 59,884 |
|
| Increases related to prior year tax positions | 14,609 |
|
| Increases related to current year tax positions | 15,676 |
|
| Increases related to business combination | 1,000 |
|
| Decreases related to prior year tax positions | (1,144 | ) |
| Decreases related to foreign currency exchange rate fluctuations | (416 | ) |
| Balance as of December 31, 2018 | $ | 89,609 |
|
We recognizerecord interest and penalties related to unrecognized tax benefits in the consolidated statements of operations and the consolidated balance sheets. ForThe table that follows presents the years ended December 31, 2015, 2014,(income)/expense related to such interest and 2013, amountspenalties recognized in the consolidated statements of operations includedduring the years ended December 31, 2018, 2017, and 2016, and the amount of interest of $0.1 million, $(1.2) million, and $(4.4) million, respectively, and penalties of $(0.3) million, $0.5 million, and $(4.7) million, respectively. As of December 31, 2015, 2014, and 2013, amounts recognized inrecorded on the consolidated balance sheets included interestas of $1.1 million, $1.8 million,December 31, 2018 and $1.8 million, respectively, and penalties of $1.5 million, $1.0 million, and $0.1 million, respectively.2017:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Statements of Operations | | Balance Sheets |
| | | For the year ended December 31, | | As of December 31, |
| (Dollars in millions) | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 |
| Interest | | $ | (0.2 | ) | | $ | 0.2 |
| | $ | 0.1 |
| | $ | 0.4 |
| | $ | 0.7 |
|
| Penalties | | $ | (0.2 | ) | | $ | (0.1 | ) | | $ | 0.1 |
| | $ | 0.4 |
| | $ | 0.5 |
|
The liability for unrecognized tax benefits generally relates to the allocation of taxable income to the various jurisdictions where we are subject to tax. At December 31, 2015,2018, we anticipate that the liability for unrecognized tax benefits could decrease by up to $5.9$0.5 million within the next twelve months due to the expiration of certain statutes of limitation or the settlement of examinations or issues with tax authorities. The amount of unrecognized tax benefits as of December 31, 20152018 and 20142017 that willif recognized, would impact our effective tax rate are $13.5$11.5 million and $20.9$5.4 million, respectively.
Our major tax jurisdictions include Belgium, Bulgaria, China, France, Germany, Japan, Malaysia, Mexico, the Netherlands, the U.S., Japan, Germany, Mexico, China, South Korea, Belgium, Bulgaria, France, Malaysia,the U.K., and the U.K.U.S. These jurisdictions generally remain open to examination by the relevant tax authority for the tax years 2006 through 2015.2018.
Indemnifications
We have various indemnification provisions in place with parties including TI, Honeywell, William Blair, CoActive Holdings, LLC, Tomkins Limited, and Custom Sensors & Technologies Ltd. These provisions provide for the reimbursement by TI, Honeywell, William Blair, CoActive Holdings, LLC, Tomkins Limited, and Custom Sensors & Technologies Ltd of future tax liabilities paid by us that relate to the pre-acquisition periods of the acquired businesses including S&C, First Technology Automotive and Special Products, Airpax DeltaTech, Schrader,Holdings, Inc., August Cayman Company, Inc. ("Schrader"), CST, and CST,GIGAVAC.
8. Net Income per Share
Basic and diluted net income per share are calculated by dividing net income by the number of basic and diluted weighted-average ordinary shares outstanding during the period. For the years ended December 31, 2018, 2017, and 2016, the weighted-average ordinary shares outstanding used to calculate basic and diluted net income per share were as follows:
|
| | | | | | | | |
| | For the year ended December 31, |
| (Shares in thousands) | 2018 | | 2017 | | 2016 |
| Basic weighted-average ordinary shares outstanding | 168,570 |
| | 171,165 |
| | 170,709 |
|
| Dilutive effect of stock options | 822 |
| | 616 |
| | 489 |
|
| Dilutive effect of unvested restricted securities | 467 |
| | 388 |
| | 262 |
|
| Diluted weighted-average ordinary shares outstanding | 169,859 |
| | 172,169 |
| | 171,460 |
|
Net income and net income per share are presented in the consolidated statements of operations.
Certain potential ordinary shares were excluded from our calculation of diluted weighted-average ordinary shares outstanding because either they would have had an anti-dilutive effect on net income per share or they related to equity awards that were contingently issuable for which the contingency had not been satisfied. Refer to Note 4, "Share-Based Payment Plans," for further discussion of our equity awards. These potential ordinary shares are as follows:
|
| | | | | | | | |
| | For the year ended December 31, |
| (Shares in thousands) | 2018 | | 2017 | | 2016 |
| Anti-dilutive shares excluded | 930 |
| | 1,410 |
| | 1,401 |
|
| Contingently issuable shares excluded | 687 |
| | 871 |
| | 606 |
|
9. Inventories
The components of inventories as of December 31, 2018 and 2017 were as follows:
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Finished goods | $ | 187,095 |
| | $ | 195,089 |
|
| Work-in-process | 104,405 |
| | 92,678 |
|
| Raw materials | 200,819 |
| | 158,362 |
|
| Inventories | $ | 492,319 |
| | $ | 446,129 |
|
Refer to Note 2, "Significant Accounting Policies," for a discussion of our accounting policies related to inventories.
10. Property, Plant and Equipment, Net
PP&E, net as of December 31, 2018 and 2017 consisted of the following:
|
| | | | | | | | |
| | | As of December 31, |
| | | 2018 | | 2017 |
| Land | | $ | 22,021 |
| | $ | 23,077 |
|
| Buildings and improvements | | 259,182 |
| | 250,475 |
|
| Machinery and equipment | | 1,220,285 |
| | 1,132,461 |
|
| Total PP&E | | 1,501,488 |
| | 1,406,013 |
|
| Accumulated depreciation | | (714,310 | ) | | (655,964 | ) |
| PP&E, net | | $ | 787,178 |
| | $ | 750,049 |
|
Depreciation expense for PP&E, including amortization of leasehold improvements and depreciation of assets under capital leases, totaled $106.0 million, $109.3 million, and $106.9 million for the years ended December 31, 2018, 2017, and 2016, respectively.
PP&E, net as of December 31, 2018 and 2017 included the following assets under capital leases:
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Assets under capital leases in PP&E | $ | 49,714 |
| | $ | 45,249 |
|
| Accumulated depreciation | (22,508 | ) | | (20,631 | ) |
| Assets under capital leases in PP&E, net | $ | 27,206 |
| | $ | 24,618 |
|
Refer to Note 2, "Significant Accounting Policies," for a discussion of our accounting policies related to PP&E, net.
10.11. Goodwill and Other Intangible Assets, Net
The following table outlines the changes in goodwill by segment for the year ended December 31, 2018. There were no acquisitions or other changes to goodwill during the year ended December 31, 2017.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Performance Sensing |
| Sensing Solutions |
| Total |
| | Gross
Goodwill |
| Accumulated
Impairment |
| Net
Goodwill |
| Gross
Goodwill |
| Accumulated
Impairment |
| Net
Goodwill |
| Gross
Goodwill |
| Accumulated
Impairment |
| Net
Goodwill |
| Balance as of December 31, 2016 and 2017 | $ | 2,148,135 |
| | $ | — |
| | $ | 2,148,135 |
| | $ | 875,795 |
| | $ | (18,466 | ) | | $ | 857,329 |
| | $ | 3,023,930 |
| | $ | (18,466 | ) | | $ | 3,005,464 |
|
| Divestiture of Valves Business | (38,800 | ) | | — |
| | (38,800 | ) | | — |
| | — |
| | — |
| | (38,800 | ) | | — |
| | (38,800 | ) |
| Acquisition of GIGAVAC | 46,298 |
| | — |
| | 46,298 |
| | 68,340 |
| | — |
| | 68,340 |
| | 114,638 |
| | — |
| | 114,638 |
|
| Balance as of December 31, 2018 | $ | 2,155,633 |
| | $ | — |
| | $ | 2,155,633 |
| | $ | 944,135 |
| | $ | (18,466 | ) | | $ | 925,669 |
| | $ | 3,099,768 |
| | $ | (18,466 | ) | | $ | 3,081,302 |
|
Goodwill attributed to the acquisition of GIGAVAC reflects our allocation of purchase price to the estimated fair value of certain assets acquired and liabilities assumed. Preliminary goodwill attributed to the acquisition of GIGAVAC has been assigned to our segments in the above table based on a methodology using anticipated future earnings of the components of business. The allocation is preliminary and is subject to change prior to the end of the measurement period. Goodwill attributed to the sale of the Valves Business is based on the relative fair value of the Valves Business to the Performance Sensing reporting unit. Refer to Note 17, "Acquisitions and Divestitures," for further discussion of the acquisition of GIGAVAC and the sale of the Valves Business.
In connection with the sale of the Valves Business, as required by FASB ASC Topic 350, we evaluated the goodwill of the retained portion of the Performance Sensing reporting unit for impairment using the quantitative method and determined that it was not impaired. In addition, we evaluated our goodwill for impairment as of October 1, 2018 using a combination of the qualitative and quantitative methods. Refer to Note 2, "Significant Accounting Policies," for discussion of these methods. Based on these analyses, we have determined that, for the Performance Sensing reporting unit, which was subject to the qualitative method, it was more likely than not that its fair value was greater than its carrying value at that date, and the Electrical
Protection, Industrial Sensing, Aerospace, Power Management, and Interconnection reporting units, which were subject to the quantitative method, that their fair values exceeded their carrying values at that date.
We evaluated our other indefinite-lived intangible assets for impairment as of October 1, 2018, using the quantitative method, and we determined that the fair value of each indefinite–lived intangible asset exceeded its respective carrying value on that date.
The following table outlines the components of definite-lived intangible assets as of December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of December 31, |
| | Weighted-
Average
Life (years) | | 2018 | | 2017 |
Gross
Carrying
Amount | | Accumulated
Amortization | | Accumulated
Impairment | | Net
Carrying
Value | | Gross
Carrying
Amount | | Accumulated
Amortization | | Accumulated
Impairment | | Net
Carrying
Value |
| Completed technologies | 14 | | $ | 759,008 |
| | $ | (475,295 | ) | | $ | (2,430 | ) | | $ | 281,283 |
| | $ | 727,968 |
| | $ | (418,987 | ) | | $ | (2,430 | ) | | $ | 306,551 |
|
| Customer relationships | 11 | | 1,825,698 |
| | (1,352,189 | ) | | (12,144 | ) | | 461,365 |
| | 1,771,198 |
| | (1,287,581 | ) | | (12,144 | ) | | 471,473 |
|
| Non-compete agreements | 8 | | 23,400 |
| | (23,400 | ) | | — |
| | — |
| | 23,400 |
| | (23,400 | ) | | — |
| | — |
|
| Tradenames | 21 | | 66,154 |
| | (13,468 | ) | | — |
| | 52,686 |
| | 50,754 |
| | (11,094 | ) | | — |
| | 39,660 |
|
Capitalized software and other(1) | 7 | | 65,896 |
| | (32,509 | ) | | — |
| | 33,387 |
| | 59,909 |
| | (25,939 | ) | | — |
| | 33,970 |
|
| Total | 12 | | $ | 2,740,156 |
| | $ | (1,896,861 | ) | | $ | (14,574 | ) | | $ | 828,721 |
| | $ | 2,633,229 |
| | $ | (1,767,001 | ) | | $ | (14,574 | ) | | $ | 851,654 |
|
| |
(1) | During the years ended December 31, 2018 and 2017, we wrote-off approximately $0.2 million and $1.1 million, respectively, of fully-amortized capitalized software that was not in use. |
Refer to Note 17, "Acquisitions and Divestitures," for details of definite-lived intangible assets recognized as a result of the acquisition of GIGAVAC.
The following table outlines amortization of intangible assets for the years ended December 31, 2018, 2017, and 2016:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Acquisition-related definite-lived intangible assets | $ | 132,235 |
| | $ | 153,729 |
| | $ | 194,208 |
|
| Capitalized software | 7,091 |
| | 7,321 |
| | 7,290 |
|
| Amortization of intangible assets | $ | 139,326 |
| | $ | 161,050 |
| | $ | 201,498 |
|
The table below presents estimated amortization of intangible assets for each of the next five years:
|
| | | |
| For the year ended December 31, | |
| 2019 | $ | 142,198 |
|
| 2020 | $ | 127,046 |
|
| 2021 | $ | 110,203 |
|
| 2022 | $ | 95,029 |
|
| 2023 | $ | 81,055 |
|
In addition to the above, we own the Klixon® and Airpax® tradenames, which are indefinite-lived intangible assets, as they have each been in continuous use for over 65 years, and we have no plans to discontinue using them. We have recorded $59.1 million and $9.4 million, respectively, on the consolidated balance sheets related to these tradenames.
12. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of December 31, 2018 and 2017 consisted of the following:
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Accrued compensation and benefits | $ | 68,936 |
| | $ | 89,816 |
|
| Accrued interest | 40,550 |
| | 36,919 |
|
| Foreign currency and commodity forward contracts | 7,710 |
| | 35,094 |
|
| Accrued severance | 6,591 |
| | 4,184 |
|
| Current portion of pension and post-retirement benefit obligations | 3,176 |
| | 3,342 |
|
| Other accrued expenses and current liabilities | 91,167 |
| | 90,205 |
|
| Accrued expenses and other current liabilities | $ | 218,130 |
| | $ | 259,560 |
|
13. Pension and Other Post-Retirement Benefits
We provide various pension and other post-retirement plans for current and former employees, including defined benefit, defined contribution, and retiree healthcare benefit plans. Refer to Note 2, "Significant Accounting Policies," for a detailed discussion of the accounting policies related to our pension and other post-retirement benefit plans.
U.S. Benefit Plans
The principal retirement plans in the U.S. include a qualified defined benefit pension plan and a defined contribution plan. In addition, we provide post-retirement medical coverage and non-qualified benefits to certain employees.
Defined Benefit Pension Plans
The benefits under the qualified defined benefit pension plan are determined using a formula based upon years of service and the highest five consecutive years of compensation.
TI closed the qualified defined benefit pension plan to participants hired after November 1997. In addition, participants eligible to retire under the TI plan as of April 26, 2006 were given the option of continuing to participate in the qualified defined benefit pension plan or retiring under the qualified defined benefit pension plan and thereafter participating in an enhanced defined contribution plan.
We intend to contribute amounts to the qualified defined benefit pension plan in order to meet the minimum funding requirements of federal laws and regulations, plus such additional amounts as we deem appropriate. During the year ended December 31, 2018, we contributed $4.0 million to the qualified defined benefit plan. We do not expect to contribute to the qualified defined benefit pension plan during 2016.in fiscal year 2019.
We also sponsor a non-qualified defined benefit pension plan, which is closed to new participants and is unfunded.
Effective January 31, 2012, we froze the defined benefit pension plans and eliminated future benefit accruals.
Defined Contribution Plans
Prior to August 1, 2012,As of 2018, we offered two defined contribution plans. Both defined contribution plans offered an employer matching savings option that allowed employees to make pre-tax contributions to various investment choices.
Employees who elected not to remain in the qualified defined benefit pension plan, and new employees hired after November 1997, could participate in an enhancedhave one defined contribution plan where employer matching contributions were provided for up to 4% of the employee’s annual eligible earnings. In addition, this plan provided for an additional fixed employer contribution of 2% of the employee’s annual eligible earnings forU.S. employees, who elected not to remain in the qualified defined benefit pension plan and employees hired between November 1997 and December 31, 2003. Effective in 2012, we discontinued the additional fixed employer contribution of 2%.
Employees who remained in the qualified defined benefit pension plan were permitted to participate in a defined contribution plan, where 50% employer matching contributions were provided for up to 2% of the employee’s annual eligible earnings. Effective in 2012, we increased the employer matching contribution to 100% for up to 4% of the employee's annual eligible earnings.
In 2012, we merged the two defined contribution plans into one plan. The combined planwhich provides for an employer matching contribution of up to 4% of the employee's annual eligible earnings. Our matching of employees’ contributions under our defined contribution plan is discretionary and is based on our assessment of our financial performance.
The aggregate expense related to the defined contribution plans for U.S. employeesplan was $4.7$5.7 million, $3.25.9 million, and $2.85.8 million for the years ended December 31, 20152018, 20142017, and 20132016, respectively.
Retiree Healthcare Benefit Plan
We offer access to group medical coverage during retirement to some of our U.S. employees. We make contributions toward the cost of those retiree medical benefits for certain retirees. The contribution rates are based upon varying factors, the most important of which are an employee’s date of hire, date of retirement, years of service, and eligibility for Medicare benefits. The balance of the cost is borne by the participants in the plan. For the year ended December 31, 2015,2018, we did not, and do not expect to, receive any amount of Medicare Part D Federal subsidy. Our projected benefit obligation as of December 31, 20152018 and 20142017 did not include an assumption for a Federal subsidy. U.S. retiree healthcare benefit plan obligations for employees that retired prior to the 2006 Acquisition have been assumed by TI.
In the fourth quarter of 2013, we amended the retiree healthcare benefit plan to eliminate supplemental medical coverage offered to Medicare eligible retirees, effective January 1, 2014. As a result of the amendment, we recognized a gain of $7.2 million that was recorded in Accumulated other comprehensive lossincome/(loss) in the fourth quarter of 2013, which is being amortized as a component of net periodic benefit cost over a period of approximately 5 years from the date of recognition, which represents the remaining average service period to the full eligibility dates of the active plan participants.
Non-U.S. Benefit Plans
Retirement coverage for non-U.S. employees is provided through separate defined benefit and defined contribution plans. Retirement benefits are generally based on an employee’s years of service and compensation. Funding requirements are determined on an individual country and plan basis and are subject to local country practices and market circumstances. We do not expect to contribute approximately $3.2 million to the non-U.S. defined benefit plans during 2016.2019.
Impact on Financial Statements
The following table outlines thecomponents of net periodic benefit cost of thecost/(credit) associated with our defined benefit and retiree healthcare benefit plans for the years ended December 31, 2015, 2014,2018, 2017, and 2013:2016 were as follows:
| | | | For the year ended December 31, | For the year ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Service cost | $ | — |
| | $ | 102 |
| | $ | 2,811 |
| | $ | — |
| | $ | 107 |
| | $ | 2,480 |
| | $ | — |
| | $ | 252 |
| | $ | 2,274 |
| $ | — |
| | $ | 50 |
| | $ | 3,122 |
| | $ | — |
| | $ | 74 |
| | $ | 2,582 |
| | $ | — |
| | $ | 83 |
| | $ | 2,716 |
|
| Interest cost | 1,564 |
| | 272 |
| | 1,075 |
| | 1,792 |
| | 329 |
| | 1,185 |
| | 1,441 |
| | 589 |
| | 1,156 |
| 1,473 |
| | 272 |
| | 1,310 |
| | 1,604 |
| | 325 |
| | 1,053 |
| | 1,461 |
| | 364 |
| | 1,179 |
|
| Expected return on plan assets | (2,666 | ) | | — |
| | (892 | ) | | (2,450 | ) | | — |
| | (865 | ) | | (2,509 | ) | | — |
| | (908 | ) | (1,710 | ) | | — |
| | (929 | ) | | (2,151 | ) | | — |
| | (905 | ) | | (2,684 | ) | | — |
| | (952 | ) |
| Amortization of net loss | 473 |
| | 361 |
| | 19 |
| | 262 |
| | 482 |
| | 179 |
| | 954 |
| | 491 |
| | 399 |
| 1,080 |
| | 5 |
| | 407 |
| | 1,149 |
| | 54 |
| | 287 |
| | 707 |
| | 143 |
| | 488 |
|
| Amortization of prior service (credit)/cost | — |
| | (1,335 | ) | | (37 | ) | | — |
| | (1,335 | ) | | — |
| | — |
| | — |
| | 10 |
| |
| Amortization of net prior service (credit)/cost | | — |
| | (1,728 | ) | | 6 |
| | — |
| | (1,335 | ) | | (4 | ) | | — |
| | (1,335 | ) | | (20 | ) |
| Loss on settlement | 391 |
| | — |
| | 479 |
| | — |
| | — |
| | 51 |
| | 779 |
| | — |
| | 18 |
| 1,047 |
| | — |
| | 1,461 |
| | 3,225 |
| | — |
| | 100 |
| | 1,293 |
| | — |
| | 34 |
|
| Loss on curtailment | — |
| | — |
| | 1,901 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Net periodic benefit cost | $ | (238 | ) | | $ | (600 | ) | | $ | 5,356 |
| | $ | (396 | ) | | $ | (417 | ) | | $ | 3,030 |
| | $ | 665 |
| | $ | 1,332 |
| | $ | 2,949 |
| |
| Loss/(gain) on curtailment | | — |
| | — |
| | 891 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (486 | ) |
| Net periodic benefit cost/(credit) | | $ | 1,890 |
| | $ | (1,401 | ) | | $ | 6,268 |
| | $ | 3,827 |
| | $ | (882 | ) | | $ | 3,113 |
| | $ | 777 |
| | $ | (745 | ) | | $ | 2,959 |
|
On January 1, 2018 we adopted the guidance in FASB ASU No. 2017-07, which requires that entities present the non–service components of net periodic benefit cost separately from the financial statement line item(s) that include service cost, outside of operating income. As a result of this adoption, the components of net periodic benefit cost, excluding service cost, were reclassified in our consolidated statements of operations from various operating cost and expense line items to other, net for the years ended December 31, 2017 and 2016.
The table below presents the effects of this adjustment.
Table of Contents |
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2017 | | 2016 |
| | As Reported | | Adjustment | | As Adjusted | | As Reported | | Adjustment | | As Adjusted |
| Net revenue | $ | 3,306,733 |
| | $ | — |
| | $ | 3,306,733 |
| | $ | 3,202,288 |
| | $ | — |
| | $ | 3,202,288 |
|
| Operating costs and expenses: | | | | | | | | | | | |
| Cost of revenue | 2,141,308 |
| | (2,410 | ) | | 2,138,898 |
| | 2,084,261 |
| | (102 | ) | | 2,084,159 |
|
| Research and development | 130,204 |
| | (77 | ) | | 130,127 |
| | 126,665 |
| | (9 | ) | | 126,656 |
|
| Selling, general and administrative | 302,811 |
| | (915 | ) | | 301,896 |
| | 293,587 |
| | (81 | ) | | 293,506 |
|
| Amortization of intangible assets | 161,050 |
| | — |
| | 161,050 |
| | 201,498 |
| | — |
| | 201,498 |
|
| Restructuring and other charges, net | 18,975 |
| | — |
| | 18,975 |
| | 4,113 |
| | — |
| | 4,113 |
|
| Total operating costs and expenses | 2,754,348 |
| | (3,402 | ) | | 2,750,946 |
| | 2,710,124 |
| | (192 | ) | | 2,709,932 |
|
| Profit from operations | 552,385 |
| | 3,402 |
| | 555,787 |
| | 492,164 |
| | 192 |
| | 492,356 |
|
| Interest expense, net | (159,761 | ) | | — |
| | (159,761 | ) | | (165,818 | ) | | — |
| | (165,818 | ) |
| Other, net | 9,817 |
| | (3,402 | ) | | 6,415 |
| | (4,901 | ) | | (192 | ) | | (5,093 | ) |
| Income before taxes | $ | 402,441 |
| | $ | — |
| | $ | 402,441 |
| | $ | 321,445 |
| | $ | — |
| | $ | 321,445 |
|
The following table outlines the rollforward of the benefit obligation and plan assets for the defined benefit and retiree healthcare benefit plans for the years ended December 31, 20152018 and 20142017:
| | | | For the year ended December 31, | For the year ended December 31, |
| | 2015 | | 2014 | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Change in Benefit Obligation | | | | | | | | | | | | |
| Change in benefit obligation: | | | | | | | | | | | | |
| Beginning balance | $ | 58,467 |
| | $ | 9,973 |
| | $ | 59,677 |
| | $ | 56,999 |
| | $ | 10,576 |
| | $ | 40,106 |
| $ | 48,615 |
| | $ | 9,692 |
| | $ | 67,413 |
| | $ | 57,679 |
| | $ | 10,296 |
| | $ | 59,056 |
|
| Service cost | — |
| | 102 |
| | 2,811 |
| | — |
| | 107 |
| | 2,480 |
| — |
| | 50 |
| | 3,122 |
| | — |
| | 74 |
| | 2,582 |
|
| Interest cost | 1,564 |
| | 272 |
| | 1,075 |
| | 1,792 |
| | 329 |
| | 1,185 |
| 1,473 |
| | 272 |
| | 1,310 |
| | 1,604 |
| | 325 |
| | 1,053 |
|
| Plan participants’ contributions | — |
| | — |
| | 134 |
| | — |
| | — |
| | 192 |
| — |
| | 475 |
| | 60 |
| | — |
| | 519 |
| | 120 |
|
| Plan amendment | — |
| | — |
| | 24 |
| | — |
| | — |
| | (698 | ) | — |
| | (3,243 | ) | | — |
| | — |
| | — |
| | (6 | ) |
| Actuarial loss/(gain) | 107 |
| | (949 | ) | | (3,683 | ) | | 1,236 |
| | (735 | ) | | 9,450 |
| |
| Settlements | (391 | ) | | — |
| | (1,656 | ) | | — |
| | — |
| | (175 | ) | |
| Actuarial (gain)/loss | | (519 | ) | | (124 | ) | | 2,777 |
| | 2,936 |
| | (197 | ) | | 2,692 |
|
| Curtailments | — |
| | — |
| | 1,901 |
| | — |
| | — |
| | — |
| — |
| | — |
| | 931 |
| | — |
| | — |
| | — |
|
| Benefits paid | (2,121 | ) | | (466 | ) | | (1,595 | ) | | (1,560 | ) | | (304 | ) | | (1,794 | ) | (4,400 | ) | | (1,105 | ) | | (6,262 | ) | | (13,604 | ) | | (1,325 | ) | | (2,572 | ) |
Acquisitions (1) | — |
| | 2,176 |
| | 1,056 |
| | — |
| | — |
| | 15,743 |
| |
| Foreign currency exchange rate changes | — |
| | — |
| | (3,642 | ) | | — |
| | — |
| | (6,812 | ) | |
| Divestiture | | — |
| | — |
| | (3,310 | ) | | — |
| | — |
| | — |
|
| Foreign currency remeasurement | | — |
| | — |
| | (350 | ) | | — |
| | — |
| | 4,488 |
|
| Ending balance | $ | 57,626 |
| | $ | 11,108 |
| | $ | 56,102 |
| | $ | 58,467 |
| | $ | 9,973 |
| | $ | 59,677 |
| $ | 45,169 |
| | $ | 6,017 |
| | $ | 65,691 |
| | $ | 48,615 |
| | $ | 9,692 |
| | $ | 67,413 |
|
| Change in Plan Assets | | | | | | | | | | | | |
| Change in plan assets: | | | | | | | | | | | | |
| Beginning balance | $ | 58,157 |
| | $ | — |
| | $ | 35,652 |
| | $ | 55,933 |
| | $ | — |
| | $ | 35,729 |
| $ | 41,101 |
| | $ | — |
| | $ | 41,222 |
| | $ | 52,042 |
| | $ | — |
| | $ | 37,361 |
|
| Actual return on plan assets | (19 | ) | | — |
| | (916 | ) | | 3,543 |
| | — |
| | 4,376 |
| (811 | ) | | — |
| | (1,308 | ) | | 2,319 |
| | — |
| | 1,241 |
|
| Employer contributions | 241 |
| | 466 |
| | 3,294 |
| | 241 |
| | 304 |
| | 2,040 |
| 3,985 |
| | 630 |
| | 5,992 |
| | 344 |
| | 1,325 |
| | 2,586 |
|
| Plan participants’ contributions | — |
| | — |
| | 134 |
| | — |
| | — |
| | 192 |
| — |
| | 475 |
| | 60 |
| | — |
| | — |
| | 120 |
|
| Settlements | (391 | ) | | — |
| | (1,656 | ) | | — |
| | — |
| | (175 | ) | |
| Benefits paid | (2,121 | ) | | (466 | ) | | (1,595 | ) | | (1,560 | ) | | (304 | ) | | (1,794 | ) | (4,400 | ) | | (1,105 | ) | | (6,262 | ) | | (13,604 | ) | | (1,325 | ) | | (2,572 | ) |
| Foreign currency exchange rate changes | — |
| | — |
| | (952 | ) | | — |
| | — |
| | (4,716 | ) | |
| Foreign currency remeasurement | | — |
| | — |
| | 164 |
| | — |
| | — |
| | 2,486 |
|
| Ending balance | $ | 55,867 |
| | $ | — |
| | $ | 33,961 |
| | $ | 58,157 |
| | $ | — |
| | $ | 35,652 |
| $ | 39,875 |
| | $ | — |
| | $ | 39,868 |
| | $ | 41,101 |
| | $ | — |
| | $ | 41,222 |
|
| Funded status at end of year | $ | (1,759 | ) | | $ | (11,108 | ) | | $ | (22,141 | ) | | $ | (310 | ) | | $ | (9,973 | ) | | $ | (24,025 | ) | $ | (5,294 | ) | | $ | (6,017 | ) | | $ | (25,823 | ) | | $ | (7,514 | ) | | $ | (9,692 | ) | | $ | (26,191 | ) |
| Accumulated benefit obligation at end of year | $ | 57,626 |
| | NA |
| | $ | 50,832 |
| | $ | 58,467 |
| | NA |
| | $ | 50,959 |
| $ | 45,169 |
| | NA |
| | $ | 59,948 |
| | $ | 48,615 |
| | NA |
| | $ | 60,588 |
|
(1) Relates to unfunded defined benefit plans assumed as part of the acquisitions of Wabash, DeltaTech, and Schrader in 2014, and CST in 2015.
The following table outlines the funded status amounts recognized in the consolidated balance sheets as of December 31, 20152018 and 20142017:
| | | | | | | | | | | | | | | As of December 31, |
| | December 31, 2015 | | December 31, 2014 | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Noncurrent assets | $ | 1,703 |
| | $ | — |
| | $ | 1,064 |
| | $ | 3,311 |
| | $ | — |
| | $ | 540 |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Current liabilities | (548 | ) | | (1,162 | ) | | (1,751 | ) | | (496 | ) | | (910 | ) | | (954 | ) | (595 | ) | | (1,116 | ) | | (1,465 | ) | | (638 | ) | | (1,210 | ) | | (1,494 | ) |
| Noncurrent liabilities | (2,914 | ) | | (9,946 | ) | | (21,454 | ) | | (3,125 | ) | | (9,063 | ) | | (23,611 | ) | (4,699 | ) | | (4,901 | ) | | (24,358 | ) | | (6,876 | ) | | (8,482 | ) | | (24,697 | ) |
| | $ | (1,759 | ) | | $ | (11,108 | ) | | $ | (22,141 | ) | | $ | (310 | ) | | $ | (9,973 | ) | | $ | (24,025 | ) | |
| Funded status | | $ | (5,294 | ) | | $ | (6,017 | ) | | $ | (25,823 | ) | | $ | (7,514 | ) | | $ | (9,692 | ) | | $ | (26,191 | ) |
Balances recognized within Accumulatedaccumulated other comprehensive loss that have not been recognized as components of net periodic benefit costs,cost, net of tax, as of December 31, 20152018, 20142017, and 20132016 are as follows:
| | | | 2015 | | 2014 | | 2013 | As of December 31, |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | 2018 | | 2017 | | 2016 |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| Prior service credit | $ | — |
| | $ | (1,847 | ) | | $ | (538 | ) | | $ | — |
| | $ | (3,182 | ) | | $ | (594 | ) | | $ | — |
| | $ | (4,517 | ) | | $ | (4 | ) | |
| | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Net prior service credit | | $ | — |
| | $ | (692 | ) | | $ | (10 | ) | | $ | — |
| | $ | 823 |
| | $ | (220 | ) | | $ | — |
| | $ | (512 | ) | | $ | (218 | ) |
| Net loss | $ | 19,122 |
| | $ | 2,387 |
| | $ | 10,719 |
| | $ | 17,194 |
| | $ | 3,697 |
| | $ | 12,212 |
| | $ | 17,312 |
| | $ | 4,914 |
| | $ | 7,790 |
| $ | 20,759 |
| | $ | 880 |
| | $ | 14,425 |
| | $ | 20,884 |
| | $ | 1,009 |
| | $ | 12,489 |
| | $ | 22,490 |
| | $ | 1,260 |
| | $ | 11,070 |
|
We expect to amortize a gainloss of $0.4$0.5 million from Accumulatedaccumulated other comprehensive loss to net periodic benefit costscost during 2016.2019.
Information for plans with an accumulated benefit obligation in excess of plan assets as of December 31, 20152018 and 20142017 is as follows:
| | | | | | | | | | | As of December 31, |
| | December 31, 2015 | | December 31, 2014 | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| Projected benefit obligation | $ | 3,461 |
| | $ | 29,874 |
| | $ | 3,622 |
| | $ | 31,908 |
| $ | 45,169 |
| | $ | 65,691 |
| | $ | 48,615 |
| | $ | 31,680 |
|
| Accumulated benefit obligation | $ | 3,461 |
| | $ | 26,012 |
| | $ | 3,622 |
| | $ | 27,299 |
| $ | 45,169 |
| | $ | 59,948 |
| | $ | 48,615 |
| | $ | 26,609 |
|
| Plan assets | $ | — |
| | $ | 6,448 |
| | $ | — |
| | $ | 7,215 |
| $ | 39,875 |
| | $ | 39,868 |
| | $ | 41,101 |
| | $ | 5,759 |
|
Information for plans with a projected benefit obligation in excess of plan assets as of December 31, 20152018 and 20142017 is as follows:
| | | | | | | | | | | As of December 31, |
| | December 31, 2015 | | December 31, 2014 | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| Projected benefit obligation | $ | 14,852 |
| | $ | 29,874 |
| | $ | 13,595 |
| | $ | 31,908 |
| $ | 51,186 |
| | $ | 65,691 |
| | $ | 58,307 |
| | $ | 63,153 |
|
| Plan assets | $ | — |
| | $ | 6,448 |
| | $ | — |
| | $ | 7,215 |
| $ | 39,875 |
| | $ | 39,868 |
| | $ | 41,101 |
| | $ | 36,990 |
|
Other changes in plan assets and benefit obligations, net of tax, recognized in Otherother comprehensive (income)/lossincome/(loss) for the years ended December 31, 20152018, 20142017, and 20132016 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2015 | | 2014 | | 2013 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Net loss/(gain) | $ | 2,792 |
| | $ | (949 | ) | | $ | (1,233 | ) | | $ | 143 |
| | $ | (735 | ) | | $ | 4,640 |
| | $ | (1,284 | ) | | $ | (393 | ) | | $ | (1,072 | ) |
| Amortization of net (loss)/gain | (473 | ) | | (361 | ) | | 70 |
| | (262 | ) | | (482 | ) | | (167 | ) | | (576 | ) | | (308 | ) | | (314 | ) |
| Amortization of prior service credit/(cost) | — |
| | 1,335 |
| | 32 |
| | — |
| | 1,335 |
| | 2 |
| | — |
| | — |
| | (6 | ) |
| Plan amendment | — |
| | — |
| | 24 |
| | — |
| | — |
| | (592 | ) | | — |
| | (4,517 | ) | | (139 | ) |
| Settlement loss | (391 | ) | | — |
| | (330 | ) | | — |
| | — |
| | (51 | ) | | (489 | ) | | — |
| | (18 | ) |
| Total recognized in other comprehensive loss/(income) | $ | 1,928 |
| | $ | 25 |
| | $ | (1,437 | ) | | $ | (119 | ) | | $ | 118 |
| | $ | 3,832 |
| | $ | (2,349 | ) | | $ | (5,218 | ) | | $ | (1,549 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Net loss/(gain) | $ | 2,002 |
| | $ | (124 | ) | | $ | 3,669 |
| | $ | 2,768 |
| | $ | (197 | ) | | $ | 1,618 |
| | $ | 5,368 |
| | $ | (984 | ) | | $ | 2,505 |
|
| Amortization of net loss | (1,080 | ) | | (5 | ) | | (298 | ) | | (1,149 | ) | | (54 | ) | | (130 | ) | | (707 | ) | | (143 | ) | | (436 | ) |
| Amortization of net prior service credit/(cost) | — |
| | 1,728 |
| | (4 | ) | | — |
| | 1,335 |
| | 3 |
| | — |
| | 1,335 |
| | 15 |
|
| Divestiture | — |
| | — |
| | (228 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Plan amendment | — |
| | (3,243 | ) | | — |
| | — |
| | — |
| | (5 | ) | | — |
| | — |
| | (73 | ) |
| Settlement effect | (1,047 | ) | | — |
| | (1,023 | ) | | (3,225 | ) | | — |
| | (69 | ) | | (1,293 | ) | | — |
| | (67 | ) |
| Curtailment effect | — |
| | — |
| | 30 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,272 | ) |
| Total in other comprehensive (income)/loss | $ | (125 | ) | | $ | (1,644 | ) | | $ | 2,146 |
| | $ | (1,606 | ) | | $ | 1,084 |
| | $ | 1,417 |
| | $ | 3,368 |
| | $ | 208 |
| | $ | 672 |
|
Assumptions and Investment Policies
Weighted-average assumptions used to calculate the projected benefit obligations of our defined benefit and retiree healthcare benefit plans as of December 31, 20152018 and 20142017 are as follows:
| | | | | | | | | | | | | | As of December 31, |
| | December 31, 2015 | | | December 31, 2014 | | 2018 | | | 2017 |
| | Defined Benefit | | Retiree Healthcare | | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare | | | Defined Benefit | | Retiree Healthcare |
| U.S. assumed discount rate | 3.10 | % | | 3.50 | % | | 2.90 | % | | 2.90 | % | | 3.79 | % | | 3.90 | % | | 3.00 | % | | 3.10 | % |
| Non-U.S. assumed discount rate | 2.20 | % | | NA |
| | | 1.99 | % | | NA |
| | 2.17 | % | | NA |
| | 2.07 | % | | NA |
|
| Non-U.S. average long-term pay progression | 2.13 | % | | NA |
| | | 3.05 | % | | NA |
| | 2.66 | % | | NA |
| | 2.66 | % | | NA |
|
Weighted-average assumptions used to calculate the net periodic benefit cost of our defined benefit and retiree healthcare benefit plans for the years ended December 31, 20152018, 20142017, and 20132016 are as follows:
| | | | For the year ended December 31, | For the year ended December 31, |
| | 2015 | | 2014 | | 2013 | | 2018 | | 2017 | | 2016 |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare |
| U.S. assumed discount rate | 2.90 | % | | 2.90 | % | | 3.50 | % | | 3.40 | % | | 2.50 | % | | 3.40 | % | | 3.45 | % | | 3.10 | % | | 3.20 | % | | 3.30 | % | | 3.10 | % | | 3.50 | % |
| Non-U.S. assumed discount rate | 4.19 | % | | NA |
| | 2.66 | % | | NA |
| | 2.85 | % | | NA |
| | 5.87 | % | | NA |
| | 3.90 | % | | NA |
| | 3.83 | % | | NA |
|
U.S. average long-term rate of return on plan assets | 5.00 | % | | — |
| (1) | 4.75 | % | | — |
| (1) | 4.75 | % | | — |
| (1) | 4.57 | % | | NA |
| | 4.50 | % | | NA |
| | 5.00 | % | | NA |
|
| Non-U.S. average long-term rate of return on plan assets | 2.51 | % | | NA |
| | 2.17 | % | | NA |
| | 2.61 | % | | NA |
| | 2.26 | % | | NA |
| | 2.29 | % | | NA |
| | 2.60 | % | | NA |
|
| U.S. average long-term pay progression | — | % | | — |
| (2) | — | % | | — |
| (2) | — | % | | — |
| (2) | |
| Non-U.S. average long-term pay progression | 4.34 | % | | NA |
| | 3.13 | % | | NA |
| | 3.21 | % | | NA |
| | 4.82 | % | | NA |
| | 3.75 | % | | NA |
| | 3.78 | % | | NA |
|
__________________
| |
(1) | Long-term rate of return on plan assets is not applicable to our U.S. retiree healthcare benefit plan as we do not hold assets for this plan. |
| |
(2) | Rate of compensation increase is not applicable to our U.S. retiree healthcare benefit plan as compensation levels do not impact earned benefits. |
Assumed healthcare cost trend rates for the U.S. retiree healthcare benefit plan as of December 31, 20152018, 20142017, and 20132016 are as follows:
| | | | Retiree Healthcare | As of December 31, |
| | December 31, 2015 | | December 31, 2014 | | December 31, 2013 | 2018 | | 2017 | | 2016 |
| Assumed healthcare trend rate for next year: | | | | | | | | | | |
| Attributed to less than age 65 | 7.30 | % | | 7.60 | % | | 7.60 | % | 6.60 | % | | 6.90 | % | | 7.10 | % |
| Attributed to age 65 or greater | 6.80 | % | | 7.00 | % | | 7.00 | % | 7.10 | % | | 7.50 | % | | 7.80 | % |
| Ultimate trend rate | 4.50 | % | | 4.50 | % | | 4.50 | % | 4.50 | % | | 4.50 | % | | 4.50 | % |
| Year in which ultimate trend rate is reached: |
| | | | |
| | | | |
| Attributed to less than age 65 | 2029 |
| | 2029 |
| | 2029 |
| 2038 |
| | 2038 |
| | 2038 |
|
| Attributed to age 65 or greater | 2029 |
| | 2029 |
| | 2029 |
| 2038 |
| | 2038 |
| | 2038 |
|
Assumed healthcare trend rates could have a significant effect on the amounts reported for retiree healthcare plans. A one percentage point change in the assumed healthcare trend rates for the year ended December 31, 20152018 would have the following effect:
| | | | | | | One Percentage Point: |
| | 1 percentage point increase | | 1 percentage point decrease | Increase | | Decrease |
| Effect on total service and interest cost components | $ | 2 |
| | $ | (2 | ) | $ | 6 |
| | $ | (5 | ) |
| Effect on post-retirement benefit obligations | $ | 265 |
| | $ | (219 | ) | $ | 200 |
| | $ | (248 | ) |
The table below outlines the benefits expected to be paid to participants from the plans in each of the following years, which reflecttaking into consideration expected future service, as appropriate. The majority of the payments will be paid from plan assets and not company assets.
|
| | | | | | | | | | | |
| Expected Benefit Payments | U.S. Defined Benefit | | U.S. Retiree Healthcare | | Non-U.S. Defined Benefit |
| | | | | | |
| 2016 | $ | 16,407 |
| | $ | 1,227 |
| | $ | 2,972 |
|
| 2017 | 6,827 |
| | 1,295 |
| | 2,304 |
|
| 2018 | 6,378 |
| | 1,359 |
| | 2,394 |
|
| 2019 | 5,710 |
| | 1,362 |
| | 2,822 |
|
| 2020 | 5,138 |
| | 1,265 |
| | 2,732 |
|
| 2021 - 2025 | 16,333 |
| | 4,140 |
| | 33,191 |
|
|
| | | | | | | | | | | |
| | Expected Benefit Payments |
| For the year ended December 31, | U.S. Defined Benefit | | U.S. Retiree Healthcare | | Non-U.S. Defined Benefit |
| 2019 | $ | 6,466 |
| | $ | 1,116 |
| | $ | 2,959 |
|
| 2020 | $ | 5,826 |
| | $ | 738 |
| | $ | 3,232 |
|
| 2021 | $ | 5,313 |
| | $ | 696 |
| | $ | 3,228 |
|
| 2022 | $ | 4,128 |
| | $ | 634 |
| | $ | 3,829 |
|
| 2023 | $ | 3,677 |
| | $ | 523 |
| | $ | 3,528 |
|
| 2024 - 2027 | $ | 10,498 |
| | $ | 1,905 |
| | $ | 21,700 |
|
Plan Assets
We hold assets for our defined benefit plans in the U.S., Japan, the Netherlands, and Belgium. Information about the assets for each of these plans is detailed below. Refer to Note 18, "Fair Value Measures," for descriptions of the levels of the fair value hierarchy in accordance with FASB ASC Topic 820.
U.S. Plan Assets
In 2012, we made the decision to change theOur target asset allocation offor the U.S. defined benefit plan from 51%is 83% fixed income and 49%17% equity to 84% fixed income and 16% equity securities, to better protect the funded status of our U.S. defined benefit plan.securities. To arrive at the targeted asset allocation, we and our investment adviser collaboratively reviewed market opportunities using historic and statisticalhistorical data, as well as the actuarial valuation for the plan, to ensure that the levels of acceptable return and risk are well-defined and monitored. Currently, we believe that there are no significant concentrations of risk associated with the plan assets.
The following table presents information about the plan’s target and actual asset allocation, as well as the actual allocation, as of December 31, 20152018:
| | | Asset Class | Target Allocation | | Actual Allocation as of December 31, 2015 | |
| | | Target Allocation | | Actual Allocation as of December 31, 2018 |
| U.S. large cap equity | 6 | % | | 7 | % | 7 | % | | 7 | % |
| U.S. small / mid cap equity | 4 | % | | 4 | % | 2 | % | | 2 | % |
| Globally managed volatility fund | | 3 | % | | 3 | % |
| International (non-U.S.) equity | 6 | % | | 5 | % | 4 | % | | 4 | % |
| Fixed income (U.S. investment grade) | 82 | % | | 82 | % | |
| Fixed income (U.S. investment and non-investment grade) | | 68 | % | | 67 | % |
| High-yield fixed income | 1 | % | | 1 | % | 2 | % | | 2 | % |
| International (non-U.S.) fixed income | 1 | % | | 1 | % | 1 | % | | 1 | % |
| Money market funds | | 13 | % | | 13 | % |
The portfolio is monitored for automatic rebalancing on a monthly basis.
