UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________________________________________________________________
FORM 10-Q
______________________________________________________________________________________________________________________
(Mark One)
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| | | | |
ý☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20172021
OR
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| | | | |
¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-34652
______________________________________________________________________________________________________________________
SENSATA TECHNOLOGIES HOLDING N.V.PLC
(Exact Namename of Registrantregistrant as Specifiedspecified in Its Charter)its charter)
_____________________________________
_________________________________________________________________________________ | | | | | | | | | | | | | | | |
England and Wales | | 98-1386780 | |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) | |
| |
| | |
THE NETHERLANDS | | 98-0641254 |
(State or other jurisdiction of
incorporation or organization)
| | (I.R.S. Employer
Identification No.)
| | |
| | | | |
Jan Tinbergenstraat 80, 7559 SP Hengelo
The Netherlands
| | 31-74-357-8000 | | |
(Address of Principal Executive Offices, including Zip Code) | | (Registrant’s Telephone Number, Including Area Code) |
529 Pleasant Street
Attleboro, Massachusetts, 02703, United States
(Address of principal executive offices, including zip code)
+1 (508) 236 3800
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report.report)
_____________________________________
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of exchange on which registered |
Ordinary Shares - nominal value €0.01 per share | ST | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by sectionSection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý☒ No ¨☐
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 ý☒ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act (Check one):
| | | | | | | | | | | | | | |
Large accelerated filer | ☒ | | Accelerated filer | ☐ |
| | | | |
Large accelerated filer | ý | | Accelerated filer | ¨ |
| | | | |
Non-accelerated filer | ¨☐ | (Do not check if a smaller reporting company) | Smaller reporting company | ¨☐ |
| | | | |
| | | Emerging growth company | ¨☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No ý☒
As of October 13, 2017, 171,296,41715, 2021, 158,472,871 ordinary shares were outstanding.
TABLE OF CONTENTS
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PART I | |
| Item 1. | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| | | |
PART II | |
| Item 1. | | |
| Item 1A. | | |
| Item 2. | | |
| Item 3. | | |
| Item 6. | | |
| | | |
PART I—FINANCIAL INFORMATION
| |
Item 1. | Financial Statements. |
Item 1.Financial Statements. SENSATA TECHNOLOGIES HOLDING N.V.PLC
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
| | | September 30, 2017 | | December 31, 2016 | | September 30, 2021 | | December 31, 2020 |
Assets | | | | Assets | | | |
Current assets: | | | | Current assets: | |
Cash and cash equivalents | $ | 612,972 |
| | $ | 351,428 |
| Cash and cash equivalents | $ | 1,958,144 | | | $ | 1,861,980 | |
Accounts receivable, net of allowances of $12,561 and $11,811 as of September 30, 2017 and December 31, 2016, respectively | 569,881 |
| | 500,211 |
| |
Accounts receivable, net of allowances of $20,709 and $19,033 as of September 30, 2021 and December 31, 2020, respectively | | Accounts receivable, net of allowances of $20,709 and $19,033 as of September 30, 2021 and December 31, 2020, respectively | 662,751 | | | 576,647 | |
Inventories | 447,486 |
| | 389,844 |
| Inventories | 551,628 | | | 451,005 | |
Prepaid expenses and other current assets | 100,935 |
| | 100,002 |
| Prepaid expenses and other current assets | 130,141 | | | 90,340 | |
Total current assets | 1,731,274 |
| | 1,341,485 |
| Total current assets | 3,302,664 | | | 2,979,972 | |
Property, plant and equipment, net | 735,924 |
| | 724,046 |
| Property, plant and equipment, net | 805,202 | | | 803,825 | |
Goodwill | 3,005,464 |
| | 3,005,464 |
| Goodwill | 3,301,947 | | | 3,111,349 | |
Other intangible assets, net of accumulated amortization of $1,727,644 and $1,607,269 as of September 30, 2017 and December 31, 2016, respectively | 958,972 |
| | 1,075,431 |
| |
Other intangible assets, net of accumulated amortization of $2,245,877 and $2,145,634 as of September 30, 2021 and December 31, 2020, respectively | | Other intangible assets, net of accumulated amortization of $2,245,877 and $2,145,634 as of September 30, 2021 and December 31, 2020, respectively | 859,367 | | | 691,549 | |
Deferred income tax assets | 26,678 |
| | 20,695 |
| Deferred income tax assets | 78,597 | | | 84,785 | |
Other assets | 79,625 |
| | 73,855 |
| Other assets | 156,981 | | | 172,722 | |
Total assets | $ | 6,537,937 |
| | $ | 6,240,976 |
| Total assets | $ | 8,504,758 | | | $ | 7,844,202 | |
Liabilities and shareholders’ equity | | | | |
Liabilities and shareholders' equity | | Liabilities and shareholders' equity | | | |
Current liabilities: | | | | Current liabilities: | |
Current portion of long-term debt, capital lease and other financing obligations | $ | 13,176 |
| | $ | 14,643 |
| |
Current portion of long-term debt, finance lease and other financing obligations | | Current portion of long-term debt, finance lease and other financing obligations | $ | 6,632 | | | $ | 757,205 | |
Accounts payable | 324,119 |
| | 299,198 |
| Accounts payable | 427,271 | | | 393,907 | |
Income taxes payable | 27,031 |
| | 23,889 |
| Income taxes payable | 32,830 | | | 19,215 | |
Accrued expenses and other current liabilities | 263,611 |
| | 245,566 |
| Accrued expenses and other current liabilities | 363,087 | | | 324,830 | |
Total current liabilities | 627,937 |
| | 583,296 |
| Total current liabilities | 829,820 | | | 1,495,157 | |
Deferred income tax liabilities | 404,575 |
| | 392,628 |
| Deferred income tax liabilities | 306,703 | | | 259,857 | |
Pension and other post-retirement benefit obligations | 36,192 |
| | 34,878 |
| Pension and other post-retirement benefit obligations | 43,621 | | | 48,002 | |
Capital lease and other financing obligations, less current portion | 29,990 |
| | 32,369 |
| |
Finance lease and other financing obligations, less current portion | | Finance lease and other financing obligations, less current portion | 27,000 | | | 27,931 | |
Long-term debt, net | 3,224,684 |
| | 3,226,582 |
| Long-term debt, net | 4,214,388 | | | 3,213,747 | |
Other long-term liabilities | 32,034 |
| | 29,216 |
| Other long-term liabilities | 73,603 | | | 94,022 | |
Total liabilities | 4,355,412 |
| | 4,298,969 |
| Total liabilities | 5,495,135 | | | 5,138,716 | |
Commitments and contingencies (Note 10) |
|
|
| |
Commitments and contingencies (Note 12) | | Commitments and contingencies (Note 12) | 0 | | 0 |
Shareholders’ equity: | | | | Shareholders’ equity: | |
Ordinary shares, €0.01 nominal value per share, 400,000 shares authorized; 178,437 shares issued | 2,289 |
| | 2,289 |
| |
Treasury shares, at cost, 7,140 and 7,557 shares as of September 30, 2017 and December 31, 2016, respectively | (290,894 | ) | | (306,505 | ) | |
Ordinary shares, €0.01 nominal value per share, 177,069 shares authorized, and 174,079 and 173,266 shares issued as of September 30, 2021 and December 31, 2020, respectively | | Ordinary shares, €0.01 nominal value per share, 177,069 shares authorized, and 174,079 and 173,266 shares issued as of September 30, 2021 and December 31, 2020, respectively | 2,230 | | | 2,220 | |
Treasury shares, at cost, 15,631 shares as of September 30, 2021 and December 31, 2020 | | Treasury shares, at cost, 15,631 shares as of September 30, 2021 and December 31, 2020 | (784,596) | | | (784,596) | |
Additional paid-in capital | 1,658,574 |
| | 1,643,449 |
| Additional paid-in capital | 1,798,549 | | | 1,759,668 | |