The following table presents information about the plan assets measured at fair value as of December 31, 20152018 and 20142017, aggregated by the level in the fair value hierarchy within which those measurements fall::
| | | | December 31, 2015 | | December 31, 2014 | As of December 31, |
| Asset Class | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | |
| | | 2018 | | 2017 |
| | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| U.S. large cap equity | $ | 3,787 |
| | $ | — |
| | $ | — |
| | $ | 3,787 |
| | $ | 3,869 |
| | $ | — |
| | $ | — |
| | $ | 3,869 |
| $ | 2,960 |
| | $ | — |
| | $ | — |
| | $ | 2,960 |
| | $ | 3,288 |
| | $ | — |
| | $ | — |
| | $ | 3,288 |
|
| U.S. small / mid cap equity | 2,076 |
| | — |
| | — |
| | 2,076 |
| | 2,204 |
| | — |
| | — |
| | 2,204 |
| 833 |
| | — |
| | — |
| | 833 |
| | 942 |
| | — |
| | — |
| | 942 |
|
| Global managed volatility fund | | 1,214 |
| | — |
| | — |
| | 1,214 |
| | 1,288 |
| | — |
| | — |
| | 1,288 |
|
| International (non-U.S.) equity | 3,090 |
| | — |
| | — |
| | 3,090 |
| | 3,273 |
| | — |
| | — |
| | 3,273 |
| 1,493 |
| | — |
| | — |
| | 1,493 |
| | 1,788 |
| | — |
| | — |
| | 1,788 |
|
| Total equity mutual funds | 8,953 |
| | — |
| | — |
| | 8,953 |
| | 9,346 |
| | — |
| | — |
| | 9,346 |
| 6,500 |
| | — |
| | — |
| | 6,500 |
| | 7,306 |
| | — |
| | — |
| | 7,306 |
|
| Fixed income (U.S. investment grade) | 45,689 |
| | — |
| | — |
| | 45,689 |
| | 47,441 |
| | — |
| | — |
| | 47,441 |
| 26,884 |
| | — |
| | — |
| | 26,884 |
| | 27,507 |
| | — |
| | — |
| | 27,507 |
|
| High-yield fixed income | 763 |
| | — |
| | — |
| | 763 |
| | 836 |
| | — |
| | — |
| | 836 |
| 792 |
| | — |
| | — |
| | 792 |
| | 821 |
| | — |
| | — |
| | 821 |
|
| International (non-U.S.) fixed income | 462 |
| | — |
| | — |
| | 462 |
| | 534 |
| | — |
| | — |
| | 534 |
| 402 |
| | — |
| | — |
| | 402 |
| | 398 |
| | — |
| | — |
| | 398 |
|
| Total fixed income mutual funds | 46,914 |
| | — |
| | — |
| | 46,914 |
| | 48,811 |
| | — |
| | — |
| | 48,811 |
| 28,078 |
| | — |
| | — |
| | 28,078 |
| | 28,726 |
| | — |
| | — |
| | 28,726 |
|
| Total | $ | 55,867 |
| | $ | — |
| | $ | — |
| | $ | 55,867 |
| | $ | 58,157 |
| | $ | — |
| | $ | — |
| | $ | 58,157 |
| |
| Money market funds | | 5,297 |
| | — |
| | — |
| | 5,297 |
| | 5,069 |
| | — |
| | — |
| | 5,069 |
|
| Total plan assets | | $ | 39,875 |
| | $ | — |
| | $ | — |
| | $ | 39,875 |
| | $ | 41,101 |
| | $ | — |
| | $ | — |
| | $ | 41,101 |
|
Investments in mutual funds are based on the publicly-quoted final net asset values on the last business day of the year.
Permitted asset classes include U.S. and non-U.S. equity, U.S. and non-U.S. fixed income, and cash, and cash equivalents. Fixed income includes both investment grade and non-investment grade. Permitted investment vehicles include mutual funds, individual securities, derivatives, and long-duration fixed income securities. While investmentinvestments in individual securities, derivatives, long-duration fixed income andsecurities, cash, and cash equivalents isare permitted, the plan did not hold these types of investments as of December 31, 20152018 or 20142017.
Prohibited investments include direct investmentinvestments in real estate, commodities, unregistered securities, uncovered options, currency exchange contracts, and natural resources (such as timber, oil, and gas).
Japan Plan Assets
The target asset allocation of the Japan defined benefit plan is 50% equity securities and 50% fixed income securities, and cash, and cash equivalents, with allowance for a 40% deviation in either direction. We, along with the trustee of the plan's assets, minimize investment risk by thoroughly assessing potential investments based on indicators of historical returns and current credit ratings. Additionally, investments are diversified by type and geography.
The following table presents information about the plan’s target asset allocation, as well as the actual allocation, as of December 31, 2015:2018:
|
| | | | |
Asset Class | Target Allocation | | Actual Allocation as of December 31, 20152018 |
| Equity securities | 10%-90% | | 3425 | % |
Fixed income securities, and cash, and cash equivalents | 10%-90% | | 6675 | % |
The following table presents information about the plan assets measured at fair value as of December 31, 20152018 and 2014, aggregated by the level in the fair value hierarchy within which those measurements fall:2017:
| | | | December 31, 2015 | | December 31, 2014 | As of December 31, |
| Asset Class | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | |
| | | 2018 | | 2017 |
| | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| U.S. equity | $ | 2,228 |
| | $ | — |
| | $ | — |
| | $ | 2,228 |
| | $ | 3,365 |
| | $ | — |
| | $ | — |
| | $ | 3,365 |
| $ | 2,212 |
| | $ | — |
| | $ | — |
| | $ | 2,212 |
| | $ | 2,461 |
| | $ | — |
| | $ | — |
| | $ | 2,461 |
|
| International (non-U.S.) equity | 7,048 |
| | — |
| | — |
| | 7,048 |
| | 9,471 |
| | 1,494 |
| | — |
| | 10,965 |
| 5,158 |
| | — |
| | — |
| | 5,158 |
| | 6,567 |
| | — |
| | — |
| | 6,567 |
|
| Total equity securities | 9,276 |
| | — |
| | — |
| | 9,276 |
| | 12,836 |
| | 1,494 |
| | — |
| | 14,330 |
| 7,370 |
| | — |
| | — |
| | 7,370 |
| | 9,028 |
| | — |
| | — |
| | 9,028 |
|
| U.S. fixed income | 3,059 |
| | — |
| | — |
| | 3,059 |
| | 1,265 |
| | 2,574 |
| | — |
| | 3,839 |
| 3,076 |
| | 269 |
| | — |
| | 3,345 |
| | 2,968 |
| | 268 |
| | — |
| | 3,236 |
|
| International (non-U.S.) fixed income | 10,873 |
| | 1,956 |
| | — |
| | 12,829 |
| | 9,753 |
| | 286 |
| | — |
| | 10,039 |
| 8,811 |
| | — |
| | — |
| | 8,811 |
| | 11,046 |
| | — |
| | — |
| | 11,046 |
|
| Total fixed income securities | 13,932 |
| | 1,956 |
| | — |
| | 15,888 |
| | 11,018 |
| | 2,860 |
| | — |
| | 13,878 |
| 11,887 |
| | 269 |
| | — |
| | 12,156 |
| | 14,014 |
| | 268 |
| | — |
| | 14,282 |
|
| Cash and cash equivalents | 2,349 |
| | — |
| | — |
| | 2,349 |
| | 230 |
| | — |
| | — |
| | 230 |
| 10,339 |
| | — |
| | — |
| | 10,339 |
| | 7,921 |
| | — |
| | — |
| | 7,921 |
|
| Total | $ | 25,557 |
| | $ | 1,956 |
| | $ | — |
| | $ | 27,513 |
| | $ | 24,084 |
| | $ | 4,354 |
| | $ | — |
| | $ | 28,438 |
| |
| Total plan assets | | $ | 29,596 |
| | $ | 269 |
| | $ | — |
| | $ | 29,865 |
| | $ | 30,963 |
| | $ | 268 |
| | $ | — |
| | $ | 31,231 |
|
The fair valuevalues of equity securities and bondsfixed income securities are based on publicly-quoted finalclosing stock and bond values on the last business day of the year.
Permitted asset classes include equity securities that are traded on the official stock exchange(s) of the respective countries, fixed income securities with certain credit ratings, and cash, and cash equivalents.
The Netherlands Plan Assets
The assets of the Netherlands defined benefit plansplan are composed of insurance policies. The contributions (or premiums) we paymake to the plan are used to purchase insurance policies that provide for specific benefit payments to our plan participants. The benefit formula is determined independently by us. OnUpon retirement of an individual plan participant, the insurance contracts purchased are converted to provide specific benefits for the participant. The contributions paid by us are commingled with contributions paid to the insurance provider by other employers for investment purposes and to reduce costs of plan administration. These Netherlands'administration costs. However, this defined benefit plans areplan is not considered a multi-employer plans.plan.
The following tables presenttable presents information about the plans’plan assets measured at fair value as of December 31, 20152018 and 20142017, aggregated by the level in the fair value hierarchy within which those measurements fall::
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2015 | | December 31, 2014 |
| Asset Class | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| Other (insurance policies) | $ | — |
| | $ | — |
| | $ | 5,757 |
| | $ | 5,757 |
| | $ | — |
| | $ | — |
| | $ | 6,544 |
| | $ | 6,544 |
|
| Total | $ | — |
| | $ | — |
| | $ | 5,757 |
| | $ | 5,757 |
| | $ | — |
| | $ | — |
| | $ | 6,544 |
| | $ | 6,544 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Insurance policies | $ | — |
| | $ | — |
| | $ | 8,897 |
| | $ | 8,897 |
| | $ | — |
| | $ | — |
| | $ | 9,059 |
| | $ | 9,059 |
|
| Total plan assets | $ | — |
| | $ | — |
| | $ | 8,897 |
| | $ | 8,897 |
| | $ | — |
| | $ | — |
| | $ | 9,059 |
| | $ | 9,059 |
|
The following table outlines thepresents a rollforward of the Netherlands plan Level 3 assets in our Netherlands' defined plan for the years ended December 31, 20152018 and 20142017:
| | | | Fair value measurement using significant unobservable inputs (Level 3) | Insurance Policies |
| Balance at December 31, 2013 | $ | 4,463 |
| |
| Balance as of December 31, 2016 | | $ | 8,014 |
|
| Actual return on plan assets still held at reporting date | 2,159 |
| (597 | ) |
| Purchases, sales, settlements, and exchange rate changes | (78 | ) | 1,642 |
|
| Balance at December 31, 2014 | 6,544 |
| |
| Balance as of December 31, 2017 | | 9,059 |
|
| Actual return on plan assets still held at reporting date | (786 | ) | 177 |
|
| Purchases, sales, settlements, and exchange rate changes | (1 | ) | (339 | ) |
| Balance at December 31, 2015 | $ | 5,757 |
| |
| Balance as of December 31, 2018 | | $ | 8,897 |
|
The fair valuevalues of the insurance contracts are measured based on the future benefit payments that would be made by the insurance company to vested plan participants if we were to switch to another insurance company without actually surrendering our policy. In this case, the insurance company would guarantee to pay the vested benefits at retirement accrued under the plan based on current salaries and service to date (i.e., with no allowance for future salary increases or pension increases). The cash flows of the future benefit payments are discounted using the same discount rate asthat is usedapplied to value the related defined benefit plan liabilities.liability.
Belgium Plan Assets
The assets of the Belgium defined benefit plan are composed of insurance policies. As of December 31, 2015 and 2014 the fair value of these plan assets was $0.7 million and $0.7 million, respectively, and are considered to be Level 3 financial instruments.
11. Share-Based Payment Plans
In connection with the completion of our initial public offering ("IPO"), we adopted the Sensata Technologies Holding N.V. 2010 Employee Stock Purchase Plan (the “2010 Stock Purchase Plan”) and the Sensata Technologies Holding N.V. 2010 Equity Incentive Plan (the “2010 Equity Incentive Plan”). The purpose of the 2010 Stock Purchase Plan is to provide an incentive for our present and future eligible employees to purchase our ordinary shares and acquire a proprietary interest in us. The purpose of the 2010 Equity Incentive Plan is to promote long-term growth and profitability by providing our present and future eligible directors, officers, employees, consultants, and advisors with incentives to contribute to, and participate in, our success.Restricted Securities
We have implemented management compensation plansgrant RSU awards that cliff vest between one and three years from the grant date, and we grant PRSU awards that cliff vest three years after the grant date. For PRSU awards, the number of units that ultimately vest depends on the extent to align compensation forwhich certain key executives with our performance. The objective ofperformance criteria are met, as described in the plans is to promote our long-term growth and profitability, along with that of our subsidiaries, by providing those persons who are involved in our successes with an opportunity to acquire an ownership interest in us. The following plans established prior to our IPO and still in effect are: (i) the First Amended and Restated Sensata Technologies Holding B.V. 2006 Management Option Plan (the “2006 Stock Option Plan”), which replaced the Sensata Technologies Holding B.V. 2006 Management Option Plan; and (ii) the First Amended and Restated 2006 Management Securities Purchase Plan (the “Restricted Stock Plan”), which replaced the Sensata Technologies Holding B.V. 2006 Management Securities Purchase Plan.table below.
A summary of the ordinary shares authorized and available under each of our outstanding equity plans as of December 31, 2015 is presented below:
|
| | | | | |
| | Shares Authorized | | Shares Available |
| 2010 Equity Incentive Plan | 10,000 |
| | 5,583 |
|
| 2010 Stock Purchase Plan | 500 |
| | 465 |
|
We have no intention to issue shares from either the 2006 Stock Option Plan or the Restricted Stock Planrestricted securities granted in the future.
Options
A summary of stock option activity for the years ended December 31, 2015,2018, 2017, and 2016 is presented below:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Percentage Range of Units That May Vest (1) |
| | | | | | | 0.0% to 150.0% | 0.0% to 172.5% | | 0.0% to 200.0% |
| (Awards in thousands) | | RSU Awards Granted | | Weighted-Average
Grant-Date
Fair Value | | PRSU Awards Granted | | Weighted-Average Grant-Date Fair Value | PRSU Awards Granted | | Weighted-Average Grant-Date Fair Value | | PRSU Awards Granted | | Weighted-Average Grant-Date Fair Value |
| 2018 | | 218 |
| | $ | 51.05 |
| | 63 |
| | $ | 51.83 |
| 118 |
| | $ | 51.83 |
| | — |
| | $ | — |
|
| 2017 | | 182 |
| | $ | 43.24 |
| | — |
| | $ | — |
| 183 |
| | $ | 43.67 |
| | 53 |
| | $ | 43.33 |
|
| 2016 | | 319 |
| | $ | 38.33 |
| | — |
| | $ | — |
| 180 |
| | $ | 38.96 |
| | — |
| | $ | — |
|
| |
(1) | Represents the percentage range of PRSU award units granted that may vest according to the terms of the awards, The amounts presented within this table do not reflect our current assessment of the probable outcome of vesting based on the achievement or expected achievement of performance conditions. |
Compensation cost for the year ended December 31, 2018 reflects our estimate of the probable outcome of the performance conditions associated with the PRSU awards granted in fiscal years 2018, 2017, and 2016.
A summary of activity related to outstanding restricted securities for fiscal years 20142018, 2017, and 20132016 is presented in the table below (amounts have been calculated based on unrounded shares):
|
| | | | | | | | | | | | | |
| | Stock Options | | Weighted-Average Exercise Price Per Option | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value |
| Options | | | | | | | |
| Balance at December 31, 2012 | 6,876 |
| | $ | 15.60 |
| | 5.6 |
| | $ | 118,660 |
|
| Granted | 887 |
| | 32.97 |
| | | | |
| Forfeited and expired | (147 | ) | | 26.29 |
| | | | |
| Exercised | (2,474 | ) | | 8.39 |
| | | | 68,291 |
|
| Balance at December 31, 2013 | 5,142 |
| | 21.75 |
| | 7.8 |
| | 87,506 |
|
| Granted | 767 |
| | 43.61 |
| | | | |
| Forfeited and expired | (231 | ) | | 35.60 |
| | | | |
| Exercised | (1,589 | ) | | 15.42 |
| | | | 47,372 |
|
| Balance at December 31, 2014 | 4,089 |
| | 27.53 |
| | 6.3 |
| | 101,705 |
|
| Granted | 353 |
| | 56.60 |
| | | | |
| Forfeited and expired | (65 | ) | | 43.93 |
| | | | |
| Exercised | (1,016 | ) | | 18.85 |
| | | | 34,835 |
|
| Balance at December 31, 2015 | 3,361 |
| | 32.89 |
| | 6.2 |
| | 47,967 |
|
| Options vested and exercisable as of December 31, 2015 | 2,172 |
| | 27.06 |
| | 5.1 |
| | 41,297 |
|
Vested and expected to vest as of December 31, 2015 (1) | 3,217 |
| | 32.37 |
| | 6.1 |
| | 47,261 |
|
|
| | | | | | |
| | Restricted Securities (thousands) | | Weighted-Average Grant-Date Fair Value |
| Balance as of December 31, 2015 | 654 |
| | $ | 45.87 |
|
| Granted | 499 |
| | $ | 38.56 |
|
| Forfeited | (48 | ) | | $ | 47.01 |
|
| Vested | (185 | ) | | $ | 33.41 |
|
| Balance as of December 31, 2016 | 920 |
| | $ | 44.35 |
|
| Granted | 418 |
| | $ | 43.44 |
|
| Forfeited | (35 | ) | | $ | 43.94 |
|
| Vested | (222 | ) | | $ | 42.24 |
|
| Balance as of December 31, 2017 | 1,081 |
| | $ | 44.43 |
|
| Granted | 399 |
| | $ | 51.40 |
|
| Forfeited | (121 | ) | | $ | 48.28 |
|
| Vested | (240 | ) | | $ | 53.01 |
|
| Balance as of December 31, 2018 | 1,119 |
| | $ | 44.66 |
|
__________________Aggregate intrinsic value information for restricted securities as of December 31, 2018, 2017, and 2016 is presented below:
|
| | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 | | 2016 |
| Outstanding | $ | 50,161 |
| | $ | 55,271 |
| | $ | 35,845 |
|
| Expected to vest | $ | 44,203 |
| | $ | 42,106 |
| | $ | 26,937 |
|
The weighted-average remaining periods over which the restrictions will lapse as of December 31, 2018, 2017, and 2016 are as follows:
|
| | | | | |
| | As of December 31, |
| (Amounts in years) | 2018 | | 2017 | | 2016 |
| Outstanding | 1.2 | | 1.3 | | 1.5 |
| Expected to vest | 1.2 | | 1.4 | | 1.5 |
The expected to vest restricted securities are calculated based on the application of a forfeiture rate assumption to all outstanding restricted securities as well as our assessment of the probability of meeting the required performance conditions that pertain to the PRSU awards.
Share-Based Compensation Expense
The table below presents non-cash compensation expense related to our equity awards, which is recorded within SG&A expense in the consolidated statements of operations, during the identified periods:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Options | $ | 5,739 |
| | $ | 6,046 |
| | $ | 7,094 |
|
| Restricted securities | 18,086 |
| | 13,773 |
| | 10,331 |
|
| Total share-based compensation expense | $ | 23,825 |
| | $ | 19,819 |
| | $ | 17,425 |
|
In 2018, we recognized a $3.0 million income tax benefit associated with share-based compensation expense. We recognized no such tax benefit in either fiscal year 2017 or 2016.
The table below presents unrecognized compensation expense at December 31, 2018 for each class of award, and the remaining expected term for this expense to be recognized:
|
| | | | | |
| | Unrecognized Compensation Expense | | Expected Recognition (years) |
| Options | $ | 9,329 |
| | 2.1 |
| Restricted securities | 23,168 |
| | 1.6 |
| Total unrecognized compensation expense | $ | 32,497 |
| | |
5. Restructuring and Other Charges, Net
Restructuring and other charges, net for the years ended December 31, 2018, 2017, and 2016 were as follows:
|
| | | | | | | | | | | | |
| | | For the year ended December 31, |
| | | 2018 | | 2017 | | 2016 |
Severance costs, net (1) | | $ | 7,566 |
| | $ | 11,125 |
| | $ | 813 |
|
Facility and other exit costs (2) | | 877 |
| | 7,850 |
| | 3,300 |
|
Gain on sale of Valves Business (3) | | (64,423 | ) | | — |
| | — |
|
Other (4) | | 8,162 |
| | — |
| | — |
|
| Restructuring and other charges, net | | $ | (47,818 | ) | | $ | 18,975 |
| | $ | 4,113 |
|
| |
(1) | ConsistsSeverance costs for the year ended December 31, 2018 were primarily related to limited workforce reductions of vested optionsmanufacturing, engineering, and unvested options that are expectedadministrative positions as well as the elimination of certain positions related to vest.site consolidations. Severance costs, net recognized during the year ended December 31, 2017 included $8.4 million of charges related to the closure of our facility in Minden, Germany, a site we obtained in connection with the acquisition of certain subsidiaries of Custom Sensors & Technologies Ltd. ("CST"). Severance costs for the year ended December 31, 2016 primarily related to charges recorded in connection with acquired businesses and the termination of a limited number of employees in various locations throughout the world. |
| |
(2) | Facility and other exit costs for the year ended December 31, 2017 included $3.2 million of costs related to the closure of our facility in Minden, Germany and the transfer of equipment to alternate operating sites as well as $3.1 million of costs associated with the consolidation of two other manufacturing sites in Europe. Facility and other exit costs for the year ended December 31, 2016 primarily related to the relocation of manufacturing lines from our facility in the Dominican Republic to a manufacturing facility in Mexico. |
| |
(3) | In fiscal year 2018 we completed the sale of the the capital stock of Schrader Bridgeport International, Inc. and August France Holding Company SAS (collectively, the "Valves Business"). The expectedgain on this sale is included in restructuring and other charges, net. Refer to vest options are determined by applyingNote 17, "Acquisitions and Divestitures," for further discussion of the forfeiture rate assumption, adjustedsale of the Valves Business. |
| |
(4) | In the year ended December 31, 2018, we incurred $5.9 million of incremental direct costs in order to transact the sale of the Valves Business and $2.2 million of deferred compensation incurred in connection with the acquisition of GIGAVAC. Refer to Note 17, "Acquisitions and Divestitures," for cumulative actual forfeitures, to total unvested options.further discussion. |
A summary ofChanges to our severance liability during the statusyears ended December 31, 2018 and 2017 were as follows:
|
| | | | |
| | | Severance |
| Balance as of December 31, 2016 | | $ | 17,350 |
|
| Charges, net of reversals | | 11,125 |
|
| Payments | | (22,511 | ) |
| Foreign currency remeasurement | | 1,619 |
|
| Balance as of December 31, 2017 | | 7,583 |
|
| Charges, net of reversals | | 7,566 |
|
| Payments | | (8,341 | ) |
| Foreign currency remeasurement | | (217 | ) |
| Balance as of December 31, 2018 | | $ | 6,591 |
|
The following table outlines the current and long-term components of our unvested optionsseverance liability recognized in the consolidated balance sheets as of December 31, 20152018 and 2017.
|
| | | | | | | | |
| | | As of December 31, |
| | | 2018 | | 2017 |
| Accrued expenses and other current liabilities | | $ | 6,591 |
| | $ | 4,184 |
|
| Other long-term liabilities | | — |
| | 3,399 |
|
| Total severance liability | | $ | 6,591 |
| | $ | 7,583 |
|
6. Other, Net
Other, net consisted of the following for the years ended December 31, 2018, 2017, and 2016:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
Currency remeasurement (loss)/gain on net monetary assets(1) | $ | (18,905 | ) | | $ | 18,041 |
| | $ | (10,621 | ) |
Gain/(loss) on foreign currency forward contracts(2) | 2,070 |
| | (15,618 | ) | | (1,850 | ) |
(Loss)/gain on commodity forward contracts(2) | (8,481 | ) | | 9,989 |
| | 7,399 |
|
Loss on debt financing(3) | (2,350 | ) | | (2,670 | ) | | — |
|
Net periodic benefit cost, excluding service cost(4) | (3,585 | ) | | (3,402 | ) | | (192 | ) |
| Other | 886 |
| | 75 |
| | 171 |
|
| Other, net | $ | (30,365 | ) | | $ | 6,415 |
| | $ | (5,093 | ) |
| |
(1) | Relates to the remeasurement of non-U.S. dollar denominated net monetary assets and liabilities into U.S. dollars. Refer to the Foreign Currency section of Note 2, "Significant Accounting Policies," for discussion. |
| |
(2) | Relates to changes in the fair value of derivative financial instruments not designated as cash flow hedges. Refer to Note 19, "Derivative Instruments and Hedging Activities," for a more detailed discussion. |
| |
(3) | Refer to Note 14, "Debt," for a more detailed discussion of our debt financing transactions. |
| |
(4) | On January 1, 2018, we adopted FASB ASU No. 2017-07, which requires the non-service cost components to be presented apart from the service cost component and outside of profit from operations. Refer to the Pension and Other Post-Retirement Benefits section of Note 2, "Significant Accounting Policies," and Note 13, "Pension and Other Post-Retirement Benefits," for additional details. |
7. Income Taxes
Effective April 27, 2006 (inception), and concurrent with the completion of the acquisition of the Sensors & Controls business ("S&C") of Texas Instruments Incorporated ("TI") (the "2006 Acquisition"), we commenced filing tax returns in the Netherlands as a stand-alone entity. On March 28, 2018, the Company reincorporated its headquarters in the U.K. Several of our Dutch resident subsidiaries continue to be taxable entities in the Netherlands and file tax returns under Dutch fiscal unity (i.e., consolidation). Prior to April 30, 2008, we filed one consolidated tax return in the U.S. On April 30, 2008, our U.S. subsidiaries executed a separation and distribution agreement that divided our U.S. businesses, resulting in two separate U.S. consolidated federal income tax returns. On January 1, 2016, our U.S. subsidiaries resumed filing one consolidated tax return. Our remaining subsidiaries will file income tax returns in the countries in which they are incorporated and/or operate, including Belgium, Bulgaria, China, France, Germany, Japan, Malaysia, Mexico, the Netherlands, South Korea, and the U.K. The 2006 Acquisition purchase accounting and the related debt and equity capitalization of the various subsidiaries of the consolidated company, and the realignment of the functions performed and risks assumed by the various subsidiaries, are of significant consequence to the determination of future book and taxable income of the respective subsidiaries and Sensata as a whole.
Refer to Note 2, "Significant Accounting Policies," for detailed discussion of the accounting policies related to income taxes.
Effects of the Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 ("Tax Reform" or "the Act") was signed into law. The Act reduced the U.S. federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and created new taxes on certain foreign sourced earnings. Given the significance of the legislation, the U.S. Securities and Exchange Commission staff issued Staff Accounting Bulletin
No. 118 ("SAB 118"). In fiscal year 2017 and the first nine months of 2018, we recorded provisional amounts for certain enactment-date effects of the Act by applying the guidance in SAB 118 because we had not yet completed our enactment-date accounting for these effects.
In fiscal years 2018 and 2017 we recorded tax expense related to the enactment-date effects of the Act that included recording the one-time transition tax liability related to undistributed earnings of certain foreign subsidiaries which were not previously taxed, and adjusting deferred tax assets and liabilities. We applied the guidance in SAB 118 when accounting for the enactment-date effects of the Act in 2017 and throughout 2018. At December 31, 2017, we had not completed our accounting for all of the enactment-date income tax effects of the Act under FASB ASC Topic 740 for the following aspects: impact on assessment on the measurement of deferred tax assets and liabilities, including the potential impact of the tax on global intangible low-taxed income, and the one-time transition tax. As of December 31, 2018, we have completed our accounting for all of the enactment-date income tax effects of the Act. As further discussed below, during fiscal year 2018 we did not record an adjustment to the provisional amounts recorded as of December 31, 2017.
Deferred tax assets and liabilities
In the year ended December 31, 2017, we remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%, by recording a tax benefit of $73.7 million, which was principally associated with indefinite lived intangible assets. Absent this deferred tax liability, we would have been in a net deferred tax asset position that was offset by a valuation allowance at December 31, 2017. Upon further analysis of certain aspects of the Act and refinement of our calculations during the year then ended December 31, 2018, we determined that no further adjustment was necessary.
One-time transition tax
The one-time transition tax is presentedbased on our total post-1986 earnings and profits (E&P) of subsidiaries held by our U.S. companies that we previously deferred from U.S. income taxes. Due to tax attributes available, which had a full valuation allowance, to offset the anticipated transition tax, we provisionally did not record an income tax expense related to this tax at December 31, 2017.
Upon further analyses of the Act and Notices and regulations issued and proposed by the U.S. Department of the Treasury and the Internal Revenue Service, we finalized our calculations of the transition tax liability during 2018. The transition tax was fully offset by tax losses incurred in 2017, resulting in no additional tax liability.
Global intangible low-taxed income (GILTI)
The Act subjects a U.S. shareholder to tax on global intangible low-taxed income (GILTI) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the table below (amountsyear the tax is incurred as a period expense only. We have been calculated based on unrounded shares):elected to account for GILTI in the year the tax is incurred.
Income before taxes
Income/(loss) before taxes for the years ended December 31, 2018, 2017, and 2016 was categorized by jurisdiction as follows:
|
| | | | | | |
| | Stock Options | | Weighted-Average Grant-Date Fair Value |
| Unvested as of December 31, 2014 | 1,514 |
| | $ | 12.41 |
|
| Granted during the year | 353 |
| | $ | 17.94 |
|
| Vested during the year | (614 | ) | | $ | 12.26 |
|
| Forfeited during the year | (64 | ) | | $ | 14.23 |
|
| Unvested as of December 31, 2015 | 1,189 |
| | $ | 14.04 |
|
|
| | | | | | | | | | | |
| | U.S. | | Non-U.S. | | Total |
| 2018 | $ | 68,027 |
| | $ | 458,348 |
| | $ | 526,375 |
|
| 2017 | $ | (11,425 | ) | | $ | 413,866 |
| | $ | 402,441 |
|
| 2016 | $ | (43,842 | ) | | $ | 365,287 |
| | $ | 321,445 |
|
(Benefit from)/provision for income taxes
(Benefit from)/provision for income taxes for the years ended December 31, 2018, 2017, and 2016 was categorized by jurisdiction as follows:
|
| | | | | | | | | | | | | | | |
| | U.S. Federal | | Non-U.S. | | U.S. State | | Total |
| 2018 | | | | | | | |
| Current | $ | 5,700 |
| | $ | 64,666 |
| | $ | 1,082 |
| | $ | 71,448 |
|
| Deferred | (109,663 | ) | | (18,770 | ) | | (15,635 | ) | | (144,068 | ) |
| Total | $ | (103,963 | ) | | $ | 45,896 |
| | $ | (14,553 | ) | | $ | (72,620 | ) |
| 2017 | | | | | | | |
| Current | $ | — |
| | $ | 50,601 |
| | $ | 240 |
| | $ | 50,841 |
|
| Deferred | (56,956 | ) | | (1,104 | ) | | 1,303 |
| | (56,757 | ) |
| Total | $ | (56,956 | ) | | $ | 49,497 |
| | $ | 1,543 |
| | $ | (5,916 | ) |
| 2016 | | | | | | | |
| Current | $ | 464 |
| | $ | 49,977 |
| | $ | 226 |
| | $ | 50,667 |
|
| Deferred | 10,036 |
| | 2,010 |
| | (3,702 | ) | | 8,344 |
|
| Total | $ | 10,500 |
| | $ | 51,987 |
| | $ | (3,476 | ) | | $ | 59,011 |
|
Effective tax rate reconciliation
The fair valueprincipal reconciling items from income tax computed at the U.S. statutory tax rate for the years ended December 31, 2018, 2017, and 2016 were as follows:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Tax computed at statutory rate of 21% in 2018 and 35% in 2017 and 2016 | $ | 110,539 |
| | $ | 140,854 |
| | $ | 112,506 |
|
| Change in valuation allowances | (123,426 | ) | | (3,368 | ) | | 30,565 |
|
| Foreign tax rate differential | (41,200 | ) | | (111,990 | ) | | (86,339 | ) |
| Change in tax laws or rates | (22,264 | ) | | 3,912 |
| | 2,542 |
|
| Research and development incentives | (19,475 | ) | | (5,922 | ) | | (10,961 | ) |
| U.S. state taxes, net of federal benefit | (11,499 | ) | | 1,087 |
| | (2,166 | ) |
| Unrealized foreign exchange losses, net | 11,346 |
| | 830 |
| | 3,829 |
|
| Reserve for tax exposure | 10,775 |
| | 38,013 |
| | 11,227 |
|
| Withholding taxes not creditable | 8,734 |
| | 3,896 |
| | 6,014 |
|
| U.S. Tax Reform impact | — |
| | (73,668 | ) | | — |
|
| Other | 3,850 |
| | 440 |
| | (8,206 | ) |
| (Benefit from)/provision for income taxes | $ | (72,620 | ) | | $ | (5,916 | ) | | $ | 59,011 |
|
Change in valuation allowances
During the years ended December 31, 2018, 2017, and 2016 we released a portion of stock optionsour valuation allowance, recognizing a deferred tax benefit. Refer to the discussion below related to the release of the valuation allowance.
U.S. Tax Reform Impact
As a result of Tax Reform, the U.S. statutory tax rate was lowered from 35% to 21%, effective on January 1, 2018. We were required to remeasure our U.S. deferred tax assets and liabilities to the new tax rate. For the year ended December 31, 2017 we recorded $73.7 million of income tax benefit for the remeasurement of the deferred tax liabilities associated with indefinite-lived intangible assets that vestedwill reverse at the new 21% rate. Absent this deferred tax liability, the U.S. operation was in a net deferred tax asset position that was offset by a full valuation allowance at December 31, 2017. We reduced our net deferred tax assets excluding the indefinite-lived intangible assets and the corresponding valuation allowance by $120.0 million.
Foreign tax rate differential
We operate in locations outside the U.S., including Bermuda, Bulgaria, China, Malaysia, the Netherlands, South Korea, and the U.K., that historically have had statutory tax rates different than the U.S. statutory rate. This can result in a foreign tax rate differential that may reflect a tax benefit or detriment. This foreign rate differential can change from year to year based upon the jurisdictional mix of earnings and changes in current and future enacted tax rates.
Certain of our subsidiaries are currently eligible, or have been eligible, for tax exemptions or holidays in their respective jurisdictions. From 2016 through 2018, a subsidiary in Changzhou, China was eligible for a reduced tax rate of 15%. The impact on current tax expense of the tax holidays and exemptions is included in the foreign tax rate differential line in the reconciliation of the statutory rate to effective rate. The remeasurement of the deferred tax assets and liabilities is included in the change in tax laws or rates line.
Research and development incentives
Certain income of our U.K. subsidiaries is eligible for lower tax rates under the "patent box" regime, resulting in certain of our intellectual property income being taxed at a rate lower than the U.K. statutory tax rate. Certain R&D expenses are eligible for a bonus deduction under China’s R&D super deduction regime. In 2018, we substantially completed an assessment of our ability to claim an R&D credit in the U.S. As a result of this assessment, we recorded a tax benefit of $10.0 million. Annually, we expect our R&D credit to result in a net benefit of approximately $2.5 million per year. Prior to fiscal year 2018, the deferred tax asset related to these R&D credits would have been offset by the valuation allowance.
Withholding taxes not creditable
Withholding taxes may apply to intercompany interest, royalty, management fees, and certain payments to third parties. Such taxes are expensed if they cannot be credited against the recipient’s tax liability in its country of residence. Additional consideration also has been given to the withholding taxes associated with the remittance of presently unremitted earnings and the recipient's ability to obtain a tax credit for such taxes. Earnings are not considered to be indefinitely reinvested in the jurisdictions in which they were earned. In certain jurisdictions we record withholding and other taxes on intercompany payments including dividends.
Deferred income tax assets and liabilities
The primary components of deferred income tax assets and liabilities as of December 31, 2018 and 2017 were as follows:
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Deferred tax assets: | | | |
| Inventories and related reserves | $ | 14,171 |
| | $ | 17,287 |
|
| Prepaid and accrued expenses | 71,004 |
| | 25,920 |
|
| Property, plant and equipment | 14,571 |
| | 13,396 |
|
| Intangible assets | 27,122 |
| | 22,050 |
|
| Unrealized exchange loss | 4,255 |
| | 12,265 |
|
| Net operating loss, interest expense, and other carryforwards | 296,255 |
| | 349,244 |
|
| Pension liability and other | 8,701 |
| | 8,880 |
|
| Share-based compensation | 11,332 |
| | 12,195 |
|
| Other | 10,151 |
| | 7,028 |
|
| Total deferred tax assets | 457,562 |
| | 468,265 |
|
| Valuation allowance | (157,043 | ) | | (277,315 | ) |
| Net deferred tax asset | 300,519 |
| | 190,950 |
|
| Deferred tax liabilities: | | | |
| Property, plant and equipment | (15,795 | ) | | (23,222 | ) |
| Intangible assets and goodwill | (440,348 | ) | | (428,028 | ) |
| Unrealized exchange gain | (6,912 | ) | | (6,031 | ) |
| Tax on undistributed earnings of subsidiaries | (35,187 | ) | | (38,894 | ) |
| Total deferred tax liabilities | (498,242 | ) | | (496,175 | ) |
| Net deferred tax liability | $ | (197,723 | ) | | $ | (305,225 | ) |
Valuation allowance and net operating loss carryforwards
In measuring our deferred tax assets, we consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed for all or some portion of the deferred tax assets. Significant judgment is required in considering the relative impact of the negative and positive evidence, and weight given to each category of evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary, and the more difficult it is to support a conclusion that a valuation allowance is not needed. Additionally, we utilize the "more likely than not" criteria established in FASB ASC Topic 740 to determine whether the future tax benefit from the deferred tax assets should be recognized. As a result, we have established valuation allowances on the deferred tax assets in jurisdictions that have incurred net operating losses and in which it is more likely than not that such losses will not be utilized in the foreseeable future.
As of each reporting date, we consider new evidence, both positive and negative, that could impact our view with regard to future realization of deferred tax assets. In the fourth quarter of 2018, based on reversals of existing taxable differences, projections of future taxable income, and taxable income in the current year, we have determined that sufficient positive evidence exists as of December 31, 2018, to conclude that it is more likely than not the additional deferred taxes of $122.1 million are realizable, and therefore, reduced the valuation allowance accordingly.
One of the provisions of the Tax Act limits the deduction for net interest expense incurred by U.S. corporations to 30% of adjusted taxable income. As a result of this provision, we have determined that certain of our interest carryforwards may be subject to limitation, and as result, determined that it was appropriate to retain the valuation allowance on a significant portion of these carryforwards.
For tax purposes, certain goodwill and indefinite-lived intangible assets are generally amortizable over 6 to 20 years. For book purposes, goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment annually. The tax amortization of goodwill and indefinite-lived intangible assets will result in a taxable temporary difference, which will not
reverse unless the related book goodwill or intangible asset is impaired or written off. This liability may not be used to support deductible temporary differences, such as net operating loss carryforwards, which may expire within a definite period.
The total valuation allowance for the years ended December 31, 2018 and 2017 decreased $120.3 million and $22.4 million, respectively. Subsequently reported tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 2018 will be allocated to income tax benefit recognized in the consolidated statements of operations.
As of December 31, 2018, we have U.S. federal net operating loss carryforwards of $416.0 million and suspended interest expense carryforwards of $460.2 million. U.S. federal net operating loss carryforwards will expire from 2027 to 2037, state net operating loss carryforwards will expire from 2019 to 2037, and the interest carryovers have an unlimited life. It is more likely than not that these net operating losses will not be utilized in the foreseeable future. We also have non-U.S. net operating loss carryforwards of $238.0 million, which will begin to expire in 2019.
Unrecognized tax benefits
A reconciliation of the amount of unrecognized tax benefits is as follows:
|
| | | |
| Balance as of December 31, 2015 | $ | 38,057 |
|
| Increases related to prior year tax positions | 6,390 |
|
| Increases related to current year tax positions | 8,462 |
|
| Decreases related to lapse of applicable statute of limitations | (256 | ) |
| Decreases related to settlements with tax authorities | (6,755 | ) |
| Balance as of December 31, 2016 | 45,898 |
|
| Increases related to prior year tax positions | 7,968 |
|
| Increases related to current year tax positions | 14,585 |
|
| Decreases related to lapse of applicable statute of limitations | (1,356 | ) |
| Decreases related to settlements with tax authorities | (7,211 | ) |
| Balance as of December 31, 2017 | 59,884 |
|
| Increases related to prior year tax positions | 14,609 |
|
| Increases related to current year tax positions | 15,676 |
|
| Increases related to business combination | 1,000 |
|
| Decreases related to prior year tax positions | (1,144 | ) |
| Decreases related to foreign currency exchange rate fluctuations | (416 | ) |
| Balance as of December 31, 2018 | $ | 89,609 |
|
We record interest and penalties related to unrecognized tax benefits in the consolidated statements of operations and the consolidated balance sheets. The table that follows presents the (income)/expense related to such interest and penalties recognized in the consolidated statements of operations during the years ended December 31, 20152018, 2017, and 2016, and the amount of interest and penalties recorded on the consolidated balance sheets as of December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Statements of Operations | | Balance Sheets |
| | | For the year ended December 31, | | As of December 31, |
| (Dollars in millions) | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 |
| Interest | | $ | (0.2 | ) | | $ | 0.2 |
| | $ | 0.1 |
| | $ | 0.4 |
| | $ | 0.7 |
|
| Penalties | | $ | (0.2 | ) | | $ | (0.1 | ) | | $ | 0.1 |
| | $ | 0.4 |
| | $ | 0.5 |
|
The liability for unrecognized tax benefits generally relates to the allocation of taxable income to the various jurisdictions where we are subject to tax. At December 31, 2018, we anticipate that the liability for unrecognized tax benefits could decrease by up to $0.5 million within the next twelve months due to the expiration of certain statutes of limitation or the settlement of examinations or issues with tax authorities. The amount of unrecognized tax benefits as of December 31, 2018 and 2017 that if recognized, would impact our effective tax rate are $11.5 million and $5.4 million, respectively.
Our major tax jurisdictions include Belgium, Bulgaria, China, France, Germany, Japan, Malaysia, Mexico, the Netherlands, South Korea, the U.K., and the U.S. These jurisdictions generally remain open to examination by the relevant tax authority for the tax years 2006 through 2018.
Indemnifications
We have various indemnification provisions in place with parties including TI, Honeywell, William Blair, Tomkins Limited, and Custom Sensors & Technologies Ltd. These provisions provide for the reimbursement of future tax liabilities paid by us that relate to the pre-acquisition periods of the acquired businesses including S&C, First Technology Automotive and Special Products, Airpax Holdings, Inc., August Cayman Company, Inc. ("Schrader"), CST, and GIGAVAC.
8. Net Income per Share
Basic and diluted net income per share are calculated by dividing net income by the number of basic and diluted weighted-average ordinary shares outstanding during the period. For the years ended December 31, 2018, 20142017, and 2013 was $7.5 million, $7.4 million2016, the weighted-average ordinary shares outstanding used to calculate basic and $6.7 million respectively.diluted net income per share were as follows:
|
| | | | | | | | |
| | For the year ended December 31, |
| (Shares in thousands) | 2018 | | 2017 | | 2016 |
| Basic weighted-average ordinary shares outstanding | 168,570 |
| | 171,165 |
| | 170,709 |
|
| Dilutive effect of stock options | 822 |
| | 616 |
| | 489 |
|
| Dilutive effect of unvested restricted securities | 467 |
| | 388 |
| | 262 |
|
| Diluted weighted-average ordinary shares outstanding | 169,859 |
| | 172,169 |
| | 171,460 |
|
Net income and net income per share are presented in the consolidated statements of operations.
Certain potential ordinary shares were excluded from our calculation of diluted weighted-average ordinary shares outstanding because either they would have had an anti-dilutive effect on net income per share or they related to employees underequity awards that were contingently issuable for which the 2010 Equity Incentive Plan vest 25% per year over four years from the datecontingency had not been satisfied. Refer to Note 4, "Share-Based Payment Plans," for further discussion of grant. Options granted to directors under the 2010 Equity Incentive Plan vest after one year.our equity awards. These potential ordinary shares are as follows:
We recognize compensation expense for options on a straight-line basis over the requisite service period, which is generally the same as the vesting period. The options expire ten years from the date of grant. Except as otherwise provided in specific option award agreements, if a participant ceases to be employed by us for any reason, options not yet vested expire at the termination date, and options that are fully vested expire 60 days after termination of the participant’s employment for any
|
| | | | | | | | |
| | For the year ended December 31, |
| (Shares in thousands) | 2018 | | 2017 | | 2016 |
| Anti-dilutive shares excluded | 930 |
| | 1,410 |
| | 1,401 |
|
| Contingently issuable shares excluded | 687 |
| | 871 |
| | 606 |
|
reason other than termination for cause (in which case the options expire on the participant’s termination date) or due to death or disability (in which case the options expire 6 months after the participant’s termination date).9. Inventories
The weighted-average grant-date fair value per option granted during the years ended components of inventories as of December 31, 20182015, 2014, and 20132017 was $17.94, were as follows:$14.33, and $10.37, respectively. The fair value of options was estimated on the date of grant using the Black-Scholes-Merton option-pricing model. See
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Finished goods | $ | 187,095 |
| | $ | 195,089 |
|
| Work-in-process | 104,405 |
| | 92,678 |
|
| Raw materials | 200,819 |
| | 158,362 |
|
| Inventories | $ | 492,319 |
| | $ | 446,129 |
|
Refer to Note 2, "Significant Accounting Policies," for a discussion of our accounting policies related to inventories.
10. Property, Plant and Equipment, Net
PP&E, net as of December 31, 2018 and 2017 consisted of the following:
|
| | | | | | | | |
| | | As of December 31, |
| | | 2018 | | 2017 |
| Land | | $ | 22,021 |
| | $ | 23,077 |
|
| Buildings and improvements | | 259,182 |
| | 250,475 |
|
| Machinery and equipment | | 1,220,285 |
| | 1,132,461 |
|
| Total PP&E | | 1,501,488 |
| | 1,406,013 |
|
| Accumulated depreciation | | (714,310 | ) | | (655,964 | ) |
| PP&E, net | | $ | 787,178 |
| | $ | 750,049 |
|
Depreciation expense for PP&E, including amortization of leasehold improvements and depreciation of assets under capital leases, totaled $106.0 million, $109.3 million, and $106.9 million for the years ended December 31, 2018, 2017, and 2016, respectively.
PP&E, net as of December 31, 2018 and 2017 included the following assets under capital leases:
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Assets under capital leases in PP&E | $ | 49,714 |
| | $ | 45,249 |
|
| Accumulated depreciation | (22,508 | ) | | (20,631 | ) |
| Assets under capital leases in PP&E, net | $ | 27,206 |
| | $ | 24,618 |
|
Refer to Note 2, "Significant Accounting Policies," for a discussion of our accounting policies related to PP&E, net.
11. Goodwill and Other Intangible Assets, Net
The following table outlines the changes in goodwill by segment for the year ended December 31, 2018. There were no acquisitions or other changes to goodwill during the year ended December 31, 2017.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Performance Sensing |
| Sensing Solutions |
| Total |
| | Gross
Goodwill |
| Accumulated
Impairment |
| Net
Goodwill |
| Gross
Goodwill |
| Accumulated
Impairment |
| Net
Goodwill |
| Gross
Goodwill |
| Accumulated
Impairment |
| Net
Goodwill |
| Balance as of December 31, 2016 and 2017 | $ | 2,148,135 |
| | $ | — |
| | $ | 2,148,135 |
| | $ | 875,795 |
| | $ | (18,466 | ) | | $ | 857,329 |
| | $ | 3,023,930 |
| | $ | (18,466 | ) | | $ | 3,005,464 |
|
| Divestiture of Valves Business | (38,800 | ) | | — |
| | (38,800 | ) | | — |
| | — |
| | — |
| | (38,800 | ) | | — |
| | (38,800 | ) |
| Acquisition of GIGAVAC | 46,298 |
| | — |
| | 46,298 |
| | 68,340 |
| | — |
| | 68,340 |
| | 114,638 |
| | — |
| | 114,638 |
|
| Balance as of December 31, 2018 | $ | 2,155,633 |
| | $ | — |
| | $ | 2,155,633 |
| | $ | 944,135 |
| | $ | (18,466 | ) | | $ | 925,669 |
| | $ | 3,099,768 |
| | $ | (18,466 | ) | | $ | 3,081,302 |
|
Goodwill attributed to the acquisition of GIGAVAC reflects our allocation of purchase price to the estimated fair value of certain assets acquired and liabilities assumed. Preliminary goodwill attributed to the acquisition of GIGAVAC has been assigned to our segments in the above table based on a methodology using anticipated future earnings of the components of business. The allocation is preliminary and is subject to change prior to the end of the measurement period. Goodwill attributed to the sale of the Valves Business is based on the relative fair value of the Valves Business to the Performance Sensing reporting unit. Refer to Note 17, "Acquisitions and Divestitures," for further discussion of howthe acquisition of GIGAVAC and the sale of the Valves Business.