Retained earnings | 862,954 |
| | 636,841 |
| Retained earnings | 2,020,346 | | | 1,777,729 | |
Accumulated other comprehensive loss | (50,398 | ) | | (34,067 | ) | Accumulated other comprehensive loss | (26,906) | | | (49,535) | |
Total shareholders’ equity | 2,182,525 |
| | 1,942,007 |
| |
Total liabilities and shareholders’ equity | $ | 6,537,937 |
| | $ | 6,240,976 |
| |
| Total shareholders' equity | | Total shareholders' equity | 3,009,623 | | | 2,705,486 | |
Total liabilities and shareholders' equity | | Total liabilities and shareholders' equity | $ | 8,504,758 | | | $ | 7,844,202 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
SENSATA TECHNOLOGIES HOLDING N.V.PLC
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| September 30, 2021 | | September 30, 2020 | | September 30, 2021 | | September 30, 2020 |
Net revenue | $ | 951,021 | | | $ | 788,313 | | | $ | 2,886,209 | | | $ | 2,139,087 | |
Operating costs and expenses: | | | | | | | |
Cost of revenue | 628,922 | | | 530,255 | | | 1,922,556 | | | 1,509,104 | |
Research and development | 40,060 | | | 33,423 | | | 118,929 | | | 98,115 | |
Selling, general and administrative | 85,784 | | | 75,747 | | | 249,728 | | | 217,698 | |
Amortization of intangible assets | 34,571 | | | 32,562 | | | 101,492 | | | 98,397 | |
Restructuring and other charges, net | 345 | | | (10,519) | | | 9,956 | | | 32,197 | |
Total operating costs and expenses | 789,682 | | | 661,468 | | | 2,402,661 | | | 1,955,511 | |
Operating income | 161,339 | | | 126,845 | | | 483,548 | | | 183,576 | |
Interest expense, net | (45,137) | | | (44,129) | | | (134,393) | | | (124,340) | |
Other, net | (9,403) | | | 9,194 | | | (47,788) | | | (1,511) | |
Income before taxes | 106,799 | | | 91,910 | | | 301,367 | | | 57,725 | |
Provision for income taxes | 21,840 | | | 15,181 | | | 49,759 | | | 15,106 | |
Net income | $ | 84,959 | | | $ | 76,729 | | | $ | 251,608 | | | $ | 42,619 | |
Basic net income per share | $ | 0.54 | | | $ | 0.49 | | | $ | 1.59 | | | $ | 0.27 | |
Diluted net income per share | $ | 0.53 | | | $ | 0.49 | | | $ | 1.58 | | | $ | 0.27 | |
|
| | | | | | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Net revenue | $ | 819,054 |
| | $ | 789,798 |
| | $ | 2,466,199 |
| | $ | 2,413,892 |
|
Operating costs and expenses: | | | | | | | |
Cost of revenue | 527,432 |
| | 508,944 |
| | 1,601,190 |
| | 1,574,763 |
|
Research and development | 34,002 |
| | 31,601 |
| | 97,032 |
| | 95,240 |
|
Selling, general and administrative | 75,972 |
| | 75,046 |
| | 227,256 |
| | 224,637 |
|
Amortization of intangible assets | 40,317 |
| | 50,562 |
| | 121,578 |
| | 151,572 |
|
Restructuring and special charges | 1,329 |
| | 837 |
| | 18,768 |
| | 3,167 |
|
Total operating costs and expenses | 679,052 |
| | 666,990 |
| | 2,065,824 |
| | 2,049,379 |
|
Profit from operations | 140,002 |
| | 122,808 |
| | 400,375 |
| | 364,513 |
|
Interest expense, net | (40,263 | ) | | (41,176 | ) | | (120,578 | ) | | (125,201 | ) |
Other, net | 3,112 |
| | (726 | ) | | 7,190 |
| | 4,892 |
|
Income before taxes | 102,851 |
| | 80,906 |
| | 286,987 |
| | 244,204 |
|
Provision for income taxes | 14,816 |
| | 11,121 |
| | 47,759 |
| | 48,297 |
|
Net income | $ | 88,035 |
| | $ | 69,785 |
| | $ | 239,228 |
| | $ | 195,907 |
|
Basic net income per share: | $ | 0.51 |
| | $ | 0.41 |
| | $ | 1.40 |
| | $ | 1.15 |
|
Diluted net income per share: | $ | 0.51 |
| | $ | 0.41 |
| | $ | 1.39 |
| | $ | 1.14 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
SENSATA TECHNOLOGIES HOLDING N.V.PLC
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| September 30, 2021 | | September 30, 2020 | | September 30, 2021 | | September 30, 2020 |
Net income | $ | 84,959 | | | $ | 76,729 | | | $ | 251,608 | | | $ | 42,619 | |
Other comprehensive income/(loss): | | | | | | | |
Cash flow hedges | 2,975 | | | (2,197) | | | 18,651 | | | (26,698) | |
Defined benefit and retiree healthcare plans | 594 | | | 1,015 | | | 3,978 | | | 6,029 | |
Other comprehensive income/(loss) | 3,569 | | | (1,182) | | | 22,629 | | | (20,669) | |
Comprehensive income | $ | 88,528 | | | $ | 75,547 | | | $ | 274,237 | | | $ | 21,950 | |
|
| | | | | | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Net income | $ | 88,035 |
| | $ | 69,785 |
| | $ | 239,228 |
| | $ | 195,907 |
|
Other comprehensive loss, net of tax: | | | | | | | |
Deferred loss on derivative instruments, net of reclassifications | (6,784 | ) | | (8,485 | ) | | (17,820 | ) | | (25,010 | ) |
Defined benefit and retiree healthcare plans | 274 |
| | 24 |
| | 1,489 |
| | 291 |
|
Other comprehensive loss | (6,510 | ) | | (8,461 | ) | | (16,331 | ) | | (24,719 | ) |
Comprehensive income | $ | 81,525 |
| | $ | 61,324 |
| | $ | 222,897 |
| | $ | 171,188 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
SENSATA TECHNOLOGIES HOLDING N.V.PLC
Condensed Consolidated Statements of Cash Flows
(In thousands)
| | | For the nine months ended | | For the nine months ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2021 | | September 30, 2020 |
Cash flows from operating activities: | | | | Cash flows from operating activities: | | | |
Net income | $ | 239,228 |
| | $ | 195,907 |
| Net income | $ | 251,608 | | | $ | 42,619 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Depreciation | 82,014 |
| | 77,649 |
| Depreciation | 94,361 | | | 94,216 | |
Amortization of deferred financing costs and original issue discounts | 5,528 |
| | 5,501 |
| |
Gain on sale of assets | (1,180 | ) | | — |
| |
Amortization of debt issuance costs | | Amortization of debt issuance costs | 5,142 | | | 5,026 | |
| Share-based compensation | 15,106 |
| | 13,279 |
| Share-based compensation | 18,871 | | | 14,212 | |
Amortization of inventory step-up to fair value | — |
| | 2,319 |
| |
Loss on debt financing | | Loss on debt financing | 30,066 | | | — | |
Amortization of intangible assets | 121,578 |
| | 151,572 |
| Amortization of intangible assets | 101,492 | | | 98,397 | |
Deferred income taxes | 11,836 |
| | 15,706 |
| Deferred income taxes | (2,070) | | | (11,600) | |
Unrealized loss on hedges and other non-cash items | 5,844 |
| | 660 |
| |
Changes in operating assets and liabilities, net of effects of acquisitions: | | | | |
| Unrealized loss on derivative instruments and other | | Unrealized loss on derivative instruments and other | 17,359 | | | 5,876 | |
Changes in operating assets and liabilities, net of the effects of acquisitions: | | Changes in operating assets and liabilities, net of the effects of acquisitions: | |
Accounts receivable, net | (69,670 | ) | | (65,373 | ) | Accounts receivable, net | (66,340) | | | (5,205) | |
Inventories | (58,476 | ) | | (20,624 | ) | Inventories | (93,651) | | | 71,207 | |
Prepaid expenses and other current assets | (19,251 | ) | | 2,320 |
| Prepaid expenses and other current assets | (18,390) | | | 15,689 | |
Accounts payable and accrued expenses | 40,144 |
| | 33,371 |
| Accounts payable and accrued expenses | 44,879 | | | (10,939) | |
Income taxes payable | 3,142 |
| | (6,361 | ) | Income taxes payable | 13,615 | | | (23,806) | |
Other | (3,564 | ) | | (9,575 | ) | Other | (3,716) | | | (2,354) | |
Net cash provided by operating activities | 372,279 |
| | 396,351 |
| Net cash provided by operating activities | 393,226 | | | 293,338 | |
Cash flows from investing activities: | | | | Cash flows from investing activities: | | | |
Acquisition of CST, net of cash received | — |
| | 4,688 |
| |
Acquisitions, net of cash received | | Acquisitions, net of cash received | (414,959) | | | (64,452) | |
Additions to property, plant and equipment and capitalized software | (103,536 | ) | | (94,584 | ) | Additions to property, plant and equipment and capitalized software | (100,410) | | | (79,939) | |
Investment in equity securities | — |
| | (50,000 | ) | |
Proceeds from the sale of assets | 8,862 |
| | 751 |
| |
Investment in debt and equity securities | | Investment in debt and equity securities | (4,655) | | | (24,794) | |
| Other | (3,000 | ) | | — |
| Other | 3,919 | | | 10,717 | |
Net cash used in investing activities | (97,674 | ) | | (139,145 | ) | Net cash used in investing activities | (516,105) | | | (158,468) | |
Cash flows from financing activities: | | | | Cash flows from financing activities: | | | |
Proceeds from exercise of stock options and issuance of ordinary shares | 5,332 |
| | 3,306 |
| Proceeds from exercise of stock options and issuance of ordinary shares | 20,016 | | | 2,237 | |
Payment of employee restricted stock tax withholdings | | Payment of employee restricted stock tax withholdings | (8,987) | | | (2,335) | |
Proceeds from borrowings on debt | | Proceeds from borrowings on debt | 1,001,875 | | | 1,150,000 | |
| Payments on debt | (14,459 | ) | | (297,698 | ) | Payments on debt | (760,768) | | | (406,568) | |
Payments to repurchase ordinary shares | (2,817 | ) | | (4,672 | ) | Payments to repurchase ordinary shares | — | | | (35,175) | |
Payments of debt issuance costs | (137 | ) | | (518 | ) | |
Other | (980 | ) | | — |
| |
Net cash used in financing activities | (13,061 | ) | | (299,582 | ) | |
Payments of debt financing costs | | Payments of debt financing costs | (33,093) | | | (6,957) | |
| Net cash provided by financing activities | | Net cash provided by financing activities | 219,043 | | | 701,202 | |
Net change in cash and cash equivalents | 261,544 |
| | (42,376 | ) | Net change in cash and cash equivalents | 96,164 | | | 836,072 | |
Cash and cash equivalents, beginning of period | 351,428 |
| | 342,263 |
| Cash and cash equivalents, beginning of period | 1,861,980 | | | 774,119 | |
Cash and cash equivalents, end of period | $ | 612,972 |
| | $ | 299,887 |
| Cash and cash equivalents, end of period | $ | 1,958,144 | | | $ | 1,610,191 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
SENSATA TECHNOLOGIES HOLDING N.V.PLC
Condensed Consolidated Statements of Changes in Shareholders' Equity
(In thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ordinary Shares | | Treasury Shares | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | | | | | Total Shareholders' Equity |
| Number | | Amount | | Number | | Amount | | | |
Balance as of June 30, 2021 | 174,005 | | | $ | 2,229 | | | (15,631) | | | $ | (784,596) | | | $ | 1,789,863 | | | $ | 1,936,427 | | | $ | (30,475) | | | | | | | $ | 2,913,448 | |
Surrender of shares for tax withholding | — | | | — | | | (18) | | | (1,039) | | | — | | | — | | | — | | | | | | | (1,039) | |
Stock options exercised | 34 | | | — | | | — | | | — | | | 1,290 | | | — | | | — | | | | | | | 1,290 | |
Vesting of restricted securities | 58 | | | 1 | | | — | | | — | | | — | | | (1) | | | — | | | | | | | — | |
| | | | | | | | | | | | | | | | | | | |
Retirement of ordinary shares | (18) | | | — | | | 18 | | | 1,039 | | | — | | | (1,039) | | | — | | | | | | | — | |
Share-based compensation | — | | | — | | | — | | | — | | | 7,396 | | | — | | | — | | | | | | | 7,396 | |
| | | | | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 84,959 | | | — | | | | | | | 84,959 | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 3,569 | | | | | | | 3,569 | |
Balance as of September 30, 2021 | 174,079 | | | $ | 2,230 | | | (15,631) | | | $ | (784,596) | | | $ | 1,798,549 | | | $ | 2,020,346 | | | $ | (26,906) | | | | | | | $ | 3,009,623 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| 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, 2020 | 173,266 | | | $ | 2,220 | | | (15,631) | | | $ | (784,596) | | | $ | 1,759,668 | | | $ | 1,777,729 | | | $ | (49,535) | | | | | | | $ | 2,705,486 | |
Surrender of shares for tax withholding | — | | | — | | | (154) | | | (8,987) | | | — | | | — | | | — | | | | | | | (8,987) | |
Stock options exercised | 501 | | | 6 | | | — | | | — | | | 20,010 | | | — | | | — | | | | | | | 20,016 | |
Vesting of restricted securities | 466 | | | 6 | | | — | | | — | | | — | | | (6) | | | — | | | | | | | — | |
| | | | | | | | | | | | | | | | | | | |
Retirement of ordinary shares | (154) | | | (2) | | | 154 | | | 8,987 | | | — | | | (8,985) | | | — | | | | | | | — | |
Share-based compensation | — | | | — | | | — | | | — | | | 18,871 | | | — | | | — | | | | | | | 18,871 | |
| | | | | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 251,608 | | | — | | | | | | | 251,608 | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 22,629 | | | | | | | 22,629 | |
Balance as of September 30, 2021 | 174,079 | | | $ | 2,230 | | | (15,631) | | | $ | (784,596) | | | $ | 1,798,549 | | | $ | 2,020,346 | | | $ | (26,906) | | | | | | | $ | 3,009,623 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ordinary Shares | | Treasury Shares | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | | | | | Total Shareholders' Equity |
| Number | | Amount | | Number | | Amount | | | |
Balance as of June 30, 2020 | 172,844 | | | $ | 2,215 | | | (15,631) | | | $ | (784,596) | | | $ | 1,735,826 | | | $ | 1,579,931 | | | $ | (39,971) | | | | | | | $ | 2,493,405 | |
Surrender of shares for tax withholding | — | | | — | | | — | | | (21) | | | — | | | — | | | — | | | | | | | (21) | |
Stock options exercised | 29 | | | 1 | | | — | | | — | | | 1,090 | | | — | | | — | | | | | | | 1,091 | |
Vesting of restricted securities | 2 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | | | — | |
| | | | | | | | | | | | | | | | | | | |
Retirement of ordinary shares | — | | | — | | | — | | | 21 | | | — | | | (21) | | | — | | | | | | | — | |
Share-based compensation | — | | | — | | | — | | | — | | | 4,622 | | | — | | | — | | | | | | | 4,622 | |
| | | | | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 76,729 | | | — | | | | | | | 76,729 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (1,182) | | | | | | | (1,182) | |
Balance as of September 30, 2020 | 172,875 | | | $ | 2,216 | | | (15,631) | | | $ | (784,596) | | | $ | 1,741,538 | | | $ | 1,656,639 | | | $ | (41,153) | | | | | | | $ | 2,574,644 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| 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, 2019 | 172,561 | | | $ | 2,212 | | | (14,733) | | | $ | (749,421) | | | $ | 1,725,091 | | | $ | 1,616,357 | | | $ | (20,484) | | | | | | | $ | 2,573,755 | |
Surrender of shares for tax withholding | — | | | — | | | (83) | | | (2,335) | | | — | | | — | | | — | | | | | | | (2,335) | |
Stock options exercised | 84 | | | 2 | | | — | | | — | | | 2,235 | | | — | | | — | | | | | | | 2,237 | |
Vesting of restricted securities | 313 | | | 3 | | | — | | | — | | | — | | | (3) | | | — | | | | | | | — | |
Repurchase of ordinary shares | — | | | — | | | (898) | | | (35,175) | | | — | | | — | | | — | | | | | | | (35,175) | |
Retirement of ordinary shares | (83) | | | (1) | | | 83 | | | 2,335 | | | — | | | (2,334) | | | — | | | | | | | — | |
Share-based compensation | — | | | — | | | — | | | — | | | 14,212 | | | — | | | — | | | | | | | 14,212 | |
| | | | | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 42,619 | | | — | | | | | | | 42,619 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (20,669) | | | | | | | (20,669) | |
Balance as of September 30, 2020 | 172,875 | | | $ | 2,216 | | | (15,631) | | | $ | (784,596) | | | $ | 1,741,538 | | | $ | 1,656,639 | | | $ | (41,153) | | | | | | | $ | 2,574,644 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts, or unless otherwise noted)
(unaudited)
1. Business Description and Basis of Presentation
Description of Business
The accompanying unaudited condensed consolidated financial statements reflect the financial position, results of operations, comprehensive income, and cash flows, and changes in shareholders' equity of Sensata Technologies Holding N.V.plc ("Sensata N.V."plc"), a public limited company incorporated under the laws of England and Wales, and its wholly-owned subsidiaries, collectively referred to as the "Company," "Sensata," "we," "our," or "us."