In connection with the sale of the Valves Business, as required by FASB ASC Topic 350, we estimateevaluated the goodwill of the retained portion of the Performance Sensing reporting unit for impairment using the quantitative method and determined that it was not impaired. In addition, we evaluated our goodwill for impairment as of October 1, 2018 using a combination of the qualitative and quantitative methods. Refer to Note 2, "Significant Accounting Policies," for discussion of these methods. Based on these analyses, we have determined that, for the Performance Sensing reporting unit, which was subject to the qualitative method, it was more likely than not that its fair value was greater than its carrying value at that date, and the Electrical
Protection, Industrial Sensing, Aerospace, Power Management, and Interconnection reporting units, which were subject to the quantitative method, that their fair values exceeded their carrying values at that date.
We evaluated our other indefinite-lived intangible assets for impairment as of October 1, 2018, using the quantitative method, and we determined that the fair value of options. each indefinite–lived intangible asset exceeded its respective carrying value on that date.
The weighted-average key assumptions usedfollowing table outlines the components of definite-lived intangible assets as of December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of December 31, |
| | Weighted-
Average
Life (years) | | 2018 | | 2017 |
Gross
Carrying
Amount | | Accumulated
Amortization | | Accumulated
Impairment | | Net
Carrying
Value | | Gross
Carrying
Amount | | Accumulated
Amortization | | Accumulated
Impairment | | Net
Carrying
Value |
| Completed technologies | 14 | | $ | 759,008 |
| | $ | (475,295 | ) | | $ | (2,430 | ) | | $ | 281,283 |
| | $ | 727,968 |
| | $ | (418,987 | ) | | $ | (2,430 | ) | | $ | 306,551 |
|
| Customer relationships | 11 | | 1,825,698 |
| | (1,352,189 | ) | | (12,144 | ) | | 461,365 |
| | 1,771,198 |
| | (1,287,581 | ) | | (12,144 | ) | | 471,473 |
|
| Non-compete agreements | 8 | | 23,400 |
| | (23,400 | ) | | — |
| | — |
| | 23,400 |
| | (23,400 | ) | | — |
| | — |
|
| Tradenames | 21 | | 66,154 |
| | (13,468 | ) | | — |
| | 52,686 |
| | 50,754 |
| | (11,094 | ) | | — |
| | 39,660 |
|
Capitalized software and other(1) | 7 | | 65,896 |
| | (32,509 | ) | | — |
| | 33,387 |
| | 59,909 |
| | (25,939 | ) | | — |
| | 33,970 |
|
| Total | 12 | | $ | 2,740,156 |
| | $ | (1,896,861 | ) | | $ | (14,574 | ) | | $ | 828,721 |
| | $ | 2,633,229 |
| | $ | (1,767,001 | ) | | $ | (14,574 | ) | | $ | 851,654 |
|
| |
(1) | During the years ended December 31, 2018 and 2017, we wrote-off approximately $0.2 million and $1.1 million, respectively, of fully-amortized capitalized software that was not in use. |
Refer to Note 17, "Acquisitions and Divestitures," for details of definite-lived intangible assets recognized as a result of the acquisition of GIGAVAC.
The following table outlines amortization of intangible assets for the years ended December 31, 2018, 2017, and 2016:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Acquisition-related definite-lived intangible assets | $ | 132,235 |
| | $ | 153,729 |
| | $ | 194,208 |
|
| Capitalized software | 7,091 |
| | 7,321 |
| | 7,290 |
|
| Amortization of intangible assets | $ | 139,326 |
| | $ | 161,050 |
| | $ | 201,498 |
|
The table below presents estimated amortization of intangible assets for each of the next five years:
|
| | | |
| For the year ended December 31, | |
| 2019 | $ | 142,198 |
|
| 2020 | $ | 127,046 |
|
| 2021 | $ | 110,203 |
|
| 2022 | $ | 95,029 |
|
| 2023 | $ | 81,055 |
|
In addition to the above, we own the Klixon® and Airpax® tradenames, which are indefinite-lived intangible assets, as they have each been in estimatingcontinuous use for over 65 years, and we have no plans to discontinue using them. We have recorded $59.1 million and $9.4 million, respectively, on the grant-date fair valueconsolidated balance sheets related to these tradenames.
12. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of optionsDecember 31, 2018 and 2017 consisted of the following:
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Accrued compensation and benefits | $ | 68,936 |
| | $ | 89,816 |
|
| Accrued interest | 40,550 |
| | 36,919 |
|
| Foreign currency and commodity forward contracts | 7,710 |
| | 35,094 |
|
| Accrued severance | 6,591 |
| | 4,184 |
|
| Current portion of pension and post-retirement benefit obligations | 3,176 |
| | 3,342 |
|
| Other accrued expenses and current liabilities | 91,167 |
| | 90,205 |
|
| Accrued expenses and other current liabilities | $ | 218,130 |
| | $ | 259,560 |
|
13. Pension and Other Post-Retirement Benefits
We provide various pension and other post-retirement plans for current and former employees, including defined benefit, defined contribution, and retiree healthcare benefit plans. Refer to Note 2, "Significant Accounting Policies," for a detailed discussion of the accounting policies related to our pension and other post-retirement benefit plans.
U.S. Benefit Plans
The principal retirement plans in the U.S. include a qualified defined benefit pension plan and a defined contribution plan. In addition, we provide post-retirement medical coverage and non-qualified benefits to certain employees.
Defined Benefit Pension Plans
The benefits under the qualified defined benefit pension plan are determined using a formula based upon years of service and the highest five consecutive years of compensation.
TI closed the qualified defined benefit pension plan to participants hired after November 1997. In addition, participants eligible to retire under the TI plan as of April 26, 2006 were given the option of continuing to participate in the qualified defined benefit pension plan or retiring under the qualified defined benefit pension plan and thereafter participating in an enhanced defined contribution plan.
We intend to contribute amounts to the qualified defined benefit pension plan in order to meet the minimum funding requirements of federal laws and regulations, plus such additional amounts as we deem appropriate. During the year ended December 31, 2018, we contributed $4.0 million to the qualified defined benefit plan. We do not expect to contribute to the qualified defined benefit pension plan in fiscal year 2019.
We also sponsor a non-qualified defined benefit pension plan, which is closed to new participants and is unfunded.
Effective January 31, 2012, we froze the defined benefit pension plans and eliminated future benefit accruals.
Defined Contribution Plans
As of 2018, we have one defined contribution plan for U.S. employees, which provides for an employer matching contribution of up to 4% of the employee's annual eligible earnings. The aggregate expense related to the defined contribution plan was $5.7 million, $5.9 million, and $5.8 million for the years ended December 31, 2018, 2017, and 2016, respectively.
Retiree Healthcare Benefit Plan
We offer access to group medical coverage during retirement to some of our U.S. employees. We make contributions toward the cost of those retiree medical benefits for certain retirees. The contribution rates are based upon varying factors, the most important of which are an employee’s date of hire, date of retirement, years of service, and eligibility for Medicare benefits. The balance of the cost is borne by the participants in the plan. For the year ended December 31, 2018, we did not, and do not expect to, receive any amount of Medicare Part D Federal subsidy. Our projected benefit obligation as of December 31, 2018 and 2017 did not include an assumption for a Federal subsidy.
In the fourth quarter of 2013, we amended the retiree healthcare benefit plan to eliminate supplemental medical coverage offered to Medicare eligible retirees, effective January 1, 2014. As a result of the amendment, we recognized a gain of $7.2 million that was recorded in other comprehensive income/(loss) in the fourth quarter of 2013, which is being amortized as a component of net periodic benefit cost over a period of approximately 5 years from the date of recognition, which represents the remaining average service period to the full eligibility dates of the active plan participants.
Non-U.S. Benefit Plans
Retirement coverage for non-U.S. employees is provided through separate defined benefit and defined contribution plans. Retirement benefits are generally based on an employee’s years of service and compensation. Funding requirements are determined on an individual country and plan basis and are subject to local country practices and market circumstances. We do not expect to contribute to the non-U.S. defined benefit plans during 2019.
Impact on Financial Statements
The components of net periodic benefit cost/(credit) associated with our defined benefit and retiree healthcare plans for the years ended December 31, 2018, 2017, and 2016 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Service cost | $ | — |
| | $ | 50 |
| | $ | 3,122 |
| | $ | — |
| | $ | 74 |
| | $ | 2,582 |
| | $ | — |
| | $ | 83 |
| | $ | 2,716 |
|
| Interest cost | 1,473 |
| | 272 |
| | 1,310 |
| | 1,604 |
| | 325 |
| | 1,053 |
| | 1,461 |
| | 364 |
| | 1,179 |
|
| Expected return on plan assets | (1,710 | ) | | — |
| | (929 | ) | | (2,151 | ) | | — |
| | (905 | ) | | (2,684 | ) | | — |
| | (952 | ) |
| Amortization of net loss | 1,080 |
| | 5 |
| | 407 |
| | 1,149 |
| | 54 |
| | 287 |
| | 707 |
| | 143 |
| | 488 |
|
| Amortization of net prior service (credit)/cost | — |
| | (1,728 | ) | | 6 |
| | — |
| | (1,335 | ) | | (4 | ) | | — |
| | (1,335 | ) | | (20 | ) |
| Loss on settlement | 1,047 |
| | — |
| | 1,461 |
| | 3,225 |
| | — |
| | 100 |
| | 1,293 |
| | — |
| | 34 |
|
| Loss/(gain) on curtailment | — |
| | — |
| | 891 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (486 | ) |
| Net periodic benefit cost/(credit) | $ | 1,890 |
| | $ | (1,401 | ) | | $ | 6,268 |
| | $ | 3,827 |
| | $ | (882 | ) | | $ | 3,113 |
| | $ | 777 |
| | $ | (745 | ) | | $ | 2,959 |
|
On January 1, 2018 we adopted the guidance in FASB ASU No. 2017-07, which requires that entities present the non–service components of net periodic benefit cost separately from the financial statement line item(s) that include service cost, outside of operating income. As a result of this adoption, the components of net periodic benefit cost, excluding service cost, were reclassified in our consolidated statements of operations from various operating cost and expense line items to other, net for the years ended December 31, 2017 and 2016.
The table below presents the effects of this adjustment.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2017 | | 2016 |
| | As Reported | | Adjustment | | As Adjusted | | As Reported | | Adjustment | | As Adjusted |
| Net revenue | $ | 3,306,733 |
| | $ | — |
| | $ | 3,306,733 |
| | $ | 3,202,288 |
| | $ | — |
| | $ | 3,202,288 |
|
| Operating costs and expenses: | | | | | | | | | | | |
| Cost of revenue | 2,141,308 |
| | (2,410 | ) | | 2,138,898 |
| | 2,084,261 |
| | (102 | ) | | 2,084,159 |
|
| Research and development | 130,204 |
| | (77 | ) | | 130,127 |
| | 126,665 |
| | (9 | ) | | 126,656 |
|
| Selling, general and administrative | 302,811 |
| | (915 | ) | | 301,896 |
| | 293,587 |
| | (81 | ) | | 293,506 |
|
| Amortization of intangible assets | 161,050 |
| | — |
| | 161,050 |
| | 201,498 |
| | — |
| | 201,498 |
|
| Restructuring and other charges, net | 18,975 |
| | — |
| | 18,975 |
| | 4,113 |
| | — |
| | 4,113 |
|
| Total operating costs and expenses | 2,754,348 |
| | (3,402 | ) | | 2,750,946 |
| | 2,710,124 |
| | (192 | ) | | 2,709,932 |
|
| Profit from operations | 552,385 |
| | 3,402 |
| | 555,787 |
| | 492,164 |
| | 192 |
| | 492,356 |
|
| Interest expense, net | (159,761 | ) | | — |
| | (159,761 | ) | | (165,818 | ) | | — |
| | (165,818 | ) |
| Other, net | 9,817 |
| | (3,402 | ) | | 6,415 |
| | (4,901 | ) | | (192 | ) | | (5,093 | ) |
| Income before taxes | $ | 402,441 |
| | $ | — |
| | $ | 402,441 |
| | $ | 321,445 |
| | $ | — |
| | $ | 321,445 |
|
The following table outlines the rollforward of the benefit obligation and plan assets for the defined benefit and retiree healthcare benefit plans for the years ended December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Change in benefit obligation: | | | | | | | | | | | |
| Beginning balance | $ | 48,615 |
| | $ | 9,692 |
| | $ | 67,413 |
| | $ | 57,679 |
| | $ | 10,296 |
| | $ | 59,056 |
|
| Service cost | — |
| | 50 |
| | 3,122 |
| | — |
| | 74 |
| | 2,582 |
|
| Interest cost | 1,473 |
| | 272 |
| | 1,310 |
| | 1,604 |
| | 325 |
| | 1,053 |
|
| Plan participants’ contributions | — |
| | 475 |
| | 60 |
| | — |
| | 519 |
| | 120 |
|
| Plan amendment | — |
| | (3,243 | ) | | — |
| | — |
| | — |
| | (6 | ) |
| Actuarial (gain)/loss | (519 | ) | | (124 | ) | | 2,777 |
| | 2,936 |
| | (197 | ) | | 2,692 |
|
| Curtailments | — |
| | — |
| | 931 |
| | — |
| | — |
| | — |
|
| Benefits paid | (4,400 | ) | | (1,105 | ) | | (6,262 | ) | | (13,604 | ) | | (1,325 | ) | | (2,572 | ) |
| Divestiture | — |
| | — |
| | (3,310 | ) | | — |
| | — |
| | — |
|
| Foreign currency remeasurement | — |
| | — |
| | (350 | ) | | — |
| | — |
| | 4,488 |
|
| Ending balance | $ | 45,169 |
| | $ | 6,017 |
| | $ | 65,691 |
| | $ | 48,615 |
| | $ | 9,692 |
| | $ | 67,413 |
|
| Change in plan assets: | | | | | | | | | | | |
| Beginning balance | $ | 41,101 |
| | $ | — |
| | $ | 41,222 |
| | $ | 52,042 |
| | $ | — |
| | $ | 37,361 |
|
| Actual return on plan assets | (811 | ) | | — |
| | (1,308 | ) | | 2,319 |
| | — |
| | 1,241 |
|
| Employer contributions | 3,985 |
| | 630 |
| | 5,992 |
| | 344 |
| | 1,325 |
| | 2,586 |
|
| Plan participants’ contributions | — |
| | 475 |
| | 60 |
| | — |
| | — |
| | 120 |
|
| Benefits paid | (4,400 | ) | | (1,105 | ) | | (6,262 | ) | | (13,604 | ) | | (1,325 | ) | | (2,572 | ) |
| Foreign currency remeasurement | — |
| | — |
| | 164 |
| | — |
| | — |
| | 2,486 |
|
| Ending balance | $ | 39,875 |
| | $ | — |
| | $ | 39,868 |
| | $ | 41,101 |
| | $ | — |
| | $ | 41,222 |
|
| Funded status at end of year | $ | (5,294 | ) | | $ | (6,017 | ) | | $ | (25,823 | ) | | $ | (7,514 | ) | | $ | (9,692 | ) | | $ | (26,191 | ) |
| Accumulated benefit obligation at end of year | $ | 45,169 |
| | NA |
| | $ | 59,948 |
| | $ | 48,615 |
| | NA |
| | $ | 60,588 |
|
The following table outlines the funded status amounts recognized in the consolidated balance sheets as of December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Noncurrent assets | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Current liabilities | (595 | ) | | (1,116 | ) | | (1,465 | ) | | (638 | ) | | (1,210 | ) | | (1,494 | ) |
| Noncurrent liabilities | (4,699 | ) | | (4,901 | ) | | (24,358 | ) | | (6,876 | ) | | (8,482 | ) | | (24,697 | ) |
| Funded status | $ | (5,294 | ) | | $ | (6,017 | ) | | $ | (25,823 | ) | | $ | (7,514 | ) | | $ | (9,692 | ) | | $ | (26,191 | ) |
Balances recognized within accumulated other comprehensive loss that have not been recognized as components of net periodic benefit cost, net of tax, as of December 31, 2018, 2017, and 2016 are as follows:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Expected dividend yield | 0 | % | | 0 | % | | 0 | % |
| Expected volatility | 30.00 | % | | 30.00 | % | | 30.00 | % |
| Risk-free interest rate | 1.52 | % | | 2.00 | % | | 1.10 | % |
| Expected term (years) | 5.9 |
| | 5.9 |
| | 6.1 |
|
| Fair value per share of underlying ordinary shares | $ | 56.60 |
| | $ | 43.61 |
| | $ | 32.97 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 | | 2016 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Net prior service credit | $ | — |
| | $ | (692 | ) | | $ | (10 | ) | | $ | — |
| | $ | 823 |
| | $ | (220 | ) | | $ | — |
| | $ | (512 | ) | | $ | (218 | ) |
| Net loss | $ | 20,759 |
| | $ | 880 |
| | $ | 14,425 |
| | $ | 20,884 |
| | $ | 1,009 |
| | $ | 12,489 |
| | $ | 22,490 |
| | $ | 1,260 |
| | $ | 11,070 |
|
We expect to amortize a loss of $0.5 million from accumulated other comprehensive loss to net periodic benefit cost during 2019.
We granted 72,Information for plans with an accumulated benefit obligation in excess of plan assets as of 96December 31, 2018 and 2017 is as follows:
|
| | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| Projected benefit obligation | $ | 45,169 |
| | $ | 65,691 |
| | $ | 48,615 |
| | $ | 31,680 |
|
| Accumulated benefit obligation | $ | 45,169 |
| | $ | 59,948 |
| | $ | 48,615 |
| | $ | 26,609 |
|
| Plan assets | $ | 39,875 |
| | $ | 39,868 |
| | $ | 41,101 |
| | $ | 5,759 |
|
Information for plans with a projected benefit obligation in excess of plan assets as of December 31, 2018 and 2017 is as follows:
|
| | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| Projected benefit obligation | $ | 51,186 |
| | $ | 65,691 |
| | $ | 58,307 |
| | $ | 63,153 |
|
| Plan assets | $ | 39,875 |
| | $ | 39,868 |
| | $ | 41,101 |
| | $ | 36,990 |
|
Other changes in plan assets and benefit obligations, net of tax, recognized in other comprehensive income/(loss) for the years ended December 31, 2018, 2017, and 1202016 optionsare as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Net loss/(gain) | $ | 2,002 |
| | $ | (124 | ) | | $ | 3,669 |
| | $ | 2,768 |
| | $ | (197 | ) | | $ | 1,618 |
| | $ | 5,368 |
| | $ | (984 | ) | | $ | 2,505 |
|
| Amortization of net loss | (1,080 | ) | | (5 | ) | | (298 | ) | | (1,149 | ) | | (54 | ) | | (130 | ) | | (707 | ) | | (143 | ) | | (436 | ) |
| Amortization of net prior service credit/(cost) | — |
| | 1,728 |
| | (4 | ) | | — |
| | 1,335 |
| | 3 |
| | — |
| | 1,335 |
| | 15 |
|
| Divestiture | — |
| | — |
| | (228 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Plan amendment | — |
| | (3,243 | ) | | — |
| | — |
| | — |
| | (5 | ) | | — |
| | — |
| | (73 | ) |
| Settlement effect | (1,047 | ) | | — |
| | (1,023 | ) | | (3,225 | ) | | — |
| | (69 | ) | | (1,293 | ) | | — |
| | (67 | ) |
| Curtailment effect | — |
| | — |
| | 30 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,272 | ) |
| Total in other comprehensive (income)/loss | $ | (125 | ) | | $ | (1,644 | ) | | $ | 2,146 |
| | $ | (1,606 | ) | | $ | 1,084 |
| | $ | 1,417 |
| | $ | 3,368 |
| | $ | 208 |
| | $ | 672 |
|
Assumptions and Investment Policies
Weighted-average assumptions used to calculate the projected benefit obligations of our directors underdefined benefit and retiree healthcare benefit plans as of December 31, 2018 and 2017 are as follows:
|
| | | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | | 2017 |
| | Defined Benefit | | Retiree Healthcare | | | Defined Benefit | | Retiree Healthcare |
| U.S. assumed discount rate | 3.79 | % | | 3.90 | % | | | 3.00 | % | | 3.10 | % |
| Non-U.S. assumed discount rate | 2.17 | % | | NA |
| | | 2.07 | % | | NA |
|
| Non-U.S. average long-term pay progression | 2.66 | % | | NA |
| | | 2.66 | % | | NA |
|
Weighted-average assumptions used to calculate the 2010 Equity Incentive Plan innet periodic benefit cost of our defined benefit and retiree healthcare benefit plans for the years ended 2015December 31, 2018, 20142017, and 2013, respectively. These options vest after 12016 year and are not subject to performance conditions. The weighted-average grant date fair value per option wasas follows:
|
| | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare |
| U.S. assumed discount rate | 3.45 | % | | 3.10 | % | | 3.20 | % | | 3.30 | % | | 3.10 | % | | 3.50 | % |
| Non-U.S. assumed discount rate | 5.87 | % | | NA |
| | 3.90 | % | | NA |
| | 3.83 | % | | NA |
|
U.S. average long-term rate of return on plan assets | 4.57 | % | | NA |
| | 4.50 | % | | NA |
| | 5.00 | % | | NA |
|
| Non-U.S. average long-term rate of return on plan assets | 2.26 | % | | NA |
| | 2.29 | % | | NA |
| | 2.60 | % | | NA |
|
| Non-U.S. average long-term pay progression | 4.82 | % | | NA |
| | 3.75 | % | | NA |
| | 3.78 | % | | NA |
|
Assumed healthcare cost trend rates for the U.S. retiree healthcare benefit plan as of $17.05December 31, 2018, $13.992017, and $10.252016 are as follows:
|
| | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 | | 2016 |
| Assumed healthcare trend rate for next year: | | | | | |
| Attributed to less than age 65 | 6.60 | % | | 6.90 | % | | 7.10 | % |
| Attributed to age 65 or greater | 7.10 | % | | 7.50 | % | | 7.80 | % |
| Ultimate trend rate | 4.50 | % | | 4.50 | % | | 4.50 | % |
| Year in which ultimate trend rate is reached: |
| | | | |
| Attributed to less than age 65 | 2038 |
| | 2038 |
| | 2038 |
|
| Attributed to age 65 or greater | 2038 |
| | 2038 |
| | 2038 |
|
Assumed healthcare trend rates could have a significant effect on the amounts reported for retiree healthcare plans. A one percentage point change in the assumed healthcare trend rates for the year ended December 31, 2018 would have the following effect:
|
| | | | | | | |
| | One Percentage Point: |
| | Increase | | Decrease |
| Effect on total service and interest cost components | $ | 6 |
| | $ | (5 | ) |
| Effect on post-retirement benefit obligations | $ | 200 |
| | $ | (248 | ) |
The table below outlines the benefits expected to be paid to participants in each of the following years, taking into consideration expected future service, as appropriate. The majority of the payments will be paid from plan assets and not company assets.
|
| | | | | | | | | | | |
| | Expected Benefit Payments |
| For the year ended December 31, | U.S. Defined Benefit | | U.S. Retiree Healthcare | | Non-U.S. Defined Benefit |
| 2019 | $ | 6,466 |
| | $ | 1,116 |
| | $ | 2,959 |
|
| 2020 | $ | 5,826 |
| | $ | 738 |
| | $ | 3,232 |
|
| 2021 | $ | 5,313 |
| | $ | 696 |
| | $ | 3,228 |
|
| 2022 | $ | 4,128 |
| | $ | 634 |
| | $ | 3,829 |
|
| 2023 | $ | 3,677 |
| | $ | 523 |
| | $ | 3,528 |
|
| 2024 - 2027 | $ | 10,498 |
| | $ | 1,905 |
| | $ | 21,700 |
|
Plan Assets
We hold assets for our defined benefit plans in the U.S., respectively.Japan, the Netherlands, and Belgium. Information about the assets for each of these plans is detailed below. Refer to Note 18, "Fair Value Measures," for descriptions of the levels of the fair value hierarchy in accordance with FASB ASC Topic 820.
U.S. Plan Assets
Our target asset allocation for the U.S. defined benefit plan is 83% fixed income and 17% equity securities. To arrive at the targeted asset allocation, we and our investment adviser reviewed market opportunities using historical data, as well as the actuarial valuation for the plan, to ensure that the levels of acceptable return and risk are well-defined and monitored.
The following table presents information about the plan’s target and actual asset allocation, as of December 31, 2018:
|
| | | | | |
| | Target Allocation | | Actual Allocation as of December 31, 2018 |
| U.S. large cap equity | 7 | % | | 7 | % |
| U.S. small / mid cap equity | 2 | % | | 2 | % |
| Globally managed volatility fund | 3 | % | | 3 | % |
| International (non-U.S.) equity | 4 | % | | 4 | % |
| Fixed income (U.S. investment and non-investment grade) | 68 | % | | 67 | % |
| High-yield fixed income | 2 | % | | 2 | % |
| International (non-U.S.) fixed income | 1 | % | | 1 | % |
| Money market funds | 13 | % | | 13 | % |
The portfolio is monitored for automatic rebalancing on a monthly basis.
The following table presents information about the plan assets measured at fair value as of December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| U.S. large cap equity | $ | 2,960 |
| | $ | — |
| | $ | — |
| | $ | 2,960 |
| | $ | 3,288 |
| | $ | — |
| | $ | — |
| | $ | 3,288 |
|
| U.S. small / mid cap equity | 833 |
| | — |
| | — |
| | 833 |
| | 942 |
| | — |
| | — |
| | 942 |
|
| Global managed volatility fund | 1,214 |
| | — |
| | — |
| | 1,214 |
| | 1,288 |
| | — |
| | — |
| | 1,288 |
|
| International (non-U.S.) equity | 1,493 |
| | — |
| | — |
| | 1,493 |
| | 1,788 |
| | — |
| | — |
| | 1,788 |
|
| Total equity mutual funds | 6,500 |
| | — |
| | — |
| | 6,500 |
| | 7,306 |
| | — |
| | — |
| | 7,306 |
|
| Fixed income (U.S. investment grade) | 26,884 |
| | — |
| | — |
| | 26,884 |
| | 27,507 |
| | — |
| | — |
| | 27,507 |
|
| High-yield fixed income | 792 |
| | — |
| | — |
| | 792 |
| | 821 |
| | — |
| | — |
| | 821 |
|
| International (non-U.S.) fixed income | 402 |
| | — |
| | — |
| | 402 |
| | 398 |
| | — |
| | — |
| | 398 |
|
| Total fixed income mutual funds | 28,078 |
| | — |
| | — |
| | 28,078 |
| | 28,726 |
| | — |
| | — |
| | 28,726 |
|
| Money market funds | 5,297 |
| | — |
| | — |
| | 5,297 |
| | 5,069 |
| | — |
| | — |
| | 5,069 |
|
| Total plan assets | $ | 39,875 |
| | $ | — |
| | $ | — |
| | $ | 39,875 |
| | $ | 41,101 |
| | $ | — |
| | $ | — |
| | $ | 41,101 |
|
Investments in mutual funds are based on the publicly-quoted final net asset values on the last business day of the year.
Permitted asset classes include U.S. and non-U.S. equity, U.S. and non-U.S. fixed income, cash, and cash equivalents. Fixed income includes both investment grade and non-investment grade. Permitted investment vehicles include mutual funds, individual securities, derivatives, and long-duration fixed income securities. While investments in individual securities, derivatives, long-duration fixed income securities, cash, and cash equivalents are permitted, the plan did not hold these types of investments as of December 31, 2018 or 2017.
Prohibited investments include direct investments in real estate, commodities, unregistered securities, uncovered options, currency exchange contracts, and natural resources (such as timber, oil, and gas).
Japan Plan Assets
The target asset allocation of the Japan defined benefit plan is 50% equity securities and 50% fixed income securities, cash, and cash equivalents, with allowance for a 40% deviation in either direction. We, along with the trustee of the plan's assets, minimize investment risk by thoroughly assessing potential investments based on indicators of historical returns and current credit ratings. Additionally, investments are diversified by type and geography.
The following table presents information about the plan’s target asset allocation, as well as the actual allocation, as of December 31, 2018:
|
| | | | |
| Target Allocation | | Actual Allocation as of December 31, 2018 |
| Equity securities | 10%-90% | | 25 | % |
| Fixed income securities, cash, and cash equivalents | 10%-90% | | 75 | % |
The following table presents information about the plan assets measured at fair value as of December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| U.S. equity | $ | 2,212 |
| | $ | — |
| | $ | — |
| | $ | 2,212 |
| | $ | 2,461 |
| | $ | — |
| | $ | — |
| | $ | 2,461 |
|
| International (non-U.S.) equity | 5,158 |
| | — |
| | — |
| | 5,158 |
| | 6,567 |
| | — |
| | — |
| | 6,567 |
|
| Total equity securities | 7,370 |
| | — |
| | — |
| | 7,370 |
| | 9,028 |
| | — |
| | — |
| | 9,028 |
|
| U.S. fixed income | 3,076 |
| | 269 |
| | — |
| | 3,345 |
| | 2,968 |
| | 268 |
| | — |
| | 3,236 |
|
| International (non-U.S.) fixed income | 8,811 |
| | — |
| | — |
| | 8,811 |
| | 11,046 |
| | — |
| | — |
| | 11,046 |
|
| Total fixed income securities | 11,887 |
| | 269 |
| | — |
| | 12,156 |
| | 14,014 |
| | 268 |
| | — |
| | 14,282 |
|
| Cash and cash equivalents | 10,339 |
| | — |
| | — |
| | 10,339 |
| | 7,921 |
| | — |
| | — |
| | 7,921 |
|
| Total plan assets | $ | 29,596 |
| | $ | 269 |
| | $ | — |
| | $ | 29,865 |
| | $ | 30,963 |
| | $ | 268 |
| | $ | — |
| | $ | 31,231 |
|
The fair values of equity and fixed income securities are based on publicly-quoted closing stock and bond values on the last business day of the year.
Permitted asset classes include equity securities that are traded on the official stock exchange(s) of the respective countries, fixed income securities with certain credit ratings, cash, and cash equivalents.
The Netherlands Plan Assets
The assets of the Netherlands defined benefit plan are insurance policies. The contributions we make to the plan are used to purchase insurance policies that provide for specific benefit payments to plan participants. The benefit formula is determined independently by us. Upon retirement of an individual plan participant, the insurance contracts purchased are converted to provide specific benefits for the participant. The contributions paid by us are commingled with contributions paid to the insurance provider by other employers for investment purposes and to reduce plan administration costs. However, this defined benefit plan is not considered a multi-employer plan.
The following table presents information about the plan assets measured at fair value as of December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Insurance policies | $ | — |
| | $ | — |
| | $ | 8,897 |
| | $ | 8,897 |
| | $ | — |
| | $ | — |
| | $ | 9,059 |
| | $ | 9,059 |
|
| Total plan assets | $ | — |
| | $ | — |
| | $ | 8,897 |
| | $ | 8,897 |
| | $ | — |
| | $ | — |
| | $ | 9,059 |
| | $ | 9,059 |
|
The following table presents a rollforward of the Level 3 assets in our Netherlands' defined plan for the years ended December 31, 2018 and 2017:
|
| | | |
| | Insurance Policies |
| Balance as of December 31, 2016 | $ | 8,014 |
|
| Actual return on plan assets still held at reporting date | (597 | ) |
| Purchases, sales, settlements, and exchange rate changes | 1,642 |
|
| Balance as of December 31, 2017 | 9,059 |
|
| Actual return on plan assets still held at reporting date | 177 |
|
| Purchases, sales, settlements, and exchange rate changes | (339 | ) |
| Balance as of December 31, 2018 | $ | 8,897 |
|
The fair values of the insurance contracts are measured based on the future benefit payments that would be made by the insurance company to vested plan participants if we were to switch to another insurance company without actually surrendering our policy. In this case, the insurance company would guarantee to pay the vested benefits at retirement accrued under the plan based on current salaries and service to date (i.e., with no allowance for future salary increases or pension increases). The cash flows of the future benefit payments are discounted using the same discount rate that is applied to value the related defined benefit plan liability.
Restricted Securities
We grant restricted securitiesRSU awards that include performance conditions. The performance-based restricted securities generallycliff vest between one and three years from the grant date, and we grant PRSU awards that cliff vest three years after the grant date. TheFor PRSU awards, the number of securitiesunits that ultimately vest will dependdepends on the extent to which certain performance criteria are met, and could range between 0% and 172.5% ofas described in the number of securities granted. We also grant non-performance-based restricted securities that cliff vest over various lengths of time ranging from 2 to 4 years, and others that vest 25% per year over four years. See Note 2, "Significant Accounting Policies," for discussion of how we estimate the fair value of restricted securities.table below.
A summary of performance-based restricted securities granted in the past three years ended December 31, 2018, 2017, and 2016 is presented below:
|
| | | | | | |
| Year ended December 31, | Performance Restricted Securities Granted | | Weighted-Average Grant-Date Fair Value |
| 2015 | 128 |
| | $ | 56.94 |
|
| 2014 | 110 |
| | $ | 43.48 |
|
| 2013 | 122 |
| | $ | 32.70 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Percentage Range of Units That May Vest (1) |
| | | | | | | 0.0% to 150.0% | 0.0% to 172.5% | | 0.0% to 200.0% |
| (Awards in thousands) | | RSU Awards Granted | | Weighted-Average
Grant-Date
Fair Value | | PRSU Awards Granted | | Weighted-Average Grant-Date Fair Value | PRSU Awards Granted | | Weighted-Average Grant-Date Fair Value | | PRSU Awards Granted | | Weighted-Average Grant-Date Fair Value |
| 2018 | | 218 |
| | $ | 51.05 |
| | 63 |
| | $ | 51.83 |
| 118 |
| | $ | 51.83 |
| | — |
| | $ | — |
|
| 2017 | | 182 |
| | $ | 43.24 |
| | — |
| | $ | — |
| 183 |
| | $ | 43.67 |
| | 53 |
| | $ | 43.33 |
|
| 2016 | | 319 |
| | $ | 38.33 |
| | — |
| | $ | — |
| 180 |
| | $ | 38.96 |
| | — |
| | $ | — |
|
| |
(1) | Represents the percentage range of PRSU award units granted that may vest according to the terms of the awards, The amounts presented within this table do not reflect our current assessment of the probable outcome of vesting based on the achievement or expected achievement of performance conditions. |
As ofCompensation cost for the year ended December 31, 2015, we considered it2018 reflects our estimate of the probable thatoutcome of the performance conditions associated with the securitiesPRSU awards granted in 2013, 2014,fiscal years 2018, 2017, and 2015 will be met.2016.
In addition, inA summary of activity related to outstanding restricted securities for fiscal years 20152018, 20142017, and 2013 we granted 150, 155, and 124 restricted securities, respectively, for which there is no performance condition, to certain of our employees under the 2010 Equity Incentive Plan. The weighted-average grant date fair value of these securities was $56.42, $44.52, and $32.87, respectively.
A summary of the unvested restricted securities (both service and performance based) activity for 2015, 2014, and 20132016 is presented in the table below (amounts have been calculated based on unrounded shares):
| | | | Restricted Securities | | Weighted-Average Grant-Date Fair Value | Restricted Securities (thousands) | | Weighted-Average Grant-Date Fair Value |
| Balance at December 31, 2012 | 489 |
| | $ | 27.64 |
| |
| Balance as of December 31, 2015 | | 654 |
| | $ | 45.87 |
|
| Granted | 246 |
| | 32.79 |
| 499 |
| | $ | 38.56 |
|
| Forfeited | (41 | ) | | 26.43 |
| (48 | ) | | $ | 47.01 |
|
| Vested | (64 | ) | | 18.32 |
| (185 | ) | | $ | 33.41 |
|
| Balance at December 31, 2013 | 629 |
| | 30.84 |
| |
| Balance as of December 31, 2016 | | 920 |
| | $ | 44.35 |
|
| Granted | 265 |
| | 44.09 |
| 418 |
| | $ | 43.44 |
|
| Forfeited | (172 | ) | | 34.87 |
| (35 | ) | | $ | 43.94 |
|
| Vested | (65 | ) | | 21.32 |
| (222 | ) | | $ | 42.24 |
|
| Balance at December 31, 2014 | 656 |
| | 36.06 |
| |
| Balance as of December 31, 2017 | | 1,081 |
| | $ | 44.43 |
|
| Granted | 278 |
| | 56.66 |
| 399 |
| | $ | 51.40 |
|
| Forfeited | (165 | ) | | 38.55 |
| (121 | ) | | $ | 48.28 |
|
| Vested | (115 | ) | | 26.72 |
| (240 | ) | | $ | 53.01 |
|
| Balance at December 31, 2015 | 654 |
| | $ | 45.87 |
| |
| Balance as of December 31, 2018 | | 1,119 |
| | $ | 44.66 |
|
Aggregate intrinsic value information for restricted securities as of December 31, 20152018, 20142017, and 20132016 is presented below:
| | | | | | | | | As of December 31, |
| | December 31,
2015 | | December 31,
2014 | | December 31,
2013 | 2018 | | 2017 | | 2016 |
| Outstanding | $ | 30,115 |
| | $ | 34,404 |
| | $ | 24,390 |
| $ | 50,161 |
| | $ | 55,271 |
| | $ | 35,845 |
|
| Expected to vest | $ | 22,704 |
| | $ | 26,982 |
| | $ | 14,670 |
| $ | 44,203 |
| | $ | 42,106 |
| | $ | 26,937 |
|
The weighted-average remaining periods over which the restrictions will lapse as of December 31, 2018, 2017, and 2016 are as follows:
|
| | | | | |
| | As of December 31, |
| (Amounts in years) | 2018 | | 2017 | | 2016 |
| Outstanding | 1.2 | | 1.3 | | 1.5 |
| Expected to vest | 1.2 | | 1.4 | | 1.5 |
The expected to vest restricted securities are calculated by consideringbased on the application of a forfeiture rate assumption to all outstanding restricted securities as well as our assessment of the probability of meeting the required performance conditions and/or by applying a forfeiture rate assumptionthat pertain to the balance of the unvested restricted securities.
The weighted-average remaining periods over which the restrictions will lapse, expressed in years, as of December 31, 2015, 2014, and 2013 are as follows:
|
| | | | | | | |
| | December 31,
2015 | | December 31,
2014 | | December 31,
2013 |
| Outstanding | 1.4 |
| | 1.5 |
| | 1.5 |
| Expected to vest | 1.4 |
| | 1.7 |
| | 2.0 |
Share-Based Compensation Expense
The table below presents non-cash compensation expense related to our equity awards:
|
| | | | | | | | | | | |
| | For the year ended |
| | December 31,
2015 | | December 31,
2014 | | December 31,
2013 |
| Options | $ | 7,176 |
| | $ | 7,685 |
| | $ | 6,790 |
|
| Restricted securities | 8,150 |
| | 5,300 |
| | 2,177 |
|
| Total share-based compensation expense | $ | 15,326 |
| | $ | 12,985 |
| | $ | 8,967 |
|
This compensation expenseawards, which is recorded within SG&A expense in the consolidated statements of operations, during the identified periods. We did not recognizeperiods:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Options | $ | 5,739 |
| | $ | 6,046 |
| | $ | 7,094 |
|
| Restricted securities | 18,086 |
| | 13,773 |
| | 10,331 |
|
| Total share-based compensation expense | $ | 23,825 |
| | $ | 19,819 |
| | $ | 17,425 |
|
In 2018, we recognized a $3.0 million income tax benefit associated with these expenses. In theshare-based compensation expense. We recognized no such tax benefit in either fiscal year ended December 31, 2014, we capitalized $0.1 million related to share based compensation. We did not capitalize any amounts in any other period presented.2017 or 2016.
The table below presents unrecognized compensation expense at December 31, 20152018 for each class of award, and the remaining expected term for this expense to be recognized:
| | | | Unrecognized compensation expense | | Expected recognition (years) | Unrecognized Compensation Expense | | Expected Recognition (years) |
| Options | $ | 9,667 |
| | 2.2 |
| $ | 9,329 |
| | 2.1 |
| Restricted securities | 13,150 |
| | 1.8 |
| 23,168 |
| | 1.6 |
| Total unrecognized compensation expense | $ | 22,817 |
| | | $ | 32,497 |
| |
12. Shareholders’ Equity5. Restructuring and Other Charges, Net
Restructuring and other charges, net for the years ended December 31, 2018, 2017, and 2016 were as follows:
|
| | | | | | | | | | | | |
| | | For the year ended December 31, |
| | | 2018 | | 2017 | | 2016 |
Severance costs, net (1) | | $ | 7,566 |
| | $ | 11,125 |
| | $ | 813 |
|
Facility and other exit costs (2) | | 877 |
| | 7,850 |
| | 3,300 |
|
Gain on sale of Valves Business (3) | | (64,423 | ) | | — |
| | — |
|
Other (4) | | 8,162 |
| | — |
| | — |
|
| Restructuring and other charges, net | | $ | (47,818 | ) | | $ | 18,975 |
| | $ | 4,113 |
|
| |
(1) | Severance costs for the year ended December 31, 2018 were primarily related to limited workforce reductions of manufacturing, engineering, and administrative positions as well as the elimination of certain positions related to site consolidations. Severance costs, net recognized during the year ended December 31, 2017 included $8.4 million of charges related to the closure of our facility in Minden, Germany, a site we obtained in connection with the acquisition of certain subsidiaries of Custom Sensors & Technologies Ltd. ("CST"). Severance costs for the year ended December 31, 2016 primarily related to charges recorded in connection with acquired businesses and the termination of a limited number of employees in various locations throughout the world. |
| |
(2) | Facility and other exit costs for the year ended December 31, 2017 included $3.2 million of costs related to the closure of our facility in Minden, Germany and the transfer of equipment to alternate operating sites as well as $3.1 million of costs associated with the consolidation of two other manufacturing sites in Europe. Facility and other exit costs for the year ended December 31, 2016 primarily related to the relocation of manufacturing lines from our facility in the Dominican Republic to a manufacturing facility in Mexico. |
| |
(3) | In fiscal year 2018 we completed the sale of the the capital stock of Schrader Bridgeport International, Inc. and August France Holding Company SAS (collectively, the "Valves Business"). The gain on this sale is included in restructuring and other charges, net. Refer to Note 17, "Acquisitions and Divestitures," for further discussion of the sale of the Valves Business. |
| |
(4) | In the year ended December 31, 2018, we incurred $5.9 million of incremental direct costs in order to transact the sale of the Valves Business and $2.2 million of deferred compensation incurred in connection with the acquisition of GIGAVAC. Refer to Note 17, "Acquisitions and Divestitures," for further discussion. |
Changes to our severance liability during the years ended December 31, 2018 and 2017 were as follows:
|
| | | | |
| | | Severance |
| Balance as of December 31, 2016 | | $ | 17,350 |
|
| Charges, net of reversals | | 11,125 |
|
| Payments | | (22,511 | ) |
| Foreign currency remeasurement | | 1,619 |
|
| Balance as of December 31, 2017 | | 7,583 |
|
| Charges, net of reversals | | 7,566 |
|
| Payments | | (8,341 | ) |
| Foreign currency remeasurement | | (217 | ) |
| Balance as of December 31, 2018 | | $ | 6,591 |
|
The following table outlines the current and long-term components of our severance liability recognized in the consolidated balance sheets as of December 31, 2018 and 2017.
|
| | | | | | | | |
| | | As of December 31, |
| | | 2018 | | 2017 |
| Accrued expenses and other current liabilities | | $ | 6,591 |
| | $ | 4,184 |
|
| Other long-term liabilities | | — |
| | 3,399 |
|
| Total severance liability | | $ | 6,591 |
| | $ | 7,583 |
|
6. Other, Net
Other, net consisted of the following for the years ended December 31, 2018, 2017, and 2016:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
Currency remeasurement (loss)/gain on net monetary assets(1) | $ | (18,905 | ) | | $ | 18,041 |
| | $ | (10,621 | ) |
Gain/(loss) on foreign currency forward contracts(2) | 2,070 |
| | (15,618 | ) | | (1,850 | ) |
(Loss)/gain on commodity forward contracts(2) | (8,481 | ) | | 9,989 |
| | 7,399 |
|
Loss on debt financing(3) | (2,350 | ) | | (2,670 | ) | | — |
|
Net periodic benefit cost, excluding service cost(4) | (3,585 | ) | | (3,402 | ) | | (192 | ) |
| Other | 886 |
| | 75 |
| | 171 |
|
| Other, net | $ | (30,365 | ) | | $ | 6,415 |
| | $ | (5,093 | ) |
| |
(1) | Relates to the remeasurement of non-U.S. dollar denominated net monetary assets and liabilities into U.S. dollars. Refer to the Foreign Currency section of Note 2, "Significant Accounting Policies," for discussion. |
| |
(2) | Relates to changes in the fair value of derivative financial instruments not designated as cash flow hedges. Refer to Note 19, "Derivative Instruments and Hedging Activities," for a more detailed discussion. |
| |
(3) | Refer to Note 14, "Debt," for a more detailed discussion of our debt financing transactions. |
| |
(4) | On January 1, 2018, we adopted FASB ASU No. 2017-07, which requires the non-service cost components to be presented apart from the service cost component and outside of profit from operations. Refer to the Pension and Other Post-Retirement Benefits section of Note 2, "Significant Accounting Policies," and Note 13, "Pension and Other Post-Retirement Benefits," for additional details. |
7. Income Taxes
Effective April 27, 2006 (inception), and concurrent with the completion of the acquisition of the Sensors & Controls business ("S&C") of Texas Instruments Incorporated ("TI") (the "2006 Acquisition"), we commenced filing tax returns in the Netherlands as a stand-alone entity. On March 16, 2010, we completed an IPO28, 2018, the Company reincorporated its headquarters in the U.K. Several of our ordinary shares. SubsequentDutch resident subsidiaries continue to be taxable entities in the Netherlands and file tax returns under Dutch fiscal unity (i.e., consolidation). Prior to April 30, 2008, we filed one consolidated tax return in the U.S. On April 30, 2008, our IPO,U.S. subsidiaries executed a separation and distribution agreement that divided our U.S. businesses, resulting in two separate U.S. consolidated federal income tax returns. On January 1, 2016, our U.S. subsidiaries resumed filing one consolidated tax return. Our remaining subsidiaries will file income tax returns in the countries in which they are incorporated and/or operate, including Belgium, Bulgaria, China, France, Germany, Japan, Malaysia, Mexico, the Netherlands, South Korea, and the U.K. The 2006 Acquisition purchase accounting and the related debt and equity capitalization of the various subsidiaries of the consolidated company, and the realignment of the functions performed and risks assumed by the various subsidiaries, are of significant consequence to the determination of future book and taxable income of the respective subsidiaries and Sensata as a whole.
Refer to Note 2, "Significant Accounting Policies," for detailed discussion of the accounting policies related to income taxes.
Effects of the Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 ("Tax Reform" or "the Act") was signed into law. The Act reduced the U.S. federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and created new taxes on certain foreign sourced earnings. Given the significance of the legislation, the U.S. Securities and Exchange Commission staff issued Staff Accounting Bulletin
No. 118 ("SAB 118"). In fiscal year 2017 and the first nine months of 2018, we recorded provisional amounts for certain enactment-date effects of the Act by applying the guidance in SAB 118 because we had not yet completed our enactment-date accounting for these effects.
In fiscal years 2018 and 2017 we recorded tax expense related to the enactment-date effects of the Act that included recording the one-time transition tax liability related to undistributed earnings of certain foreign subsidiaries which were not previously taxed, and adjusting deferred tax assets and liabilities. We applied the guidance in SAB 118 when accounting for the enactment-date effects of the Act in 2017 and throughout 2018. At December 31, 2017, we had not completed our accounting for all of the enactment-date income tax effects of the Act under FASB ASC Topic 740 for the following aspects: impact on assessment on the measurement of deferred tax assets and liabilities, including the potential impact of the tax on global intangible low-taxed income, and the one-time transition tax. As of December 31, 2018, we have completed various secondary public offeringsour accounting for all of the enactment-date income tax effects of the Act. As further discussed below, during fiscal year 2018 we did not record an adjustment to the provisional amounts recorded as of December 31, 2017.
Deferred tax assets and liabilities
In the year ended December 31, 2017, we remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%, by recording a tax benefit of $73.7 million, which was principally associated with indefinite lived intangible assets. Absent this deferred tax liability, we would have been in a net deferred tax asset position that was offset by a valuation allowance at December 31, 2017. Upon further analysis of certain aspects of the Act and refinement of our ordinary shares. Our former principalcalculations during the year ended December 31, 2018, we determined that no further adjustment was necessary.
One-time transition tax
The one-time transition tax is based on our total post-1986 earnings and profits (E&P) of subsidiaries held by our U.S. companies that we previously deferred from U.S. income taxes. Due to tax attributes available, which had a full valuation allowance, to offset the anticipated transition tax, we provisionally did not record an income tax expense related to this tax at December 31, 2017.
Upon further analyses of the Act and Notices and regulations issued and proposed by the U.S. Department of the Treasury and the Internal Revenue Service, we finalized our calculations of the transition tax liability during 2018. The transition tax was fully offset by tax losses incurred in 2017, resulting in no additional tax liability.
Global intangible low-taxed income (GILTI)
The Act subjects a U.S. shareholder Sensata Investment Company S.C.A. ("SCA")to tax on global intangible low-taxed income (GILTI) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. We have elected to account for GILTI in the year the tax is incurred.
Income before taxes
Income/(loss) before taxes for the years ended December 31, 2018, 2017, and certain members2016 was categorized by jurisdiction as follows:
|
| | | | | | | | | | | |
| | U.S. | | Non-U.S. | | Total |
| 2018 | $ | 68,027 |
| | $ | 458,348 |
| | $ | 526,375 |
|
| 2017 | $ | (11,425 | ) | | $ | 413,866 |
| | $ | 402,441 |
|
| 2016 | $ | (43,842 | ) | | $ | 365,287 |
| | $ | 321,445 |
|
(Benefit from)/provision for income taxes
(Benefit from)/provision for income taxes for the years ended December 31, 2018, 2017, and 2016 was categorized by jurisdiction as follows:
|
| | | | | | | | | | | | | | | |
| | U.S. Federal | | Non-U.S. | | U.S. State | | Total |
| 2018 | | | | | | | |
| Current | $ | 5,700 |
| | $ | 64,666 |
| | $ | 1,082 |
| | $ | 71,448 |
|
| Deferred | (109,663 | ) | | (18,770 | ) | | (15,635 | ) | | (144,068 | ) |
| Total | $ | (103,963 | ) | | $ | 45,896 |
| | $ | (14,553 | ) | | $ | (72,620 | ) |
| 2017 | | | | | | | |
| Current | $ | — |
| | $ | 50,601 |
| | $ | 240 |
| | $ | 50,841 |
|
| Deferred | (56,956 | ) | | (1,104 | ) | | 1,303 |
| | (56,757 | ) |
| Total | $ | (56,956 | ) | | $ | 49,497 |
| | $ | 1,543 |
| | $ | (5,916 | ) |
| 2016 | | | | | | | |
| Current | $ | 464 |
| | $ | 49,977 |
| | $ | 226 |
| | $ | 50,667 |
|
| Deferred | 10,036 |
| | 2,010 |
| | (3,702 | ) | | 8,344 |
|
| Total | $ | 10,500 |
| | $ | 51,987 |
| | $ | (3,476 | ) | | $ | 59,011 |
|
Effective tax rate reconciliation
The principal reconciling items from income tax computed at the U.S. statutory tax rate for the years ended December 31, 2018, 2017, and 2016 were as follows:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Tax computed at statutory rate of 21% in 2018 and 35% in 2017 and 2016 | $ | 110,539 |
| | $ | 140,854 |
| | $ | 112,506 |
|
| Change in valuation allowances | (123,426 | ) | | (3,368 | ) | | 30,565 |
|
| Foreign tax rate differential | (41,200 | ) | | (111,990 | ) | | (86,339 | ) |
| Change in tax laws or rates | (22,264 | ) | | 3,912 |
| | 2,542 |
|
| Research and development incentives | (19,475 | ) | | (5,922 | ) | | (10,961 | ) |
| U.S. state taxes, net of federal benefit | (11,499 | ) | | 1,087 |
| | (2,166 | ) |
| Unrealized foreign exchange losses, net | 11,346 |
| | 830 |
| | 3,829 |
|
| Reserve for tax exposure | 10,775 |
| | 38,013 |
| | 11,227 |
|
| Withholding taxes not creditable | 8,734 |
| | 3,896 |
| | 6,014 |
|
| U.S. Tax Reform impact | — |
| | (73,668 | ) | | — |
|
| Other | 3,850 |
| | 440 |
| | (8,206 | ) |
| (Benefit from)/provision for income taxes | $ | (72,620 | ) | | $ | (5,916 | ) | | $ | 59,011 |
|
Change in valuation allowances
During the years ended December 31, 2018, 2017, and 2016 we released a portion of management participatedour valuation allowance, recognizing a deferred tax benefit. Refer to the discussion below related to the release of the valuation allowance.
U.S. Tax Reform Impact
As a result of Tax Reform, the U.S. statutory tax rate was lowered from 35% to 21%, effective on January 1, 2018. We were required to remeasure our U.S. deferred tax assets and liabilities to the new tax rate. For the year ended December 31, 2017 we recorded $73.7 million of income tax benefit for the remeasurement of the deferred tax liabilities associated with indefinite-lived intangible assets that will reverse at the new 21% rate. Absent this deferred tax liability, the U.S. operation was in a net deferred tax asset position that was offset by a full valuation allowance at December 31, 2017. We reduced our net deferred tax assets excluding the indefinite-lived intangible assets and the corresponding valuation allowance by $120.0 million.
Foreign tax rate differential
We operate in locations outside the U.S., including Bermuda, Bulgaria, China, Malaysia, the Netherlands, South Korea, and the U.K., that historically have had statutory tax rates different than the U.S. statutory rate. This can result in a foreign tax rate differential that may reflect a tax benefit or detriment. This foreign rate differential can change from year to year based upon the jurisdictional mix of earnings and changes in current and future enacted tax rates.
Certain of our subsidiaries are currently eligible, or have been eligible, for tax exemptions or holidays in their respective jurisdictions. From 2016 through 2018, a subsidiary in Changzhou, China was eligible for a reduced tax rate of 15%. The impact on current tax expense of the tax holidays and exemptions is included in the secondary offerings.foreign tax rate differential line in the reconciliation of the statutory rate to effective rate. The share capitalremeasurement of SCA was ownedthe deferred tax assets and liabilities is included in the change in tax laws or rates line.
Research and development incentives
Certain income of our U.K. subsidiaries is eligible for lower tax rates under the "patent box" regime, resulting in certain of our intellectual property income being taxed at a rate lower than the U.K. statutory tax rate. Certain R&D expenses are eligible for a bonus deduction under China’s R&D super deduction regime. In 2018, we substantially completed an assessment of our ability to claim an R&D credit in the U.S. As a result of this assessment, we recorded a tax benefit of $10.0 million. Annually, we expect our R&D credit to result in a net benefit of approximately $2.5 million per year. Prior to fiscal year 2018, the deferred tax asset related to these R&D credits would have been offset by entitiesthe valuation allowance.
Withholding taxes not creditable
Withholding taxes may apply to intercompany interest, royalty, management fees, and certain payments to third parties. Such taxes are expensed if they cannot be credited against the recipient’s tax liability in its country of residence. Additional consideration also has been given to the withholding taxes associated with Bain Capital Partners, LLC (“Bain Capital”the remittance of presently unremitted earnings and the recipient's ability to obtain a tax credit for such taxes. Earnings are not considered to be indefinitely reinvested in the jurisdictions in which they were earned. In certain jurisdictions we record withholding and other taxes on intercompany payments including dividends.
Deferred income tax assets and liabilities
The primary components of deferred income tax assets and liabilities as of December 31, 2018 and 2017 were as follows:
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Deferred tax assets: | | | |
| Inventories and related reserves | $ | 14,171 |
| | $ | 17,287 |
|
| Prepaid and accrued expenses | 71,004 |
| | 25,920 |
|
| Property, plant and equipment | 14,571 |
| | 13,396 |
|
| Intangible assets | 27,122 |
| | 22,050 |
|
| Unrealized exchange loss | 4,255 |
| | 12,265 |
|
| Net operating loss, interest expense, and other carryforwards | 296,255 |
| | 349,244 |
|
| Pension liability and other | 8,701 |
| | 8,880 |
|
| Share-based compensation | 11,332 |
| | 12,195 |
|
| Other | 10,151 |
| | 7,028 |
|
| Total deferred tax assets | 457,562 |
| | 468,265 |
|
| Valuation allowance | (157,043 | ) | | (277,315 | ) |
| Net deferred tax asset | 300,519 |
| | 190,950 |
|
| Deferred tax liabilities: | | | |
| Property, plant and equipment | (15,795 | ) | | (23,222 | ) |
| Intangible assets and goodwill | (440,348 | ) | | (428,028 | ) |
| Unrealized exchange gain | (6,912 | ) | | (6,031 | ) |
| Tax on undistributed earnings of subsidiaries | (35,187 | ) | | (38,894 | ) |
| Total deferred tax liabilities | (498,242 | ) | | (496,175 | ) |
| Net deferred tax liability | $ | (197,723 | ) | | $ | (305,225 | ) |
Valuation allowance and net operating loss carryforwards
In measuring our deferred tax assets, we consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed for all or some portion of the deferred tax assets. Significant judgment is required in considering the relative impact of the negative and positive evidence, and weight given to each category of evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary, and the more difficult it is to support a conclusion that a valuation allowance is not needed. Additionally, we utilize the "more likely than not" criteria established in FASB ASC Topic 740 to determine whether the future tax benefit from the deferred tax assets should be recognized. As a result, we have established valuation allowances on the deferred tax assets in jurisdictions that have incurred net operating losses and in which it is more likely than not that such losses will not be utilized in the foreseeable future.
As of each reporting date, we consider new evidence, both positive and negative, that could impact our view with regard to future realization of deferred tax assets. In the fourth quarter of 2018, based on reversals of existing taxable differences, projections of future taxable income, and taxable income in the current year, we have determined that sufficient positive evidence exists as of December 31, 2018, to conclude that it is more likely than not the additional deferred taxes of $122.1 million are realizable, and therefore, reduced the valuation allowance accordingly.
One of the provisions of the Tax Act limits the deduction for net interest expense incurred by U.S. corporations to 30% of adjusted taxable income. As a result of this provision, we have determined that certain of our interest carryforwards may be subject to limitation, and as result, determined that it was appropriate to retain the valuation allowance on a significant portion of these carryforwards.
For tax purposes, certain goodwill and indefinite-lived intangible assets are generally amortizable over 6 to 20 years. For book purposes, goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment annually. The tax amortization of goodwill and indefinite-lived intangible assets will result in a taxable temporary difference, which will not
reverse unless the related book goodwill or intangible asset is impaired or written off. This liability may not be used to support deductible temporary differences, such as net operating loss carryforwards, which may expire within a definite period.
The total valuation allowance for the years ended December 31, 2018 and 2017 decreased $120.3 million and $22.4 million, respectively. Subsequently reported tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 2018 will be allocated to income tax benefit recognized in the consolidated statements of operations.
As of December 31, 2018, we have U.S. federal net operating loss carryforwards of $416.0 million and suspended interest expense carryforwards of $460.2 million. U.S. federal net operating loss carryforwards will expire from 2027 to 2037, state net operating loss carryforwards will expire from 2019 to 2037, and the interest carryovers have an unlimited life. It is more likely than not that these net operating losses will not be utilized in the foreseeable future. We also have non-U.S. net operating loss carryforwards of $238.0 million, which will begin to expire in 2019.
Unrecognized tax benefits
A reconciliation of the amount of unrecognized tax benefits is as follows:
|
| | | |
| Balance as of December 31, 2015 | $ | 38,057 |
|
| Increases related to prior year tax positions | 6,390 |
|
| Increases related to current year tax positions | 8,462 |
|
| Decreases related to lapse of applicable statute of limitations | (256 | ) |
| Decreases related to settlements with tax authorities | (6,755 | ) |
| Balance as of December 31, 2016 | 45,898 |
|
| Increases related to prior year tax positions | 7,968 |
|
| Increases related to current year tax positions | 14,585 |
|
| Decreases related to lapse of applicable statute of limitations | (1,356 | ) |
| Decreases related to settlements with tax authorities | (7,211 | ) |
| Balance as of December 31, 2017 | 59,884 |
|
| Increases related to prior year tax positions | 14,609 |
|
| Increases related to current year tax positions | 15,676 |
|
| Increases related to business combination | 1,000 |
|
| Decreases related to prior year tax positions | (1,144 | ) |
| Decreases related to foreign currency exchange rate fluctuations | (416 | ) |
| Balance as of December 31, 2018 | $ | 89,609 |
|
We record interest and penalties related to unrecognized tax benefits in the consolidated statements of operations and the consolidated balance sheets. The table that follows presents the (income)/expense related to such interest and penalties recognized in the consolidated statements of operations during the years ended December 31, 2018, 2017, and 2016, and the amount of interest and penalties recorded on the consolidated balance sheets as of December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Statements of Operations | | Balance Sheets |
| | | For the year ended December 31, | | As of December 31, |
| (Dollars in millions) | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 |
| Interest | | $ | (0.2 | ) | | $ | 0.2 |
| | $ | 0.1 |
| | $ | 0.4 |
| | $ | 0.7 |
|
| Penalties | | $ | (0.2 | ) | | $ | (0.1 | ) | | $ | 0.1 |
| | $ | 0.4 |
| | $ | 0.5 |
|
The liability for unrecognized tax benefits generally relates to the allocation of taxable income to the various jurisdictions where we are subject to tax. At December 31, 2018, we anticipate that the liability for unrecognized tax benefits could decrease by up to $0.5 million within the next twelve months due to the expiration of certain statutes of limitation or the settlement of examinations or issues with tax authorities. The amount of unrecognized tax benefits as of December 31, 2018 and 2017 that if recognized, would impact our effective tax rate are $11.5 million and $5.4 million, respectively.
Our major tax jurisdictions include Belgium, Bulgaria, China, France, Germany, Japan, Malaysia, Mexico, the Netherlands, South Korea, the U.K., and the U.S. These jurisdictions generally remain open to examination by the relevant tax authority for the tax years 2006 through 2018.
Indemnifications
We have various indemnification provisions in place with parties including TI, Honeywell, William Blair, Tomkins Limited, and Custom Sensors & Technologies Ltd. These provisions provide for the reimbursement of future tax liabilities paid by us that relate to the pre-acquisition periods of the acquired businesses including S&C, First Technology Automotive and Special Products, Airpax Holdings, Inc., August Cayman Company, Inc. ("Schrader"), CST, and GIGAVAC.
8. Net Income per Share
Basic and diluted net income per share are calculated by dividing net income by the number of basic and diluted weighted-average ordinary shares outstanding during the period. For the years ended December 31, 2018, 2017, and 2016, the weighted-average ordinary shares outstanding used to calculate basic and diluted net income per share were as follows:
|
| | | | | | | | |
| | For the year ended December 31, |
| (Shares in thousands) | 2018 | | 2017 | | 2016 |
| Basic weighted-average ordinary shares outstanding | 168,570 |
| | 171,165 |
| | 170,709 |
|
| Dilutive effect of stock options | 822 |
| | 616 |
| | 489 |
|
| Dilutive effect of unvested restricted securities | 467 |
| | 388 |
| | 262 |
|
| Diluted weighted-average ordinary shares outstanding | 169,859 |
| | 172,169 |
| | 171,460 |
|
Net income and net income per share are presented in the consolidated statements of operations.
Certain potential ordinary shares were excluded from our calculation of diluted weighted-average ordinary shares outstanding because either they would have had an anti-dilutive effect on net income per share or they related to equity awards that were contingently issuable for which the contingency had not been satisfied. Refer to Note 4, "Share-Based Payment Plans," for further discussion of our equity awards. These potential ordinary shares are as follows:
|
| | | | | | | | |
| | For the year ended December 31, |
| (Shares in thousands) | 2018 | | 2017 | | 2016 |
| Anti-dilutive shares excluded | 930 |
| | 1,410 |
| | 1,401 |
|
| Contingently issuable shares excluded | 687 |
| | 871 |
| | 606 |
|
9. Inventories
The components of inventories as of December 31, 2018 and 2017 were as follows:
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Finished goods | $ | 187,095 |
| | $ | 195,089 |
|
| Work-in-process | 104,405 |
| | 92,678 |
|
| Raw materials | 200,819 |
| | 158,362 |
|
| Inventories | $ | 492,319 |
| | $ | 446,129 |
|
Refer to Note 2, "Significant Accounting Policies," for a global privatediscussion of our accounting policies related to inventories.
10. Property, Plant and Equipment, Net
PP&E, net as of December 31, 2018 and 2017 consisted of the following:
|
| | | | | | | | |
| | | As of December 31, |
| | | 2018 | | 2017 |
| Land | | $ | 22,021 |
| | $ | 23,077 |
|
| Buildings and improvements | | 259,182 |
| | 250,475 |
|
| Machinery and equipment | | 1,220,285 |
| | 1,132,461 |
|
| Total PP&E | | 1,501,488 |
| | 1,406,013 |
|
| Accumulated depreciation | | (714,310 | ) | | (655,964 | ) |
| PP&E, net | | $ | 787,178 |
| | $ | 750,049 |
|
Depreciation expense for PP&E, including amortization of leasehold improvements and depreciation of assets under capital leases, totaled $106.0 million, $109.3 million, and $106.9 million for the years ended December 31, 2018, 2017, and 2016, respectively.
PP&E, net as of December 31, 2018 and 2017 included the following assets under capital leases:
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Assets under capital leases in PP&E | $ | 49,714 |
| | $ | 45,249 |
|
| Accumulated depreciation | (22,508 | ) | | (20,631 | ) |
| Assets under capital leases in PP&E, net | $ | 27,206 |
| | $ | 24,618 |
|
Refer to Note 2, "Significant Accounting Policies," for a discussion of our accounting policies related to PP&E, net.
11. Goodwill and Other Intangible Assets, Net
The following table outlines the changes in goodwill by segment for the year ended December 31, 2018. There were no acquisitions or other changes to goodwill during the year ended December 31, 2017.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Performance Sensing |
| Sensing Solutions |
| Total |
| | Gross
Goodwill |
| Accumulated
Impairment |
| Net
Goodwill |
| Gross
Goodwill |
| Accumulated
Impairment |
| Net
Goodwill |
| Gross
Goodwill |
| Accumulated
Impairment |
| Net
Goodwill |
| Balance as of December 31, 2016 and 2017 | $ | 2,148,135 |
| | $ | — |
| | $ | 2,148,135 |
| | $ | 875,795 |
| | $ | (18,466 | ) | | $ | 857,329 |
| | $ | 3,023,930 |
| | $ | (18,466 | ) | | $ | 3,005,464 |
|
| Divestiture of Valves Business | (38,800 | ) | | — |
| | (38,800 | ) | | — |
| | — |
| | — |
| | (38,800 | ) | | — |
| | (38,800 | ) |
| Acquisition of GIGAVAC | 46,298 |
| | — |
| | 46,298 |
| | 68,340 |
| | — |
| | 68,340 |
| | 114,638 |
| | — |
| | 114,638 |
|
| Balance as of December 31, 2018 | $ | 2,155,633 |
| | $ | — |
| | $ | 2,155,633 |
| | $ | 944,135 |
| | $ | (18,466 | ) | | $ | 925,669 |
| | $ | 3,099,768 |
| | $ | (18,466 | ) | | $ | 3,081,302 |
|
Goodwill attributed to the acquisition of GIGAVAC reflects our allocation of purchase price to the estimated fair value of certain assets acquired and liabilities assumed. Preliminary goodwill attributed to the acquisition of GIGAVAC has been assigned to our segments in the above table based on a methodology using anticipated future earnings of the components of business. The allocation is preliminary and is subject to change prior to the end of the measurement period. Goodwill attributed to the sale of the Valves Business is based on the relative fair value of the Valves Business to the Performance Sensing reporting unit. Refer to Note 17, "Acquisitions and Divestitures," for further discussion of the acquisition of GIGAVAC and the sale of the Valves Business.
In connection with the sale of the Valves Business, as required by FASB ASC Topic 350, we evaluated the goodwill of the retained portion of the Performance Sensing reporting unit for impairment using the quantitative method and determined that it was not impaired. In addition, we evaluated our goodwill for impairment as of October 1, 2018 using a combination of the qualitative and quantitative methods. Refer to Note 2, "Significant Accounting Policies," for discussion of these methods. Based on these analyses, we have determined that, for the Performance Sensing reporting unit, which was subject to the qualitative method, it was more likely than not that its fair value was greater than its carrying value at that date, and the Electrical
Protection, Industrial Sensing, Aerospace, Power Management, and Interconnection reporting units, which were subject to the quantitative method, that their fair values exceeded their carrying values at that date.
We evaluated our other indefinite-lived intangible assets for impairment as of October 1, 2018, using the quantitative method, and we determined that the fair value of each indefinite–lived intangible asset exceeded its respective carrying value on that date.
The following table outlines the components of definite-lived intangible assets as of December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of December 31, |
| | Weighted-
Average
Life (years) | | 2018 | | 2017 |
Gross
Carrying
Amount | | Accumulated
Amortization | | Accumulated
Impairment | | Net
Carrying
Value | | Gross
Carrying
Amount | | Accumulated
Amortization | | Accumulated
Impairment | | Net
Carrying
Value |
| Completed technologies | 14 | | $ | 759,008 |
| | $ | (475,295 | ) | | $ | (2,430 | ) | | $ | 281,283 |
| | $ | 727,968 |
| | $ | (418,987 | ) | | $ | (2,430 | ) | | $ | 306,551 |
|
| Customer relationships | 11 | | 1,825,698 |
| | (1,352,189 | ) | | (12,144 | ) | | 461,365 |
| | 1,771,198 |
| | (1,287,581 | ) | | (12,144 | ) | | 471,473 |
|
| Non-compete agreements | 8 | | 23,400 |
| | (23,400 | ) | | — |
| | — |
| | 23,400 |
| | (23,400 | ) | | — |
| | — |
|
| Tradenames | 21 | | 66,154 |
| | (13,468 | ) | | — |
| | 52,686 |
| | 50,754 |
| | (11,094 | ) | | — |
| | 39,660 |
|
Capitalized software and other(1) | 7 | | 65,896 |
| | (32,509 | ) | | — |
| | 33,387 |
| | 59,909 |
| | (25,939 | ) | | — |
| | 33,970 |
|
| Total | 12 | | $ | 2,740,156 |
| | $ | (1,896,861 | ) | | $ | (14,574 | ) | | $ | 828,721 |
| | $ | 2,633,229 |
| | $ | (1,767,001 | ) | | $ | (14,574 | ) | | $ | 851,654 |
|
| |
(1) | During the years ended December 31, 2018 and 2017, we wrote-off approximately $0.2 million and $1.1 million, respectively, of fully-amortized capitalized software that was not in use. |
Refer to Note 17, "Acquisitions and Divestitures," for details of definite-lived intangible assets recognized as a result of the acquisition of GIGAVAC.
The following table outlines amortization of intangible assets for the years ended December 31, 2018, 2017, and 2016:
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Acquisition-related definite-lived intangible assets | $ | 132,235 |
| | $ | 153,729 |
| | $ | 194,208 |
|
| Capitalized software | 7,091 |
| | 7,321 |
| | 7,290 |
|
| Amortization of intangible assets | $ | 139,326 |
| | $ | 161,050 |
| | $ | 201,498 |
|
The table below presents estimated amortization of intangible assets for each of the next five years:
|
| | | |
| For the year ended December 31, | |
| 2019 | $ | 142,198 |
|
| 2020 | $ | 127,046 |
|
| 2021 | $ | 110,203 |
|
| 2022 | $ | 95,029 |
|
| 2023 | $ | 81,055 |
|
In addition to the above, we own the Klixon® and Airpax® tradenames, which are indefinite-lived intangible assets, as they have each been in continuous use for over 65 years, and we have no plans to discontinue using them. We have recorded $59.1 million and $9.4 million, respectively, on the consolidated balance sheets related to these tradenames.
12. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of December 31, 2018 and 2017 consisted of the following:
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Accrued compensation and benefits | $ | 68,936 |
| | $ | 89,816 |
|
| Accrued interest | 40,550 |
| | 36,919 |
|
| Foreign currency and commodity forward contracts | 7,710 |
| | 35,094 |
|
| Accrued severance | 6,591 |
| | 4,184 |
|
| Current portion of pension and post-retirement benefit obligations | 3,176 |
| | 3,342 |
|
| Other accrued expenses and current liabilities | 91,167 |
| | 90,205 |
|
| Accrued expenses and other current liabilities | $ | 218,130 |
| | $ | 259,560 |
|
13. Pension and Other Post-Retirement Benefits
We provide various pension and other post-retirement plans for current and former employees, including defined benefit, defined contribution, and retiree healthcare benefit plans. Refer to Note 2, "Significant Accounting Policies," for a detailed discussion of the accounting policies related to our pension and other post-retirement benefit plans.
U.S. Benefit Plans
The principal retirement plans in the U.S. include a qualified defined benefit pension plan and a defined contribution plan. In addition, we provide post-retirement medical coverage and non-qualified benefits to certain employees.
Defined Benefit Pension Plans
The benefits under the qualified defined benefit pension plan are determined using a formula based upon years of service and the highest five consecutive years of compensation.
TI closed the qualified defined benefit pension plan to participants hired after November 1997. In addition, participants eligible to retire under the TI plan as of April 26, 2006 were given the option of continuing to participate in the qualified defined benefit pension plan or retiring under the qualified defined benefit pension plan and thereafter participating in an enhanced defined contribution plan.
We intend to contribute amounts to the qualified defined benefit pension plan in order to meet the minimum funding requirements of federal laws and regulations, plus such additional amounts as we deem appropriate. During the year ended December 31, 2018, we contributed $4.0 million to the qualified defined benefit plan. We do not expect to contribute to the qualified defined benefit pension plan in fiscal year 2019.
We also sponsor a non-qualified defined benefit pension plan, which is closed to new participants and is unfunded.
Effective January 31, 2012, we froze the defined benefit pension plans and eliminated future benefit accruals.
Defined Contribution Plans
As of 2018, we have one defined contribution plan for U.S. employees, which provides for an employer matching contribution of up to 4% of the employee's annual eligible earnings. The aggregate expense related to the defined contribution plan was $5.7 million, $5.9 million, and $5.8 million for the years ended December 31, 2018, 2017, and 2016, respectively.
Retiree Healthcare Benefit Plan
We offer access to group medical coverage during retirement to some of our U.S. employees. We make contributions toward the cost of those retiree medical benefits for certain retirees. The contribution rates are based upon varying factors, the most important of which are an employee’s date of hire, date of retirement, years of service, and eligibility for Medicare benefits. The balance of the cost is borne by the participants in the plan. For the year ended December 31, 2018, we did not, and do not expect to, receive any amount of Medicare Part D Federal subsidy. Our projected benefit obligation as of December 31, 2018 and 2017 did not include an assumption for a Federal subsidy.
In the fourth quarter of 2013, we amended the retiree healthcare benefit plan to eliminate supplemental medical coverage offered to Medicare eligible retirees, effective January 1, 2014. As a result of the amendment, we recognized a gain of $7.2 million that was recorded in other comprehensive income/(loss) in the fourth quarter of 2013, which is being amortized as a component of net periodic benefit cost over a period of approximately 5 years from the date of recognition, which represents the remaining average service period to the full eligibility dates of the active plan participants.
Non-U.S. Benefit Plans
Retirement coverage for non-U.S. employees is provided through separate defined benefit and defined contribution plans. Retirement benefits are generally based on an employee’s years of service and compensation. Funding requirements are determined on an individual country and plan basis and are subject to local country practices and market circumstances. We do not expect to contribute to the non-U.S. defined benefit plans during 2019.
Impact on Financial Statements
The components of net periodic benefit cost/(credit) associated with our defined benefit and retiree healthcare plans for the years ended December 31, 2018, 2017, and 2016 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Service cost | $ | — |
| | $ | 50 |
| | $ | 3,122 |
| | $ | — |
| | $ | 74 |
| | $ | 2,582 |
| | $ | — |
| | $ | 83 |
| | $ | 2,716 |
|
| Interest cost | 1,473 |
| | 272 |
| | 1,310 |
| | 1,604 |
| | 325 |
| | 1,053 |
| | 1,461 |
| | 364 |
| | 1,179 |
|
| Expected return on plan assets | (1,710 | ) | | — |
| | (929 | ) | | (2,151 | ) | | — |
| | (905 | ) | | (2,684 | ) | | — |
| | (952 | ) |
| Amortization of net loss | 1,080 |
| | 5 |
| | 407 |
| | 1,149 |
| | 54 |
| | 287 |
| | 707 |
| | 143 |
| | 488 |
|
| Amortization of net prior service (credit)/cost | — |
| | (1,728 | ) | | 6 |
| | — |
| | (1,335 | ) | | (4 | ) | | — |
| | (1,335 | ) | | (20 | ) |
| Loss on settlement | 1,047 |
| | — |
| | 1,461 |
| | 3,225 |
| | — |
| | 100 |
| | 1,293 |
| | — |
| | 34 |
|
| Loss/(gain) on curtailment | — |
| | — |
| | 891 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (486 | ) |
| Net periodic benefit cost/(credit) | $ | 1,890 |
| | $ | (1,401 | ) | | $ | 6,268 |
| | $ | 3,827 |
| | $ | (882 | ) | | $ | 3,113 |
| | $ | 777 |
| | $ | (745 | ) | | $ | 2,959 |
|
On January 1, 2018 we adopted the guidance in FASB ASU No. 2017-07, which requires that entities present the non–service components of net periodic benefit cost separately from the financial statement line item(s) that include service cost, outside of operating income. As a result of this adoption, the components of net periodic benefit cost, excluding service cost, were reclassified in our consolidated statements of operations from various operating cost and expense line items to other, net for the years ended December 31, 2017 and 2016.
The table below presents the effects of this adjustment.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2017 | | 2016 |
| | As Reported | | Adjustment | | As Adjusted | | As Reported | | Adjustment | | As Adjusted |
| Net revenue | $ | 3,306,733 |
| | $ | — |
| | $ | 3,306,733 |
| | $ | 3,202,288 |
| | $ | — |
| | $ | 3,202,288 |
|
| Operating costs and expenses: | | | | | | | | | | | |
| Cost of revenue | 2,141,308 |
| | (2,410 | ) | | 2,138,898 |
| | 2,084,261 |
| | (102 | ) | | 2,084,159 |
|
| Research and development | 130,204 |
| | (77 | ) | | 130,127 |
| | 126,665 |
| | (9 | ) | | 126,656 |
|
| Selling, general and administrative | 302,811 |
| | (915 | ) | | 301,896 |
| | 293,587 |
| | (81 | ) | | 293,506 |
|
| Amortization of intangible assets | 161,050 |
| | — |
| | 161,050 |
| | 201,498 |
| | — |
| | 201,498 |
|
| Restructuring and other charges, net | 18,975 |
| | — |
| | 18,975 |
| | 4,113 |
| | — |
| | 4,113 |
|
| Total operating costs and expenses | 2,754,348 |
| | (3,402 | ) | | 2,750,946 |
| | 2,710,124 |
| | (192 | ) | | 2,709,932 |
|
| Profit from operations | 552,385 |
| | 3,402 |
| | 555,787 |
| | 492,164 |
| | 192 |
| | 492,356 |
|
| Interest expense, net | (159,761 | ) | | — |
| | (159,761 | ) | | (165,818 | ) | | — |
| | (165,818 | ) |
| Other, net | 9,817 |
| | (3,402 | ) | | 6,415 |
| | (4,901 | ) | | (192 | ) | | (5,093 | ) |
| Income before taxes | $ | 402,441 |
| | $ | — |
| | $ | 402,441 |
| | $ | 321,445 |
| | $ | — |
| | $ | 321,445 |
|
The following table outlines the rollforward of the benefit obligation and plan assets for the defined benefit and retiree healthcare benefit plans for the years ended December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Change in benefit obligation: | | | | | | | | | | | |
| Beginning balance | $ | 48,615 |
| | $ | 9,692 |
| | $ | 67,413 |
| | $ | 57,679 |
| | $ | 10,296 |
| | $ | 59,056 |
|
| Service cost | — |
| | 50 |
| | 3,122 |
| | — |
| | 74 |
| | 2,582 |
|
| Interest cost | 1,473 |
| | 272 |
| | 1,310 |
| | 1,604 |
| | 325 |
| | 1,053 |
|
| Plan participants’ contributions | — |
| | 475 |
| | 60 |
| | — |
| | 519 |
| | 120 |
|
| Plan amendment | — |
| | (3,243 | ) | | — |
| | — |
| | — |
| | (6 | ) |
| Actuarial (gain)/loss | (519 | ) | | (124 | ) | | 2,777 |
| | 2,936 |
| | (197 | ) | | 2,692 |
|
| Curtailments | — |
| | — |
| | 931 |
| | — |
| | — |
| | — |
|
| Benefits paid | (4,400 | ) | | (1,105 | ) | | (6,262 | ) | | (13,604 | ) | | (1,325 | ) | | (2,572 | ) |
| Divestiture | — |
| | — |
| | (3,310 | ) | | — |
| | — |
| | — |
|
| Foreign currency remeasurement | — |
| | — |
| | (350 | ) | | — |
| | — |
| | 4,488 |
|
| Ending balance | $ | 45,169 |
| | $ | 6,017 |
| | $ | 65,691 |
| | $ | 48,615 |
| | $ | 9,692 |
| | $ | 67,413 |
|
| Change in plan assets: | | | | | | | | | | | |
| Beginning balance | $ | 41,101 |
| | $ | — |
| | $ | 41,222 |
| | $ | 52,042 |
| | $ | — |
| | $ | 37,361 |
|
| Actual return on plan assets | (811 | ) | | — |
| | (1,308 | ) | | 2,319 |
| | — |
| | 1,241 |
|
| Employer contributions | 3,985 |
| | 630 |
| | 5,992 |
| | 344 |
| | 1,325 |
| | 2,586 |
|
| Plan participants’ contributions | — |
| | 475 |
| | 60 |
| | — |
| | — |
| | 120 |
|
| Benefits paid | (4,400 | ) | | (1,105 | ) | | (6,262 | ) | | (13,604 | ) | | (1,325 | ) | | (2,572 | ) |
| Foreign currency remeasurement | — |
| | — |
| | 164 |
| | — |
| | — |
| | 2,486 |
|
| Ending balance | $ | 39,875 |
| | $ | — |
| | $ | 39,868 |
| | $ | 41,101 |
| | $ | — |
| | $ | 41,222 |
|
| Funded status at end of year | $ | (5,294 | ) | | $ | (6,017 | ) | | $ | (25,823 | ) | | $ | (7,514 | ) | | $ | (9,692 | ) | | $ | (26,191 | ) |
| Accumulated benefit obligation at end of year | $ | 45,169 |
| | NA |
| | $ | 59,948 |
| | $ | 48,615 |
| | NA |
| | $ | 60,588 |
|
The following table outlines the funded status amounts recognized in the consolidated balance sheets as of December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Noncurrent assets | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Current liabilities | (595 | ) | | (1,116 | ) | | (1,465 | ) | | (638 | ) | | (1,210 | ) | | (1,494 | ) |
| Noncurrent liabilities | (4,699 | ) | | (4,901 | ) | | (24,358 | ) | | (6,876 | ) | | (8,482 | ) | | (24,697 | ) |
| Funded status | $ | (5,294 | ) | | $ | (6,017 | ) | | $ | (25,823 | ) | | $ | (7,514 | ) | | $ | (9,692 | ) | | $ | (26,191 | ) |
Balances recognized within accumulated other comprehensive loss that have not been recognized as components of net periodic benefit cost, net of tax, as of December 31, 2018, 2017, and 2016 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 | | 2016 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Net prior service credit | $ | — |
| | $ | (692 | ) | | $ | (10 | ) | | $ | — |
| | $ | 823 |
| | $ | (220 | ) | | $ | — |
| | $ | (512 | ) | | $ | (218 | ) |
| Net loss | $ | 20,759 |
| | $ | 880 |
| | $ | 14,425 |
| | $ | 20,884 |
| | $ | 1,009 |
| | $ | 12,489 |
| | $ | 22,490 |
| | $ | 1,260 |
| | $ | 11,070 |
|
We expect to amortize a loss of $0.5 million from accumulated other comprehensive loss to net periodic benefit cost during 2019.
Information for plans with an accumulated benefit obligation in excess of plan assets as of December 31, 2018 and 2017 is as follows:
|
| | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| Projected benefit obligation | $ | 45,169 |
| | $ | 65,691 |
| | $ | 48,615 |
| | $ | 31,680 |
|
| Accumulated benefit obligation | $ | 45,169 |
| | $ | 59,948 |
| | $ | 48,615 |
| | $ | 26,609 |
|
| Plan assets | $ | 39,875 |
| | $ | 39,868 |
| | $ | 41,101 |
| | $ | 5,759 |
|
Information for plans with a projected benefit obligation in excess of plan assets as of December 31, 2018 and 2017 is as follows:
|
| | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| Projected benefit obligation | $ | 51,186 |
| | $ | 65,691 |
| | $ | 58,307 |
| | $ | 63,153 |
|
| Plan assets | $ | 39,875 |
| | $ | 39,868 |
| | $ | 41,101 |
| | $ | 36,990 |
|
Other changes in plan assets and benefit obligations, net of tax, recognized in other comprehensive income/(loss) for the years ended December 31, 2018, 2017, and 2016 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Defined Benefit | | Retiree Healthcare | | Defined Benefit |
| Net loss/(gain) | $ | 2,002 |
| | $ | (124 | ) | | $ | 3,669 |
| | $ | 2,768 |
| | $ | (197 | ) | | $ | 1,618 |
| | $ | 5,368 |
| | $ | (984 | ) | | $ | 2,505 |
|
| Amortization of net loss | (1,080 | ) | | (5 | ) | | (298 | ) | | (1,149 | ) | | (54 | ) | | (130 | ) | | (707 | ) | | (143 | ) | | (436 | ) |
| Amortization of net prior service credit/(cost) | — |
| | 1,728 |
| | (4 | ) | | — |
| | 1,335 |
| | 3 |
| | — |
| | 1,335 |
| | 15 |
|
| Divestiture | — |
| | — |
| | (228 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Plan amendment | — |
| | (3,243 | ) | | — |
| | — |
| | — |
| | (5 | ) | | — |
| | — |
| | (73 | ) |
| Settlement effect | (1,047 | ) | | — |
| | (1,023 | ) | | (3,225 | ) | | — |
| | (69 | ) | | (1,293 | ) | | — |
| | (67 | ) |
| Curtailment effect | — |
| | — |
| | 30 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,272 | ) |
| Total in other comprehensive (income)/loss | $ | (125 | ) | | $ | (1,644 | ) | | $ | 2,146 |
| | $ | (1,606 | ) | | $ | 1,084 |
| | $ | 1,417 |
| | $ | 3,368 |
| | $ | 208 |
| | $ | 672 |
|
Assumptions and Investment Policies
Weighted-average assumptions used to calculate the projected benefit obligations of our defined benefit and retiree healthcare benefit plans as of December 31, 2018 and 2017 are as follows:
|
| | | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | | 2017 |
| | Defined Benefit | | Retiree Healthcare | | | Defined Benefit | | Retiree Healthcare |
| U.S. assumed discount rate | 3.79 | % | | 3.90 | % | | | 3.00 | % | | 3.10 | % |
| Non-U.S. assumed discount rate | 2.17 | % | | NA |
| | | 2.07 | % | | NA |
|
| Non-U.S. average long-term pay progression | 2.66 | % | | NA |
| | | 2.66 | % | | NA |
|
Weighted-average assumptions used to calculate the net periodic benefit cost of our defined benefit and retiree healthcare benefit plans for the years ended December 31, 2018, 2017, and 2016 are as follows:
|
| | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Retiree Healthcare |
| U.S. assumed discount rate | 3.45 | % | | 3.10 | % | | 3.20 | % | | 3.30 | % | | 3.10 | % | | 3.50 | % |
| Non-U.S. assumed discount rate | 5.87 | % | | NA |
| | 3.90 | % | | NA |
| | 3.83 | % | | NA |
|
U.S. average long-term rate of return on plan assets | 4.57 | % | | NA |
| | 4.50 | % | | NA |
| | 5.00 | % | | NA |
|
| Non-U.S. average long-term rate of return on plan assets | 2.26 | % | | NA |
| | 2.29 | % | | NA |
| | 2.60 | % | | NA |
|
| Non-U.S. average long-term pay progression | 4.82 | % | | NA |
| | 3.75 | % | | NA |
| | 3.78 | % | | NA |
|
Assumed healthcare cost trend rates for the U.S. retiree healthcare benefit plan as of December 31, 2018, 2017, and 2016 are as follows:
|
| | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 | | 2016 |
| Assumed healthcare trend rate for next year: | | | | | |
| Attributed to less than age 65 | 6.60 | % | | 6.90 | % | | 7.10 | % |
| Attributed to age 65 or greater | 7.10 | % | | 7.50 | % | | 7.80 | % |
| Ultimate trend rate | 4.50 | % | | 4.50 | % | | 4.50 | % |
| Year in which ultimate trend rate is reached: |
| | | | |
| Attributed to less than age 65 | 2038 |
| | 2038 |
| | 2038 |
|
| Attributed to age 65 or greater | 2038 |
| | 2038 |
| | 2038 |
|
Assumed healthcare trend rates could have a significant effect on the amounts reported for retiree healthcare plans. A one percentage point change in the assumed healthcare trend rates for the year ended December 31, 2018 would have the following effect:
|
| | | | | | | |
| | One Percentage Point: |
| | Increase | | Decrease |
| Effect on total service and interest cost components | $ | 6 |
| | $ | (5 | ) |
| Effect on post-retirement benefit obligations | $ | 200 |
| | $ | (248 | ) |
The table below outlines the benefits expected to be paid to participants in each of the following years, taking into consideration expected future service, as appropriate. The majority of the payments will be paid from plan assets and not company assets.
|
| | | | | | | | | | | |
| | Expected Benefit Payments |
| For the year ended December 31, | U.S. Defined Benefit | | U.S. Retiree Healthcare | | Non-U.S. Defined Benefit |
| 2019 | $ | 6,466 |
| | $ | 1,116 |
| | $ | 2,959 |
|
| 2020 | $ | 5,826 |
| | $ | 738 |
| | $ | 3,232 |
|
| 2021 | $ | 5,313 |
| | $ | 696 |
| | $ | 3,228 |
|
| 2022 | $ | 4,128 |
| | $ | 634 |
| | $ | 3,829 |
|
| 2023 | $ | 3,677 |
| | $ | 523 |
| | $ | 3,528 |
|
| 2024 - 2027 | $ | 10,498 |
| | $ | 1,905 |
| | $ | 21,700 |
|
Plan Assets
We hold assets for our defined benefit plans in the U.S., Japan, the Netherlands, and Belgium. Information about the assets for each of these plans is detailed below. Refer to Note 18, "Fair Value Measures," for descriptions of the levels of the fair value hierarchy in accordance with FASB ASC Topic 820.
U.S. Plan Assets
Our target asset allocation for the U.S. defined benefit plan is 83% fixed income and 17% equity securities. To arrive at the targeted asset allocation, we and our investment firm, co-investors (Bain Capital and co-investors are collectively referred toadviser reviewed market opportunities using historical data, as well as the “Sponsors”)actuarial valuation for the plan, to ensure that the levels of acceptable return and risk are well-defined and monitored.
The following table presents information about the plan’s target and actual asset allocation, as of December 31, 2018:
|
| | | | | |
| | Target Allocation | | Actual Allocation as of December 31, 2018 |
| U.S. large cap equity | 7 | % | | 7 | % |
| U.S. small / mid cap equity | 2 | % | | 2 | % |
| Globally managed volatility fund | 3 | % | | 3 | % |
| International (non-U.S.) equity | 4 | % | | 4 | % |
| Fixed income (U.S. investment and non-investment grade) | 68 | % | | 67 | % |
| High-yield fixed income | 2 | % | | 2 | % |
| International (non-U.S.) fixed income | 1 | % | | 1 | % |
| Money market funds | 13 | % | | 13 | % |
The portfolio is monitored for automatic rebalancing on a monthly basis.
The following table presents information about the plan assets measured at fair value as of December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| U.S. large cap equity | $ | 2,960 |
| | $ | — |
| | $ | — |
| | $ | 2,960 |
| | $ | 3,288 |
| | $ | — |
| | $ | — |
| | $ | 3,288 |
|
| U.S. small / mid cap equity | 833 |
| | — |
| | — |
| | 833 |
| | 942 |
| | — |
| | — |
| | 942 |
|
| Global managed volatility fund | 1,214 |
| | — |
| | — |
| | 1,214 |
| | 1,288 |
| | — |
| | — |
| | 1,288 |
|
| International (non-U.S.) equity | 1,493 |
| | — |
| | — |
| | 1,493 |
| | 1,788 |
| | — |
| | — |
| | 1,788 |
|
| Total equity mutual funds | 6,500 |
| | — |
| | — |
| | 6,500 |
| | 7,306 |
| | — |
| | — |
| | 7,306 |
|
| Fixed income (U.S. investment grade) | 26,884 |
| | — |
| | — |
| | 26,884 |
| | 27,507 |
| | — |
| | — |
| | 27,507 |
|
| High-yield fixed income | 792 |
| | — |
| | — |
| | 792 |
| | 821 |
| | — |
| | — |
| | 821 |
|
| International (non-U.S.) fixed income | 402 |
| | — |
| | — |
| | 402 |
| | 398 |
| | — |
| | — |
| | 398 |
|
| Total fixed income mutual funds | 28,078 |
| | — |
| | — |
| | 28,078 |
| | 28,726 |
| | — |
| | — |
| | 28,726 |
|
| Money market funds | 5,297 |
| | — |
| | — |
| | 5,297 |
| | 5,069 |
| | — |
| | — |
| | 5,069 |
|
| Total plan assets | $ | 39,875 |
| | $ | — |
| | $ | — |
| | $ | 39,875 |
| | $ | 41,101 |
| | $ | — |
| | $ | — |
| | $ | 41,101 |
|
Investments in mutual funds are based on the publicly-quoted final net asset values on the last business day of the year.