Sensata N.V. is incorporated under the laws of the Netherlands and conducts its 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, Bulgaria, France, Germany, the U.K., and the U.S. We organize our operations into two businesses, Performance Sensing and Sensing Solutions.
On September 28, 2017, the board of directors of Sensata N.V. unanimously approved a plan to change our parent company’s location of incorporation from the Netherlands to the U.K. To effect this change, the shareholders of Sensata N.V. will be asked to approve a cross-border merger between Sensata N.V. and Sensata Technologies Holding plc (“Sensata U.K.”), a newly formed, public limited company incorporated under the laws of England and Wales, with Sensata U.K. being the surviving entity (the “Merger”). If approved by our shareholders, we would expect to complete the Merger during the first quarter of 2018, which would result in Sensata U.K. becoming the publicly-traded parent of the subsidiary companies that are currently controlled by Sensata N.V.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States ("U.S.") generally accepted accounting principles ("U.S. GAAP") for interim financial information and the instructions to Form 10-Q. Accordingly, these interim financial statements do not include all of the information and note disclosures required by U.S. GAAP for complete financial statements. The accompanying financial information reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the interim period results. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year, nor were the results of operations of the comparable periods in 2016 necessarily representative of those actually experienced for the full year 2016. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.
All intercompany balances and transactions have been eliminated.2020 (the "2020 Annual Report").
All U.S. dollar ("USD") 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. New Accounting Standards
In May 2014, the Financial Accounting Standards Board (the "FASB")There are no recently issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), which creates one Accounting Standards Codification ("ASC") Topic (FASB ASC 606, Revenue from Contracts with Customers)accounting standards that replaceshave been adopted in the current guidance found in FASB ASC 605, Revenue Recognition, and various other revenue accounting standards for specialized transactions and industries. FASB ASU No. 2014-09 outlines a comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue to depict the transfer of promised goodsperiod 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. FASB ASU No. 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,adopted in future periods that have had 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 adjustmentare expected to the opening balance of retained earnings at the effective date for contracts that still require performance by the entity.
In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date, which defers the effective date of FASB ASU No. 2014-09 by one year. FASB ASU No. 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. We have developed an implementation plan to adopt this new guidance. As part of this plan, we are currently assessing the impact of the new guidance on our financial position and results of operations. Based on our procedures performed to date, nothing has come to our attention that would indicate that the adoption of FASB ASU No. 2014-09 will have a material impact on our consolidated financial position or results of operations. However, we will continue to evaluate this assessment through the remainder of 2017. In addition, the adoption of FASB ASU No. 2014-09 requires new disclosures related to revenue recognition, which we are continuing to evaluate. We intend to adopt FASB ASU No. 2014-09 on January 1, 2018 using the modified retrospective transition method.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes 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 12 months or less) using a method similar to the current 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. At December 31, 2016, we were contractually obligated to make future payments of $69.8 million under our operating lease obligations in existence as of that date, primarily related to long-term facility leases. While we are in the early stages of our implementation process for FASB ASU No. 2016-02, and have not yet determined its impact on our consolidated financial statements, these leases would potentially be required to be presented on the balance sheet in accordance with the requirements of FASB ASU No. 2016-02. FASB ASU No. 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods, with early adoption permitted. FASB ASU No. 2016-02 must be applied using a modified retrospective approach, which requires recognition and measurement of leases at the beginning of the earliest period presented, with certain practical expedients available.
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, 2018, including interim periods within those annual reporting periods, with early adoption permitted. We are still evaluating the impact that this guidance will have on our consolidated financial statements, and we have not yet determined whether we will early adopt FASB ASU No. 2017-12.
3. Inventories
The components of inventories as of September 30, 2017 and December 31, 2016 were as follows:
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Finished goods | $ | 191,165 |
| | $ | 169,304 |
|
Work-in-process | 91,569 |
| | 74,810 |
|
Raw materials | 164,752 |
| | 145,730 |
|
Inventories | $ | 447,486 |
| | $ | 389,844 |
|
4. Shareholders' Equity
Treasury Shares
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. The cost of reissued shares is determined using the first-in, first-out method. During the nine months ended September 30, 2017, we reissued 0.5 million treasury shares, and as a result, we recognized a reduction in Retained earnings of $13.1 million.
Accumulated Other Comprehensive LossRevenue Recognition
The following is a roll forward of the components of Accumulated other comprehensive loss for the nine months ended September 30, 2017:
|
| | | | | | | | | | | | |
| | Cash Flow Hedges | | Defined Benefit and Retiree Healthcare Plans | | Accumulated Other Comprehensive Loss |
Balance as of December 31, 2016 | | $ | 23 |
| | $ | (34,090 | ) | | $ | (34,067 | ) |
Other comprehensive loss before reclassifications, net of tax | | (25,078 | ) | | — |
| | (25,078 | ) |
Amounts reclassified from accumulated other comprehensive loss, net of tax | | 7,258 |
| | 1,489 |
| | 8,747 |
|
Net current period other comprehensive (loss)/income | | (17,820 | ) | | 1,489 |
| | (16,331 | ) |
Balance as of September 30, 2017 | | $ | (17,797 | ) | | $ | (32,601 | ) | | $ | (50,398 | ) |
The details of the amounts reclassified from Accumulated other comprehensive losstables presents net revenue disaggregated by segment and end market for the three and nine months ended September 30, 20172021 and 2016 are as follows:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, 2021 | | For the three months ended September 30, 2020 |
| | Performance Sensing | | Sensing Solutions | | Total | | Performance Sensing | | Sensing Solutions | | Total |
Automotive | | $ | 488,041 | | | $ | 9,451 | | | $ | 497,492 | | | $ | 456,200 | | | $ | 7,801 | | | $ | 464,001 | |
HVOR (1) | | 218,425 | | | — | | | 218,425 | | | 124,736 | | | — | | | 124,736 | |
Industrial | | — | | | 106,809 | | | 106,809 | | | — | | | 87,174 | | | 87,174 | |
Appliance and HVAC (2) | | — | | | 62,793 | | | 62,793 | | | — | | | 47,618 | | | 47,618 | |
Aerospace | | — | | | 34,377 | | | 34,377 | | | — | | | 31,740 | | | 31,740 | |
Other | | — | | | 31,125 | | | 31,125 | | | — | | | 33,044 | | | 33,044 | |
Total | | $ | 706,466 | | | $ | 244,555 | | | $ | 951,021 | | | $ | 580,936 | | | $ | 207,377 | | | $ | 788,313 | |
________________________
(1) Heavy vehicle and off-road
(2) Heating, ventilation and air conditioning
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the nine months ended September 30, 2021 | | For the nine months ended September 30, 2020 |
| | Performance Sensing | | Sensing Solutions | | Total | | Performance Sensing | | Sensing Solutions | | Total |
Automotive | | $ | 1,543,121 | | | $ | 33,003 | | | $ | 1,576,124 | | | $ | 1,180,402 | | | $ | 23,316 | | | $ | 1,203,718 | |
HVOR | | 619,709 | | | — | | | 619,709 | | | 354,430 | | | — | | | 354,430 | |
Industrial | | — | | | 302,758 | | | 302,758 | | | — | | | 247,037 | | | 247,037 | |
Appliance and HVAC | | — | | | 185,896 | | | 185,896 | | | — | | | 136,703 | | | 136,703 | |
Aerospace | | — | | | 99,847 | | | 99,847 | | | — | | | 101,057 | | | 101,057 | |
Other | | — | | | 101,875 | | | 101,875 | | | — | | | 96,142 | | | 96,142 | |
Total | | $ | 2,162,830 | | | $ | 723,379 | | | $ | 2,886,209 | | | $ | 1,534,832 | | | $ | 604,255 | | | $ | 2,139,087 | |
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Amount of Loss/(Gain) Reclassified from Accumulated Other Comprehensive Loss | | Affected Line in Condensed Consolidated Statements of Operations |
| | For the three months ended | | For the nine months ended | |
Component | | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 | |
Derivative instruments designated and qualifying as cash flow hedges | | | | | | | | | | |
Foreign currency forward contracts | | $ | 4,075 |
| | $ | (2,771 | ) | | $ | (3,678 | ) | | $ | (15,075 | ) | | Net revenue (1) |
Foreign currency forward contracts | | 1,953 |
| | 4,834 |
| | 13,356 |
| | 14,857 |
| | Cost of revenue (1) |
Total, before taxes | | 6,028 |
| | 2,063 |
| | 9,678 |
| | (218 | ) | | Income before taxes |
Income tax effect | | (1,507 | ) | | (514 | ) | | (2,420 | ) | | 55 |
| | Provision for income taxes |
Total, net of taxes | | $ | 4,521 |
| | $ | 1,549 |
| | $ | 7,258 |
| | $ | (163 | ) | | Net income |
| | | | | | | | | | |
Defined benefit and retiree healthcare plans | | $ | 297 |
| | $ | (5 | ) | | $ | 1,557 |
| | $ | 324 |
| | Various (2) |
Income tax effect | | (23 | ) | | 29 |
| | (68 | ) | | (33 | ) | | Provision for income taxes |
Total, net of taxes | | $ | 274 |
| | $ | 24 |
| | $ | 1,489 |
| | $ | 291 |
| | Net income |
| |
(1) | See Note 12, "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, and Selling, general and administrative ("SG&A") expense line items in the condensed consolidated statements of operations. The amounts reclassified are included in the computation of net periodic benefit cost. See Note 8, "Pension and Other Post-Retirement Benefits," for additional details of net periodic benefit cost. |
4. Share-Based Payment Plans
5. Restructuring and Special Charges
Restructuring and special chargesThe following table presents the components of non-cash compensation expense related to our equity awards for the three and nine months ended September 30, 20172021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| September 30, 2021 | | September 30, 2020 | | September 30, 2021 | | September 30, 2020 |
Stock options | $ | 307 | | | $ | 179 | | | $ | 1,072 | | | $ | 2,721 | |
Restricted securities | 7,089 | | | 4,443 | | | 17,799 | | | 11,491 | |
Share-based compensation expense | $ | 7,396 | | | $ | 4,622 | | | $ | 18,871 | | | $ | 14,212 | |
Equity Awards
At our Annual General Meeting held on May 27, 2021, our shareholders approved the Sensata Technologies Holding plc 2021 Equity Incentive Plan (the "2021 Equity Plan"), which replaced the Sensata Technologies Holding plc First Amended and Restated 2010 Equity Incentive Plan (the "2010 Equity Plan"). The 2021 Equity Plan is substantially similar to the 2010 Equity Plan with some updates based on changes in law and current practices. The purpose of the 2021 Equity Plan is to promote the long-term growth, profitability, and interests of the Company and its shareholders by aiding us in attracting and retaining employees, officers, consultants, advisors, and non-employee directors capable of assuring our future success. All awards granted subsequent to this approval were made under the 2021 Equity Plan.
We granted the following restricted stock units ("RSUs" and each, an "RSU") and performance-based restricted stock units ("PRSUs" and each, a "PRSU") under the 2021 Equity Plan and 2010 Equity Plan during the nine months ended September 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Awards Granted To: | | Type of Award | | Number of Units Granted (in thousands) | | Percentage of PRSUs Awarded that May Vest | | Weighted Average Grant Date Fair Value |
| | | | | | | | |
Directors | | RSU (1)(5) | | 27 | | | N/A | | $ | 58.63 | |
Various executives and employees | | RSU (2)(4) | | 373 | | | N/A | | $ | 58.37 | |
Various executives and employees | | PRSU (3)(4) | | 236 | | | 0.0% - 200.0% | | $ | 58.20 | |
________________________(1) These RSUs cliff vest one year from the grant date (May 2022).
(2) These RSUs vest ratably over three years, one-third per year beginning on the first anniversary of the grant date. These RSUs will fully vest on various dates between February 2024 and August 2024.
(3) ThesePRSUs vest on various dates between April 2024 and May 2024. The number of units that ultimately vest is dependent on the achievement of certain performance criteria.
(4) Primarily granted under the 2010 Equity Plan.
(5) Primarily granted under the 2021 Equity Plan.
5. Restructuring and Other Charges, Net
On June 30, 2020, in response to the potential long-term impact of the global financial and health crisis caused by the coronavirus ("COVID-19") pandemic on our business, we committed to a plan to reorganize our business (the “Q2 2020 Global Restructure Program”), consisting of voluntary and involuntary reductions-in-force and certain site closures. The Q2 2020 Global Restructure Program was commenced in order to align our cost structure to the then anticipated future demand outlook, and as of September 30, 2021, we have completed all actions contemplated thereunder, with approximately 840 positions impacted. Since inception of the Q2 2020 Global Restructure Program, we have recognized cumulative costs of $33.2 million, of which $28.4 million related to severance charges and $4.8 million related to facility and exit costs. As of September 30, 2021, we have a liability of approximately $7.5 million related to actions taken under this plan. We expect to settle these remaining liabilities with cash on hand.
Restructuring actions taken under the Q2 2020 Global Restructure Program impacted our business segments and corporate functions as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Reductions-in-Force | | Site Closures |
(Dollars in millions) | Positions | | Minimum | | Maximum | | Minimum | | Maximum |
Performance Sensing | 170 | | | $ | 9.3 | | | $ | 10.0 | | | $ | 3.0 | | | $ | 4.0 | |
Sensing Solutions | 280 | | | 8.0 | | | 8.0 | | | 3.0 | | | 4.0 | |
Corporate and other (1) | 390 | | | 9.7 | | | 11.0 | | | — | | | — | |
Total | 840 | | | $ | 27.0 | | | $ | 29.0 | | | $ | 6.0 | | | $ | 8.0 | |
(1) The majority of these positions relate to engineering and manufacturing operations, which are allocated to corporate and other. However, these restructuring actions will benefit the results of Performance Sensing and Sensing Solutions as well.
Charges recognized in the three and nine months ended September 30, 2021 and 2020 resulting from the Q2 2020 Global Restructure Program are presented by impacted segment below. However, as discussed in Note 17: Segment Reporting, restructuring and other charges, net are excluded from segment operating income.
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| September 30, 2021 | | September 30, 2020 | | September 30, 2021 | | September 30, 2020 |
Performance Sensing | $ | 1,106 | | | $ | — | | | $ | 1,909 | | | $ | 7,609 | |
Sensing Solutions | 1,992 | | | — | | | 5,132 | | | 7,181 | |
Corporate and other | — | | | — | | | 1,711 | | | 9,330 | |
Restructuring and other charges | $ | 3,098 | | | $ | — | | | $ | 8,752 | | | $ | 24,120 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Approximately $1.3 million and $18.8$3.0 million of these charges in the three and nine months ended September 30, 2021, respectively, which related primarilyrelate to site closures in Sensing Solutions. Approximately $0.9 million and $1.2 million of these charges in the closing of our facilitythree and nine months ended September 30, 2021, respectively, relate to site closures in Minden, Germany that was partPerformance Sensing. None of the acquisitioncharges recognized in 2020 relate to site closures.
The following table presents the components of certain subsidiaries of Custom Sensors & Technologies Ltd. ("CST"), facility exit costs related to a limited number ofrestructuring and other line moves and exit activities, and severance costs related to the termination of a limited number of employees. Charges related to the closing of our facility in Minden, Germanycharges, net for the three and nine months ended September 30, 2017 consisted2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| September 30, 2021 | | September 30, 2020 | | September 30, 2021 | | September 30, 2020 |
Q2 2020 Global Restructure Program charges | $ | 3,098 | | | $ | — | | | $ | 8,752 | | | $ | 24,120 | |
Other restructuring charges | | | | | | | |
Severance costs, net (1) | 133 | | | 206 | | | 726 | | | 4,103 | |
Facility and other exit costs | 541 | | | 423 | | | 1,832 | | | 423 | |
| | | | | | | |
Other (2) | (3,427) | | | (11,148) | | | (1,354) | | | 3,551 | |
Restructuring and other charges, net | $ | 345 | | | $ | (10,519) | | | $ | 9,956 | | | $ | 32,197 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(1) Severance costs, net (excluding those related to the Q2 2020 Global Restructure Program) for the nine months ended September 30, 2020 were related to termination benefits arising from the shutdown and relocation of (i)an operating site in Northern Ireland.