Permitted asset classes include U.S. and non-U.S. equity, U.S. and non-U.S. fixed income, cash, and cash equivalents. Fixed income includes both investment grade and non-investment grade. Permitted investment vehicles include mutual funds, individual securities, derivatives, and long-duration fixed income securities. While investments in individual securities, derivatives, long-duration fixed income securities, cash, and cash equivalents are permitted, the plan did not hold these types of investments as of December 31, 2018 or 2017.
Prohibited investments include direct investments in real estate, commodities, unregistered securities, uncovered options, currency exchange contracts, and natural resources (such as timber, oil, and gas).
Japan Plan Assets
The target asset allocation of the Japan defined benefit plan is 50% equity securities and 50% fixed income securities, cash, and cash equivalents, with allowance for a 40% deviation in either direction. We, along with the trustee of the plan's assets, minimize investment risk by thoroughly assessing potential investments based on indicators of historical returns and current credit ratings. Additionally, investments are diversified by type and geography.
The following table presents information about the plan’s target asset allocation, as well as the actual allocation, as of December 31, 2018:
|
| | | | |
| Target Allocation | | Actual Allocation as of December 31, 2018 |
| Equity securities | 10%-90% | | 25 | % |
| Fixed income securities, cash, and cash equivalents | 10%-90% | | 75 | % |
The following table presents information about the plan assets measured at fair value as of December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| U.S. equity | $ | 2,212 |
| | $ | — |
| | $ | — |
| | $ | 2,212 |
| | $ | 2,461 |
| | $ | — |
| | $ | — |
| | $ | 2,461 |
|
| International (non-U.S.) equity | 5,158 |
| | — |
| | — |
| | 5,158 |
| | 6,567 |
| | — |
| | — |
| | 6,567 |
|
| Total equity securities | 7,370 |
| | — |
| | — |
| | 7,370 |
| | 9,028 |
| | — |
| | — |
| | 9,028 |
|
| U.S. fixed income | 3,076 |
| | 269 |
| | — |
| | 3,345 |
| | 2,968 |
| | 268 |
| | — |
| | 3,236 |
|
| International (non-U.S.) fixed income | 8,811 |
| | — |
| | — |
| | 8,811 |
| | 11,046 |
| | — |
| | — |
| | 11,046 |
|
| Total fixed income securities | 11,887 |
| | 269 |
| | — |
| | 12,156 |
| | 14,014 |
| | 268 |
| | — |
| | 14,282 |
|
| Cash and cash equivalents | 10,339 |
| | — |
| | — |
| | 10,339 |
| | 7,921 |
| | — |
| | — |
| | 7,921 |
|
| Total plan assets | $ | 29,596 |
| | $ | 269 |
| | $ | — |
| | $ | 29,865 |
| | $ | 30,963 |
| | $ | 268 |
| | $ | — |
| | $ | 31,231 |
|
The fair values of equity and fixed income securities are based on publicly-quoted closing stock and bond values on the last business day of the year.
Permitted asset classes include equity securities that are traded on the official stock exchange(s) of the respective countries, fixed income securities with certain credit ratings, cash, and cash equivalents.
The Netherlands Plan Assets
The assets of the Netherlands defined benefit plan are insurance policies. The contributions we make to the plan are used to purchase insurance policies that provide for specific benefit payments to plan participants. The benefit formula is determined independently by us. Upon retirement of an individual plan participant, the insurance contracts purchased are converted to provide specific benefits for the participant. The contributions paid by us are commingled with contributions paid to the insurance provider by other employers for investment purposes and to reduce plan administration costs. However, this defined benefit plan is not considered a multi-employer plan.
The following table presents information about the plan assets measured at fair value as of December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Insurance policies | $ | — |
| | $ | — |
| | $ | 8,897 |
| | $ | 8,897 |
| | $ | — |
| | $ | — |
| | $ | 9,059 |
| | $ | 9,059 |
|
| Total plan assets | $ | — |
| | $ | — |
| | $ | 8,897 |
| | $ | 8,897 |
| | $ | — |
| | $ | — |
| | $ | 9,059 |
| | $ | 9,059 |
|
The following table presents a rollforward of the Level 3 assets in our Netherlands' defined plan for the years ended December 31, 2018 and 2017:
|
| | | |
| | Insurance Policies |
| Balance as of December 31, 2016 | $ | 8,014 |
|
| Actual return on plan assets still held at reporting date | (597 | ) |
| Purchases, sales, settlements, and exchange rate changes | 1,642 |
|
| Balance as of December 31, 2017 | 9,059 |
|
| Actual return on plan assets still held at reporting date | 177 |
|
| Purchases, sales, settlements, and exchange rate changes | (339 | ) |
| Balance as of December 31, 2018 | $ | 8,897 |
|
The fair values of the insurance contracts are measured based on the future benefit payments that would be made by the insurance company to vested plan participants if we were to switch to another insurance company without actually surrendering our policy. In this case, the insurance company would guarantee to pay the vested benefits at retirement accrued under the plan based on current salaries and service to date (i.e., and certain memberswith no allowance for future salary increases or pension increases). The cash flows of our senior management.the future benefit payments are discounted using the same discount rate that is applied to value the related defined benefit plan liability.
Belgium Plan Assets
The assets of the Belgium defined benefit plan are insurance policies. As of December 31, 20152018 and 2017 the fair values of these assets were $1.1 million and $0.9 million, SCA no longer owned anyrespectively. These fair value measurements are categorized in level 3 of our outstanding ordinary shares.the fair value hierarchy.
The following table summarizes the details of our IPO14. Debt
Long-term debt, net and secondary offerings:
|
| | | | | | | | | | | | | | | |
| | Date of Completion | | Ordinary shares sold by us | | Ordinary shares sold by our existing shareholders and employees | | Offering price per share | | Net proceeds received (1) |
| IPO | March 16, 2010 | | 26,316 |
| | 5,284 |
| | $ | 18.00 |
| | $ | 436,053 |
|
Over-allotment (2) | April 14, 2010 | | — |
| | 4,740 |
| | $ | 18.00 |
| | $ | 2,515 |
|
Secondary public offering (2) | November 17, 2010 | | — |
| | 23,000 |
| | $ | 24.10 |
| | $ | 3,696 |
|
| Secondary public offering | February 24, 2011 | | — |
| | 20,000 |
| | $ | 33.15 |
| | $ | 2,137 |
|
Over-allotment (2) | March 2, 2011 | | — |
| | 3,000 |
| | $ | 33.15 |
| | $ | 261 |
|
| Secondary public offering | December 17, 2012 | | — |
| | 10,000 |
| | $ | 29.95 |
| | $ | 2,384 |
|
| Secondary public offering | February 19, 2013 | | — |
| | 15,000 |
| | $ | 33.20 |
| | $ | — |
|
| Secondary public offering | May 28, 2013 | | — |
| | 12,500 |
| | $ | 35.95 |
| | $ | — |
|
| Secondary public offering | December 6, 2013 | | — |
| | 15,500 |
| | $ | 38.25 |
| | $ | — |
|
| Secondary public offering | May 27, 2014 | | — |
| | 11,500 |
| | $ | 42.42 |
| | $ | — |
|
| Secondary public offering | September 10, 2014 | | — |
| | 15,051 |
| | $ | 47.30 |
| | $ | — |
|
(1)The proceeds received by us, which include proceeds received from the exercise of stock options, are net of underwriters'discountscapital lease and commissions and offering expenses.
(2) Represents or includes shares exercised by the underwriters' option to purchase additional shares from the selling shareholders.
Our authorized share capital consists of 400.0 million ordinary shares with a nominal value of €0.01 per share, of which 178.4 million ordinary shares were issued and 170.4 million were outstandingother financing obligations as of December 31, 2018 and 2017 consisted of the following:
|
| | | | | | | | |
| | | As of December 31, |
| | Maturity Date | 2018 | | 2017 |
| Term Loan | October 14, 2021 | $ | 917,794 |
| | $ | 927,794 |
|
| 4.875% Senior Notes | October 15, 2023 | 500,000 |
| | 500,000 |
|
| 5.625% Senior Notes | November 1, 2024 | 400,000 |
| | 400,000 |
|
| 5.0% Senior Notes | October 1, 2025 | 700,000 |
| | 700,000 |
|
| 6.25% Senior Notes | February 15, 2026 | 750,000 |
| | 750,000 |
|
| Less: discount | | (15,169 | ) | | (14,424 | ) |
| Less: deferred financing costs | | (23,159 | ) | | (27,758 | ) |
| Less: current portion | | (9,704 | ) | | (9,802 | ) |
| Long-term debt, net | | $ | 3,219,762 |
| | $ | 3,225,810 |
|
| Capital lease and other financing obligations | | $ | 35,475 |
| | $ | 34,657 |
|
| Less: current portion | | (4,857 | ) | | (5,918 | ) |
| Capital lease and other financing obligations, less current portion | | $ | 30,618 |
| | $ | 28,739 |
|
Senior Secured Credit Facilities
In May 2011, we completed a series of transactions designed to refinance our then existing indebtedness. These transactions included the execution of a credit agreement (as amended, the "Credit Agreement"), which provided for senior secured credit facilities (the "Senior Secured Credit Facilities") consisting of a term loan facility, a revolving credit facility, and incremental availability under which additional secured credit facilities could be issued under certain circumstances.
Currently outstanding under the Senior Secured Credit Facilities are a term loan facility (the "Term Loan"), a $420.0 million revolving credit facility (the "Revolving Credit Facility"), and $1.0 billion incremental availability (the "Accordion") under which, subject to certain limitations as defined in the indentures (the "Senior Notes Indentures") under which the Senior Notes (as defined below) were issued, additional secured debt may be issued or the capacity of the Revolving Credit Facility may be increased.
All obligations under the Senior Secured Credit Facilities are unconditionally guaranteed by certain of our subsidiaries (the "Guarantors") and collateralized by substantially all present and future property and assets of Sensata Technologies B.V. ("STBV"), Sensata Technologies Finance Company, LLC, and the Guarantors.
The Credit Agreement stipulates certain events and conditions that may require us to use excess cash flow, as defined in the Credit Agreement, generated by operating, investing, or financing activities, to prepay some or all of the outstanding borrowings under the Senior Secured Credit Facilities. The Credit Agreement also requires mandatory prepayments of the outstanding borrowings under the Senior Secured Credit Facilities upon certain asset dispositions and casualty events, in each case subject to certain reinvestment rights, and the incurrence of certain indebtedness (excluding any permitted indebtedness). These provisions were not triggered during the year ended December 31, 2018.
Term Loan
On November 7, 2017, we entered into the eighth amendment of the Credit Agreement, which resulted in a "Repricing Transaction" as that term is defined in the Credit Agreement. As a result, the Term Loan replaced the term loan provided under the sixth amendment of the Credit Agreement (the "Sixth Amendment"). Pursuant to the Eighth Amendment, changes from the previously issued term loan included the following: (i) the applicable interest rate margins were reduced as discussed below; (ii) the senior secured net leverage ratio threshold that triggers the excess cash flow mandatory prepayment requirement was increased; (iii) the Accordion was re-set to $1.0 billion as of the effective date of the Eighth Amendment; (iv) various baskets, permissions and other provisions under certain of the affirmative and negative covenants were increased or otherwise amended for our benefit; and (v) certain other changes were made to the Credit Agreement that are not considered material. The Term Loan retains all other provisions of the Sixth Amendment, including original principal amount and maturity, amongst others.
In accordance with the Credit Agreement, the Term Loan may, at our option, be maintained from time to time as a Base Rate loan or a Eurodollar Rate loan (each as defined in the Credit Agreement), with each representing a different determination of interest rates. The principal amount of the Term Loan amortizes in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the term loan provided under the Sixth Amendment, with the balance due at maturity. The applicable margins for the Term Loan as of December 31, 2018 were 0.75% and 1.75% for Base Rate loans and Eurodollar Rate loans, respectively, (a decrease from 1.25% and 2.25%, respectively, pursuant to the Sixth Amendment) subject to floors of 1.00% and 0.00% for Base Rate loans and Eurodollar Rate loans, respectively (a decrease from 1.75% and 0.75%, respectively, pursuant to the Sixth Amendment). As of December 31, 2018, we maintained the Term Loan as a Eurodollar Rate loan.
Revolving Credit Facility
At our option, the Revolving Credit Facility may be maintained from time to time as a Base Rate loan or a Eurodollar Rate loan, each with a different determination of interest rates. Interest rates and fees on the Revolving Credit Facility are as follows (each depending on the achievement of certain senior secured net leverage ratios) (i) the index rate spread for Eurodollar Rate loans is 1.75% or 1.50%; (ii) the index rate spread for Base Rate loans is 0.75% or 0.50%; and (iii) the letter of credit fees are 1.625% or 1.375%.
We are required to pay to our revolving credit lenders, on a quarterly basis, a commitment fee on the unused portion of the Revolving Credit Facility. The commitment fee is subject to a pricing grid based on our leverage ratio. The spreads on the commitment fee currently range from 0.25% to 0.375%.
As of December 31, 2018, there was $416.1 million of availability under the Revolving Credit Facility, net of $3.9 million in letters of credit. Outstanding letters of credit are issued primarily for the benefit of certain operating activities. As of December 31, 2018, no amounts had been drawn against these outstanding letters of credit.
Availability under the Revolving Credit Facility may be borrowed, repaid, and re-borrowed to fund our working capital needs and for other general corporate purposes.
Senior Notes
At December 31, 2018 we had various tranches of senior notes outstanding, including $500.0 million aggregate principal amount of 4.875% senior notes due 2023 (the "4.875% Senior Notes"), $400.0 million aggregate principal amount of 5.625% senior notes due 2024 (the "5.625% Senior Notes"), $700.0 million aggregate principal amount of 5.0% senior notes due 2025 (the "5.0% Senior Notes"), and $750.0 million aggregate principal amount of 6.25% senior notes due 2026 (the "6.25% Senior Notes" and together with each tranche of senior notes outstanding, the "Senior Notes").
With the exception of the 6.25% Senior Notes, we may redeem the Senior Notes at any time, in whole or in part, at a redemption price equal to 100% of the principal amount of the Senior Notes redeemed plus accrued and unpaid interest, if any, to the date of redemption, plus the Applicable Premium (also known as the "make-whole premium") set forth in the Senior Notes Indentures. Upon the occurrence of certain change in control events, we will be required to make an offer to purchase the Senior Notes then outstanding at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of repurchase. In addition, if certain changes in the law of any relevant taxing jurisdiction become effective that would impose withholding taxes or other deductions on the payments of the Senior Notes or the guarantees, we may redeem the Senior Notes in whole, but not in part, at any time, at a redemption price of 100% of the principal amount, plus accrued and unpaid interest, if any, and additional amounts, if any, to the date of redemption.
The Senior Notes Indentures provide for events of default that include, among others, nonpayment of principal or interest when due, breach of covenants or other provisions in the Senior Notes Indentures, defaults in payment of certain other
indebtedness, certain events of bankruptcy or insolvency, failure to pay certain judgments, and the cessation of the full force and effect of the guarantees of significant subsidiaries. Generally, if an event of default occurs, the trustee or the holders of at least 25% in principal amount of the then outstanding Senior Notes may declare the principal of, and accrued but unpaid interest on, all of the Senior Notes to be due and payable immediately. All provisions regarding remedies in an event of default are subject to the Senior Notes Indentures.
Our obligations under the 4.875% Senior Notes, the 5.625% Senior Notes, and the 5.0% Senior Notes are guaranteed by all of STBV’s existing and future wholly-owned subsidiaries that guarantee our obligations under the Senior Secured Credit Facilities. The 4.875% Senior Notes, the 5.625% Senior Notes, and the 5.0% Senior Notes and the related guarantees are the senior unsecured obligations of STBV and the Guarantors, respectively and rank equally in right of payment to all existing and future senior unsecured indebtedness of STBV or the Guarantors.
Our obligations under the 6.25% Senior Notes are guaranteed by STBV and all of STBV’s existing and future wholly-owned subsidiaries (other than Sensata Technologies UK Financing Co. plc ("STUK")) that guarantee our obligations under the Senior Secured Credit Facilities. The 6.25% Senior Notes and the related guarantees are the senior unsecured obligations of STUK and the Guarantors, respectively. The 6.25% Senior Notes and the guarantees rank equally in right of payment to all existing and future senior unsecured indebtedness of STUK, STBV, or the Guarantors.
4.875% Senior Notes
In April 2013 we completed the issuance and sale of the 4.875% Senior Notes, which were issued under an indenture dated April 17, 2013 among STBV, as issuer, The Bank of New York Mellon, as trustee, and the Guarantors. The 4.875% Senior Notes were offered at par. Interest on the 4.875% Senior Notes is payable semi-annually on April 15 and October 15 of each year.
5.625% Senior Notes
In October 2014 we completed the issuance and sale of the 5.625% Senior Notes, which were issued under an indenture dated October 14, 2014, among STBV, as issuer, The Bank of New York Mellon, as trustee, and the Guarantors. The 5.625% Senior Notes were offered at par. Interest on the 5.625% Senior Notes is payable semi-annually on May 1 and November 1 of each year.
5.0%Senior Notes
In March 2015 we completed the issuance and sale of the 5.0% Senior Notes, which were issued under an indenture dated March 26, 2015, among STBV, as issuer, The Bank of New York Mellon, as trustee, and the Guarantors. The 5.0% Senior Notes were offered at par. Interest on the 5.0% Senior Notes is payable semi-annually on April 1 and October 1 of each year.
6.25% Senior Notes
In November 2015, we completed the issuance and sale of the 6.25% Senior Notes, which were issued under an indenture dated November 27, 2015 (the "6.25% Senior Notes Indenture") among STUK, as issuer, The Bank of New York Mellon, as trustee, and the Guarantors. The 6.25% Senior Notes were offered at par. Interest on the 6.25% Senior Notes is payable semi-annually on February 15 and August 15 of each year.
We may redeem the 6.25% Senior Notes, in whole or in part, at any time prior to February 15, 2021, at a redemption price equal to 100% of the principal amount of the 6.25% Senior Notes redeemed plus accrued and unpaid interest to the date of redemption, if any, plus the Applicable Premium set forth in the 6.25% Senior Notes Indenture. Thereafter, we may redeem the 6.25% Senior Notes, in whole or in part, at the following prices (plus accrued and unpaid interest to the date of redemption, if any):
|
| |
| Period beginning February 15, | Price |
| 2021 | 103.125% |
| 2022 | 102.083% |
| 2023 | 101.042% |
| 2024 and thereafter | 100.000% |
Restrictions and Covenants
As of December 31, 2018, all of the subsidiaries of STBV were subject to certain restrictive covenants. Under certain circumstances, STBV will be permitted to designate a subsidiary as "unrestricted," in which case the restrictive covenants will not apply to that subsidiary. STBV has not designated any subsidiaries as unrestricted. The net assets of STBV subject to these restrictions totaled $2,932.2 million at December 31, 2018.
Credit Agreement
The Credit Agreement contains non-financial covenants (subject to important exceptions and qualifications set forth in the Credit Agreement) that limit our ability to:
incur indebtedness or liens, prepay subordinated debt, or amend the terms of our subordinated debt;
make loans and investments (including acquisitions), make capital expenditures, or sell assets;
change our business or accounting policies, merge, consolidate, dissolve or liquidate, or amend the terms of our organizational documents;
enter into affiliate transactions;
pay dividends and make other restricted payments; or
enter into certain burdensome contractual obligations.
In addition, under the Credit Agreement, STBV and its subsidiaries are required to maintain a senior secured net leverage ratio not to exceed 5.0:1.0 under the following circumstances:
at the conclusion of certain periods when outstanding loans and letters of credit that are not cash collateralized for the full face amount thereof exceed 10% of the commitments under the Revolving Credit Facility; and
on a pro forma basis, in connection with any new borrowings (including any letter of credit issuances) under the Revolving Credit Facility as of the time of such borrowings.
Senior Notes Indentures
The Senior Notes Indentures contain restrictive covenants (subject to important exceptions and qualifications set forth in the Senior Notes Indentures) that limit the ability of STBV and its subsidiaries to, among other things:
incur additional indebtedness or liens, prepay subordinated indebtedness, or guarantee indebtedness;
make certain investments or certain other restricted payments or sell certain kinds of assets;
effect mergers or consolidations;
enter into certain types of transactions with affiliates;
pay dividends or make other distributions in respect of STBV's and its subsidiaries' capital stock;
create restrictions on STBV's subsidiaries' ability to make payments to STBV;
issue preferred stock;
redeem or repurchase STBV's capital stock, our capital stock, or the capital stock of any other direct or indirect parent company of STBV; or
designate unrestricted subsidiaries.
Certain of these covenants will be suspended if the Senior Notes are assigned an investment grade rating by Standard & Poor's Rating Services or Moody's Investors Service, Inc. and provided no default has occurred and is continuing at such time. The suspended covenants will be reinstated if the Senior Notes are no longer assigned an investment grade rating by either rating agency and an event of default has occurred and is continuing at such time. As of December 31, 2018, none of the Senior Notes were assigned an investment grade rating by either rating agency.
Restrictions on Payment of Dividends
The Guarantors are generally not restricted in their ability to pay dividends or otherwise distribute funds to STBV, except for restrictions imposed under applicable corporate law.
STBV, however, is limited in its ability to pay dividends or otherwise make distributions to its immediate parent company and, ultimately, to Sensata plc, under the Credit Agreement and the Senior Notes Indentures. Specifically, the Credit Agreement
prohibits STBV from paying dividends or making distributions to its parent companies except for purposes that include, but are not limited to, the following:
customary and reasonable operating expenses, legal and accounting fees and expenses, and overhead of such parent companies incurred in the ordinary course of business, provided that such amounts, in the aggregate, do not exceed $20.0 million in any fiscal year;
dividends and other distributions in an aggregate amount not to exceed $100.0 million plus certain amounts, including the retained portion of excess cash flow, but only insofar as no default or event of default exists and the senior secured net leverage ratio is less than 2.0:1.0 calculated on a pro forma basis;
dividends and other distributions in an aggregate amount not to exceed $50.0 million in any calendar year (subject to increase upon the achievement of certain ratios); and
dividends and other distributions in an aggregate amount not to exceed $150.0 million, so long as no default or event of default exists.
The Senior Notes Indentures generally provide that STBV can pay dividends and make other distributions to its parent companies upon the achievement of certain conditions and in an amount as determined in accordance with the Senior Notes Indentures.
Compliance with Financial and Non-Financial Covenants
We were in compliance with all of the financial and non–financial covenants and default provisions associated with our indebtedness as of December 31, 2018 and for the fiscal year then ended.
Accounting for Debt Financing Transactions
Refer to Note 2, "Significant Accounting Policies," for discussion of our accounting policies regarding debt financing transactions.
In connection with the Merger, we paid $5.8 million of creditor fees and related third-party costs in order to obtain consents to the transaction from our existing lenders. As a result, and based on application of the provisions in FASB ASC Subtopic 470-50, we recognized a $3.5 million adjustment to the carrying value of long-term debt, net and a $2.4 million loss in other, net.
During the year ended December 31, 2017, as a result and based on application of the provisions of ASC Subtopic 470–50, Modifications and Extinguishments, we recognized a $0.2 million adjustment to the carrying value of long–term debt, net and a $2.7 million loss in other, net.
Leases
We occupy leased facilities with initial terms ranging up to 20 years. The lease agreements frequently include options to renew for additional periods or to purchase the leased assets and generally require that we pay taxes, insurance, and maintenance costs. Depending on the specific terms of the leases, our obligations are in two forms: capital leases and operating leases. Rent expense for the years ended December 31, 2018, 2017, and 2016 was $21.0 million, $19.7 million, and $18.1 million, respectively.
We have material capital leases for facilities in Baoying, China and Attleboro, Massachusetts. As of December 31, 2018 and 2017, the combined capital lease obligation outstanding for these facilities was $30.4 million and $26.2 million, respectively. The increase in the capital lease obligation relates to a renegotiation of the terms of our lease in Attleboro.
Other Financing Obligations
In 2013, we entered into an agreement with one of our suppliers, Measurement Specialties, Inc., under which we acquired the rights to certain intellectual property in exchange for fixed royalty payments, payable quarterly through the fourth quarter of 2019. As of December 31, 2018 and 2017, we had recognized a liability related to this agreement of $1.8 million and $3.5 million, respectively.
Debt Maturities
The aggregate principal amount of each tranche of our Senior Notes is due in full at its maturity date. The Term Loan must be repaid in full on or prior to its final maturity date. Loans made pursuant to the Revolving Credit Facility must be repaid
in full at its maturity date and can be repaid prior to then at par. All letters of credit issued thereunder will terminate at the final maturity of the Revolving Credit Facility unless cash collateralized prior to such time.
The following table presents the remaining mandatory principal repayments of long-term debt, excluding capital lease payments, other financing obligations, and discretionary repurchases of debt, in each of the years ended December 31, 2019 through 2023 and thereafter.
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| | | | |
| For the year ended December 31, | | Aggregate Maturities |
| 2019 | | $ | 9,704 |
|
| 2020 | | 9,901 |
|
| 2021 | | 898,189 |
|
| 2022 | | — |
|
| 2023 | | 500,000 |
|
| Thereafter | | 1,850,000 |
|
| Total long-term debt principal payments | | $ | 3,267,794 |
|
15. Commitments and Contingencies
Future minimum payments for capital leases, other financing obligations, and non-cancelable operating leases in effect as of December 31, 2018 are as follows:
|
| | | | | | | | | | | | | | | |
| | Future Minimum Payments |
| | Capital Leases | | Other Financing Obligations | | Operating Leases | | Total |
| For the year ending December 31, | | | | | | | |
| 2019 | $ | 4,672 |
| | $ | 2,541 |
| | $ | 16,621 |
| | $ | 23,834 |
|
| 2020 | 4,540 |
| | 459 |
| | 12,319 |
| | 17,318 |
|
| 2021 | 4,062 |
| | 178 |
| | 9,688 |
| | 13,928 |
|
| 2022 | 3,712 |
| | — |
| | 7,707 |
| | 11,419 |
|
| 2023 | 3,771 |
| | — |
| | 6,471 |
| | 10,242 |
|
| 2024 and thereafter | 36,327 |
| | — |
| | 26,580 |
| | 62,907 |
|
| Net minimum rentals | 57,084 |
| | 3,178 |
| | 79,386 |
| | 139,648 |
|
| Less: interest portion | (24,395 | ) | | (392 | ) | | — |
| | (24,787 | ) |
| Present value of future minimum rentals | $ | 32,689 |
| | $ | 2,786 |
| | $ | 79,386 |
| | $ | 114,861 |
|
Non-cancelable purchase agreements exist with various suppliers, primarily for services such as information technology support. The terms of these agreements are fixed and determinable. As of December 31, 2018, we had the following purchase commitments:
|
| | | |
| | Purchase Commitments |
| For the year ending December 31, | |
| 2019 | $ | 23,983 |
|
| 2020 | 24,202 |
|
| 2021 | 18,525 |
|
| 2022 | 8,065 |
|
| 2023 | 4,952 |
|
| 2024 and thereafter | 39 |
|
| Total purchase commitments | $ | 79,766 |
|
Collaborative Arrangements
On March 4, 2016, we entered into a strategic partnership agreement (the "SPA") with Quanergy to jointly develop, manufacture, and sell solid state Light Detection and Ranging ("LiDAR") sensors. Under the terms of the SPA, we are exclusive partners with Quanergy for component level solid state LiDAR sensors in the transportation end market.
We are accounting for the SPA under the provisions of FASB ASC Topic 808, Collaborative Arrangements, under which the accounting for certain transactions is determined using principal versus agent considerations. Using the guidance in FASB ASC Topic 606, we have determined that we are the principal with respect to the SPA.
During the years ended December 31, 2018, 2017, and 2016, there were no material amounts recorded to earnings related to the SPA.
Off-Balance Sheet Commitments
From time to time, we execute contracts that require us to indemnify the other parties to the contracts. These indemnification obligations generally arise in two contexts. First, in connection with certain transactions, such as the sale of a business or the issuance of debt or equity securities, the agreement typically contains standard provisions requiring us to indemnify the purchaser against breaches by us of representations and warranties contained in the agreement. These indemnities are generally subject to time and liability limitations. Second, we enter into agreements in the ordinary course of business, such as customer contracts, that might contain indemnification provisions relating to product quality, intellectual property infringement, governmental regulations and employment related matters, and other typical indemnities. In certain cases, indemnification obligations arise by law.
We believe that our indemnification obligations are consistent with other companies in the markets in which we compete. Performance under any of these indemnification obligations would generally be triggered by a breach of the terms of the contract or by a third-party claim. Historically, we have experienced only immaterial and irregular losses associated with these indemnifications. Consequently, any future liabilities brought about by these indemnifications cannot reasonably be estimated or accrued.
Indemnifications Provided As Part of Contracts and Agreements
We are party to the following types of agreements pursuant to which we may be obligated to indemnify a third party with respect to certain matters.
Officers and Directors: Our articles of association provide for indemnification of directors and officers by us to the fullest extent permitted by applicable law, as it now exists or may hereinafter be amended (but, in the case of an amendment, only to the extent such amendment permits broader indemnification rights than permitted prior thereto), against any and all liabilities, including all expenses (including attorneys’ fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit, or proceeding, provided he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our best interests, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful or outside of his or her mandate. The articles do not provide a limit to the maximum future payments, if any, under the indemnification. No indemnification is provided for in respect of any claim, issue, or matter as to which such person has been adjudged to be liable for gross negligence or willful misconduct in the performance of his or her duty on our behalf.
In addition, we have a liability insurance policy that insures directors and officers against the cost of defense, settlement, or payment of claims and judgments under some circumstances. Certain indemnification payments may not be covered under our directors’ and officers’ insurance coverage.
Initial Purchasers of Senior Notes: Pursuant to the terms of the purchase agreements entered into in connection with our private placement senior note offerings, we are obligated to indemnify the initial purchasers of the Senior Notes against certain liabilities caused by any untrue statement or alleged untrue statement of a material fact in various documents relied upon by such initial purchasers, or to contribute to payments the initial purchasers may be required to make in respect thereof. The purchase agreements do not provide a limit to the maximum future payments, if any, under these indemnifications.
Intellectual Property and Product Liability Indemnification: We routinely sell products with a limited intellectual property and product liability indemnification included in the terms of sale. Historically, we have had only immaterial and irregular losses associated with these indemnifications. Consequently, any future liabilities resulting from these indemnifications cannot reasonably be estimated or accrued.
Product Warranty Liabilities
Refer to Note 3, "Revenue Recognition," for a description of warranties we provide to customers.
In the event a warranty claim based on defective materials exists, we may be able to recover some of the cost of the claim from the vendor from whom the materials were purchased. Our ability to recover some of the costs will depend on the terms
and conditions to which we agreed when the materials were purchased. When a warranty claim is made, the only collateral available to us is the return of the inventory from the customer making the warranty claim. Historically, when customers make a warranty claim, we either replace the product or provide the customer with a credit. We generally do not rework the returned product.
Our policy is to accrue for warranty claims when a loss is both probable and estimable. This is accomplished by accruing for estimated returns and estimated costs to replace the product at the time the related revenue is recognized. Liabilities for warranty claims have historically not been material. In some instances, customers may make claims for costs they incurred or other damages related to a claim.
Environmental Remediation Liabilities
Our operations and facilities are subject to U.S. and non-U.S. laws and regulations governing the protection of the environment and our employees, including those governing air emissions, water discharges, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites. We could incur substantial costs, including cleanup costs, fines, civil or criminal sanctions, or third-party property damage or personal injury claims, in the event of violations or liabilities under these laws and regulations, or non-compliance with the environmental permits required at our facilities. Potentially significant expenditures could be required in order to comply with environmental laws that may be adopted or imposed in the future. We are, however, not aware of any threatened or pending material environmental investigations, lawsuits, or claims involving us or our operations.
Legal Proceedings and Claims
We are regularly involved in a number of claims and litigation matters in the ordinary course of business. Most of our litigation matters are third-party claims related to patent infringement allegations or for property damage allegedly caused by our products, but some involve allegations of personal injury or wrongful death. Although it is not feasible to predict the outcome of these matters, based upon our experience and current information known to us, we do not expect the outcome of these matters, either individually or in the aggregate, to have a material adverse effect on our results of operations, financial position, or cash flows.
We account for litigation and claims losses in accordance with FASB ASC Topic 450, Contingencies. IssuedUnder FASB ASC Topic 450, loss contingency provisions are recorded for probable and estimable losses at our best estimate of a loss or, when a best estimate cannot be made, at our estimate of the minimum loss. These estimates are often developed prior to knowing the amount of the ultimate loss, require the application of considerable judgment, and are refined each accounting period as additional information becomes known. Accordingly, we are often initially unable to develop a best estimate of loss and therefore the minimum amount, which could be an immaterial amount, is recorded. As information becomes known, either the minimum loss amount is increased, or a best estimate can be made, generally resulting in additional loss provisions. A best estimate amount may be changed to a lower amount when events result in an expectation of a more favorable outcome than previously expected.
Pending Litigation and Claims:
We are a defendant in a lawsuit, Wasica Finance Gmbh et al v. Schrader International Inc. et al, Case No. 13-1353-CPS, U.S.D.C., Delaware, in which the claimant alleges infringement of their patent (US 5,602,524) in connection with our tire pressure monitoring system products. The patent in question has expired, and as a result, the claimant only seeks damages for past infringement with interest and costs. Should the claimant prevail, these amounts could be material. We have denied liability and have been defending the litigation, which is in discovery. The court held a claims construction hearing on December 3, 2018 and is expected to issue a ruling in February 2019. Trial is currently expected in February 2020. We do not believe a loss related to this matter is probable. As of December 31, 2018, we have not recorded an accrual related to this matter.
We are a defendant in a lawsuit, Metal Seal Precision, Ltd. v. Sensata Technologies Inc., Case No. 2017-0518-BCSI, MA Superior Court (Suffolk County), in which the claimant ("Metal Seal"), a supplier of metal parts used in the manufacture of our products, alleges breach of contract, misrepresentation, and unfair trade practices under Massachusetts general laws. The dispute arises out of a long-term supply agreement under which Metal Seal alleges certain minimum purchase requirements were not met, resulting in lost profits and loss of future revenues. If the claimant prevails additionally under the unfair trade practices claims, it could obtain additional treble damages and attorney's fees. Plaintiff’s damage expert claims that Metal Seal has losses ranging up to $51.0 million. We are defending the lawsuit, which is currently scheduled for trial on March 11, 2019 through March 19, 2019. We do not believe a loss related to this matter is probable. As of December 31, 2018, we have not recorded an accrual related to this matter.
16. Shareholders’ Equity
Prior to the Merger, Sensata N.V.’s articles of association authorized it to issue up to 400.0 million ordinary shares. However, entities incorporated under the laws of England and Wales are limited in the number of shares they can issue to those shares that have been authorized for "allotment" by their shareholders. In connection with the Merger, our Board of Directors asked shareholders to approve an allotment of ordinary shares equal to the total ordinary shares then issued and outstanding plus the maximum number of ordinary shares exclude 0.7 million unvested restricted securities and 3.4 million outstanding stock options. We also have authorized 400.0 million preference shares with a nominal value of €0.01 per share, none of which arethat could be reasonably expected to be issued or outstanding. See Note 11, "Share-Based Payment Plans," for awards available for grant under our outstanding equity plans.plans within the next year, which resulted in an allotment of 177.1 million ordinary shares.
Treasury SharesIndemnifications Provided As Part of Contracts and Agreements
We are party to the following types of agreements pursuant to which we may be obligated to indemnify a third party with respect to certain matters.
Officers and Directors: Our articles of association provide for indemnification of directors and officers by us to the fullest extent permitted by applicable law, as it now exists or may hereinafter be amended (but, in the case of an amendment, only to the extent such amendment permits broader indemnification rights than permitted prior thereto), against any and all liabilities, including all expenses (including attorneys’ fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit, or proceeding, provided he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our best interests, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful or outside of his or her mandate. The articles do not provide a limit to the maximum future payments, if any, under the indemnification. No indemnification is provided for in respect of any claim, issue, or matter as to which such person has been adjudged to be liable for gross negligence or willful misconduct in the performance of his or her duty on our behalf.
In addition, we have a $250.0 million share repurchase program in place. Under this program, weliability insurance policy that insures directors and officers against the cost of defense, settlement, or payment of claims and judgments under some circumstances. Certain indemnification payments may repurchase ordinary shares from timenot be covered under our directors’ and officers’ insurance coverage.
Initial Purchasers of Senior Notes: Pursuant to time, at such times and in amounts to be determined by our management, based on market conditions, legal requirements, and other corporate considerations, on the open market or in privately negotiated transactions. We expect that any future repurchases of ordinary shares will be funded by cash from operations. The share repurchase program may be modified or terminated by our Board of Directors at any time. We did not repurchase any ordinary shares under this program during the year ended December 31, 2015. During the years ended December 31, 2014 and 2013, we repurchased 4.3 million and 8.6 million ordinary shares, respectively, for an aggregate purchase price of $181.8 million and $305.1 million, respectively, at an average price of $42.22 and $35.55 per ordinary share, respectively. Of the ordinary shares repurchased during the years ended December 31, 2014 and 2013, 4.0 million and 4.5 million, respectively, were repurchased from SCA in private, non-
underwritten transactions, concurrent with the closingterms of the May 2014 and December 2013 secondary offerings, respectively, at $42.42 and $38.25 per ordinary share, respectively, which, in each case, was equal to the price paid by the underwriters. At December 31, 2015, $74.7 million remained available for share repurchase under this program.
Ordinary shares repurchased by us are recorded at cost as treasury shares and result in a reduction of shareholders' equity. We reissue treasury shares as part of our share-based compensation programs. When shares are reissued, we determine the cost using the FIFO method. During 2015, 2014, and 2013 we issued 1.1 million, 1.6 million, and 2.5 million ordinary shares held in treasury, respectively, as part of our share-based compensation programs and employee stock purchase plan. In connection with our treasury share reissuances, in 2015, 2014, and 2013, we recognized losses of $23.7 million, $28.7 million, and $59.5 million, that were recorded in Retained earnings/accumulated deficit.
Accumulated Other Comprehensive Loss
The components of Accumulated other comprehensive loss were as follows:
|
| | | | | | | | | | | |
| | Net Unrealized (Loss)/Gain on Derivative Instruments Designated and Qualifying as Cash Flow Hedges | | Defined Benefit and Retiree Healthcare Plans | | Accumulated Other Comprehensive Loss |
| Balance at December 31, 2012 | $ | (4,795 | ) | | $ | (34,611 | ) | | $ | (39,406 | ) |
| Pre-tax current period change | (3,756 | ) | | 14,621 |
| | 10,865 |
|
| Income tax benefit/(expense) | 939 |
| | (5,505 | ) | | (4,566 | ) |
| Balance at December 31, 2013 | (7,612 | ) | | (25,495 | ) | | (33,107 | ) |
| Pre-tax current period change | 34,521 |
| | (4,667 | ) | | 29,854 |
|
| Income tax (expense)/benefit | (9,331 | ) | | 836 |
| | (8,495 | ) |
| Balance at December 31, 2014 | 17,578 |
| | (29,326 | ) | | (11,748 | ) |
| Pre-tax current period change | (18,301 | ) | | 359 |
| | (17,942 | ) |
| Income tax benefit/(expense) | 4,575 |
| | (875 | ) | | 3,700 |
|
| Balance at December 31, 2015 | $ | 3,852 |
| | $ | (29,842 | ) | | $ | (25,990 | ) |
The details of the components of Other comprehensive (loss)/income, net of tax, for the years ended December 31, 2015, 2014, and 2013 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2015 | | Year Ended December 31, 2014 | | Year Ended December 31, 2013 |
| | | Deriva-tives - Cash Flow Hedges | | Defined Benefit and Retiree Health-care Plans | | Change in Accum-ulated Other Comp-rehensive Loss | | Deriva - tives - Cash Flow Hedges | | Defined Benefit and Retiree Health-care Plans | | Change in Accum-ulated Other Comp-rehensive Loss | | Deriva - tives - Cash Flow Hedges | | Defined Benefit and Retiree Health-care Plans | | Change in Accum-ulated Other Comp-rehensive Loss |
| Other comprehensive income/(loss) before reclassifications | | $ | 19,464 |
| | $ | (634 | ) | | $ | 18,830 |
| | $ | 25,014 |
| | (3,456 | ) | | $ | 21,558 |
| | $ | (4,767 | ) | | 7,405 |
| | $ | 2,638 |
|
| Amounts reclassified from Accumulated other comprehensive loss | | (33,190 | ) | | 118 |
| | (33,072 | ) | | 176 |
| | (375 | ) | | (199 | ) | | 1,950 |
| | 1,711 |
| | 3,661 |
|
| Net current period other comprehensive (loss)/income | | $ | (13,726 | ) | | $ | (516 | ) | | $ | (14,242 | ) | | $ | 25,190 |
| | $ | (3,831 | ) | | $ | 21,359 |
| | $ | (2,817 | ) | | $ | 9,116 |
| | $ | 6,299 |
|
The details about the amounts reclassified from Accumulated other comprehensive loss for the years ended December 31, 2015, 2014, and 2013 are as follows:
|
| | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | Amount of Loss/(Gain) Reclassified from Accumulated Other Comprehensive Loss | | | |
| Component | | Year Ended December 31, 2015 | | Year Ended December 31, 2014 | | Year Ended December 31, 2013 | | Affected Line in Consolidated Statements of Operations | |
| Derivative instruments designated and qualifying as cash flow hedges | | | | | | | | | |
| Interest rate caps | | $ | — |
| | $ | 972 |
| | $ | 1,063 |
| | Interest expense (1) | |
| Interest rate caps | | — |
| | — |
| | 1,097 |
| | Other, net (1) | |
| Foreign currency forward contracts | | (54,537 | ) | | 334 |
| | 2,206 |
| | Net revenue (1) | |
| Foreign currency forward contracts | | 10,284 |
| | (1,070 | ) | | (1,766 | ) | | Cost of revenue (1) | |
| | | (44,253 | ) | | 236 |
| | 2,600 |
| | Total before tax | |
| | | 11,063 |
| | (60 | ) | | (650 | ) | | Benefit from income taxes | |
| | | $ | (33,190 | ) | | $ | 176 |
| | $ | 1,950 |
| | Net of tax | |
| Defined benefit and retiree healthcare plans | | $ | 351 |
| | $ | (361 | ) | | $ | 2,651 |
| | Various (2) | |
| | | (233 | ) | | (14 | ) | | (940 | ) | | Benefit from income taxes | |
| | | $ | 118 |
| | $ | (375 | ) | | $ | 1,711 |
| | Net of tax | |
| |
(1)
| See Note 16, "Derivative Instruments and Hedging Activities," for additional details on amounts to be reclassified in the future from Accumulated other comprehensive loss. |
| |
(2)
| Amounts related to defined benefit and retiree healthcare plans reclassified from Accumulated other comprehensive loss affect the Cost of revenue, Research and development, Restructuring and special charges, and SG&A line items in the consolidated statements of operations. These amounts reclassified are included in the computation of net periodic benefit cost. See Note 10, "Pension and Other Post-Retirement Benefits," for additional details of net periodic benefit cost. |
13. Related Party Transactions
SCA
Between the 2006 Acquisition and September 10, 2014, we engaged in certain transactions with our former principal shareholder, SCA, and certain of its affiliates. On September 10, 2014, SCA sold its remaining shares in Sensata, and was no longer a related party as of that date. The transactions disclosed herein related to SCA and its affiliates represent transactions that occurred prior to that date.
The table below presents a summary of certain transactions with SCA and its affiliates recognized during the years ended December 31, 2014 and 2013. The year ended December 31, 2015 is not presented, as SCA was not a related party during this period.
|
| | | | | | | |
| | Administrative Services Agreement | | Legal Services |
| Charges recognized in SG&A expense | | | |
| 2014 | $ | — |
| | $ | 260 |
|
| 2013 | $ | (281 | ) | | $ | 1,022 |
|
| | | | |
| Payments made related to charges recognized in SG&A expense | | | |
| 2014 | $ | — |
| | $ | 512 |
|
| 2013 | $ | — |
| | $ | 1,256 |
|
Administrative Services Agreement
In 2009, weagreements entered into a fee for service arrangement with SCA for ongoing consulting, management advisory, and other services (the “Administrative Services Agreement”), effective January 1, 2008. Expenses related to this arrangement were recorded in SG&A expense. On May 10, 2013, the Administrative Services Agreement was terminated upon a mutual agreement between us and SCA. We do not currently have any obligations to SCA under this agreement.
Financing and Secondary Transactions
During the time SCA was one of our shareholders, we utilized one of SCA’s shareholders for legal services. Costs related to such legal services are recorded in SG&A expense. During the year ended December 31, 2013, we recorded $0.4 million for legal services provided by this shareholder in connection with our refinancing transactions, of which $0.3 million was paid during the year ended December 31, 2013 and $0.1 million was paid during the year ended December 31, 2014. These amounts are not reflected in the table above. We did not record any expense related to these legal services for the period from January 1, 2014 through September 10, 2014, when this shareholder was a related party.
Share Repurchases
Concurrent with the closing of the May 2014 and December 2013 secondaryprivate placement senior note offerings, we repurchased 4.0 million and 4.5 million ordinary shares, respectively, from SCA in private, non-underwritten transactions at a price per ordinary share of $42.42 and $38.25, respectively, which was equal to the price paid by the underwriters.
Texas Instruments
Cross License Agreement
In connection with the 2006 Acquisition, we entered into a perpetual, royalty-free cross license agreement with TI (the “Cross License Agreement”). Under the Cross License Agreement, the parties granted each other a license to use certain technology used in connection with the other party’s business.