(2) In the three months ended September 30, 2020, we settled a patent infringement case brought by Wasica Finance GmbH ("Wasica") against Schrader, and released $11.7 million of the related liability, which is presented in restructuring and other charges, net. For the nine months ended September 30, 2020, this release largely offset a charge of $12.1 million resulting from a prejudgment interest-related award granted by the court on behalf of Wasica in intellectual property litigation in the second quarter of 2020.
The following table presents a rollforward of the severance chargesportion of $0.0 millionour restructuring obligations for the nine months ended September 30, 2021.
| | | | | | | | | | | | | | | | | |
| Q2 2020 Global Restructure Program | | Other | | Total |
Balance at December 31, 2020 | $ | 10,842 | | | $ | 4,037 | | | $ | 14,879 | |
Charges, net of reversals | 4,579 | | | 726 | | | 5,305 | |
Payments | (7,736) | | | (3,239) | | | (10,975) | |
Foreign currency remeasurement | (171) | | | (10) | | | (181) | |
Balance at September 30, 2021 | $ | 7,514 | | | $ | 1,514 | | | $ | 9,028 | |
The severance liability as of September 30, 2021 was entirely recorded in accrued expenses and $8.4 million, respectively, and (ii) facility exit costsother current liabilities on our condensed consolidated balance sheet.
6. Other, Net
The following table presents the components of $1.3 million and $2.4 million, respectively.
Restructuring and special chargesother, net for the three and nine months ended September 30, 2016 were $0.8 million2021 and $3.2 million, respectively, which consisted primarily of facility exit costs related to2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| September 30, 2021 | | September 30, 2020 | | September 30, 2021 | | September 30, 2020 |
Currency remeasurement (loss)/gain on net monetary assets | $ | (324) | | | $ | 5,422 | | | $ | 187 | | | $ | 5,878 | |
Loss on foreign currency forward contracts | (2,414) | | | (1,060) | | | (4,791) | | | (4,424) | |
(Loss)/gain on commodity forward contracts | (6,495) | | | 6,138 | | | (6,462) | | | 5,990 | |
Loss on debt refinancing | — | | | — | | | (30,066) | | | — | |
Net periodic benefit cost, excluding service cost | (1,053) | | | (1,506) | | | (5,731) | | | (8,403) | |
Other | 883 | | | 200 | | | (925) | | | (552) | |
Other, net | $ | (9,403) | | | $ | 9,194 | | | $ | (47,788) | | | $ | (1,511) | |
7. Income Taxes
The following table presents the relocation of manufacturing lines from our facility inprovision for income taxes for the Dominican Republic to a manufacturing facility in Mexico,three and severance charges recorded in connection with acquired businesses and the termination of a limited number of employees. We completed the cessation of manufacturing in our Dominican Republic facility in the third quarter of 2016.
Changes to the severance portion of our restructuring liability during the nine months ended September 30, 2017 were as follows:2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| September 30, 2021 | | September 30, 2020 | | September 30, 2021 | | September 30, 2020 |
| | | | | | | |
| | | | | | | |
Provision for income taxes | $ | 21,840 | | | $ | 15,181 | | | $ | 49,759 | | | $ | 15,106 | |
|
| | | | |
| | Severance |
Balance at December 31, 2016 | | $ | 17,350 |
|
Charges, net of reversals | | 11,747 |
|
Payments | | (20,072 | ) |
Impact of changes in foreign currency exchange rates | | 1,529 |
|
Balance at September 30, 2017 | | $ | 10,554 |
|
6. Debt
Our long-term debt and capital lease and other financing obligations as of September 30, 2017 and December 31, 2016 consisted of the following:
|
| | | | | | | | | | |
| | Maturity Date | | September 30, 2017 | | December 31, 2016 |
Term Loan | | October 14, 2021 | | $ | 927,794 |
| | $ | 937,794 |
|
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 | | | | (15,812 | ) | | (17,655 | ) |
Less: deferred financing costs | | | | (29,971 | ) | | (33,656 | ) |
Less: current portion | | | | (7,327 | ) | | (9,901 | ) |
Long-term debt, net | | | | $ | 3,224,684 |
| | $ | 3,226,582 |
|
| | | | | | |
Capital lease and other financing obligations | | | | $ | 35,839 |
| | $ | 37,111 |
|
Less: current portion | | | | (5,849 | ) | | (4,742 | ) |
Capital lease and other financing obligations, less current portion | | | | $ | 29,990 |
| | $ | 32,369 |
|
As of September 30, 2017, there was $415.3 million of availability under our $420.0 million revolving credit facility, net of $4.7 millionThe increase in letters of credit. Outstanding letters of credit are issued primarily for the benefit of certain operating activities. As of September 30, 2017, no amounts had been drawn against these outstanding letters of credit, which are scheduled to expire on various dates in 2017 and 2018.
Accrued Interest
Accrued interest associated with our outstanding debt is included as a component of Accrued expenses and other current liabilities in the condensed consolidated balance sheets. As of September 30, 2017 and December 31, 2016, accrued interest totaled $45.7 million and $36.8 million, respectively.
7. Income Taxes
We recorded a Provision for income taxestotal tax for the three months ended September 30, 2017 and 2016 of $14.8 million and $11.1 million, respectively, and2021 compared to the three months ended September 30, 2020 was primarily due to the increase in income before taxes. The increase in total tax for the nine months ended September 30, 20172021 compared to the nine months ended September 30, 2020 was predominantly due to the increase in income before taxes as impacted by the mix of profits in the various jurisdictions in which we operate as well as the nonrecurrence of the benefit recognized in the first quarter of 2020 as a result of the Coronavirus Aid, Relief, and 2016Economic Security Act (the "CARES Act").
In response to the global financial and health crisis caused by COVID-19, the U.S. federal government enacted the CARES Act on March 27, 2020. Federal limitations on interest deductions were reduced in connection with this legislation, and we recognized a deferred tax benefit of $47.8$7.5 million and $48.3 million, respectively. in the three months ended March 31, 2020, as we were able to utilize additional interest expense that was previously subject to a valuation allowance.
The Provisionprovision for income taxes consists of (1) current tax expense, which relates primarily to our profitable operations in non-U.S. tax jurisdictions with limited or no net operating loss carryforwards and withholding taxes related to management fees, royalties, and the repatriation of foreign earnings; and (2) deferred tax expense (or benefit), which relates torepresents adjustments in book-to-tax basis differences primarily duerelated to the step-up(a) book versus tax basis in fair value of fixed and intangible assets, including goodwill, acquired(b) changes in connection with business combination transactions, and the utilization of net operating losses.loss carryforwards, (c) changes in tax rates, and (d) changes in our assessment of the realizability of our deferred tax assets.
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 three and nine months ended September 30, 2016, we recognized a benefit2021 and 2020 the weighted-average ordinary shares outstanding used to calculate basic and diluted net income per share were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| September 30, 2021 | | September 30, 2020 | | September 30, 2021 | | September 30, 2020 |
Basic weighted-average ordinary shares outstanding | 158,394 | | | 157,220 | | | 158,122 | | | 157,335 | |
Dilutive effect of stock options | 603 | | | 233 | | | 660 | | | 211 | |
Dilutive effect of unvested restricted securities | 482 | | | 526 | | | 569 | | | 444 | |
Diluted weighted-average ordinary shares outstanding | 159,479 | | | 157,979 | | | 159,351 | | | 157,990 | |
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 taxes of $5.1 million and $3.7 million, respectively,per share or they related to the change in our U.S. valuation allowance associated with the acquisition of CST,equity awards that were contingently issuable for which deferred tax liabilitiesthe contingency had not been satisfied. These potential ordinary shares were established related primarily toas follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| September 30, 2021 | | September 30, 2020 | | September 30, 2021 | | September 30, 2020 |
Anti-dilutive shares excluded | 9 | | | 1,680 | | | 8 | | | 1,868 | |
Contingently issuable shares excluded | 1,072 | | | 1,183 | | | 1,037 | | | 1,010 | |
9. Inventories
The following table presents the step-upcomponents of tangible assets for book purposes.inventories as of September 30, 2021 and December 31, 2020:
| | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
Finished goods | $ | 185,044 | | | $ | 170,488 | |
Work-in-process | 102,671 | | | 87,006 | |
Raw materials | 263,913 | | | 193,511 | |
Inventories | $ | 551,628 | | | $ | 451,005 | |
8.