14. Commitments and Contingencies
Future minimum payments for capital leases, other financing obligations, and non-cancelable operating leases in effect as of December 31, 2015are as follows:
|
| | | | | | | | | | | | | | | |
| | Future Minimum Payments |
| | Capital Leases | | Other Financing Obligations (1) | | Operating Leases | | Total |
| For the year ending December 31, | | | | | | | |
| 2016 | $ | 5,253 |
| | $ | 8,252 |
| | $ | 9,940 |
| | $ | 23,445 |
|
| 2017 | 5,131 |
| | 2,000 |
| | 7,770 |
| | 14,901 |
|
| 2018 | 5,168 |
| | 2,000 |
| | 6,100 |
| | 13,268 |
|
| 2019 | 5,203 |
| | 2,000 |
| | 3,945 |
| | 11,148 |
|
| 2020 | 5,239 |
| | — |
| | 1,761 |
| | 7,000 |
|
| 2021 and thereafter | 24,639 |
| | — |
| | 12,099 |
| | 36,738 |
|
| Net minimum rentals | 50,633 |
| | 14,252 |
| | 41,615 |
| | 106,500 |
|
| Less: interest portion | (17,004 | ) | | (1,124 | ) | | — |
| | (18,128 | ) |
| Present value of future minimum rentals | $ | 33,629 |
| | $ | 13,128 |
| | $ | 41,615 |
| | $ | 88,372 |
|
| |
(1) | In December 2015, we reached an agreement to reacquire our manufacturing facility in Subang Jaya, Malaysia, which is accounted for as an "other financing obligation." This transaction is expected to close in 2016, and as a result, the remaining obligation is presented on our consolidated balance sheet as of December 31, 2015 as a current liability. Accordingly, the remaining obligation related to this facility is presented in the table above as being due in 2016. |
Non-cancelable purchase agreements exist with various suppliers, primarily for services such as information technology support. The terms of these agreements are fixed and determinable. As of December 31, 2015, we had the following purchase commitments:
|
| | | |
| | Purchase Commitments |
| For the year ending December 31, | |
| 2016 | $ | 11,972 |
|
| 2017 | 6,676 |
|
| 2018 | 2,998 |
|
| 2019 | 968 |
|
| 2020 | 24 |
|
| 2021 and thereafter | 32 |
|
| Total | $ | 22,670 |
|
Off-Balance Sheet Commitments
From time to time, we execute contracts that require usobligated to indemnify the other partiesinitial purchasers of the Senior Notes against certain liabilities caused by any untrue statement or alleged untrue statement of a material fact in various documents relied upon by such initial purchasers, or to contribute to payments the initial purchasers may be required to make in respect thereof. The purchase agreements do not provide a limit to the contracts. These indemnification obligations generally arise in two contexts. First, in connectionmaximum future payments, if any, under these indemnifications.
Intellectual Property and Product Liability Indemnification: We routinely sell products with certain transactions, such as the sale of a business or the issuance of debt or equity securities, the agreement typically contains standard provisions requiring us to indemnify the purchaser against breaches by us of representations and warranties contained in the agreement. These indemnities are generally subject to time and liability limitations. Second, we enter into agreements in the ordinary course of business, such as customer contracts, which might contain indemnification provisions relating to product quality,limited intellectual property infringement, governmental regulations and employment related matters, and other typical indemnities. In certain cases,product liability indemnification obligations arise by law. Performance under any of these indemnification obligations would generally be triggered by a breach ofincluded in the terms of the contract or by a third-party claim.sale. Historically, we have experiencedhad only immaterial and irregular losses associated with these indemnifications. Consequently, any future liabilities brought about byresulting from these indemnifications cannot reasonably be estimated or accrued.
SpecificProduct Warranty Liabilities
Refer to Note 3, "Revenue Recognition," for a description of warranties we provide to customers.
In the event a warranty claim based on defective materials exists, we may be able to recover some of the cost of the claim from the vendor from whom the materials were purchased. Our ability to recover some of the costs will depend on the terms
and conditions to which we agreed when the materials were purchased. When a warranty claim is made, the only collateral available to us is the return of the inventory from the customer making the warranty claim. Historically, when customers make a warranty claim, we either replace the product or provide the customer with a credit. We generally do not rework the returned product.
Our policy is to accrue for warranty claims when a loss is both probable and estimable. This is accomplished by accruing for estimated returns and estimated costs to replace the product at the time the related revenue is recognized. Liabilities for warranty claims have historically not been material. In some instances, customers may make claims for costs they incurred or other damages related to a claim.
Environmental Remediation Liabilities
Our operations and facilities are subject to U.S. and non-U.S. laws and regulations governing the protection of the environment and our employees, including those governing air emissions, water discharges, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites. We could incur substantial costs, including cleanup costs, fines, civil or criminal sanctions, or third-party property damage or personal injury claims, in the event of violations or liabilities under these laws and regulations, or non-compliance with the environmental permits required at our facilities. Potentially significant expenditures could be required in order to comply with environmental laws that may be adopted or imposed in the future. We are, however, not aware of any threatened or pending material indemnificationsenvironmental investigations, lawsuits, or claims involving us or our operations.
Legal Proceedings and Claims
We are describedregularly involved in a number of claims and litigation matters in the ordinary course of business. Most of our litigation matters are third-party claims related to patent infringement allegations or for property damage allegedly caused by our products, but some involve allegations of personal injury or wrongful death. Although it is not feasible to predict the outcome of these matters, based upon our experience and current information known to us, we do not expect the outcome of these matters, either individually or in the aggregate, to have a material adverse effect on our results of operations, financial position, or cash flows.
We account for litigation and claims losses in accordance with FASB ASC Topic 450, Contingencies. Under FASB ASC Topic 450, loss contingency provisions are recorded for probable and estimable losses at our best estimate of a loss or, when a best estimate cannot be made, at our estimate of the minimum loss. These estimates are often developed prior to knowing the amount of the ultimate loss, require the application of considerable judgment, and are refined each accounting period as additional information becomes known. Accordingly, we are often initially unable to develop a best estimate of loss and therefore the minimum amount, which could be an immaterial amount, is recorded. As information becomes known, either the minimum loss amount is increased, or a best estimate can be made, generally resulting in additional loss provisions. A best estimate amount may be changed to a lower amount when events result in an expectation of a more detail below.favorable outcome than previously expected.
Pending Litigation and Claims:
111
TableWe are a defendant in a lawsuit, Wasica Finance Gmbh et al v. Schrader International Inc. et al, Case No. 13-1353-CPS, U.S.D.C., Delaware, in which the claimant alleges infringement of Contentstheir patent (US 5,602,524) in connection with our tire pressure monitoring system products. The patent in question has expired, and as a result, the claimant only seeks damages for past infringement with interest and costs. Should the claimant prevail, these amounts could be material. We have denied liability and have been defending the litigation, which is in discovery. The court held a claims construction hearing on December 3, 2018 and is expected to issue a ruling in February 2019. Trial is currently expected in February 2020. We do not believe a loss related to this matter is probable. As of December 31, 2018, we have not recorded an accrual related to this matter.We are a defendant in a lawsuit, Metal Seal Precision, Ltd. v. Sensata Technologies Inc., Case No. 2017-0518-BCSI, MA Superior Court (Suffolk County), in which the claimant ("Metal Seal"), a supplier of metal parts used in the manufacture of our products, alleges breach of contract, misrepresentation, and unfair trade practices under Massachusetts general laws. The dispute arises out of a long-term supply agreement under which Metal Seal alleges certain minimum purchase requirements were not met, resulting in lost profits and loss of future revenues. If the claimant prevails additionally under the unfair trade practices claims, it could obtain additional treble damages and attorney's fees. Plaintiff’s damage expert claims that Metal Seal has losses ranging up to $51.0 million. We are defending the lawsuit, which is currently scheduled for trial on March 11, 2019 through March 19, 2019. We do not believe a loss related to this matter is probable. As of December 31, 2018, we have not recorded an accrual related to this matter.
16. Shareholders’ Equity
Prior to the Merger, Sensata N.V.’s articles of association authorized it to issue up to 400.0 million ordinary shares. However, entities incorporated under the laws of England and Wales are limited in the number of shares they can issue to those shares that have been authorized for "allotment" by their shareholders. In connection with the Merger, our Board of Directors asked shareholders to approve an allotment of ordinary shares equal to the total ordinary shares then issued and outstanding plus the maximum number of ordinary shares that could be reasonably expected to be issued under our equity plans within the next year, which resulted in an allotment of 177.1 million ordinary shares.
Indemnifications Provided As Part of Contracts and Agreements
We are party to the following types of agreements pursuant to which we may be obligated to indemnify a third party with respect to certain matters.
Sponsors: Upon the closing of the 2006 Acquisition, we entered into customary indemnification agreements with the Sponsors, pursuant to which we agreed to indemnify them, either during or after the term of the agreements, against certain liabilities arising out of performance of a consulting agreement between us and each of the Sponsors, and certain other claims and liabilities, including liabilities arising out of financing arrangements and securities offerings. There is no limit to the maximum future payments, if any, under these indemnifications.
Officers and Directors: In connection with our IPO, we entered into indemnification agreements with each of our board members and executive officers pursuant to which we agreed to indemnify, defend, and hold harmless, and also advance expenses as incurred, to the fullest extent permitted under applicable law, from damages arising from the fact that such person is or was one of our directors or officers or that of any of our subsidiaries.
Our articles of association provide for indemnification of directors and officers by us to the fullest extent permitted by applicable law, as it now exists or may hereinafter be amended (but, in the case of an amendment, only to the extent such amendment permits broader indemnification rights than permitted prior thereto), against any and all liabilities, including all expenses (including attorneys’ fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit, or proceeding, provided he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our best interests, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful or outside of his or her mandate. The articles do not provide a limit to the maximum future payments, if any, under the indemnification. No indemnification is provided for in respect of any claim, issue, or matter as to which such person has been adjudged to be liable for gross negligence or willful misconduct in the performance of his or her duty on our behalf.
In addition, we have a liability insurance policy that insures directors and officers against the cost of defense, settlement, or payment of claims and judgments under some circumstances. Certain indemnification payments may not be covered under our directors’ and officers’ insurance coverage.
Underwriters: Pursuant to the terms of the underwriting agreements entered into in connection with our IPO and secondary public equity offerings, we are obligated to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments the underwriters may be required to make in respect thereof. The underwriting agreements do not provide a limit to the maximum future payments, if any, under these indemnifications.
Initial Purchasers of Senior Notes: Pursuant to the terms of the purchase agreements entered into in connection with our private placement senior note offerings, we are obligated to indemnify the initial purchasers of the Senior Notes against certain liabilities caused by any untrue statement or alleged untrue statement of a material fact in various documents relied upon by such initial purchasers, or to contribute to payments the initial purchasers may be required to make in respect thereof. The purchase agreements do not provide a limit to the maximum future payments, if any, under these indemnifications.
Intellectual Property and Product Liability Indemnification: We routinely sell products with a limited intellectual property and product liability indemnification included in the terms of sale. Historically, we have had only immaterial and irregular losses associated with these indemnifications. Consequently, any future liabilities resulting from these indemnifications cannot reasonably be estimated or accrued.
Product Warranty Liabilities
Our standard terms of sale provide our customers with a warranty against faulty workmanship and the use of defective materials, which, depending on the product, generally existsRefer to Note 3, "Revenue Recognition," for a perioddescription of twelvewarranties we provide to eighteen months after the date we ship the product to our customer or for a period of twelve months after the date the customer resells our product, whichever comes first. We do not offer separately priced extended warranty or product maintenance contracts. Our liability associated with this warranty is, at our option, to repair the product, replace the product, or provide the customer with a credit.customers.
We also sell products to customers under negotiated agreements or where we have accepted the customer’s terms of purchase. In these instances, we may provide additional warranties for longer durations, consistent with differing end-market practices, and where our liability is not limited. In addition, many sales take place in situations where commercial or civil codes, or other laws, would imply various warranties and restrict limitations on liability.
In the event a warranty claim based on defective materials exists, we may be able to recover some of the cost of the claim from the vendor from whom the materials were purchased. Our ability to recover some of the costs will depend on the terms
and conditions to which we agreed when the materials were purchased. When a warranty claim is made, the only collateral available to us is the return of the inventory from the customer making the warranty claim. Historically, when customers make a warranty claim, we either replace the product or provide the customer with a credit. We generally do not rework the returned product.
Our policy is to accrue for warranty claims when a loss is both probable and estimable. This is accomplished by accruing for estimated returns and estimated costs to replace the product at the time the related revenue is recognized. Liabilities for warranty claims have historically not been material. In some instances, customers may make claims for costs they incurred or other damages related to a claim. Any potentially material liabilities associated with these claims are discussed in this Note under the heading Legal Proceedings and Claims.
Environmental Remediation Liabilities
Our operations and facilities are subject to U.S. and non-U.S. laws and regulations governing the protection of the environment and our employees, including those governing air emissions, water discharges, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites. We could incur substantial costs, including cleanup costs, fines, civil or criminal sanctions, or third-party property damage or personal injury claims, in the event of violations or liabilities under these laws and regulations, or non-compliance with the environmental permits required at our facilities. Potentially significant expenditures could be required in order to comply with environmental laws that may be adopted or imposed in the future. We are, however, not aware of any threatened or pending material environmental investigations, lawsuits, or claims involving us or our operations.
In 2001, TI's subsidiary in Brazil ("TI Brazil") was notified by the State of São Paolo, Brazil regarding its potential cleanup liability as a generator of wastes sent to the Aterro Mantovani disposal site, which operated near Campinas from 1972 to 1987. The site is a landfill contaminated with a variety of chemical materials, including petroleum products, allegedly disposed at the site. TI Brazil is one of over 50 companies notified of potential cleanup liability. There have been several lawsuits filed by third parties alleging personal injuries caused by exposure to drinking water contaminated by the disposal site. Our subsidiary, Sensata Technologies Sensores e Controles do Brasil Ltda. ("ST Brazil"), is the successor in interest to TI Brazil. However, in accordance with the terms of the acquisition agreement entered into in connection with the 2006 Acquisition (the “Acquisition Agreement”), TI retained these liabilities (subject to the limitations set forth in that agreement) and has agreed to indemnify us with regard to these excluded liabilities. Additionally, in 2008, five lawsuits were filed against ST Brazil alleging personal injuries suffered by individuals who were exposed to drinking water allegedly contaminated by the Aterro Mantovani disposal site. These matters are managed and controlled by TI. TI is defending these five lawsuits in the 1st Civil Court of Jaquariuna, São Paolo. Although ST Brazil cooperates with TI in this process, we do not anticipate incurring any non-reimbursable expenses related to the matters described above. Accordingly, no amounts have been accrued for these matters as of December 31, 2015.
Control Devices, Inc. (“CDI”), a wholly-owned subsidiary of one of our U.S. operating subsidiaries, Sensata Technologies, Inc., acquired through our acquisition of First Technology Automotive, is party to a post-closure license, along with GTE Operations Support, Inc. (“GTE”), from the Maine Department of Environmental Protection with respect to a closed hazardous waste surface impoundment located on real property owned by CDI in Standish, Maine. The post-closure license obligates GTE to operate a pump and treatment process to reduce the levels of chlorinated solvents in the groundwater under the property. The post-closure license obligates CDI to maintain the property and provide access to GTE. We do not expect the costs to comply with the post-closure license to be material. As a related but separate matter, pursuant to the terms of an environmental agreement dated July 6, 1994, GTE retained liability and agreed to indemnify CDI for certain liabilities related to the soil and groundwater contamination from the surface impoundment and an out-of-service leach field at the Standish, Maine facility, and CDI and GTE have certain obligations related to the property and each other. The site is contaminated primarily with chlorinated solvents. In 2013, CDI subdivided and sold a portion of the property subject to the post-closure license, including a manufacturing building, but retained the portion of the property that contains the closed hazardous waste surface impoundment, for which it and GTE continue to be subject to the obligations of the post closure license. The buyer of the facility is also now subject to certain restrictions of the post-closure license. CDI has agreed to complete an ecological risk assessment on sediments in an unnamed stream crossing the sold and retained land and to indemnify the buyer for certain remediation costs associated with sediments in the unnamed stream. We do not expect the remaining cost associated with addressing the soil and groundwater contamination, or our obligations relating to the indemnification of the buyer of the facility, to be material.
Legal Proceedings and Claims
We are regularly involved in a number of claims and litigation matters in the ordinary course of business. Most of our litigation matters are third-party claims related to patent infringement allegations or for property damage allegedly caused by our products, but some involve allegations of personal injury or wrongful death. Although it is not feasible to predict the outcome of these matters, based upon our experience and current information known to us, we do not expect the outcome of these matters, either individually or in the aggregate, to have a material adverse effect on our results of operations, financial position, or cash flows.
We account for litigation and claims losses in accordance with FASB ASC Topic 450, Contingencies(“ASC 450”). Under FASB ASC Topic 450, loss contingency provisions are recorded for probable and estimable losses at our best estimate of a loss or, when a best estimate cannot be made, at our estimate of the minimum loss. These estimates are often developed prior to knowing the amount of the ultimate loss, require the application of considerable judgment, and are refined each accounting period as additional information becomes known. Accordingly, we are often initially unable to develop a best estimate of loss and therefore the minimum amount, which could be an immaterial amount, is recorded. As information becomes known, either the minimum loss amount is increased, or a best estimate can be made, generally resulting in additional loss provisions. A best estimate amount may be changed to a lower amount when events result in an expectation of a more favorable outcome than previously expected.
We are regularly involved in a number of claims and litigation matters in the ordinary course of business. Most of our litigation matters are third-party claims for property damage allegedly caused by our products, but some involve allegations of personal injury or wrongful death. We believe that the ultimate resolution of the current litigation matters pending against us, except potentially those matters described below, will not be material to our financial statements.
Insurance Claims
The accounting for insurance claims depends on a variety of factors, including the nature of the claim, the evaluation of coverage, the amount of proceeds (or anticipated proceeds), the ability of an insurer to satisfy the claim, and the timing of the loss and corresponding recovery. In accordance with ASC 450, receipts from insurance up to the amount of loss recognized are considered recoveries. Recoveries are recognized in the financial statements when they are probable of receipt. Insurance proceeds in excess of the amount of loss recognized are considered gains. Gains are recognized in the financial statements in the period in which contingencies related to the claim (or a specific portion of the claim) have been resolved. We classify insurance proceeds in our consolidated statements of operations in a manner consistent with the related losses.
Pending Litigation and ClaimsClaims:
Korean Supplier: In the first quarter of 2014, one of our Korean suppliers, Yukwang Co. Ltd. ("Yukwang"), notified us that it was terminating its existing agreement with us and stopped shipping product to us. We brought legal proceedings against Yukwang in Seoul Central District Court, seeking an injunction to protect Sensata-owned manufacturing equipment physically located at Yukwang’s facility. Yukwang countered that we were in breach of contract and alleged damages of approximately $7.6 million. We are litigatinga defendant in a lawsuit, Wasica Finance Gmbh et al v. Schrader International Inc. et al, Case No. 13-1353-CPS, U.S.D.C., Delaware, in which the claimant alleges infringement of their patent (US 5,602,524) in connection with our tire pressure monitoring system products. The patent in question has expired, and as a result, the claimant only seeks damages for past infringement with interest and costs. Should the claimant prevail, these proceedings. The Seoul Central District Court granted our request for an injunction ordering Yukwang not to destroy any of our assets physically located at Yukwang’s facility, but on August 25, 2014 did not grant injunctive relief requiring Yukwang to return equipment and inventory to us.amounts could be material. We have filed an appeal ofdenied liability and have been defending the adverse decision and intend to aggressively pursue our claims and to defend against Yukwang’s counter claims.
In the first quarter of 2014, Yukwang filed a complaint against us with the Small and Medium Business Administration (the “SMBA”), a Korean government agency charged with protecting the interests of small and medium sized businesses. The SMBA attempted to mediate the dispute between us and Yukwang, but its efforts failed. We believe that the SMBA has abandoned its efforts to mediate the dispute.
On May 27, 2014, Yukwang filed a patent infringement action against us and our equipment supplier with the Suwon district court seeking a preliminary injunction for infringement of Korean patent number 847,738. Yukwang also filed a patent scope action on the same patent with the Korean Intellectual Property Tribunal ("KIPT") and sought police investigation into the alleged infringement. Yukwang is seeking unspecified damages as well as an injunction barring us from using parts covered by the patent in the future. On October 8, 2014, the Suwon district court entered an order dismissing the patent infringement action on invalidity grounds. Yukwang filed an appeal of that decision on October 14, 2014,litigation, which is being heard by the Seoul High Court (an intermediate appellate court).in discovery. The Seoul High Courtcourt held a firstclaims construction hearing on the appeal on March 10, 2015December 3, 2018 and is expected to issue a second hearing on May 26, 2015. On April 24, 2015, the KIPT issued a decisionruling in our favor, finding the patent to be invalid. On January 22, 2016, the Korean Patent Court affirmed the invalidity decision. Both matters remain on appeal, and we continue to vigorously defend ourselvesFebruary 2019. Trial is currently expected in these actions.
In August 2014, the Korean Fair Trade Commission (the “KFTC”) opened investigations into allegations made by Yukwang that our indirect, wholly-owned subsidiary, Sensata Technologies Korea Limited, engaged in unfair trade practices and violated a Korean law relating to subcontractors. We have responded to information requests from the KFTC. A hearing was held by the KFTC on October 2, 2015, and we anticipate an initial ruling on this matter in the first quarter of 2016. If its investigation determines that our subsidiary has violated Korean law, the KFTC can order injunctions, award damages of up to 2% of impacted revenue for unfair trade practices, and award damages of up to two times the value of the relevant subcontract
for violations of the subcontractor law. Damages could cover up to the entire period, which is several years, during which Sensata or any of its current subsidiaries had been operating in Korea. In addition, the KFTC has the authority to prosecute criminally.
We are responding to these various actions by Yukwang.February 2020. We do not believe that a loss is probable, and as of December 31, 2015, we have not recorded an accrual related to these matters.
Brazil Local Tax: Schrader International Brasil Ltda. is involved in litigation with the tax department of the State of São Paulo, Brazil (the “São Paulo Tax Department”), which is claiming underpayment of state taxes. The total amount claimed is approximately $26.0 million, which includes penalties and interest. It is our understanding that the courts have denied the São Paulo Tax Department’s claim, a decision which has been appealed. Although we do not believe that a loss is probable in this matter Schrader International Brasil Ltda. has been requested to pledge certain of its assets as collateral for the disputed amount while the case is heard. Certain of our subsidiaries have been indemnified by Tomkins Limited (a previous owner of Schrader) for any potential loss relating to this issue, and Tomkins Limited is responsible for and is currently managing the defense of this matter.probable. As of December 31, 2015,2018, we have not recorded an accrual related to this matter.
Hassett Class Action Lawsuit:We are a defendant in a lawsuit, OnMetal Seal Precision, Ltd. v. Sensata Technologies Inc., Case No. 2017-0518-BCSI, MA Superior Court (Suffolk County), in which the claimant ("Metal Seal"), a supplier of metal parts used in the manufacture of our products, alleges breach of contract, misrepresentation, and unfair trade practices under Massachusetts general laws. The dispute arises out of a long-term supply agreement under which Metal Seal alleges certain minimum purchase requirements were not met, resulting in lost profits and loss of future revenues. If the claimant prevails additionally under the unfair trade practices claims, it could obtain additional treble damages and attorney's fees. Plaintiff’s damage expert claims that Metal Seal has losses ranging up to $51.0 million. We are defending the lawsuit, which is currently scheduled for trial on March 11, 2019 through March 19, 2015, two named plaintiffs filed a class action complaint in the U.S. District Court for the Eastern District of Michigan against Chrysler and Schrader-Bridgeport International, Inc., styled Hassett v. FCA US, LLC et al., case number 2:2015cv11030 (E.D. Michigan). The lawsuit alleged that faulty valve stems were used in Schrader TPMS installed on Chrysler vehicles model years 2007 through 2014. It alleged breach of warranty, unjust enrichment, and violations of the Michigan Consumer Protection Act and the federal Magnuson-Moss Warranty Act, and was seeking compensatory and punitive damages. Both the size of the class and the damages sought were unspecified. The plaintiffs, joined by an additional individual, filed an amended complaint dated June 2, 2015. On July 23, 2015, along with Chrysler, we filed motions to dismiss. The court held a hearing on these motions on December 2, 2015. Subsequent to this hearing, the court dismissed the complaint on procedural grounds. The plaintiffs have the right to re-file.2019. We do not believe a loss related to this matter is probable, and asprobable. As of December 31, 2015,2018, we have not recorded an accrual related to this matter.
Automotive Customers: In
16. Shareholders’ Equity
Prior to the fourth quarterMerger, Sensata N.V.’s articles of 2013, oneassociation authorized it to issue up to 400.0 million ordinary shares. However, entities incorporated under the laws of our automotive customers alleged defects in certain of our sensor products installedEngland and Wales are limited in the customer's vehicles during 2013.number of shares they can issue to those shares that have been authorized for "allotment" by their shareholders. In connection with the first quarterMerger, our Board of 2014, a second customer alleged similar defects. The alleged defects are not safety related. In the third quarterDirectors asked shareholders to approve an allotment of 2014, we made a contributionordinary shares equal to the first customertotal ordinary shares then issued and outstanding plus the maximum number of ordinary shares that could be reasonably expected to be issued under our equity plans within the next year, which resulted in an allotment of 177.1 million ordinary shares.
Treasury Shares
Ordinary shares repurchased by us are recognized, measured at cost, and presented as treasury shares on our consolidated balance sheets, resulting in a reduction of shareholders' equity.
In connection with the Merger, all then outstanding treasury shares were canceled in accordance with U.K. law. Accordingly, we (1) derecognized the total purchase price of these treasury shares, (2) recognized a reduction to ordinary shares at an amount equal to the total par value of such shares, and (3) recognized a reduction to retained earnings at an amount equal to the excess of the total repurchase price over the total par value of the then outstanding treasury shares, or $286.1 million.
Also, upon completion of the Merger, the $250.0 million share repurchase program previously authorized by the Board of Directors of Sensata N.V. lapsed, and our ability to repurchase shares as a company incorporated in England and Wales became contingent upon the completion of certain court proceedings in the amount of $0.7 million, which resolved a portion of the claim. InU.K. (which were completed in the second quarter of 2015,2018), approval of our shareholders (which occurred at our May 31, 2018 annual general meeting of shareholders), and authorization by our Board of Directors.
On May 31, 2018, we settled with the second customer for an immaterial amount. We continue to work towards a final resolution of the open matter with the first customer and consider a loss to be probable. As of December 31, 2015, we have recorded an accrual related to the open matter of $0.7 million, representing our best estimate of the potential loss.
During the fourth quarter of 2015, an additional customer raised similar complaints involving other vehicles from the same approximate production period. At this time, the total number of vehicles affected and, therefore, the total potential liability of the Company, are not known. The Company considers a loss related to this matter to be probable and, as of December 31, 2015, we have recorded an accrual related to this additional matter of $0.2 million. However, the aggregate amount of the Company's actual liability will ultimately depend on the actions taken by the customer and the number of vehicles affected, and such liability could be material and in excess of the accrual.
FCPA Voluntary Disclosure
In 2010, an internal investigation was conducted under the direction of the Audit Committee ofannounced that our Board of Directors had authorized a $400.0 million share repurchase program. Under this program, we may repurchase ordinary shares at such times and in amounts to determine whether any laws, includingbe determined by our management, based on market conditions, legal requirements, and other corporate considerations, on the Foreign Corrupt Practices Act (the “FCPA”), may have been violatedopen market or in connectionprivately negotiated transactions, provided that such transactions were completed pursuant to an agreement and with a third party approved by our shareholders at the annual general meeting. The authorized amount of our share repurchase program could be modified or terminated by our Board of Directors at any time. We repurchased 7,571 ordinary shares under this program during the year ended December 31, 2018, for a total purchase price of approximately $399.4 million, which are now held as treasury shares.
In October 2018, our Board of Directors authorized a new $250.0 million share repurchase program, subject to the same conditions that applied to the previously authorized $400.0 million share repurchase program. We did not make any repurchases under this program during fiscal year 2018.
As a result of certain business relationshipaspects of U.K. law, we discontinued the practice of reissuing treasury shares as part of our share-based compensation programs upon completion of the Merger. The number of treasury shares reissued prior to completion of the Merger was not material.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss were as follows:
|
| | | | | | | | | | | |
| | Cash Flow Hedges | | Defined Benefit and Retiree Healthcare Plans | | Accumulated Other Comprehensive Loss |
| Balance as of December 31, 2015 | $ | 3,852 |
| | $ | (29,842 | ) | | $ | (25,990 | ) |
| Pre-tax current period change | (5,106 | ) | | (4,934 | ) | | (10,040 | ) |
| Tax effect | 1,277 |
| | 686 |
| | 1,963 |
|
| Balance as of December 31, 2016 | 23 |
| | (34,090 | ) | | (34,067 | ) |
| Pre-tax current period change | (37,603 | ) | | (1,445 | ) | | (39,048 | ) |
| Tax effect | 9,401 |
| | 550 |
| | 9,951 |
|
| Balance as of December 31, 2017 | (28,179 | ) | | (34,985 | ) | | (63,164 | ) |
| Pre-tax current period change | 49,817 |
| | (1,183 | ) | | 48,634 |
|
| Tax effect | (12,454 | ) | | 806 |
| | (11,648 | ) |
| Balance as of December 31, 2018 | $ | 9,184 |
| | $ | (35,362 | ) | | $ | (26,178 | ) |
The details of the components of other comprehensive income/(loss), net of tax, for the years ended December 31, 2018, 2017, and 2016 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the year ended December 31, |
| | | 2018 | | 2017 | | 2016 |
| | | Cash Flow Hedges | | Defined Benefit and Retiree Healthcare Plans | | Total | | Cash Flow Hedges | | Defined Benefit and Retiree Healthcare Plans | | Total | | Cash Flow Hedges | | Defined Benefit and Retiree Healthcare Plans | | Total |
| Other comprehensive income/(loss) before reclassifications | | $ | 26,859 |
| | $ | (2,120 | ) | | $ | 24,739 |
| | $ | (39,387 | ) | | $ | (4,184 | ) | | $ | (43,571 | ) | | $ | (6,356 | ) | | $ | (6,816 | ) | | $ | (13,172 | ) |
| Amounts reclassified from accumulated other comprehensive loss | | 10,504 |
| | 1,743 |
| | 12,247 |
| | 11,185 |
| | 3,289 |
| | 14,474 |
| | 2,527 |
| | 2,568 |
| | 5,095 |
|
| Other comprehensive income/(loss) | | $ | 37,363 |
| | $ | (377 | ) | | $ | 36,986 |
| | $ | (28,202 | ) | | $ | (895 | ) | | $ | (29,097 | ) | | $ | (3,829 | ) | | $ | (4,248 | ) | | $ | (8,077 | ) |
The details of the amounts reclassified from accumulated other comprehensive loss for the years ended December 31, 2018, 2017, and 2016 are as follows:
|
| | | | | | | | | | | | | | |
| | | Amount of Loss/(Gain) Reclassified from Accumulated Other Comprehensive Loss | | |
| | | For the year ended December 31, | | Affected Line in Consolidated Statements of Operations |
| | | 2018 | | 2017 | | 2016 | |
| Derivative instruments designated and qualifying as cash flow hedges: | | | | | | | | |
| Foreign currency forward contracts | | $ | 18,072 |
| | $ | 916 |
| | $ | (17,720 | ) | | Net revenue (1) |
| Foreign currency forward contracts | | (5,442 | ) | | 13,997 |
| | 21,089 |
| | Cost of revenue (1) |
| Foreign currency forward contracts | | 1,376 |
| | — |
| | — |
| | Other, net (1) |
| Total, before taxes | | 14,006 |
| | 14,913 |
| | 3,369 |
| | Income before taxes |
| Income tax effect | | (3,502 | ) | | (3,728 | ) | | (842 | ) | | (Benefit from)/provision for income taxes |
| Total, net of taxes | | $ | 10,504 |
| | $ | 11,185 |
| | $ | 2,527 |
| | Net income |
| | | | | | | | | |
| Defined benefit and retiree healthcare plans | | $ | 1,993 |
| | $ | 3,476 |
| | $ | 2,975 |
| | Other, net (2) |
| Defined benefit and retiree healthcare plans | | 228 |
| | — |
| | — |
| | Restructuring and other charges, net (3) |
| Total, before taxes | | 2,221 |
| | 3,476 |
| | 2,975 |
| | Income before taxes |
| Income tax effect | | (478 | ) | | (187 | ) | | (407 | ) | | (Benefit from)/provision for income taxes |
| Total, net of taxes | | $ | 1,743 |
| | $ | 3,289 |
| | $ | 2,568 |
| | Net income |
| |
(1) | See Note 19, "Derivative Instruments and Hedging Activities," for details on amounts to be reclassified in the future from accumulated other comprehensive loss. |
| |
(2) | See Note 13, "Pension and Other Post-Retirement Benefits," for details of net periodic benefit cost. |
| |
(3) | Amount represents an equity component of the Valves Business. Refer to Note 5, "Restructuring and Other Charges, Net," and Note 17, "Acquisitions and Divestitures," for information related to the sale of the Valves Business. |
17. Acquisitions and Divestitures
GIGAVAC merger
On September 24, 2018, we entered into byan agreement and plan of merger with GIGAVAC, whereby GIGAVAC would merge with one of our operatingwholly-owned subsidiaries, involving business in China. We believethereby becoming a wholly-owned subsidiary of Sensata. On October 31, 2018, we completed the amountacquisition of payments and the business involved was immaterial. We discontinued the specific business relationship, and our investigation has not identified any other suspect transactions. We contacted the U.S. DepartmentGIGAVAC for $233.0 million of Justice (the "DOJ") and the SECcash consideration, subject to make a voluntary disclosure of the possible violations, the investigation, and the initial findings. We have been fully cooperating with their review. During 2012, the DOJ informed us that it has closed its inquiry into the matter but indicated that it could reopen its inquiry in the future in the event it were to receive additional information or evidence. We have not received an update from the SEC concerning the status of its inquiry. The FCPA (and related statutes and regulations) provides for potential monetary penalties, criminal and civil sanctions,working capital and other remedies.adjustments, approximately $12.0 million of which related to certain compensation arrangements with certain GIGAVAC employees and shareholders.
Based in Carpinteria, California, GIGAVAC has more than 270 employees and is a leading provider of solutions that enable electrification in demanding environments within the automotive, battery storage, industrial, and HVOR end markets. We are unableacquired GIGAVAC to estimate the potential penalties and/or sanctions, if any, that mightincrease our content and capabilities for electrification, including products such as cars, delivery trucks, buses, material handling equipment, and charging stations. Portions of GIGAVAC will be assessed and, accordingly, no provision has been made in the accompanying consolidated financial statements. Given the lengthintegrated into each of time that has lapsed since the voluntary disclosure, we believe that the SEC will not take action against us in this matter, although they still have the right to do so in the future.our operating segments.
Matters that have become immaterial for future disclosure
The following matters have been disclosed in previous filings. While these matters have not been resolved in 2015, they have become immaterial for disclosure, as we believe any future activity is unlikely to be material to our financial statements.
Ford Speed Control Deactivation Switch Litigation: We are involved in a number of litigation matters relating to a pressure switch that TI sold to Ford Motor Company (“Ford”) for several years until 2002. Ford incorporatedtable summarizes the switch into a cruise control deactivation switch system that it installed in certain vehicles. Due to concerns that, in some circumstances, this system and switch may cause fires, Ford and related companies issued numerous separate recalls of vehicles between 1999 and 2009, which covered approximately fourteen million vehicles in the aggregate.
As of December 31, 2015, we were a defendant in eight lawsuits in which plaintiffs have alleged property damage, and in somepreliminary allocation of the cases, various personal injuries caused by vehicle firespurchase price to the estimated fair values of the assets acquired and liabilities assumed:
|
| | | | |
| Net working capital, excluding cash | | $ | 16,980 |
|
| Property, plant and equipment | | 4,384 |
|
| Goodwill | | 114,638 |
|
| Other intangible assets | | 122,742 |
|
| Other assets | | 63 |
|
| Deferred income tax liabilities | | (27,000 | ) |
| Other long-term liabilities | | (1,000 | ) |
| Fair value of net assets acquired, excluding cash and cash equivalents | | 230,807 |
|
| Cash and cash equivalents | | 359 |
|
| Fair value of net assets acquired | | $ | 231,166 |
|
The allocation of purchase price related to the systemGIGAVAC Merger is preliminary, and switch. Foris based on management’s judgments after evaluating several factors, including preliminary valuation assessments of tangible and intangible assets. The final allocation of the most part, these cases seek an unspecifiedpurchase price to the assets acquired will be completed when the final valuations are completed. The preliminary goodwill recognized as a result of this acquisition was approximately $114.6 million, which represents future economic benefits expected to arise from synergies from combining operations and the extension of existing customer relationships. The amount of compensatorygoodwill recorded that is expected to be deductible for tax purposes is not material.
In connection with the allocation of purchase price to the assets acquired and exemplary damages, however three plaintiffs have submitted demandsliabilities assumed, we identified certain definite-lived intangible assets. The following table presents the acquired intangible assets, their estimated fair values, and weighted average lives:
|
| | | | | |
| | Acquisition Date Fair Value | | Weighted-Average Lives (years) |
| Acquired definite-lived intangible assets: | | | |
| Customer relationships | $ | 74,500 |
| | 10 |
| Completed technologies | 31,040 |
| | 13 |
| Tradenames | 15,400 |
| | 15 |
| Other | 1,802 |
| | 6 |
| Total definite-lived intangible assets acquired | $ | 122,742 |
| | 12 |
The definite-lived intangible assets were valued using the income approach. We used the relief-from-royalty method to value completed technologies and tradenames, and we used the multi-period excess earnings method to value customer relationships. These valuation methods incorporate assumptions including expected discounted future cash flows resulting from either the future estimated after-tax royalty payments avoided as a result of owning the completed technologies or the future earnings related to existing customer relationships.
Valves Business Divestiture
On August 31, 2018 we completed the sale of the Valves Business to Pacific Industrial Co. Ltd. (together with its affiliates, "Pacific"). Contemporaneous with the closing of the sale, Sensata and Pacific entered into a long-term supply agreement, which imposes an obligation on us to purchase minimum quantities of product from Pacific over a period of nearly five years.
In exchange for selling the Valves Business and entering into the long-term supply agreement, we received cash consideration from Pacific of approximately $165.5 million, net of $11.8 million of cash and cash equivalents sold. We recognized a (pre-tax) gain on sale of $64.4 million, which is presented in amounts ranging from $0.1restructuring and other charges, net. In addition, we recognized $5.9 million of costs to $0.4 million. Fordsell the Valves Business, which are also presented in restructuring and TI are co-defendants in each of these lawsuits. In accordance withother charges, net. Refer to Note 5, "Restructuring and Other Charges, Net," for additional information.
We determined that the terms of the Acquisition Agreement, we are managing and defending these lawsuits on behalf of both parties.
Pursuant tolong-term supply agreement entered into concurrent with the termssale of the Acquisition Agreement, and subject toValves Business were not at market. Accordingly, we recognized a liability of $16.4 million, measured at fair value, which represented the limitations set forthfair value of the off-market component of the supply agreement.
The Valves Business, which we acquired in that agreement, TI has agreed to indemnify us for certain claims and litigation, including the Ford matter. The Acquisition Agreement provides that when the aggregate amount of costs and/or damages from such claims exceeds $30.0 million, TI will reimburse us for amounts incurred in excess of that threshold up to a cap of $300.0 million. We entered into an agreement with TI, called the Contribution and Cooperation Agreement, dated October 24, 2011, whereby TI acknowledged that amounts we paid through September 30, 2011, plus an additional cash payment, would be deemed to satisfy the $30.0 million threshold. Accordingly, TI will not contest the claims or the amounts claimed through September 30, 2011. Costs that we have incurred since September 30, 2011, or may incur in the future, will be reimbursed by TI up to a cap of $300.0 million less amounts incurred by TI. We do not believe that aggregate TI and Sensata costs will exceed $300.0 million.
Matters Resolved During 2015
SGL Italia: Our subsidiaries, STBV and Sensata Technologies Italia, were defendants in a lawsuit, Luigi Lavazza s.p.a. and SGL Italia s.r.l. v. Sensata Technologies Italia s.r.l., Sensata Technologies, B.V., and Komponent s.r.l., Court of Milan, bench 7, brought in the court in Milan, Italy. The lawsuit alleged defects in one2014 as part of our electromechanical controlacquisition of Schrader, manufactures mechanical valves for pressure applications in tires and fluid controls and assembles tire hardware aftermarket products. The plaintiffs had alleged €5.0 millionValves Business has manufacturing locations in damages. On July 3, 2015, the parties entered into a settlement agreement to end the litigation, under which we agreed to pay €1.0 million to the plaintiffs. We made this payment in the third quarter of 2015.
U.S. Automaker: A U.S. automaker has alleged non-safety-related defects in certain of our sensor products installed in its vehicles from 2009 through 2011. In January 2015, the customer informed us that future repairs may involve up to 150,000 vehicles over an estimated 10-year period, and that it would seek reimbursement of these costs (or a portion thereof). On March 26, 2015, we entered into a settlement agreement with the customer in which we agreed to reimburse it for 50% of its future costs, with a maximum contribution by us of $4.0 million. As of December 31, 2015, based on the projected repairs anticipated, we have recorded an accrual at the maximum of $4.0 million related to this matter.
Bridgestone: We were involved in patent litigation with Bridgestone Americas Tire Operations, LLC (“Bridgestone”) in both the U.S. and Germany.Europe.
On May 2, 2013, Bridgestone filed a lawsuit, Bridgestone Americas Tire Operations, LLC v. Schrader-Bridgeport International, Inc., Case No. 1:13-cv-00763,The Valves Business was included in the U.S. District Court for the District of Delaware, alleging that Schrader-Bridgeport International, Inc. d/b/a Schrader International, Inc., Schrader Electronics Ltd., and Schrader Electronics, Inc. (collectively, “Schrader Electronics”) infringed on certain of its patents (U.S. Patent Numbers 5,562,787, 6,630,885, and 7,161,476) concerning original equipment and original equipment replacement TPMS. Bridgestone was seeking a permanent injunction preventing Schrader Electronics from making, using, importing, offering to sell, or selling any devices that infringe or contributeour Performance Sensing segment (and reporting unit). We allocated goodwill to the infringement of any claimValves Business based on its fair value relative to the fair value of the asserted patents, or from inducing others to infringe any claim of the asserted patents; judgment for money damages, interest, costs, and other damages; and the award of a compulsory ongoing licensing fee. A trial was held in Wilmington, Delaware from June 1, 2015 through June 9, 2015. At the trial, Bridgestone claimed approximately $28.0 million in damages for past sales. On June 9, 2015, the jury announced its decision finding that the Bridgestone patents were valid but not infringed by Schrader Electronics. Bridgestone subsequently filed a motion asking the court to dismiss the jury verdict.retained Performance Sensing reporting unit.
On May 2, 2013, Bridgestone also filed a patent infringement lawsuit in Germany, Bridgestone Americas Tire Operations LLC v. Schrader International Inc., District Court Munich I, alleging that Schrader Electronics’ TPMS products
sold in Germany were infringing on one of its German counterparts’ patents (the German part of European Patent Office patent No. 1309460 B1). On June 12, 2014, the German court rendered a judgment in favor of Bridgestone on the issue of infringement. We filed an appeal of this decision. On May 25, 2015, we also filed a motion requesting stay of any enforcement of the first instance decision, pending the appeal. Additionally, we filed a nullity action in the German patent court seeking a finding of invalidity of the patent. Bridgestone was seeking a permanent injunction preventing Schrader Electronics from making, using, importing, offering to sell, or selling any devices that infringe or contribute to the infringement of any claim of the asserted patent, or from inducing others to infringe any claim of the asserted patent; judgment for money damages for past sales since September 25, 2010, interest, costs, and other damages; and the award of compulsory ongoing licensing fees. The specific amounts claimed were unspecified.
On October 15, 2015, the parties reached an oral agreement to settle the U.S. and German matters. The parties executed an agreement dated November 10, 2015, under which we agreed to pay Bridgestone $6.0 million, an amount which was paid in December 2015.
15.18. Fair Value Measures
Our assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with FASB ASC Topic 820. The levels of the fair value hierarchy are described below:
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets and liabilities that we have the ability to access at the measurement date.
Level 2 inputs utilize inputs, other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs for the asset or liability, allowing for situations where there is little, if any, market activity for the asset or liability.
Measured on a Recurring Basis
The following table presents information aboutfair values of our assets and liabilities measured at fair value on a recurring basis as of as of December 31, 20152018 and 2014, aggregated by2017 are as shown in the levelbelow table. All fair value measures presented are categorized in Level 2 of the fair value hierarchy within which those measurements fell:hierarchy.
| | | | December 31, 2015 | | December 31, 2014 | | As of December 31, |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | 2018 | | 2017 |
| Assets | | | | | | | | | | | | | | | | |
| Assets measured at fair value: | | | | | |
| Foreign currency forward contracts | $ | — |
| | $ | 28,569 |
| | $ | — |
| | $ | 28,569 |
| | $ | — |
| | $ | 31,785 |
| | $ | — |
| | $ | 31,785 |
| | $ | 17,871 |
| | $ | 3,955 |
|
| Commodity forward contracts | — |
| | 42 |
| | — |
| | 42 |
| | — |
| | 114 |
| | — |
| | 114 |
| | 831 |
| | 6,458 |
|
| Total | $ | — |
| | $ | 28,611 |
| | $ | — |
| | $ | 28,611 |
| | $ | — |
| | $ | 31,899 |
| | $ | — |
| | $ | 31,899 |
| |
| Liabilities | | | | | | | | | | | | | | | | |
| Total assets measured at fair value | | | $ | 18,702 |
| | $ | 10,413 |
|
| Liabilities measured at fair value: | | | | | |
| Foreign currency forward contracts | $ | — |
| | $ | 20,561 |
| | $ | — |
| | $ | 20,561 |
| | $ | — |
| | $ | 9,656 |
| | $ | — |
| | $ 9,656 | | $ | 5,165 |
| | $ | 40,969 |
|
| Commodity forward contracts | — |
| | 13,685 |
| | — |
| | 13,685 |
| | — |
| | 11,975 |
| | — |
| | 11,975 |
| | 4,137 |
| | 1,104 |
|
| Total | $ | — |
| | $ | 34,246 |
| | $ | — |
| | $ | 34,246 |
| | $ | — |
| | $ | 21,631 |
| | $ | — |
| | $ 21,631 | |
| Total liabilities measured at fair value | | | $ | 9,302 |
| | $ | 42,073 |
|
SeeRefer to Note 2, "Significant Accounting Policies," under the caption Financial Instruments,for a discussion of how wethe methods used to estimate the fair value of our financial instruments. Seeinstruments, and refer Note 16,19, "Derivative Instruments and Hedging Activities," for specific contractual terms utilized asfurther discussion of the inputs in determiningused to determine these fair value measurements and a discussion of the nature of the risks being mitigated bythat these instruments.derivative instruments are intended to mitigate.
Although we have determined that the majority of the inputs used to value our derivativesderivative instruments fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to appropriately reflect both our own non-performance risk and the respective counterparties' non-performance risk in the fair value measurement. However, asAs of December 31, 20152018 and 2014,2017, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivatives in their entirety are classified in Level 2 in the fair value hierarchy.
Measured on a Non-RecurringNonrecurring Basis
We evaluateIn connection with the recoverabilitysale of the Valves Business, as required by FASB ASC Topic 350, we evaluated the goodwill of the retained portion of the Performance Sensing reporting unit for impairment and indefinite-lived intangible assets in the fourth quarter of each fiscal year, or more frequently if events or changes in circumstances indicatedetermined that goodwill or other intangible assets may beit was not impaired. As of October 1, 2015,In addition, we evaluated our goodwill for impairment as of October 1, 2018 using thea combination of qualitative method.and quantitative methods. Refer to CriticalNote 2, "Significant Accounting Policies, and Estimates in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this Annual Report on Form 10-K for further discussion of this process. Based on this analysis,these analyses, we determined that it was more likely than not that thetheir fair values of each of our reporting units were greater thanexceeded their net bookcarrying values at that date.
As of October 1, 2015,2018, we evaluated our other indefinite-lived intangible assets for impairment (using the quantitative method) and determined that the fair values of our indefinite-lived intangiblethose assets exceeded their carrying values on that date. The fair valuevalues of our other indefinite-lived intangible assets are considered levelLevel 3 fair value measurements.
As of December 31, 20152018, no events or changes in circumstances occurred that would have triggered the need for an additional impairment review of goodwill or other indefinite-lived intangible assets.
On January 1, 2018, we adopted FASB ASU No. 2016-01, which requires measurement of certain equity instruments at fair value, with changes to fair value recognized in net income, or in certain instances, by use of a measurement alternative. Refer to Note 2, "Significant Accounting Policies," for detailed discussion of this guidance. As of December 31, 2018, our only equity investment is the Series B Preferred Stock of Quanergy, for which we elected to use the measurement alternative. There was no change to the $50.0 million carrying value of this investment as a result of application of the measurement alternative.
Financial Instruments Not RecordedMeasured at Fair Value
The following table presents the carrying values and fair values of financial instruments not recordedmeasured at fair value in the consolidated balance sheets as of December 31, 20152018 and 20142017:. All fair value measures presented are categorized within Level 2 of the fair value hierarchy.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2015 | | December 31, 2014 |
| | Carrying Value (1) | | Fair Value | | Carrying Value (1) | | Fair Value |
| | | Level 1 | | Level 2 | | Level 3 | | | Level 1 | | Level 2 | | Level 3 |
| Liabilities | | | | | | | | | | | | | | | |
| Original Term Loan | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 469,308 |
| | $ | — |
| | $ | 466,966 |
| | $ | — |
|
| Incremental Term Loan | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 598,500 |
| | $ | — |
| | $ | 595,534 |
| | $ | — |
|
| Term Loan | $ | 982,695 |
| | $ | — |
| | $ | 963,041 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| 6.5% Senior Notes | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 700,000 |
| | $ | — |
| | $ | 730,660 |
| | $ | — |
|
| 4.875% Senior Notes | $ | 500,000 |
| | $ | — |
| | $ | 484,690 |
| | $ | — |
| | $ | 500,000 |
| | $ | — |
| | $ | 495,650 |
| | $ | — |
|
| 5.625% Senior Notes | $ | 400,000 |
| | $ | — |
| | $ | 409,252 |
| | $ | — |
| | $ | 400,000 |
| | $ | — |
| | $ | 415,000 |
| | $ | — |
|
| 5.0% Senior Notes | $ | 700,000 |
| | $ | — |
| | $ | 675,941 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| 6.25% Senior Notes | $ | 750,000 |
| | $ | — |
| | $ | 781,410 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Revolving Credit Facility | $ | 280,000 |
| | $ | — |
| | $ | 266,877 |
| | $ | — |
| | $ | 130,000 |
| | $ | — |
| | $ | 128,250 |
| | $ | — |
|
| Other debt | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2,153 |
| | $ | — |
| | $ | 2,153 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| | Carrying Value (1) | | Fair Value | | Carrying Value (1) | | Fair Value |
| Term Loan | $ | 917,794 |
| | $ | 904,027 |
| | $ | 927,794 |
| | $ | 930,114 |
|
| 4.875% Senior Notes | $ | 500,000 |
| | $ | 491,875 |
| | $ | 500,000 |
| | $ | 521,875 |
|
| 5.625% Senior Notes | $ | 400,000 |
| | $ | 400,500 |
| | $ | 400,000 |
| | $ | 439,000 |
|
| 5.0% Senior Notes | $ | 700,000 |
| | $ | 660,625 |
| | $ | 700,000 |
| | $ | 741,125 |
|
| 6.25% Senior Notes | $ | 750,000 |
| | $ | 751,875 |
| | $ | 750,000 |
| | $ | 813,750 |
|
(1)The carrying value is presented excluding discount. | |
(1) | Excluding any related debt discounts and deferred financing costs. |
The fair values of the Original Term Loan, the Incremental Term Loan, the Term Loan and the Senior Notes are determined primarily using observable prices in markets where these instruments are generally not traded on a daily basis. The fair value of the Revolving Credit Facility is calculated as the present value of the difference between the contractual spread on the loan and the estimated replacement credit spread using the current outstanding balance on the loan projected to the loan maturity.
Cash and cash equivalents, trade receivables,accounts receivable, and trade payablesaccounts payable are carried at their cost, which approximates fair value because of their short-term nature.
16.19. Derivative Instruments and Hedging Activities
As required by ASC 815, we record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of theWe utilize derivative whether we have elected to designate the derivative as being in a hedging relationship, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivativesinstruments that are designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifyingqualify as hedges of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. We currently only utilize cash flow hedges.
flows. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on thethese hedging instrumentinstruments with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge, or the earnings effect of the hedged forecasted transactions in a cash flow hedge.transactions. We may enter into other derivative contracts that are intended to economically hedge certain risks, even though we elect not to apply hedge accounting under FASB ASC Topic 815. Changes in the fair value of derivativesDerivative financial instruments not designated in hedging relationshipsas hedges are recorded directly in the consolidated statements of operations. Specific information about the valuations of derivatives is described inused to manage our exposure to certain risks, not for trading or speculative purposes. Refer to Note 2, "Significant Accounting Policies," for detailed discussion of the valuation techniques and classification of derivatives in the fair value hierarchy is described in Note 15, “Fair Value Measures.”accounting policies related to derivative instruments and hedging activities.
The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in Accumulatedaccumulated other comprehensive loss and is subsequently reclassified into earnings in the period in which the hedged forecasted transaction affects earnings. The ineffective portion of such derivatives’ change in fair value is immediately recognized in earnings. Changes in the fair value of contracts that are not designated as accounting hedges are recognized immediately in other, net. Refer to Note 12,16, "Shareholders' Equity," and elsewhere in this Note 19, for more details on the reclassification of amounts from Accumulatedaccumulated other comprehensive loss into earnings. The ineffective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recognized directly in earnings.
We do not offset the fair value amounts recognized for derivative instruments against fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral. As of December 31, 2015 and 2014, we had posted no cash collateral.
Hedges of Interest Rate Risk
On August 12, 2014, our interest rate cap, a portion of which was designated as a cash flow hedge of floating interest payments on the Original Term Loan, matured. As a result, as of December 31, 2015, we have no outstanding interest rate derivatives.
Our objectives in using interest rate derivatives have historically been to add stability to interest expense and to manage our exposure to interest rate movements on our floating rate debt. To accomplish these objectives, during the years ended December 31, 2014 and 2013, we used interest rate caps to hedge the variable cash flows associated with our variable rate debt as part of our interest rate risk management strategy. Interest rate caps designated as cash flow hedges involve the receipt of variable rate amounts if interest rates rise above the cap strike rate on the contract.
For the year ended December 31, 2014, we recorded no ineffectiveness in earnings and no amounts were excluded from the assessment of effectiveness. For the year ended December 31, 2013, the ineffective portion of the changes in the fair value of these derivatives recognized directly in earnings was not material and no amounts were excluded from the assessment of effectiveness.
Hedges of Foreign Currency Risk
We are exposed to fluctuations in various foreign currencies against our functional currency, the U.S. dollar.dollar (the "USD"). We useenter into forward contracts for certain of these foreign currency forward agreementscurrencies to manage this exposure. We currently have outstanding foreign currency forward contracts that qualify as cash flow hedges intended to offset the effect of exchange rate fluctuations on forecasted sales and certain manufacturing costs. We also have outstanding foreign currency forward contracts that are intended to preserve the economic value of foreign currency denominated monetary assets and liabilities; these instrumentsliabilities, which are not designated for hedge accounting treatment in accordance with FASB ASC Topic 815. Derivatives not designated as hedges are not speculative and are used to manage our exposure to foreign exchange movements.
For each of the years ended December 31, 20152018, 20142017, and 20132016, amounts excluded from the assessment of effectiveness and the ineffective portion of the changes in the fair value of these derivativesour foreign currency forward agreements that was recognized directly in earnings wasare designated as cash flow hedges were not material and no amounts were excluded from the assessment of effectiveness.material. As of December 31, 2015,2018, we estimate that $5.8$11.4 million in net gains will be reclassified from Accumulatedaccumulated other comprehensive loss to earnings during the twelve monthsmonth period ending December 31, 2016.2019.
As of December 31, 2015,2018, we had the following outstanding foreign currency forward contracts:
|
| | | | | | | | | | |
Notional
(in millions)
| | Effective Date | | Maturity Date | | Index | | Weighted- Average Strike Rate | | Hedge Designation(1) |
535.344.0 EUR | | Various from September 2014 to December 201527, 2018 | | Various from February 2016 to December 2017January 31, 2019 | | Euro to U.S. Dollar Exchange Rate | | 1.151.14 USD | | DesignatedNone |
92.0341.5 EUR | | Various from September 2014February 2017 to December 20152018 | | Various from January 29, 20162019 to November 2020 | | Euro to U.S. Dollar Exchange Rate | | 1.111.22 USD | | Non-designatedCash flow hedge |
89.0285.0 CNY | | December 17, 201526, 2018 | | January 29, 201631, 2019 | | U.S. Dollar to Chinese Renminbi Exchange Rate | | 6.576.91 CNY | | Non-designatedNone |
48,640.031,275.0 KRW | | Various from September 2014February 2017 to December 20152018 | | Various from February 2016January 2019 to December 2017November 2020 | | U.S. Dollar to Korean Won Exchange Rate | | 1,132.341,093.49 KRW | | DesignatedCash flow hedge |
33,700.0 KRW26.8 MYR | | Various from September 2014 to December 201526, 2018 | | January 29, 2016 | | U.S. Dollar to Korean Won Exchange Rate | | 1,180.22 KRW | | Non-designated |
98.5 MYR | | Various from September 2014 to December 2015 | | Various from February 2016 to December 201731, 2019 | | U.S. Dollar to Malaysian Ringgit Exchange Rate | | 3.894.18 MYR | | DesignatedNone |
34.7 MYR195.0 MXN | | Various from September 2014 to December 201527, 2018 | | January 29, 2016 | | U.S. Dollar to Malaysian Ringgit Exchange Rate | | 4.19 MYR | | Non-designated |
2,095.4 MXN | | Various from September 2014 to December 2015 | | Various from February 2016 to December 201731, 2019 | | U.S. Dollar to Mexican Peso Exchange Rate | | 16.4519.86 MXN | | DesignatedNone |
197.92,713.2 MXN | | Various from September 2014February 2017 to December 20152018 | | Various from January 29, 20162019 to November 2020 | | U.S. Dollar to Mexican Peso Exchange Rate | | 15.9020.72 MXN | | Non-designatedCash flow hedge |
57.148.5 GBP | | Various from October 2014February 2017 to December 20152018 | | Various from February 2016January 2019 to December 2017November 2020 | | British Pound Sterling to U.S. Dollar Exchange Rate | | 1.531.34 USD | | DesignatedCash flow hedge |
| |
9.2 GBP(1) | | Various from October 2014Derivative financial instruments not designated as hedges are used to December 2015 | | January 29, 2016 | | British Pound Sterlingmanage our exposure to U.S. Dollar Exchange Rate | | 1.51 USD | | Non-designatedcurrency exchange rate risk. They are intended to preserve the economic value and not for trading or speculative purposes. |
The notional amounts above represent the total quantities we have outstanding over the remaining contracted periods.
Hedges of Commodity Risk
Our objective in usingWe enter into commodity forward contracts isin order to offset a portion oflimit our exposure to the potential changevariability in prices associated with certain commodities usedraw material costs that is caused by movements in the manufacturingprice of our products, including silver, gold, nickel, aluminum, copper, platinum, palladium, and zinc.underlying metals. The terms of these forward contracts fix the price at a future date for various notional amounts associated with these commodities. These instruments are not designated for hedge accounting treatment in accordance with FASB ASC Topic 815. Commodity forward contracts not designated as hedges are not speculative and are used to manage our exposure to commodity price movements.
WeDecember 31, 2018, we had the following outstanding commodity forward contracts, none of which were designated as derivatives in qualifying hedging relationships, as of December 31, 2015:relationships:
|
| | | | | | |
Commodity | | Notional | | Remaining Contracted Periods | | Weighted-
Average
Strike Price Per Unit
|
Silver | | 1,554,959 troy oz. | | January 2016 - December 2017 | | $16.63 |
Gold | | 13,940 troy oz. | | January 2016 - December 2017 | | $1,177.94 |
Nickel | | 520,710 pounds | | January 2016 - December 2017 | | $6.18 |
Aluminum | | 4,686,080 pounds | | January 2016 - December 2017 | | $0.85 |
Copper | | 7,258,279 pounds | | January 2016 - December 2017 | | $2.72 |
Platinum | | 6,730 troy oz. | | January 2016 - December 2017 | | $1,154.61 |
Palladium | | 2,139 troy oz. | | January 2016 - December 2017 | | $647.71 |
Zinc | | 554,992 pounds | | January 2016 - October 2016 | | $1.04 |
|
| | | | | | | | |
| | | Notional | | Remaining Contracted Periods | | Weighted-Average Strike Price Per Unit |
| Silver | | 1,093,907 troy oz. | | January 2019 - November 2020 | | $ | 16.42 |
|
| Gold | | 9,859 troy oz. | | January 2019 - November 2020 | | $ | 1,307.90 |
|
| Nickel | | 287,681 pounds | | January 2019 - November 2020 | | $ | 5.75 |
|
| Aluminum | | 2,350,172 pounds | | January 2019 - November 2020 | | $ | 0.97 |
|
| Copper | | 2,904,061 pounds | | January 2019 - November 2020 | | $ | 3.17 |
|
| Platinum | | 9,095 troy oz. | | January 2019 - November 2020 | | $ | 912.29 |
|
| Palladium | | 1,001 troy oz. | | January 2019 - November 2020 | | $ | 966.21 |
|
The notional amounts above represent the total quantities we have outstanding over the remaining contracted periods.
Financial Instrument Presentation
The following table presents the fair values of our derivative financial instruments and their classification in the consolidated balance sheets as of December 31, 20152018 and 2014:2017:
| | | | Asset Derivatives | | Liability Derivatives | Asset Derivatives | | Liability Derivatives |
| | | | | | | | | Balance Sheet Location | | As of December 31, | | Balance Sheet Location | | As of December 31, |
| | | | Fair Value | | Fair Value | | 2018 | | 2017 | | 2018 | | 2017 |
| | Balance Sheet Location | | December 31, 2015 | | December 31, 2014 | | Balance Sheet Location | | December 31, 2015 | | December 31, 2014 | |
| Derivatives designated as hedging instruments under ASC 815 | | | | | | | | | | |
| Derivatives designated as hedging instruments: | | Derivatives designated as hedging instruments: | | | | | | | | |
| Foreign currency forward contracts | Prepaid expenses and other current assets | | $ | 20,057 |
| | $ | 24,097 |
| | Accrued expenses and other current liabilities | | $ | 13,851 |
| | $ | 6,332 |
| Prepaid expenses and other current assets | | $ | 14,608 |
| | $ | 3,576 |
| | Accrued expenses and other current liabilities | | $ | 3,615 |
| | $ | 32,806 |
|
| Foreign currency forward contracts | Other assets | | 5,382 |
| | 5,163 |
| | Other long-term liabilities | | 3,763 |
| | 2,210 |
| Other assets | | 3,168 |
| | 373 |
| | Other long-term liabilities | | 1,134 |
| | 6,881 |
|
| Total | | $ | 25,439 |
| | $ | 29,260 |
| | $ | 17,614 |
| | $ | 8,542 |
| | $ | 17,776 |
| | $ | 3,949 |
| | $ | 4,749 |
| | $ | 39,687 |
|
| Derivatives not designated as hedging instruments under ASC 815 | | | | | | | | | |
| Derivatives not designated as hedging instruments: | | Derivatives not designated as hedging instruments: | | | | | | | | |
| Commodity forward contracts | Prepaid expenses and other current assets | | $ | — |
| | $ | 107 |
| | Accrued expenses and other current liabilities | | $ | 10,876 |
| | $ | 10,591 |
| Prepaid expenses and other current assets | | $ | 524 |
| | $ | 5,403 |
| | Accrued expenses and other current liabilities | | $ | 3,679 |
| | $ | 1,006 |
|
| Commodity forward contracts | Other assets | | 42 |
| | 7 |
| | Other long-term liabilities | | 2,809 |
| | 1,384 |
| Other assets | | 307 |
| | 1,055 |
| | Other long-term liabilities | | 458 |
| | 98 |
|
| Foreign currency forward contracts | Prepaid expenses and other current assets | | 3,130 |
| | 2,525 |
| | Accrued expenses and other current liabilities | | 2,947 |
| | 1,114 |
| Prepaid expenses and other current assets | | 95 |
| | 6 |
| | Accrued expenses and other current liabilities | | 416 |
| | 1,282 |
|
| Total | | $ | 3,172 |
| | $ | 2,639 |
| | $ | 16,632 |
| | $ | 13,089 |
| | $ | 926 |
| | $ | 6,464 |
| | $ | 4,553 |
| | $ | 2,386 |
|
These fair value measurements are all categorized within Level 2 of the fair value hierarchy. Refer to Note 15,18, "Fair Value Measures," for more information onfurther discussion regarding the categorization of these measurements.fair value measurements within the fair value hierarchy.
The following tables present the effect of our derivative financial instruments on the consolidated statements of operations and the consolidated statements of comprehensive income for the years ended December 31, 20152018 and 20142017:
| | Derivatives designated as hedging instruments under ASC 815 | | Amount of Deferred Gain/(Loss) Recognized in Other Comprehensive (Loss)/Income | | Location of Net Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Net Income | | Amount of Net Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Net Income | |
| | | 2015 | | 2014 | | | | 2015 | | 2014 | |
| Interest rate caps | | $ | — |
| | $ | — |
| | Interest expense | | $ | — |
| | $ | (972 | ) | |
| Derivatives designated as hedging instruments | | | Amount of Deferred Gain/(Loss) Recognized in Other Comprehensive Income/(Loss) | | Location of Net (Loss)/Gain Reclassified from Accumulated Other Comprehensive Loss into Net Income | | Amount of Net (Loss)/Gain Reclassified from Accumulated Other Comprehensive Loss into Net Income |
| | For the year ended December 31, | | For the year ended December 31, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| Foreign currency forward contracts | | $ | 46,540 |
| | $ | 42,936 |
| | Net revenue | | $ | 54,537 |
| | $ | (334 | ) | | $ | 30,752 |
| | $ | (68,071 | ) | | Net revenue | | $ | (18,072 | ) | | $ | (916 | ) |
| Foreign currency forward contracts | | $ | (20,588 | ) | | $ | (8,651 | ) | | Cost of revenue | | $ | (10,284 | ) | | $ | 1,070 |
| | $ | 5,059 |
| | $ | 15,555 |
| | Cost of revenue | | $ | 5,442 |
| | $ | (13,997 | ) |
| Foreign currency forward contracts | | | $ | — |
| | $ | — |
| | Other, net | | $ | (1,376 | ) | | $ | — |
|
| | Derivatives not designated as hedging instruments under ASC 815 | | Amount of (Loss)/Gain on Derivatives Recognized in Net Income | | Location of (Loss)/Gain on Derivatives
Recognized in Net Income | |
| | | 2015 | | 2014 | | | |
| Derivatives not designated as hedging instruments | | | Amount of (Loss)/Gain Recognized in Net Income | | Location of Gain/(Loss) |
| | For the year ended December 31, | |
| | 2018 | | 2017 | |
| Commodity forward contracts | | $ | (18,468 | ) | | $ | (9,017 | ) | | Other, net | | $ | (8,481 | ) | | $ | 9,989 |
| | Other, net |
| Foreign currency forward contracts | | $ | 3,606 |
| | $ | 5,469 |
| | Other, net | | $ | 3,446 |
| | $ | (15,618 | ) | | Other, net |
Credit risk related contingent features
We have agreements with certain of our derivative counterparties that contain a provision whereby if we default on our indebtedness, and where repayment of the indebtedness has been accelerated by the lender, then we could also be declared in default on our derivative obligations.
As of December 31, 2015,2018, the termination value of outstanding derivatives in a liability position, excluding any adjustment for non-performance risk, was $35.2$9.4 million. As of December 31, 2015,2018, we have not posted any cash collateral related to these agreements. If we breach any of the default provisions on any of our indebtedness as described above, we could be required to settle our obligations under the derivative agreements at their termination values.
17. Restructuring and Special Charges
Restructuring
Our restructuring programs are described below.
2011 Plan
In 2011, we committed to a restructuring plan (the "2011 Plan") to reduce the workforce in several business centers and manufacturing facilities throughout the world and to move certain manufacturing operations to our low-cost sites. In 2012, we expanded the 2011 Plan to include additional costs associated with the planned cessation of manufacturing in our JinCheon, South Korea facility. These actions were completed in 2013, and we do not expect to incur any additional charges related to this plan. Substantially all remaining payments have been made.
MSP Plan
On January 28, 2011, we acquired the Magnetic Speed and Position ("MSP") business from Honeywell International Inc. On January 31, 2011, we announced a plan (the “MSP Plan”) to close the manufacturing facilities in Freeport, Illinois and Brno, Czech Republic. Restructuring charges related to these actions consisted primarily of severance and facility exit and other costs. These actions were completed in 2013, and we do not expect to incur any additional charges related to this plan. Substantially all remaining payments have been made.
Special Charges
On September 30, 2012, a fire damaged a portion of our manufacturing facility in JinCheon, South Korea. We incurred various costs related to the fire during the year ended December 31, 2013, which were primarily recognized in Cost of revenue. During the year ended December 31, 2013, we recognized $10.0 million of insurance proceeds related to this fire, of which
$0.8 million was recognized in the Restructuring and special charges line of our consolidated statements of operations, and the remainder in Cost of revenue. During the year ended December 31, 2014, we recognized $7.3 million of insurance proceeds related to this fire, which were partially offset by certain charges and expenses incurred during the second quarter of 2014 related to the completed transformation of our South Korean operations. The insurance proceeds received during the year ended December 31, 2014, and the offsetting charges and expenses incurred, were recognized in the Cost of revenue line of our consolidated statements of operations. We did not receive any insurance proceeds during the year ended December 31, 2015. As discussed in Note 14, "Commitments and Contingencies," we classify insurance proceeds in our consolidated statements of operations in a manner consistent with the related losses.
Summary of Restructuring Programs and Special Charges
The following tables present costs/(gains) recorded within the consolidated statements of operations associated with our restructuring activities and special charges, and where these amounts were recognized, for the years ended December 31, 2015, 2014, and 2013:
|
| | | | | | | | | | | | | | | | | | | |
| | 2011 Plan | | MSP Plan | | Other | | Special Charges | | Total |
| For the year ended December 31, 2015 | | | | | | | | | |
| Restructuring and special charges | $ | — |
| | $ | — |
| | $ | 21,919 |
| | $ | — |
| | $ | 21,919 |
|
| Other, net | — |
| | — |
| | (2,020 | ) | | — |
| | (2,020 | ) |
| Total | $ | — |
| | $ | — |
| | $ | 19,899 |
| | $ | — |
| | $ | 19,899 |
|
| | 2011 Plan | | MSP Plan | | Other | | Special Charges | | Total |
| For the year ended December 31, 2014 | | | | | | | | | |
| Restructuring and special charges | $ | (198 | ) | | $ | — |
| | $ | 22,091 |
| | $ | — |
| | $ | 21,893 |
|
| Cost of revenue | — |
| | — |
| | — |
| | (4,072 | ) | | (4,072 | ) |
| Total | $ | (198 | ) | | $ | — |
| | $ | 22,091 |
| | $ | (4,072 | ) | | $ | 17,821 |
|
| | 2011 Plan | | MSP Plan | | Other | | Special Charges | | Total |
| For the year ended December 31, 2013 | | | | | | | | | |
| Restructuring and special charges | $ | 5,332 |
| | $ | 451 |
| | $ | 957 |
| | $ | (1,220 | ) | | $ | 5,520 |
|
| Other, net | (49 | ) | | — |
| | 20 |
| | — |
| | (29 | ) |
| Cost of revenue | 1,304 |
| | — |
| | — |
| | (8,030 | ) | | (6,726 | ) |
| Total | $ | 6,587 |
| | $ | 451 |
| | $ | 977 |
| | $ | (9,250 | ) | | $ | (1,235 | ) |
| | | | | | | | | | |
The "other" restructuring charges recognized during the year ended December 31, 2015 include $7.6 million in severance charges recorded in connection with acquired businesses in order to integrate these businesses with ours, $4.0 million of severance charges related to the closing of our manufacturing facility in Brazil that was part of the Schrader acquisition, and the remainder primarily associated with the termination of a limited number of employees in various locations throughout the world. These charges were accounted for as part of an ongoing benefit arrangement in accordance with ASC Topic 712, Compensation - Nonretirement Postemployment Benefits ("ASC 712"). Additional charges related to the closing of the manufacturing facility in Brazil are not included in the table above, and are discussed below in Exit and Disposal Activities.
The "other" restructuring charges recognized during the year ended December 31, 2014 includes $16.2 million in severance charges recorded in connection with acquired businesses, in order to integrate these businesses with ours, and the remainder primarily associated with the termination of a limited number of employees in various locations throughout the world.
The "other" restructuring charges recognized during the year ended December 31, 2013 includes severance charges associated with the termination of a limited number of employees in various locations throughout the world.
Amounts presented in the table above that were recorded to Other, net in our consolidated statements of operations represent (gains)/losses associated with the remeasurement of our restructuring liabilities.
The following table outlines the changes to the restructuring liability associated with the severance portion of our "other" actions during the years ended December 31, 2015 and 2014:
|
| | | | | |
| | | Severance | |
| Balance at December 31, 2013 | | $ | 119 |
| |
| Charges | | 22,091 |
| |
| Payments | | (2,296 | ) | |
| Balance at December 31, 2014 | | $ | 19,914 |
| |
| Charges | | 19,829 |
| |
| Payments | | (13,737 | ) | |
| Impact of changes in foreign currency exchange rates | | (2,020 | ) | |
| Balance at December 31, 2015 | | $ | 23,986 |
| |
The table below outlines the current and long-term components of our restructuring liabilities recognized in the consolidated balance sheets as of December 31, 2015 and 2014.
|
| | | | | | | |
| | December 31,
2015 | | December 31,
2014 |
| Current liabilities | $ | 14,089 |
| | $ | 14,046 |
|
| Long-term liabilities | 10,918 |
| | 6,350 |
|
| | $ | 25,007 |
| | $ | 20,396 |
|
Exit and Disposal Activities
In the second quarter of 2015, we decided to close our manufacturing facility in Brazil that was part of the Schrader acquisition. During 2015, in connection with this closing, and in addition to the $4.0 million of severance charges recorded in Restructuring and special charges as discussed above, we incurred approximately $5.0 million of charges, primarily recorded in Cost of revenue, related to the write-down of certain assets, including PP&E and Inventory. These charges are not included in the restructuring and special charges table above.
18.20. Segment Reporting
We organize our business into two reportable segments, Performance Sensing (formerly referred to as "Sensors") and Sensing Solutions (formerly referred to as "Controls"). The reportable segments are organized, in general, around end-market, and are consistent with how management views the markets served by us and reflect the financial information that is reviewed by our chief operating decision maker. Our operating segments, Performance Sensing and Sensing Solutions, each of which is also a reportable segment,an operating segment. Our operating segments are businesses that we manage as components of an enterprise, for which
separate financial information is available and is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and assess performance.
An operating segment’s performance is primarily evaluated based on segment operating income,Segment profit, which excludes share-based compensation expense,amortization of intangible assets, restructuring and specialother charges, net, and certain corporate costscosts/credits not associated with the operations of the segment, including amortizationshare-based compensation expense and a portion of depreciation expense associated with assets recorded in connection with acquisitions. In addition, an operating segment’s performance excludes results from discontinued operations, if any. Corporate and other costs excluded from an operating segment’s performance are separately stated below and also include costs that are related to functional areas such as finance, information technology, legal, and human resources. We believe that segment operating income,Segment profit, as defined above, is an appropriate measure for evaluating the operating performance of our segments. However, this measure should be considered in addition to, and not as a substitute for, or superior to, incomeprofit from operations or other measures of financial performance prepared in accordance with U.S. GAAP. The accounting policies of each of our two reportingreportable segments are materially consistent with those in the summary of significant accounting policies as described in Note 2, "Significant Accounting Policies."
The Performance Sensing segment is a developer and manufacturer of pressure temperature,sensors, speed and position sensors, and electromechanical sensor productstemperature sensors used in subsystems of automobiles (e.g., engine,powertrain, air conditioning, tire pressure monitoring, and ride stabilization), and heavy on- and off-road vehicles.HVOR. These products help improve operating performance, for example, by making an automobile’sautomobile's heating and air conditioning systems work more efficiently, thereby improving gas mileage. These products are also used in
systems that address environmental or safety and environmental concerns, for example, by reducing vehicle emissions or improving the stability control of the vehicle and reducing vehicle emissions.vehicle.
Our Performance Sensing segment uses a broad range of manufactured components, subassemblies, and raw materials in the manufacture of our products, including silver, gold, platinum, palladium, copper, aluminum, zinc, and nickel, as well as magnets containing rare earth metals, of which a large majority of the world's production is in China. A reduction in the export of rare earth materials from China could limit the worldwide supply of these rare earth materials, significantly increasing the price of magnets, which could materially impact our business.
The Sensing Solutions segment is a developer and manufacturer of a variety ofvarious control products used in industrial, aerospace, military, commercial, medical device, and residential end markets, and sensorssensor products used in aerospace and industrial productsapplications such as HVAC systems and military and commercial aircraft. These products include motor and compressor protectors, circuit breakers, semiconductor burn-in test sockets,motor starters, temperature sensors and switches/thermostats, pressure sensors and switches, electronic HVAC sensors and controls, charge controllers, solid state relays, linear and rotary position sensors, precision switches,circuit breakers, and thermostats.semiconductor burn-in test sockets. These products help prevent damage from overheating and fires in a wide variety of applications, including commercial heating and air conditioningHVAC systems, refrigerators, aircraft, automobiles, lighting, and other industrial applications. Theapplications, and help optimize performance by using sensors that provide feedback to control systems. Sensing Solutions business also designs and manufactures DCdirect current to ACalternating current power inverters, which enable the operation of electronic equipment when grid power is not available.
The following table presents Netnet revenue and Segment operating incomeprofit for the reported segments and other operating results not allocated to the reported segments for the years ended December 31, 20152018, 20142017, and 20132016:
| | | | For the year ended December 31, | For the year ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| Net revenue: | | | | | | | | | | |
| Performance Sensing | $ | 2,346,226 |
| | $ | 1,755,857 |
| | $ | 1,358,238 |
| $ | 2,627,651 |
| | $ | 2,460,600 |
| | $ | 2,385,380 |
|
| Sensing Solutions | 628,735 |
| | 653,946 |
| | 622,494 |
| 893,976 |
| | 846,133 |
| | 816,908 |
|
| Total net revenue | $ | 2,974,961 |
| | $ | 2,409,803 |
| | $ | 1,980,732 |
| $ | 3,521,627 |
| | $ | 3,306,733 |
| | $ | 3,202,288 |
|
| Segment operating income (as defined above): | | | | | | |
| Segment profit (as defined above): | | | | | | |
| Performance Sensing | $ | 598,524 |
| | $ | 475,943 |
| | $ | 401,595 |
| $ | 712,682 |
| | $ | 664,186 |
| | $ | 615,526 |
|
| Sensing Solutions | 199,744 |
| | 202,115 |
| | 195,822 |
| 293,009 |
| | 277,450 |
| | 261,914 |
|
| Total segment operating income | 798,268 |
| | 678,058 |
| | 597,417 |
| |
| Total segment profit | | 1,005,691 |
| | 941,636 |
| | 877,440 |
|
| Corporate and other | (196,133 | ) | | (137,872 | ) | | (94,029 | ) | (203,764 | ) | | (205,824 | ) | | (179,473 | ) |
| Amortization of intangible assets | (186,632 | ) | | (146,704 | ) | | (134,387 | ) | (139,326 | ) | | (161,050 | ) | | (201,498 | ) |
| Restructuring and special charges | (21,919 | ) | | (21,893 | ) | | (5,520 | ) | |
| Restructuring and other charges, net | | 47,818 |
| | (18,975 | ) | | (4,113 | ) |
| Profit from operations | 393,584 |
| | 371,589 |
| | 363,481 |
| 710,419 |
| | 555,787 |
| | 492,356 |
|
| Interest expense, net | (137,626 | ) | | (106,104 | ) | | (93,915 | ) | (153,679 | ) | | (159,761 | ) | | (165,818 | ) |
| Other, net | (50,329 | ) | | (12,059 | ) | | (35,629 | ) | (30,365 | ) | | 6,415 |
| | (5,093 | ) |
| Income before income taxes | $ | 205,629 |
| | $ | 253,426 |
| | $ | 233,937 |
| |
| Income before taxes | | $ | 526,375 |
| | $ | 402,441 |
| | $ | 321,445 |
|
No customer exceeded 10% of our Netnet revenue in any of the periods presented.
Prior to fiscal year 2018, we presented four significant product categories in Performance Sensing (pressure sensors, speed and position sensors, temperature sensors, and pressure switches), and five significant product categories in Sensing
125Solutions (bimetal electromechanical controls, industrial and aerospace sensors, power conversion and control, thermal and magnetic-hydraulic circuit breakers, and interconnection). Beginning in fiscal year 2018, we are categorizing our products more broadly, as sensors, controls, or other, to better reflect how we view our products.
The following table presents Netnet revenue by product categoriescategory for the years ended December 31, 2015, 2014,2018, 2017, and 2013:
|
| | | | | | | | | | | | | | | |
| | Performance Sensing | | Sensing Solutions | | For the year ended December 31, |
| | | | 2015 | | 2014 | | 2013 |
| Net revenue: | | | | | | | | | |
| Pressure sensors | X | | X | | $ | 1,669,393 |
| | $ | 1,186,913 |
| | $ | 943,763 |
|
| Speed and position sensors | X | | | | 328,102 |
| | 275,628 |
| | 153,537 |
|
| Bimetal electromechanical controls | | | X | | 318,721 |
| | 359,610 |
| | 355,089 |
|
| Temperature sensors | X | | | | 191,369 |
| | 152,662 |
| | 137,016 |
|
| Thermal and magnetic-hydraulic circuit breakers | | | X | | 110,980 |
| | 117,816 |
| | 113,228 |
|
| Pressure switches | X | | X | | 86,994 |
| | 99,489 |
| | 87,846 |
|
| Interconnection | | | X | | 61,738 |
| | 69,332 |
| | 72,206 |
|
| Power conversion and control | | | X | | 58,180 |
| | 35,160 |
| | 19,994 |
|
| Other | X | | X | | 149,484 |
| | 113,193 |
| | 98,053 |
|
| | | | | | $ | 2,974,961 |
| | $ | 2,409,803 |
| | $ | 1,980,732 |
|
In 2015, we determined that force sensors were no longer a significant product category for our business, and we reclassified the revenue related to this product category to "other." In addition, we determined that the products of certain businesses acquired in 2014 that were previously included in "other" were more appropriately categorized as speed and position sensors. Prior2016 (prior periods have been recast to reflect these changes.current period presentation):
|
| | | | | | | | | | | | | | | |
| | Performance Sensing | | Sensing Solutions | | For the year ended December 31, |
| | | | 2018 | | 2017 | | 2016 |
| Net revenue: | | | | | | | | | |
| Sensors | X | | X | | $ | 2,755,280 |
| | $ | 2,542,863 |
| | $ | 2,455,476 |
|
| Controls | X | | X | | 508,745 |
| | 497,853 |
| | 486,207 |
|
| Other | X | | X | | 257,602 |
| | 266,017 |
| | 260,605 |
|
| Net revenue | | | | | $ | 3,521,627 |
| | $ | 3,306,733 |
| | $ | 3,202,288 |
|
The following table presents depreciation and amortization expense for the reportedour reportable segments for the years ended December 31, 2015, 20142018, 2017 and 2013:2016:
| | | | For the year ended December 31, | For the year ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| Total depreciation and amortization | | | | | | |
| Depreciation and amortization: | | | | | | |
| Performance Sensing | $ | 62,754 |
| | $ | 40,092 |
| | $ | 37,967 |
| $ | 72,067 |
| | $ | 68,910 |
| | $ | 68,837 |
|
| Sensing Solutions | 10,643 |
| | 9,582 |
| | 8,313 |
| 16,798 |
| | 17,179 |
| | 14,095 |
|
Corporate and other(1) | 209,286 |
| | 162,834 |
| | 138,996 |
| 156,475 |
| | 184,282 |
| | 225,469 |
|
| Total | $ | 282,683 |
| | $ | 212,508 |
| | $ | 185,276 |
| |
| Total depreciation and amortization | | $ | 245,340 |
| | $ | 270,371 |
| | $ | 308,401 |
|
__________________
| |
(1) | Included within Corporate and other is depreciation and amortization expense associated with the fair value step-up recognized in prior acquisitions and accelerated depreciation recorded in connection with restructuring actions. We do not allocate the additional depreciation and amortization expense associated with the step-up in the fair value of the PP&E and intangible assets associated with these acquisitions or accelerated depreciation related to restructuring actions to our segments. This treatment is consistent with the financial information reviewed by our chief operating decision maker. |
The following table presents total assets for the reportedour reportable segments as of December 31, 20152018 and 2014:2017:
| | | | December 31,
2015 | | December 31,
2014 | As of December 31, |
| Total assets | | | | |
| | | 2018 | | 2017 |
| Assets: | | | | |
| Performance Sensing | $ | 1,263,790 |
| | $ | 1,157,628 |
| $ | 1,490,310 |
| | $ | 1,396,565 |
|
| Sensing Solutions | 329,055 |
| | 304,522 |
| 468,131 |
| | 424,237 |
|
Corporate and other(1) | 4,744,410 |
| | 3,654,459 |
| 4,839,246 |
| | 4,820,723 |
|
| Total | $ | 6,337,255 |
| | $ | 5,116,609 |
| |
| Total assets | | $ | 6,797,687 |
| | $ | 6,641,525 |
|
__________________
| |
(1) | Included within Corporate and other as of December 31, 20152018 and 20142017 is $3,019.7$3,081.3 million and $2,424.8$3,005.5 million, respectively, of Goodwill, $1,262.6goodwill, as well as $897.2 million and $910.8$920.1 million, respectively, of Otherother intangible assets, net, $342.3$729.8 million and $211.3$753.1 million, respectively, of cash and $29.0cash equivalents, and $36.5 million and $36.3$36.1 million, respectively, of PP&E.&E, net. This treatment is consistent with the financial information reviewed by our chief operating decision maker. |
The following table presents capital expendituresadditions to property, plant and equipment and capitalized software for the reportedour reportable segments for the years ended December 31, 2015, 2014,2018, 2017, and 2013:2016:
| | | | For the year ended December 31, | For the year ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| Total capital expenditures | | | | | | |
| Additions to property, plant and equipment and capitalized software: | | | | | | |
| Performance Sensing | $ | 125,376 |
| | $ | 95,534 |
| | $ | 38,358 |
| $ | 130,234 |
| | $ | 106,520 |
| | $ | 99,299 |
|
| Sensing Solutions | 16,899 |
| | 13,832 |
| | 20,738 |
| 12,492 |
| | 13,980 |
| | 11,947 |
|
| Corporate and other | 34,921 |
| | 34,845 |
| | 23,688 |
| 17,061 |
| | 24,084 |
| | 18,971 |
|
| Total | $ | 177,196 |
| | $ | 144,211 |
| | $ | 82,784 |
| |
| Total additions to property, plant and equipment and capitalized software | | $ | 159,787 |
| | $ | 144,584 |
| | $ | 130,217 |
|
Geographic Area Information
In theThe following tables present net revenue by geographic area data below, Netand by significant country for the years ended December 31, 2018, 2017, and 2016. In these tables, net revenue is aggregated based on an internal methodology that considers both the location of our subsidiaries and the primary location of each subsidiary's customers. PP&E is aggregated based on the location of our subsidiaries.
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Net revenue: | | | | | |
| Americas | $ | 1,480,567 |
| | $ | 1,367,113 |
| | $ | 1,367,860 |
|
| Asia and rest of world | 1,012,526 |
| | 903,118 |
| | 810,094 |
|
| Europe | 1,028,534 |
| | 1,036,502 |
| | 1,024,334 |
|
| Net revenue | $ | 3,521,627 |
| | $ | 3,306,733 |
| | $ | 3,202,288 |
|
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Net revenue: | | | | | |
| United States | $ | 1,360,590 |
| | $ | 1,276,304 |
| | $ | 1,322,206 |
|
| Netherlands | 585,036 |
| | 571,735 |
| | 550,937 |
|
| China | 560,938 |
| | 478,713 |
| | 412,460 |
|
| Korea | 188,114 |
| | 184,101 |
| | 182,464 |
|
| United Kingdom | 163,963 |
| | 174,376 |
| | 171,206 |
|
| All other | 662,986 |
| | 621,504 |
| | 563,015 |
|
| Net revenue | $ | 3,521,627 |
| | $ | 3,306,733 |
| | $ | 3,202,288 |
|
The following tables present Net revenue by geographic area and by significant country for the years ended December 31, 2015, 2014, and 2013:
|
| | | | | | | | | | | |
| | Net Revenue |
| | For the year ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Americas | $ | 1,217,626 |
| | $ | 961,024 |
| | $ | 739,847 |
|
| Asia | 764,298 |
| | 742,263 |
| | 656,070 |
|
| Europe | 993,037 |
| | 706,516 |
| | 584,815 |
|
| | $ | 2,974,961 |
| | $ | 2,409,803 |
| | $ | 1,980,732 |
|
|
| | | | | | | | | | | |
| | Net Revenue |
| | For the year ended December 31, |
| | 2015 | | 2014 | | 2013 |
| United States | $ | 1,084,757 |
| | $ | 913,958 |
| | $ | 704,493 |
|
| The Netherlands | 553,192 |
| | 496,376 |
| | 449,054 |
|
| China | 346,890 |
| | 341,864 |
| | 285,118 |
|
| Korea | 198,440 |
| | 181,588 |
| | 166,457 |
|
| Japan | 153,114 |
| | 150,018 |
| | 155,277 |
|
| All Other | 638,568 |
| | 325,999 |
| | 220,333 |
|
| | $ | 2,974,961 |
| | $ | 2,409,803 |
| | $ | 1,980,732 |
|
The following tables present long-lived assets, exclusive of Goodwill and Other intangible assets,PP&E, net, by geographic area and by significant country as of December 31, 20152018 and 2014:2017. In these tables, PP&E, net is aggregated based on the location of our subsidiaries.
| | | | Long-Lived Assets | As of December 31, |
| | December 31,
2015 | | December 31,
2014 | 2018 | | 2017 |
| PP&E, net: | | | | |
| Americas | $ | 249,996 |
| | $ | 220,761 |
| $ | 292,625 |
| | $ | 296,863 |
|
| Asia | 254,224 |
| | 222,129 |
| 309,542 |
| | 266,524 |
|
| Europe | 189,935 |
| | 146,594 |
| 185,011 |
| | 186,662 |
|
| Total | $ | 694,155 |
| | $ | 589,484 |
| |
| PP&E, net | | $ | 787,178 |
| | $ | 750,049 |
|
| | | | Long-Lived Assets | As of December 31, |
| | December 31,
2015 | | December 31,
2014 | 2018 | | 2017 |
| PP&E, net: | | | | |
| United States | $ | 137,849 |
| | $ | 114,333 |
| $ | 83,664 |
| | $ | 95,603 |
|
| China | 204,835 |
| | 170,857 |
| 239,315 |
| | 211,566 |
|
| Mexico | 107,229 |
| | 97,190 |
| 204,552 |
| | 196,813 |
|
| Bulgaria | 74,433 |
| | 43,196 |
| 119,477 |
| | 97,562 |
|
| United Kingdom | 73,463 |
| | 67,751 |
| 51,404 |
| | 63,310 |
|
| Malaysia | 43,994 |
| | 41,766 |
| 65,688 |
| | 50,783 |
|
| The Netherlands | 7,254 |
| | 6,310 |
| |
| All Other | 45,098 |
| | 48,081 |
| |
| | $ | 694,155 |
| | $ | 589,484 |
| |
| All other | | 23,078 |
| | 34,412 |
|
| PP&E, net | | $ | 787,178 |
| | $ | 750,049 |
|
19. Net Income per Share
Basic and diluted net income per share are calculated by dividing Net income by the number of basic and diluted weighted-average ordinary shares outstanding during the period. For the years ended December 31, 2015, 2014, and 2013, the weighted-average shares outstanding for basic and diluted net income per share were as follows:
|
| | | | | | | | |
| | For the year ended |
| | December 31, 2015 | | December 31, 2014 | | December 31, 2013 |
| Basic weighted-average ordinary shares outstanding | 169,977 |
| | 170,113 |
| | 176,091 |
|
| Dilutive effect of stock options | 1,265 |
| | 1,929 |
| | 2,774 |
|
| Dilutive effect of unvested restricted securities | 271 |
| | 175 |
| | 159 |
|
| Diluted weighted-average ordinary shares outstanding | 171,513 |
| | 172,217 |
| | 179,024 |
|
Net income and net income per share are presented in the consolidated statements of operations.