10. Pension and Other Post-Retirement Benefits
We provide various pension and other post-retirement benefit plans for current and former employees, including defined benefit, defined contribution, and retiree healthcare benefit plans.
The components of net periodic benefit cost/(credit) associated with our defined benefit and retiree healthcare plans for the three months ended September 30, 20172021 and 20162020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Plans | | Non-U.S. Plans | | |
| Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Total |
| 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Service cost | $ | — | | | $ | — | | | $ | 2 | | | $ | 2 | | | $ | 725 | | | $ | 777 | | | $ | 727 | | | $ | 779 | |
Interest cost | 167 | | | 206 | | | 21 | | | 37 | | | 405 | | | 294 | | | 593 | | | 537 | |
Expected return on plan assets | (226) | | | (292) | | | — | | | — | | | (177) | | | (177) | | | (403) | | | (469) | |
Amortization of net loss | 243 | | | 311 | | | — | | | (1) | | | 461 | | | 257 | | | 704 | | | 567 | |
Amortization of prior service (credit)/cost | — | | | — | | | (159) | | | (196) | | | 3 | | | 2 | | | (156) | | | (194) | |
Loss on settlement | 315 | | | 31 | | | — | | | — | | | — | | | 785 | | | 315 | | | 816 | |
Loss on curtailment | — | | | — | | | — | | | 249 | | | — | | | — | | | — | | | 249 | |
Net periodic benefit cost/(credit) | $ | 499 | | | $ | 256 | | | $ | (136) | | | $ | 91 | | | $ | 1,417 | | | $ | 1,938 | | | $ | 1,780 | | | $ | 2,285 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Plans | | Non-U.S. Plans | | |
| Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Total |
| September 30, | | September 30, | | September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
Service cost | $ | — |
| | $ | — |
| | $ | 21 |
| | $ | 25 |
| | $ | 661 |
| | $ | 697 |
| | $ | 682 |
| | $ | 722 |
|
Interest cost | 385 |
| | 332 |
| | 80 |
| | 94 |
| | 273 |
| | 298 |
| | 738 |
| | 724 |
|
Expected return on plan assets | (527 | ) | | (659 | ) | | — |
| | — |
| | (230 | ) | | (249 | ) | | (757 | ) | | (908 | ) |
Amortization of net loss | 291 |
| | 118 |
| | 8 |
| | 46 |
| | 64 |
| | 42 |
| | 363 |
| | 206 |
|
Amortization of prior service (credit) | — |
| | — |
| | (334 | ) | | (334 | ) | | (1 | ) | | (18 | ) | | (335 | ) | �� | (352 | ) |
Loss on settlement | 269 |
| | 140 |
| | — |
| | — |
| | — |
| | 1 |
| | 269 |
| | 141 |
|
Net periodic benefit cost/(credit) | $ | 418 |
| | $ | (69 | ) | | $ | (225 | ) | | $ | (169 | ) | | $ | 767 |
| | $ | 771 |
| | $ | 960 |
| | $ | 533 |
|
The components of net periodic benefit cost/(credit) associated with our defined benefit and retiree healthcare plans for the nine months ended September 30, 20172021 and 20162020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Plans | | Non-U.S. Plans | | |
| Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Total |
| 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Service cost | $ | — | | | $ | — | | | $ | 6 | | | $ | 7 | | | $ | 3,028 | | | $ | 2,485 | | | $ | 3,034 | | | $ | 2,492 | |
Interest cost | 407 | | | 679 | | | 63 | | | 110 | | | 1,210 | | | 1,005 | | | 1,680 | | | 1,794 | |
Expected return on plan assets | (678) | | | (1,018) | | | — | | | — | | | (534) | | | (523) | | | (1,212) | | | (1,541) | |
Amortization of net loss | 1,045 | | | 906 | | | — | | | 18 | | | 1,382 | | | 852 | | | 2,427 | | | 1,776 | |
Amortization of prior service (credit)/cost | — | | | — | | | (477) | | | (589) | | | 19 | | | 7 | | | (458) | | | (582) | |
Loss on settlement | 3,294 | | | 4,363 | | | — | | | — | | | — | | | 2,344 | | | 3,294 | | | 6,707 | |
Loss on curtailment | — | | | — | | | — | | | 249 | | | — | | | — | | | — | | | 249 | |
Net periodic benefit cost/(credit) | $ | 4,068 | | | $ | 4,930 | | | $ | (408) | | | $ | (205) | | | $ | 5,105 | | | $ | 6,170 | | | $ | 8,765 | | | $ | 10,895 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Plans | | Non-U.S. Plans | | |
| Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Total |
| September 30, | | September 30, | | September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
Service cost | $ | — |
| | $ | — |
| | $ | 64 |
| | $ | 76 |
| | $ | 1,917 |
| | $ | 2,003 |
| | $ | 1,981 |
| | $ | 2,079 |
|
Interest cost | 1,214 |
| | 1,109 |
| | 239 |
| | 283 |
| | 784 |
| | 887 |
| | 2,237 |
| | 2,279 |
|
Expected return on plan assets | (1,617 | ) | | (2,006 | ) | | — |
| | — |
| | (677 | ) | | (714 | ) | | (2,294 | ) | | (2,720 | ) |
Amortization of net loss | 854 |
| | 355 |
| | 32 |
| | 142 |
| | 202 |
| | 89 |
| | 1,088 |
| | 586 |
|
Amortization of prior service (credit)/cost | — |
| | — |
| | (1,001 | ) | | (1,001 | ) | | (3 | ) | | 8 |
| | (1,004 | ) | | (993 | ) |
Loss on settlement | 1,473 |
| | 730 |
| | — |
| | — |
| | — |
| | 1 |
| | 1,473 |
| | 731 |
|
Net periodic benefit cost/(credit) | $ | 1,924 |
| | $ | 188 |
| | $ | (666 | ) | | $ | (500 | ) | | $ | 2,223 |
| | $ | 2,274 |
| | $ | 3,481 |
| | $ | 1,962 |
|
9. Share-Based Payment Plans
Share-Based Compensation Expense
The table below presents non-cash compensation expense related to our equity awards, which is recorded within SG&A expenseComponents of net periodic benefit cost/(credit) other than service cost are presented in other, net in the condensed consolidated statements of operations, duringoperations. Refer to Note 6: Other, Net.
11. Debt
Our long-term debt, finance lease, and other financing obligations as of September 30, 2021 and December 31, 2020 consisted of the
identified periods:following: |
| | | | | | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Stock options | $ | 1,575 |
| | $ | 1,621 |
| | $ | 5,055 |
| | $ | 5,547 |
|
Restricted securities | 3,522 |
| | 3,136 |
| | 10,051 |
| | 7,732 |
|
Share-based compensation expense | $ | 5,097 |
| | $ | 4,757 |
| | $ | 15,106 |
| | $ | 13,279 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Maturity Date | | September 30, 2021 | | December 31, 2020 |
Term Loan | | September 20, 2026 | | $ | 452,623 | | | $ | 456,096 | |
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 | |
4.375% Senior Notes | | February 15, 2030 | | 450,000 | | | 450,000 | |
3.75% Senior Notes | | February 15, 2031 | | 750,000 | | | 750,000 | |
4.0% Senior Notes | | April 15, 2029 | | 1,000,000 | | | — | |
| | | | | | |
| | | | | | |
Less: discount, net of premium | | | | (5,652) | | | (9,605) | |
Less: deferred financing costs | | | | (27,953) | | | (28,114) | |
Less: current portion | | | | (4,630) | | | (754,630) | |
Long-term debt, net | | | | $ | 4,214,388 | | | $ | 3,213,747 | |
| | | | | | |
Finance lease and other financing obligations | | | | $ | 29,002 | | | $ | 30,506 | |
Less: current portion | | | | (2,002) | | | (2,575) | |
Finance lease and other financing obligations, less current portion | | | | $ | 27,000 | | | $ | 27,931 | |
Share-Based Compensation AwardsRevolving Credit Facility
As of September 30, 2021, we had $416.1 million available under our $420.0 million revolving credit facility (the "Revolving Credit Facility"), net of $3.9 million of obligations in respect of outstanding letters of credit issued thereunder. Outstanding letters of credit are issued primarily for the benefit of certain operating activities. As of September 30, 2021, no amounts had been drawn against these outstanding letters of credit.