Certain potential ordinary shares were excluded from our calculation of diluted weighted-average shares outstanding because they would have had an anti-dilutive effect on net income per share, or because they related to share-based awards associated with restricted securities that were contingently issuable, for which the contingency had not been satisfied. Refer to Note 11, "Share-Based Payment Plans," for further discussion of our share-based payment plans.
|
| | | | | | | | |
| | For the year ended |
| | December 31, 2015 | | December 31, 2014 | | December 31, 2013 |
| Anti-dilutive shares excluded | 747 |
| | 737 |
| | 1,700 |
|
| Contingently issuable shares excluded | 409 |
| | 386 |
| | 411 |
|
20.21. Unaudited Quarterly Data
A summary of the unaudited quarterly results of operations for the years ended December 31, 20152018 and 20142017 is as follows:
| | | | December 31,
2015 | | September 30,
2015 | | June 30,
2015 | | March 31,
2015 | For the three months ended |
| For the year ended December 31, 2015 | | | | | | | | |
| | | December 31, 2018 | | September 30, 2018 | | June 30, 2018 | | March 31, 2018 |
| Net revenue | $ | 726,471 |
| | $ | 727,360 |
| | $ | 770,445 |
| | $ | 750,685 |
| $ | 847,922 |
| | $ | 873,552 |
| | $ | 913,860 |
| | $ | 886,293 |
|
| Gross profit | $ | 249,814 |
| | $ | 250,726 |
| | $ | 252,570 |
| | $ | 244,052 |
| $ | 304,359 |
| | $ | 315,218 |
| | $ | 331,351 |
| | $ | 303,836 |
|
| Net income | $ | 218,289 |
| | $ | 53,152 |
| | $ | 40,900 |
| | $ | 35,355 |
| $ | 254,099 |
| | $ | 149,118 |
| | $ | 105,288 |
| | $ | 90,490 |
|
| Basic net income per share | $ | 1.28 |
| | $ | 0.31 |
| | $ | 0.24 |
| | $ | 0.21 |
| $ | 1.55 |
| | $ | 0.89 |
| | $ | 0.61 |
| | $ | 0.53 |
|
| Diluted net income per share | $ | 1.27 |
| | $ | 0.31 |
| | $ | 0.24 |
| | $ | 0.21 |
| $ | 1.54 |
| | $ | 0.88 |
| | $ | 0.61 |
| | $ | 0.52 |
|
| | | | December 31,
2014 | | September 30,
2014 | | June 30,
2014 | | March 31,
2014 | For the three months ended |
| For the year ended December 31, 2014 | | | | | | | | |
| | | December 31, 2017 | | September 30, 2017 | | June 30, 2017 | | March 31, 2017 |
| Net revenue | $ | 705,261 |
| | $ | 577,095 |
| | $ | 575,853 |
| | $ | 551,594 |
| $ | 840,534 |
| | $ | 819,054 |
| | $ | 839,874 |
| | $ | 807,271 |
|
Gross profit | $ | 235,512 |
| | $ | 205,155 |
| | $ | 207,407 |
| | $ | 194,395 |
| $ | 301,799 |
| | $ | 291,815 |
| | $ | 299,369 |
| | $ | 274,852 |
|
| Net income | $ | 69,520 |
| | $ | 81,963 |
| | $ | 63,893 |
| | $ | 68,373 |
| $ | 169,129 |
| | $ | 88,035 |
| | $ | 79,457 |
| | $ | 71,736 |
|
Basic net income per share | $ | 0.41 |
| | $ | 0.49 |
| | $ | 0.37 |
| | $ | 0.40 |
| $ | 0.99 |
| | $ | 0.51 |
| | $ | 0.46 |
| | $ | 0.42 |
|
| Diluted net income per share | $ | 0.41 |
| | $ | 0.48 |
| | $ | 0.37 |
| | $ | 0.39 |
| $ | 0.98 |
| | $ | 0.51 |
| | $ | 0.46 |
| | $ | 0.42 |
|
| |
(1) | On January 1, 2018, we adopted FASB ASU No. 2017-07, which requires the service cost component of net periodic benefit cost to be presented separately on the consolidated statements of operations from the other components of net periodic benefit cost. Accordingly, a portion of cost of revenue (a component of Gross profit) has been recast to other, net for each quarter in the year ended December 31, 2017. Refer to Note 13, "Pension and Other Post-Retirement Benefits," for additional details. |
| |
(2) | The sum of basic net income per share for the four quarters does not equal the full year basic net income per share due to rounding. |
Acquisitions and Divestitures
In the first, second, and third quarters of 2014,On August 31, 2018 we completed the acquisitionssale of Wabash, Magnum,the Valves Business. As a result, in the third quarter of 2018, we recognized a (pre-tax) gain of $64.4 million and DeltaTech, respectively. Aggregate Net revenue for these acquisitions includedcosts of $5.9 million in restructuring and other charges, net in our consolidated statement of operationsoperations. Refer to Note 17, "Acquisitions and Divestitures," for eachfurther discussion of the first, second, third, and fourth quarterssale of 2014 was $21.3 million, $23.5 million, $47.7 million, and $56.0 million, respectively. Net income for Wabash, Magnum, and DeltaTech included in ourthe Valves Business. Our consolidated statementsresults presented above only include the results of operations was not material in any of these quarters.this business before August 31, 2018.
In the fourth quarter of 2014,On October 31, 2018 we completed the acquisition of Schrader.GIGAVAC. Refer to Note 17, "Acquisitions and Divestitures," for further discussion if this merger. Net revenue and Income/(loss) before taxes for Schraderof GIGAVAC included in our consolidated statement of operations in the fourth quarter of 2014 were $133.3 million and $(3.6) million, respectively.2018 was $12.6 million. In the third and fourth quartersquarter of 2014,2018, we recorded related transaction costs of $3.5$2.5 million, and $9.0 million, respectively, in connection with this acquisition, which are included withinin SG&A expense in our consolidated statements of operations.
In the fourth quarter of 2015, we completed the acquisition of CST. Net revenue of CST included in our consolidated statements of operations in the fourth quarter of 2015 was $19.9 million. Earnings of CST in the fourth quarter of 2015, excluding integration costs, transaction costs, and interest expense recorded related to the indebtedness incurred in order to finance the acquisition of CST, were not material. In the third and fourth quarters of 2015, we recorded transaction costs of $3.7 million and $5.6 million, respectively, in connection with this acquisition, which are included within SG&A expense in our consolidated statements of operations.
Refer to Note 6, "Acquisitions," for further discussion of these transactions.
Debt transactionsIncome taxes
In the fourth quarter of 2014, we completed a series of financing transactions in order to fund the acquisition of Schrader. In connection with these transactions, in the fourth quarter of 2014, we incurred $17.7 million of financing costs, of which $1.9 million was recorded in Interest expense, $1.9 million was recorded in Other, net, and $13.9 million was recorded in deferred financing costs. In addition, the debt incurred as a result of these transactions resulted in an incremental $9.4 million of interest expense in the fourth quarter of 2014.
In the first quarter of 2015, we completed a series of financing transactions including the settlement of $620.9 million of the 6.5% Senior Notes in connection with a tender offer, the related issuance and sale of the 5.0% Senior Notes, and the entry into the Fifth Amendment. In connection with these transactions, in the first quarter of 2015,2018, we recorded chargesan income tax benefit of $19.6$122.1 million in Other, net.
In the second quarter of 2015, we redeemed the remaining 6.5% Senior Notes and entered into the Sixth Amendment in order to refinance the Original Term Loan and the Incremental Term Loan with the Term Loan. In connection with these transactions, in the second quarter of 2015, we recorded charges of $6.0 million in Other, net.
U.S. deferred tax assets previously offset by a valuation allowance. In the fourth quarter of 2015, we completed a series of debt transactions in order to fund the acquisition of CST, including the issuance and sale of the 6.25% Senior Notes. In connection with these transactions, in the fourth quarter of 2015,2017, we recorded $8.8an income tax benefit of $73.7 million in Interest expense. In addition, the debt incurredto remeasure deferred tax liabilities associated with indefinite-lived intangible assets that are deemed to reverse as a result of these transactions resultedchanges in an incremental $4.4 million of interest expenseapplicable U.S. tax law set forth in the fourth quarter of 2015.
Act. Refer to Note 8, "Debt," for further discussion of these transactions.
Income taxes
The provision for income taxes for the first, third, and fourth quarters of 2014 included benefits from income taxes of $8.3 million, $32.5 million, and $30.3 million, respectively, due to the release of a portion of the U.S. valuation allowance in connection with the acquisitions of Wabash, DeltaTech, and Schrader, respectively, for which deferred tax liabilities were established related to acquired intangible assets.
In the second quarter of 2015, we wrote off $5.0 million related to a tax indemnification asset related to a pre-acquisition tax liability that was favorably resolved, which was recorded in SG&A expense.
The benefit from income taxes in the fourth quarter of 2015 included a benefit from income taxes of $180.0 million, primarily due to the release of a portion of the U.S. valuation allowance in connection with the acquisition of CST, for which deferred tax liabilities were established related to acquired intangible assets.
Refer to Note 9,7, "Income Taxes," for further discussion of tax related matters.
Restructuring charges
In the third quarter of 2014, we recorded restructuring charges of $4.5 million related primarily to the termination of a limited number of employees in various locations throughout the world, which were accounted for as part of an ongoing benefit arrangement in accordance with ASC 712.
In the fourth quarter of 2014, we recorded restructuring charges of $14.7 million, primarily related to businesses acquired in 2014, in order to integrate these businesses with ours.
In the second quarter of 2015, we recorded restructuring charges of $10.1 million, primarily related to severance charges associated with the termination of a limited number of employees in various locations throughout the world and severance charges recorded in connection with acquired businesses, including $4.0 million of severance charges related to the closing of our manufacturing facility in Brazil that was part of the Schrader acquisition. Also in relation to the closing of this facility, we incurred approximately $5.0 million of charges, primarily recorded in Cost of revenue, related to the write-down of certain assets, including PP&E and Inventory.
In the fourth quarter of 2015, we recorded restructuring charges of $9.5 million, related to severance charges recorded in connection with acquired businesses in order to integrate these businesses with ours and charges associated with the termination of a limited number of employees in various locations throughout the world.
Refer to Note 17, "Restructuring and Special Charges," for further discussion of our restructuring charges.
Commodity forward contracts
Gains and losses related to our commodity forward contracts, which are not designated for hedge accounting treatment in accordance with FASB ASC Topic 815, are recorded in Other,other, net in the consolidated statements of operations. During the first, second, third, and fourth quarters of 2015, we recognized (losses) of $(1.4) million, $(4.7) million, $(8.0) million, and $(4.4) million, respectively, related to these contracts. During the first, second, third, and fourth quarters of 2014, we recognized gains/(losses) of $1.3 million, $4.2 million, $(9.1) million, and $(5.4) million, respectively, related to these contracts.
Refer to Note 16,19, "Derivative Instruments and Hedging Activities," for further discussion of our commodity forward contracts, and Note 2, "Significant Accounting Policies,6, "Other, Net," for a detail of Other,other, net for the years ended December 31, 20152018 and 2014.
Litigation and claims
In the first quarter of 2015, we settled a pending warranty claim against us by a U.S. automaker. In this settlement, we agreed to reimburse the U.S. automaker for 50% of its future costs, with a maximum contribution by us of $4.0 million. In the second quarter of 2015, based on updated projections of anticipated repairs, we recorded a charge in Cost of revenue of $4.0 million2017. The below table presents gains/(losses) recognized related to this claim.these contracts in the periods presented:
In October 2015, we settled pending intellectual property litigation brought against us by Bridgestone. As a result, we |
| | | | | | | | | | | | | | | |
| | For the three months ended |
| | December 31, | | September 30, | | June 30, | | March 31, |
| 2018 | $ | 373 |
| | $ | (4,233 | ) | | $ | (1,426 | ) | | $ | (3,195 | ) |
| 2017 | $ | 3,550 |
| | $ | 2,956 |
| | $ | (1,957 | ) | | $ | 5,440 |
|
Restructuring and other charges
The below table presents charges/(gains) recorded a chargeto restructuring and other charges, net in Cost of revenue of $6.0 million related to this claimthe periods presented:
|
| | | | | | | | | | | | | | | |
| | For the three months ended |
| | December 31, | | September 30, | | June 30, | | March 31, |
| 2018 | $ | 870 |
| | $ | (52,698 | ) | | $ | 244 |
| | $ | 3,766 |
|
| 2017 | $ | 207 |
| | $ | 1,329 |
| | $ | 6,389 |
| | $ | 11,050 |
|
The amount presented as restructuring and other charges, net in the third quarter of 2015, reflecting2018 relates in large part to the agreed upon settlement.
gain on sale of the Valves Business, net of transaction costs. Refer to Note 14, "Commitments5, "Restructuring and Contingencies,Other Charges, Net," for further discussion of pending and settled litigation.our restructuring charges.
21. Subsequent EventsCharges related to the Merger
On FebruaryMarch 28, 2018, we completed the Merger. Refer for Note 1, 2016, our Board"Business Description and Basis of Directors amended the terms of our outstanding authorized share buyback program in order to reset the amount available for share repurchases to $250 million. Refer to Note 12, "Shareholders' Equity,Presentation," for additional informationfurther discussion of the Merger. The table below presents expenses recorded related to our share buyback program.the Merger in the periods presented:
|
| | | | | | | | | | | | | | | |
| | For the three months ended |
| | December 31, | | September 30, | | June 30, | | March 31, |
| 2018 | $ | — |
| | $ | — |
| | $ | 1,766 |
| | $ | 2,352 |
|
| 2017 | $ | 2,059 |
| | $ | 3,518 |
| | $ | 1,020 |
| | $ | — |
|
SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
SENSATA TECHNOLOGIES HOLDING N.V.PLC
(Parent Company Only)
Balance Sheets
(InDollars in thousands)
|
| | | | | | | |
| | December 31, 2015 | | December 31, 2014 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,283 |
| | $ | 1,398 |
|
| Intercompany receivables from subsidiaries | 79,384 |
| | 55,578 |
|
| Prepaid expenses and other current assets | 886 |
| | 783 |
|
| Total current assets | 81,553 |
| | 57,759 |
|
| Investment in subsidiaries | 1,592,310 |
| | 1,249,050 |
|
| Total assets | $ | 1,673,863 |
| | $ | 1,306,809 |
|
| Liabilities and shareholders’ equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 486 |
| | $ | 229 |
|
| Intercompany payables to subsidiaries | 2,885 |
| | 389 |
|
| Accrued expenses and other current liabilities | 983 |
| | 2,371 |
|
| Total current liabilities | 4,354 |
| | 2,989 |
|
| Pension obligations | 933 |
| | 928 |
|
| Total liabilities | 5,287 |
| | 3,917 |
|
| Total shareholders’ equity | 1,668,576 |
| | 1,302,892 |
|
| Total liabilities and shareholders’ equity | $ | 1,673,863 |
| | $ | 1,306,809 |
|
The accompanying notes are an integral part of these condensed financial statements.
SENSATA TECHNOLOGIES HOLDING N.V.
(Parent Company Only)
Statements of Operations
(In thousands)
|
| | | | | | | | | | | |
| | For the year ended |
| | December 31, 2015 | | December 31, 2014 | | December 31, 2013 |
| Net revenue | $ | — |
| | $ | — |
| | $ | — |
|
| Operating costs/(income) and expenses: | | | | | |
| Cost of revenue | — |
| | (2,417 | ) | | — |
|
| Selling, general and administrative | 618 |
| | 1,423 |
| | 1,822 |
|
| Total operating costs/(income) and expenses | 618 |
| | (994 | ) | | 1,822 |
|
| (Loss)/gain from operations | (618 | ) | | 994 |
| | (1,822 | ) |
| Interest expense, net | — |
| | — |
| | — |
|
| Other, net | 60 |
| | (50 | ) | | 6 |
|
| (Loss)/gain before income taxes and equity in net income of subsidiaries | (558 | ) | | 944 |
| | (1,816 | ) |
| Equity in net income of subsidiaries | 348,254 |
| | 282,805 |
| | 189,941 |
|
| Provision for income taxes | — |
| | — |
| | — |
|
| Net income | $ | 347,696 |
| | $ | 283,749 |
| | $ | 188,125 |
|
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,089 |
| | $ | 2,150 |
|
| Intercompany receivables from subsidiaries | — |
| | 94,094 |
|
| Prepaid expenses and other current assets | 528 |
| | 643 |
|
| Total current assets | 1,617 |
| | 96,887 |
|
| Investment in subsidiaries | 2,932,218 |
| | 2,258,559 |
|
| Total assets | $ | 2,933,835 |
| | $ | 2,355,446 |
|
| Liabilities and shareholders’ equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 58 |
| | $ | 608 |
|
| Intercompany payables to subsidiaries | 323,561 |
| | 7,465 |
|
| Accrued expenses and other current liabilities | 1,782 |
| | 1,219 |
|
| Total current liabilities | 325,401 |
| | 9,292 |
|
| Pension obligations | — |
| | 528 |
|
| Total liabilities | 325,401 |
| | 9,820 |
|
| Total shareholders’ equity | 2,608,434 |
| | 2,345,626 |
|
| Total liabilities and shareholders’ equity | $ | 2,933,835 |
| | $ | 2,355,446 |
|
The accompanying notes are an integral part of these condensed financial statements.
SENSATA TECHNOLOGIES HOLDING N.V.PLC
(Parent Company Only)
Statements of Comprehensive IncomeOperations
(InDollars in thousands)
|
| | | | | | | | | | | |
| | For the year ended |
| | December 31, 2015 | | December 31, 2014 | | December 31, 2013 |
| Net income | $ | 347,696 |
| | $ | 283,749 |
| | $ | 188,125 |
|
| Other comprehensive (loss)/income, net of tax: | | | | | |
| Defined benefit plan | (22 | ) | | (374 | ) | | (353 | ) |
| Subsidiaries' other comprehensive (loss)/income | (14,220 | ) | | 21,733 |
| | 6,652 |
|
| Other comprehensive (loss)/income | (14,242 | ) | | 21,359 |
| | 6,299 |
|
| Comprehensive income | $ | 333,454 |
| | $ | 305,108 |
| | $ | 194,424 |
|
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Net revenue | $ | — |
| | $ | — |
| | $ | — |
|
| Operating costs and expenses: | | | | | |
| Selling, general and administrative | 10,153 |
| | 6,894 |
| | 104 |
|
| Total operating costs and expenses | 10,153 |
| | 6,894 |
| | 104 |
|
| Loss from operations | (10,153 | ) | | (6,894 | ) | | (104 | ) |
| Intercompany interest (expense)/income, net | (4,709 | ) | | 8 |
| | 72 |
|
| Other, net | 474 |
| | (169 | ) | | 107 |
|
| (Loss)/income before income taxes and equity in net income of subsidiaries | (14,388 | ) | | (7,055 | ) | | 75 |
|
| Equity in net income of subsidiaries | 613,383 |
| | 415,412 |
| | 262,359 |
|
| Provision for income taxes | — |
| | — |
| | — |
|
| Net income | $ | 598,995 |
| | $ | 408,357 |
| | $ | 262,434 |
|
The accompanying notes are an integral part of these condensed financial statements.
SENSATA TECHNOLOGIES HOLDING N.V.PLC
(Parent Company Only)
Statements of Comprehensive Income
(Dollars in thousands)
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Net income | $ | 598,995 |
| | $ | 408,357 |
| | $ | 262,434 |
|
| Other comprehensive income/(loss), net of tax: | | | | | |
| Defined benefit plan | 535 |
| | 77 |
| | 515 |
|
| Subsidiaries' other comprehensive income/(loss) | 36,451 |
| | (29,174 | ) | | (8,592 | ) |
| Other comprehensive income/(loss) | 36,986 |
| | (29,097 | ) | | (8,077 | ) |
| Comprehensive income | $ | 635,981 |
| | $ | 379,260 |
| | $ | 254,357 |
|
The accompanying notes are an integral part of these condensed financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
(Parent Company Only)
Statements of Cash Flows
(InDollars in thousands)
| | | | For the year ended | For the year ended December 31, |
| | December 31, 2015 | | December 31, 2014 | | December 31, 2013 | 2018 | | 2017 | | 2016 |
| Net cash used in operating activities | $ | (25,576 | ) | | $ | (30,491 | ) | | $ | (24,958 | ) | $ | (14,253 | ) | | $ | (9,109 | ) | | $ | (4,756 | ) |
| Cash flows from investing activities: | | | | | | | | | | |
| Insurance proceeds | — |
| | 2,417 |
| | — |
| |
| Return of capital from subsidiaries | 6,100 |
| | 164,200 |
| | 320,000 |
| — |
| | 5,000 |
| | 6,000 |
|
| Net cash provided by investing activities | 6,100 |
| | 166,617 |
| | 320,000 |
| — |
| | 5,000 |
| | 6,000 |
|
| Cash flows from financing activities: | | | | | | | | | | |
| Proceeds from exercise of stock options and issuance of ordinary shares | 19,411 |
| | 24,909 |
| | 20,999 |
| 6,093 |
| | 7,450 |
| | 3,944 |
|
| Proceeds from intercompany borrowings | | 410,190 |
| | — |
| | — |
|
| Payments to repurchase ordinary shares | (50 | ) | | (181,774 | ) | | (305,096 | ) | (399,417 | ) | | — |
| | — |
|
| Payment of employee restricted stock tax withholdings | | (3,674 | ) | | (2,910 | ) | | (4,752 | ) |
| Net cash provided by/(used in) financing activities | 19,361 |
| | (156,865 | ) | | (284,097 | ) | 13,192 |
| | 4,540 |
| | (808 | ) |
| Net change in cash and cash equivalents | (115 | ) | | (20,739 | ) | | 10,945 |
| (1,061 | ) | | 431 |
| | 436 |
|
| Cash and cash equivalents, beginning of year | 1,398 |
| | 22,137 |
| | 11,192 |
| 2,150 |
| | 1,719 |
| | 1,283 |
|
| Cash and cash equivalents, end of year | $ | 1,283 |
| | $ | 1,398 |
| | $ | 22,137 |
| $ | 1,089 |
| | $ | 2,150 |
| | $ | 1,719 |
|
The accompanying notes are an integral part of these condensed financial statements.
1. Basis of Presentation and Description of Business
Sensata Technologies Holding N.V.plc (Parent Company)—Schedule I—Condensed Financial Information of Sensata Technologies Holding N.V. (“plc ("Sensata Technologies Holding”plc"), included in this Annual Report on Form 10-K, provides all parent company information that is required to be presented in accordance with the United States ("U.S.") Securities and Exchange Commission (“SEC”("SEC") rules and regulations for financial statement schedules. The accompanying condensed financial statements have been prepared in accordance with the reduced disclosure requirements permitted by the SEC. Sensata Technologies Holdingplc and subsidiaries' audited consolidated financial statements are included elsewhere in this Annual Report on Form 10-K.10-K (this "Report").
On September 28, 2017, the Board of Directors of Sensata Technologies Holding N.V. ("Sensata N.V.") unanimously approved a plan to change our location of incorporation from the Netherlands to the United Kingdom (the "U.K."). To effect this change, on February 16, 2018 the shareholders of Sensata N.V. approved a cross-border merger between Sensata N.V. and Sensata plc, a newly formed, public limited company incorporated under the laws of England and Wales, with Sensata plc being the surviving entity (the "Merger").
We received approval of the Merger by the U.K. High Court of Justice, and the Merger was completed, on March 28, 2018. As a result thereof, Sensata plc became the publicly-traded parent of the subsidiary companies that were previously controlled by Sensata N.V., with no changes made to the business being conducted by us prior to the Merger. Due to the fact that the Merger was a business combination between entities under common control, the assets and liabilities exchanged were accounted for at their carrying values.
Sensata plc conducts limited separate operations and acts primarily as a holding company. Sensata Technologies Holdingplc has no direct outstanding debt obligations. However, Sensata Technologies B.V, an indirect, wholly-owned subsidiary of Sensata Technologies Holding,plc, is limited in its ability to pay dividends or otherwise make other distributions to its immediate parent company and, ultimately, to Sensata Technologies Holding,plc, under its senior secured credit facilities and the indentures governing its senior notes. For a discussion of the debt obligations of the subsidiaries of Sensata Technologies Holding,plc, see Note 8,14, "Debt," of theSensata plc and subsidiaries' audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.Report.
All U.S. dollar amounts presented except per share amounts are stated in thousands, unless otherwise indicated.
2. Commitments and Contingencies
For a discussion of the commitments and contingencies of the subsidiaries of Sensata Technologies Holding,plc, see Note 14,15, "Commitments and Contingencies," of theSensata plc and subsidiaries' audited consolidated financial statements and accompanying notes thereto included elsewhere in this Annual Report on Form 10-K.
3. Related Party Transactions
On September 10, 2014, Sensata Investment Company S.C.A. ("SCA") sold its remaining shares in Sensata Technologies Holding, and was no longer a related party as of that date. The transactions below represent transactions that occurred prior to that date.
Administrative Services Agreement
In 2009, Sensata Technologies Holding entered into a fee for service arrangement with SCA for ongoing consulting, management advisory, and other services (the “Administrative Services Agreement”), effective January 1, 2008. Expenses related to this arrangement were recorded in Selling, general and administrative expense. On May 10, 2013, the Administrative Services Agreement was terminated upon a mutual agreement between Sensata Technologies Holding and SCA. Sensata Technologies Holding does not have any obligations to SCA under this agreement.
Share Repurchase
Concurrent with the closing of the May 2014 and December 2013 secondary offerings, Sensata Technologies Holding repurchased 4.0 million and 4.5 million ordinary shares, respectively, from SCA in private, non-underwritten transactions at a price per ordinary share of $42.42 and $38.25, respectively, which was equal to the price paid by the underwriters. For further details on these secondary offerings, refer to Note 12, "Shareholders’ Equity," of the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.Report.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
|
| | | | | | | | | | | | | | | |
| | Balance at the beginning of the period | | Additions | | Deductions | | Balance at the end of the period |
Charged to expenses/against revenue | |
| For the year ended December 31, 2015 | | | | | | | |
| Allowance for doubtful accounts and sales allowances | $ | 10,364 |
| | $ | 2,424 |
| | $ | (3,253 | ) | | $ | 9,535 |
|
| For the year ended December 31, 2014 | | | | | | | |
| Allowance for doubtful accounts and sales allowances | $ | 9,199 |
| | $ | 2,015 |
| | $ | (850 | ) | | $ | 10,364 |
|
| For the year ended December 31, 2013 | | | | | | | |
| Allowance for doubtful accounts and sales allowances | $ | 11,059 |
| | $ | 507 |
| | $ | (2,367 | ) | | $ | 9,199 |
|
|
| | | | | | | | | | | | | | | |
| | Balance at the Beginning of the Period | | Additions | | Deductions | | Balance at the End of the Period |
Charged, Net of Reversals, to Expenses/Against Revenue | |
| For the year ended December 31, 2018 | | | | | | | |
| Accounts receivable allowances | $ | 12,947 |
| | $ | 2,194 |
| | $ | (1,379 | ) | | $ | 13,762 |
|
| For the year ended December 31, 2017 | | | | | | | |
| Accounts receivable allowances | $ | 11,811 |
| | $ | 2,205 |
| | $ | (1,069 | ) | | $ | 12,947 |
|
| For the year ended December 31, 2016 | | | | | | | |
| Accounts receivable allowances | $ | 9,535 |
| | $ | 3,072 |
| | $ | (796 | ) | | $ | 11,811 |
|
Note: Additions to the allowance for doubtful accounts are charged to expense. Additions to sales allowances are charged against revenues.
| |
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| |
| ITEM 9A. | CONTROLS AND PROCEDURES |
The required certifications of our Chief Executive Officer and Chief Financial Officer are included as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K. The disclosures set forth in this Item 9A contain information concerning the evaluation of our disclosure controls and procedures, management's report on internal control over financial reporting, and changes in internal control over financial reporting referred to in these certifications. These certifications should be read in conjunction with this Item 9A for a more complete understanding of the matters covered by the certifications.
Evaluation of Disclosure Controls and Procedures
With the participation of our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as of December 31, 20152018. The term “disclosure"disclosure controls and procedures,”" as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”"Exchange Act"), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC'sU.S. Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 20152018, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
In December 2015,On October 31, 2018, we completed the acquisition of all of the outstanding shares of certain subsidiaries of Custom Sensors & Technologies Ltd. in the U.S., the U.K., and France, as well as certain assets in China (collectively, "CST"a merger with GIGAVAC, LLC ("GIGAVAC"). As permitted by the U.S. Securities and Exchange Commission, we excluded this acquisitionGIGAVAC from our assessment of the effectiveness of internal control over financial reporting as of December 31, 2015,2018, since it was not practical for management to conduct an assessment of internal control over financial reporting for this entity between the acquisitionmerger date and the date of management's assessment. Excluded from our assessment of the effectiveness of internal control over financial reporting as of December 31, 2015,2018 were total assets and net revenues of approximately 2.2%0.4% and 0.7%0.4%, respectively, of our consolidated total assets and net revenues as of and for the year ended December 31, 2015.2018.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fourth quarter of the year ended December 31, 20152018 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management of Sensata Technologies Holding plc (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting as is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Company’s internal control system was designed to provide reasonable assurance to the Company’s management, Board of Directors, and shareholders regarding the preparation and fair presentation of the Company’s published financial statements in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
There are inherent limitations to the effectiveness of any system of internal control over financial reporting. Accordingly, even an effective system of internal control over financial reporting can only provide reasonable assurance with respect to financial statement preparation and presentation in accordance with accounting principles generally accepted in the United States of America. Our internal controls over financial reporting are subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may be inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time.
In December 2015,On October 31, 2018, we completed the acquisition of CST.a merger with GIGAVAC, LLC ("GIGAVAC"). As permitted by the U.S. Securities and Exchange Commission, we excluded this acquisitionGIGAVAC from our assessment of the effectiveness of internal control over financial reporting as of December 31, 2015,2018, since it was not practical for management to conduct an assessment of internal control over financial reporting for this entity between the acquisitionmerger date and the date of management's assessment. Excluded from our assessment of the effectiveness of internal control over financial reporting as of December 31, 2015,2018 were total assets and net revenues of approximately 2.2%0.4% and 0.7%0.4%, respectively, of our consolidated total assets and net revenues as of and for the year ended December 31, 2015.2018.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 20152018. In making its assessment of internal control over financial reporting, management used the criteria issued by the Committee of Sponsoring Organizations ("COSO") of the Treadway Commission in May 2013.
Based on the results of this assessment, management, including our Chief Executive Officer and Chief Financial Officer, has concluded that, as of December 31, 20152018, the Company’s internal control over financial reporting was effective.
The Company’s independent registered public accounting firm, Ernst & Young LLP, has also issued an audit report on the Company’s internal control over financial reporting, which is included elsewhere in this Annual Report on Form 10-K.
Almelo, The NetherlandsSwindon, United Kingdom
February 2, 20166, 2019
Report of Independent Registered Public Accounting Firm
TheTo the Shareholders and the Board of Directors and Shareholders of
Sensata Technologies Holding N.V.plc
Opinion on Internal Control over Financial Reporting
We have audited Sensata Technologies Holding N.V.'splc’s internal control over financial reporting as of December 31, 2015,2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Sensata Technologies Holding N.V.'splc (the Company) maintained, in all material aspects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
As indicated in the accompanying Management's Report on Internal Control over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of GIGAVAC, LLC, which is included in the 2018 consolidated financial statements of the Company and constituted 0.4% and 0.4%, respectively, of consolidated total assets and net revenues as of December 31, 2018 and for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of GIGAVAC, LLC.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, cash flows and changes in shareholders' equity for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “financial statements”), and our report dated February 6, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management's Report on Internal Control over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the subsidiaries and assets of Custom Sensors & Technologies Ltd. that were acquired by Sensata Technologies Holding N.V., which are included in the 2015 consolidated financial statements of Sensata Technologies Holding N.V. and constituted 2.2% of total assets and 0.7% of net revenues, respectively, as of December 31, 2015 and for the year then ended. Our audit of internal control over financial reporting of Sensata Technologies Holding N.V. also did not include an evaluation of the internal control over financial reporting of the subsidiaries and assets of Custom Sensors & Technologies Ltd. that were acquired by Sensata Technologies Holding N.V.
In our opinion, Sensata Technologies Holding N.V. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Sensata Technologies Holding N.V. as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, cash flows and changes in shareholders’ equity for each of the three years in the period ended December 31, 2015 of Sensata Technologies Holding N.V. and our report dated February 2, 2016 expressed an unqualified opinion thereon.
Boston, Massachusetts
February 2, 20166, 2019
| |
| ITEM 9B. | OTHER INFORMATION |
None.
PART III
| |
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE |
The information required by this Item 10 will be set forth inis incorporated herein by reference from the Definitive Proxy Statement for our Annual General Meeting of ShareholdersSensata Technologies Holding plc (the "Company"), to be held on May 19, 2016filed with the Securities and is incorporated by reference into this Annual Report on Form 10-K.Exchange Commission within 120 days of the Company's fiscal year ended December 31, 2018.
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| ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this Item 11 will be set forth inis incorporated herein by reference from the Company's Definitive Proxy Statement, for our Annual General Meeting of Shareholders to be held on May 19, 2016filed with the Securities and is incorporated by reference into this Annual Report on Form 10-K.Exchange Commission within 120 days of the Company's fiscal year ended December 31, 2018.
| |
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Item 12 will be set forth inis incorporated herein by reference from the Company's Definitive Proxy Statement, for our Annual General Meeting of Shareholders to be held on May 19, 2016filed with the Securities and is incorporated by reference into this Annual Report on Form 10-K.Exchange Commission within 120 days of the Company's fiscal year ended December 31, 2018.
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| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this Item 13 will be set forth inis incorporated herein by reference from the Company's Definitive Proxy Statement, for our Annual General Meeting of Shareholders to be held on May 19, 2016filed with the Securities and is incorporated by reference into this Annual Report on Form 10-K.Exchange Commission within 120 days of the Company's fiscal year ended December 31, 2018.
| |
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this Item 14 will be set forth inis incorporated herein by reference from the Company's Definitive Proxy Statement, for our Annual General Meeting of Shareholders to be held on May 19, 2016filed with the Securities and is incorporated by reference into this Annual Report on Form 10-K.
PART IV
| |
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a)
| |
| 1. | Financial Statements — See “Financial Statements”"Financial Statements" under Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K. |
| |
| 2. | Financial Statement Schedules — See “Financial"Financial Statement Schedules”Schedules" under Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K. |
EXHIBIT INDEX
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3.12.1 | | Amended Articles |
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3.22.2 | | Amendments |
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| 3.1 | | |
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| 4.1 | | Indenture, dated as of May 12, 2011, among Sensata Technologies B.V., the Guarantors and The Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed on May 17, 2011). |
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4.2 | | Form of 6.5% Senior Note due 2019 (incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K filed on May 17, 2011) (included as Exhibit A to Exhibit 4.1 thereof). |
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4.3 | | |
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4.44.2 | | |
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4.54.3 | | |
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4.64.4 | | |
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4.74.5 | |
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4.84.6 | |
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4.94.7 | | |
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4.104.8 | | |
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| 4.9 | | |
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| 4.10 | | |
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| 4.11 | | |
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|
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| 4.12 | | |
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| 10.1 | | Asset and Stock Purchase Agreement, dated January 8, 2006, between Texas Instruments Incorporated and S&C Purchase Corp (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-4 of Sensata Technologies B.V. filed on December 29, 2006). |
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10.2 | | Amendment No. 1 to Asset and Stock Purchase Agreement, dated March 30, 2006, between Texas Instruments Incorporated, Potazia Holding B.V. and S&C Purchase Corp (incorporated by reference to Exhibit 10.7 to Amendment No. 1 to the Registration Statement on Form S-4/A of Sensata Technologies B.V. filed on January 24, 2007). |
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10.3 | | Amendment No. 2 to Asset and Stock Purchase Agreement, dated April 27, 2006, between Texas Instruments Incorporated and Sensata Technologies B.V. (incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-4 of Sensata Technologies B.V. filed on December 29, 2006). |
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10.4 | | Cross-License Agreement, dated April 27, 2006, among Texas Instruments Incorporated, Sensata Technologies B.V. and Potazia Holding B.V. (incorporated by reference to Exhibit 10.10 toof the Registration Statement on Form S-4 of Sensata Technologies B.V. filed on December 29, 2006). |
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10.510.2 | | Sensata Technologies Holding B.V. First Amended and Restated 2006 Management Option Plan (incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-4 of Sensata Technologies B.V. filed on December 29, 2006).† |
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10.6 | | Sensata Technologies Holding B.V. First Amended and Restated 2006 Management Securities Purchase Plan (incorporated by reference to Exhibit 10.13 to the Registration Statement on Form S-4 of Sensata Technologies B.V. filed on December 29, 2006).† |
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10.7 | | First Amendment to the Sensata Technologies Holding B.V. First Amended and Restated 2006 Management Option Plan (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the period ended September 30, 2009 of Sensata Technologies B.V. filed on November 13, 2009).† |
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10.8 | | First Amended and Restated Management Securityholders Addendum—Dutchco Option Plan, dated as of April 27, 2006 (incorporated by reference to Exhibit 10.47 to the Registration Statement on Form S-1 filed on November 25, 2009). |
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10.9 | | First Amended and Restated Management Securityholders Addendum—Dutchco Securities Plan, dated as of April 27, 2006 (incorporated by reference to Exhibit 10.48 to the Registration Statement on Form S-1 filed on November 25, 2009). |
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10.10 | | Form of First Amended and Restated Investor Rights Agreement, entered into by and among Sensata Management Company S.A., Sensata Investment Company S.C.A, Sensata Technologies Holding N.V. (formerly known as Sensata Technologies Holding B.V.), funds managed by Bain Capital Partners, LLC or its affiliates, certain other investors that are parties thereto and such other persons, if any, that from time to time become parties thereto (incorporated by reference to Exhibit 10.50 to Amendment No. 4 to the Registration Statement on Form S-1 filed on February 26, 2010). |
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10.11 | | |
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10.1210.3 | | Administrative Services Agreement, effective as of January 1, 2008, by and between Sensata Investment Company S.C.A. and Sensata Technologies Holding B.V. (incorporated by reference to Exhibit 10.52 to Amendment No. 2 to the Registration Statement on Form S-1 filed on January 22, 2010). |
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10.13 | | |
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10.1410.4 | | Amended and Restated Employment Agreement, dated March 22, 2011, between Sensata Technologies, Inc. and Martin Carter (incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q filed on April 22, 2011).† |
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10.15 | | Credit Agreement, dated as of May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company, LLC, Sensata Technologies Intermediate Holding B.V., Morgan Stanley Senior Funding, Inc., as administrative agent, the initial l/c issuer and initial swing line lender named therein, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 toof the Registrant's Current Report on Form 8-K filed on May 17, 2011)2011, Commission File Number 001-34652). |
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10.1610.5 | | Domestic Guaranty, dated as of May 12, 2011, made by each of Sensata Technologies Finance Company, LLC, Sensata Technologies, Inc., Sensata Technologies Massachusetts, Inc. and each of the Additional Guarantors from time to time made a party thereto in favor of the Secured Parties (as defined therein) (incorporated by reference to Exhibit 10.2 toof the Registrant's Current Report on Form 8-K filed on May 17, 2011)2011, Commission File Number 001-34652). |
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10.1710.6 | | |
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10.1810.7 | | Foreign Guaranty, dated as of May 12, 2011, made by each of Sensata Technologies Holding Company US B.V., Sensata Technologies Holland, B.V., Sensata Technologies Holding Company Mexico, B.V., Sensata Technologies de México, S. de R.L. de C.V., Sensata Technologies Japan Limited, Sensata Technologies Malaysia Sdn. Bhd. and each of the Additional Guarantors from time to time made a party thereto in favor of the Secured Parties (as defined therein) (incorporated by reference to Exhibit 10.4 toof the Registrant's Current Report on Form 8-K filed on May 17, 2011)2011, Commission File Number 001-34652). |
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10.1910.8 | | Patent Security Agreement, dated as of May 12, 2011, made by each of Sensata Technologies Finance Company, LLC, Sensata Technologies, Inc. and Sensata Technologies Massachusetts, Inc. to Morgan Stanley Senior Funding, Inc., as collateral agent (incorporated by reference to Exhibit 10.5 toof the Registrant's Current Report on Form 8-K filed on May 17, 2011)2011, Commission File Number 001-34652). |
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10.2010.9 | | Trademark Security Agreement, dated as of May 12, 2011, made by each of Sensata Technologies Finance Company, LLC, Sensata Technologies, Inc. and Sensata Technologies Massachusetts, Inc. to Morgan Stanley Senior Funding, Inc., as collateral agent (incorporated by reference to Exhibit 10.6 toof the Registrant's Current Report on Form 8-K filed on May 17, 2011)2011, Commission File Number 001-34652). |
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10.2110.10 | | |
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10.2210.11 | | Domestic Security Agreement, dated as of May 12, 2011, made by each of Sensata Technologies Finance Company, LLC, Sensata Technologies, Inc. and Sensata Technologies Massachusetts, Inc. to Morgan Stanley Senior Funding, Inc., as collateral agent (incorporated by reference to Exhibit 10.8 toof the Registrant's Current Report on Form 8-K filed on May 17, 2011)2011, Commission File Number 001-34652). |
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10.2310.12 | | |
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10.2410.13 | | |
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10.25 |
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| 10.14 | | Amendment No. 1 to Credit Agreement dated as of December 6, 2012, to the Credit Agreement dated as of May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company LLC, Sensata Technologies Intermediate Holding B.V., the subsidiary guarantors party thereto, Morgan Stanley Senior Funding, Inc., and Barclays Bank PLC (incorporated by reference to Exhibit 10.1 toof the Registrant's Current Report on Form 8-K filed on December 10, 2012)2012, Commission File No. 001-34652). |
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10.2610.15 | | |
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10.2710.16 | | |
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10.2810.17 | | |
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10.2910.18 | | |
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10.3010.19 | | |
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10.3110.20 | | Agreement between Sensata Technologies Holding, N.V. and Sensata Investment Company S.C.A., dated May 10, 2013, to terminate the Administrative Services Agreement (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on May 10, 2013). |
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10.32 | | Sensata Technologies Holding N.V. 2010 Equity Incentive Plan, as Amended May 22, 2013 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed on July 29, 2013).† |
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10.33 | | |
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10.3410.21 | | Amendment No. 2 to Credit Agreement dated as of December 11, 2013, to the Credit Agreement dated as of May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company LLC, Sensata Technologies Intermediate Holding B.V., the subsidiary guarantors party thereto, and Morgan Stanley Senior Funding, Inc. (incorporated by reference to Exhibit 10.1 toof the Registrant's Current Report on Form 8-K filed on December 11, 2013). |
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10.3510.22 | | |
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10.3610.23 | | |
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10.3710.24 | | |
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10.3810.25 | | |
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10.3910.26 | | Amendment No. 3 to Credit Agreement dated as of October 14, 2014, to the Credit Agreement dated as of May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company LLC, Sensata Technologies Intermediate Holding B.V., the subsidiary guarantors party thereto, Barclays Bank PLC and the other lenders party thereto, and Morgan Stanley Senior Funding, Inc. (incorporated by reference to Exhibit 10.1 toof the Registrant's Current Report on Form 8-K filed on October 17, 2014). |
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10.4010.27 | | Amendment No. 4 to Credit Agreement, dated as of November 4, 2014, to the Credit Agreement, dated as of May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company, LLC, Sensata Technologies Intermediate Holding B.V., the subsidiary guarantors party thereto, Morgan Stanley Senior Funding, Inc. and the other lenders party thereto (incorporated by reference to Exhibit 10.1 toof the Registrant's Current Report on Form 8-K filed on November 10, 2014). |
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10.4110.28 | | Amendment No. 5 to Credit Agreement, dated as of March 26, 2015, to the Credit Agreement dated as of May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company, LLC, Sensata Technologies Intermediate Holding B.V., the subsidiary guarantors party thereto, Morgan Stanley Senior Funding, Inc. and the other lenders party thereto (incorporated by reference to Exhibit 10.1 toof the Registrant's Current Report on Form 8-K filed on April 1, 2015).
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10.42 |
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| 10.29 | | Amendment No. 6 to Credit Agreement dated as of May 11, 2015, to the Credit Agreement dated as of May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company, LLC, Sensata Technologies Intermediate Holding B.V., Morgan Stanley Senior Funding, Inc. and Barclays Bank PLC as joint lead arrangers and bookrunners, Morgan Stanley Senior Funding, Inc. as administrative agent on behalf of the lenders party to the Credit Agreement, and the lenders party thereto (incorporated by reference to Exhibit 10.1 toof the Registrant's Current Report on Form 8-K filed on May 14, 2015).
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10.4310.30 | | |
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10.4410.31 | | Amendment No. 7 to Credit Agreement, dated as of September 29, 2015, to the Credit Agreement, dated as of May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company, LLC, Sensata Technologies Intermediate Holding B.V., the subsidiary guarantors party thereto, Morgan Stanley Senior Funding, Inc. and the other lenders party thereto (incorporated by reference to Exhibit 10.1 toof the Registrant's Current Report on Form 8-K filed on October 2, 2015).
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10.4510.32 | | Separation |
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| 10.33 | | |
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| 10.34 | | |
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| 10.35 | | Amendment No. 8 to Credit Agreement, dated as of November 7, 2017, to the Credit Agreement, dated as of May 12, 2011, by and among Sensata Technologies B.V., Sensata Technologies Finance Company, LLC, Sensata Technologies Intermediate Holding B.V., the subsidiary guarantors party thereto, Morgan Stanley Senior Funding, Inc. and the other lenders party thereto. (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on November 19, 2015).14, 2017) |
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| 10.36 | | |
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| 10.37 | | |
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| 10.38 | | |
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| 10.39 | | |
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| 10.40 | | |
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| 21.1 | | |
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| 23.1 | | |
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| 31.1 | | |
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| 31.2 | | |
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| 32.1 | | |
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|
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| 101 | | The following materials from Sensata's Annual Report on Form 10-K for the year ended December 31, 2015,2018, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Statements of Operations for the years ended December 31, 2015, 2014,2018, 2017, and 2013,2016, (ii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014,2018, 2017, and 2013,2016, (iii) Consolidated Balance Sheets at December 31, 20152018 and 2014,2017, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2015, 2014,2018, 2017, and 2013,2016, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014,2018, 2017, and 2013,2016, (vi) the Notes to Consolidated Financial Statements, (vii) Schedule I — Condensed Financial Information of the Registrant and (viii) Schedule II — Valuation and Qualifying Accounts. |
____________________
* Filed herewith.
† Indicates management contract or compensatory plan, contract or arrangement.
‡ There have been non-material modifications to this contract since inception
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | |
| | SENSATA TECHNOLOGIES HOLDING N.V.PLC |
| | | |
| | | /s/ MARTHA SULLIVAN |
| | By: | Martha Sullivan |
| | Its: | President and Chief Executive Officer |
Date: February 2, 20166, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| SIGNATURE | | TITLE | | DATE |
| | | | | |
| /S/ MARTHA SULLIVAN | | President, Chief Executive Officer and Director (Principal Executive Officer) | | February 2, 20166, 2019 |
| Martha Sullivan | | | | |
| | | | | |
/S/ PAUL VASINGTON | | Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | | February 2, 20166, 2019 |
| Paul Vasington | | | | |
| | | | | |
/S/ PAUL EDGERLEY | | Chairman of the Board of Directors | | February 2, 20166, 2019 |
| Paul Edgerley | | | | |
| | | | |
/S/ LEWIS CAMPBELL
| | Director | | February 2, 2016 |
Lewis Campbell | | | | |
| | | | | |
/S/ JAMES HEPPELMANN | | Director | | February 2, 20166, 2019 |
| James Heppelmann | | | | |
| | | | | |
/S/ MICHAEL JACOBSONCHARLES PEFFER | | Director | | February 2, 2016 |
Michael Jacobson | | | | |
| | | | |
/S/ CHARLES PEFFER
| | Director | | February 2, 20166, 2019 |
| Charles Peffer | | | | |
| | | | | |
/S/ KIRK POND | | Director | | February 2, 20166, 2019 |
| Kirk Pond | | | | |
| | | | |
/S/ CONSTANCE SKIDMORE | | Director | | February 6, 2019 |
| Constance Skidmore | | | | |
| | | | | |
/S/ ANDREW TEICH | | Director | | February 2, 20166, 2019 |
| Andrew Teich | | | | |
| | | | | |
/S/ THOMAS WROE | | Director | | February 2, 20166, 2019 |
| Thomas Wroe | | | | |
| | | | | |
/S/ STEPHEN ZIDE | | Director | | February 2, 20166, 2019 |
| Stephen Zide | | | | |
| | | | | |
/S/ MARTHA SULLIVAN | | Authorized Representative in the United States | | February 2, 20166, 2019 |
| Martha Sullivan | | | | |