6.25% Senior Notes redemption
On February 3, 2021, we announced that we intended to redeem in full the $750.0 million aggregate principal amount outstanding on our 6.25% senior notes due 2026 (the "6.25% Senior Notes"). On February 15, 2021, the “make-whole” premium with respect to the 6.25% Senior Notes expired. Accordingly, we reflected the 6.25% Senior Notes as a current liability on our consolidated balance sheet as of December 31, 2020.
We grant share-based compensation awards forredeemed the 6.25% Senior Notes on March 5, 2021 in accordance with the terms of the indenture under which vesting is subject only to continued employmentthe 6.25% Senior Notes were issued and the passageterms of time (options and restricted stock units ("RSUs" and each an "RSU")), as well as those for which vesting also depends on the attainmentnotice of certain performance criteria (performance-based options and performance-based restricted stock units ("PRSUs" and eachredemption at a "PRSU")).
redemption price equal to 103.125% of the aggregate
principal amount of the outstanding 6.25% Senior Notes, plus accrued and unpaid interest to (but not including) the redemption date. In addition to the $750.0 million aggregate principal amount outstanding, at redemption we paid the $23.4 million premium and $2.6 million accrued interest.
4.0% Senior Notes
On March 29, 2021, our indirect, wholly-owned subsidiary, Sensata Technologies B.V. ("STBV"), completed the issuance and sale of $750.0 million aggregate principal amount of 4.0% senior notes due 2029 (the "4.0% Senior Notes"). The 4.0% Senior Notes were issued under an indenture dated as of March 29, 2021 among STBV, as issuer, The Bank of New York Mellon, as trustee (the "Trustee"), and our guarantor subsidiaries (the "Guarantors") named therein (the "4.0% Senior Notes Indenture").
The 4.0% Senior Notes Indenture contains covenants that limit the ability of STBV and its subsidiaries to, among other things: incur liens; engage in sale and leaseback transactions; with respect to any subsidiary of STBV, incur indebtedness without such subsidiary’s guaranteeing the 4.0% Senior Notes; or consolidate, merge with, or sell, assign, convey, transfer, lease, or otherwise dispose of all or substantially all of their properties or assets to, another person. These covenants are subject to important exceptions and qualifications set forth in the 4.0% Senior Notes Indenture.
The 4.0% Senior Notes bear interest at 4.0% per year and mature on April 15, 2029. Interest is payable semi-annually on April 15 and October 15 of each year, commencing on October 15, 2021. The 4.0% Senior Notes are guaranteed by each of STBV's wholly-owned subsidiaries that is a borrower or guarantor under the senior secured credit facilities (the "Senior Secured Credit Facilities") of STBV's wholly-owned subsidiary Sensata Technologies, Inc. ("STI") and the issuer or a guarantor under our existing senior notes as follows: STBV's 4.875% Senior Notes due 2023, 5.625% Senior Notes due 2024, and 5.0% Senior Notes due 2025; and STI's 4.375% Senior Notes due 2030 and 3.75% Senior Notes due 2031.
At any time, and from time to time, prior to April 15, 2024, STBV may redeem the 4.0% Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the 4.0% Senior Notes being redeemed, plus a “make whole” premium, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. At any time on or after April 15, 2024, STBV may redeem the 4.0% Senior Notes, in whole or in part, at the following prices (expressed as a percentage of principal amount), plus accrued and unpaid interest, if any, up to but excluding the redemption date.
| | | | | | | | |
Period beginning April 15, | | Price |
2024 | | 102.000 | % |
2025 | | 101.000 | % |
2026 and thereafter | | 100.000 | % |
In addition, at any time prior to April 15, 2024, STBV may redeem up to 40% of the principal amount of the outstanding 4.0% Senior Notes (including additional 4.0% Senior Notes, if any, that may be issued after March 29, 2021) with the net cash proceeds of certain equity offerings at a redemption price (expressed as a percentage of principal amount) of 104.00%, plus accrued and unpaid interest, if any, up to but excluding the redemption date, provided that at least 60% of the aggregate principal amount of the 4.0% Senior Notes (including additional 4.0% Senior Notes, if any) remains outstanding immediately after each such redemption.
Upon the occurrence of certain changes in control, each holder of the 4.0% Senior Notes will have the right to require STBV to repurchase the 4.0% Senior Notes at 101% of their principal amount plus accrued and unpaid interest, if any, up to but excluding the date of repurchase.
Upon changes in certain tax laws or treaties, or any change in the official application, administration, or interpretation thereof, STBV may, at its option, redeem the 4.0% Senior Notes, in whole but not in part, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, up to but excluding the redemption date, premium, if any, and all Additional Amounts (as defined in the 4.0% Senior Notes Indenture), if any, then due and which will become due on the date of redemption.
On April 8, 2021, STBV completed the issuance and sale of an additional $250.0 million in aggregate principal amount of 4.0% Senior Notes (the “Additional Notes”). The Additional Notes were priced at 100.75% and were issued pursuant to the 4.0% Senior Notes Indenture, as supplemented by the First Supplemental Indenture, dated as of April 8, 2021, among STBV, the Guarantors, and the Trustee. The Additional Notes are consolidated and form a single class with the $750.0 million aggregate principal amount of 4.0% Senior Notes issued by STBV on March 29, 2021 (the “Initial Notes”). The Additional Notes have the same terms as the Initial Notes, other than with respect to the date of issuance and the issue price.
We grantedintend to use the following options undernet proceeds from the Sensata Technologies Holding N.V. 2010 Equity Incentive Plan (the "2010 Equity Plan") duringissuance and sale of the 4.0% Senior Notes and the Additional Notes for general corporate purposes, which may include working capital, capital expenditures, the acquisition of other companies, businesses, or assets, strategic investments, the refinancing or repayment of debt, and share repurchases.
Accounting for Debt Financing Transactions
We account for our debt financing transactions as disclosed in Note 2: Significant Accounting Policies of the audited consolidated financial statements and notes thereto included in our 2020 Annual Report.
In the nine months ended September 30, 2017:2021, in connection with the redemption of the 6.25% Senior Notes, we recognized a loss of $30.1 million, which included $23.4 million in premiums paid, with the remaining loss representing write-off of debt discounts and deferred financing costs. In addition, in connection with the issuance of the 4.0% Senior Notes, we recognized $9.6 million of deferred financing costs, which are presented as a reduction of long-term debt on our condensed consolidated balance sheets and $1.7 million of issuance premiums, which are presented as an addition to long-term debt on our condensed consolidated balance sheets.
|
| | | | | | |
Options Granted to | | Number of Options Granted (in thousands) | | Weighted- Average Grant Date Fair Value | | Vesting Period |
Various executives and employees | | 387 | | $14.50 | | 25% per year over four years |
We grantedAccrued interest associated with our outstanding debt is included as a component of accrued expenses and other current liabilities in the following RSUs and PRSUs under the 2010 Equity Plan during the nine months endedcondensed consolidated balance sheets. As of September 30, 2017:2021 and December 31, 2020, accrued interest totaled $64.7 million and $53.6 million, respectively.
|
| | | | | | | | |
Awards Granted to | | Type of Award | | Number of Units Granted (in thousands) | | Percentage of PRSUs Awarded That May Vest
| | Weighted- Average Grant Date Fair Value |
Various executives and employees | | RSU (1) | | 147 | | N/A | | $43.67 |
Directors | | RSU (1) | | 34 | | N/A | | $41.10 |
Various executives and employees | | PRSU (2) | | 183 | | 0.0% - 172.5% | | $43.67 |
Various executives and employees | | PRSU (2) | | 53 | | 0.0% - 200.0% | | $43.33 |
| |
(1)
| RSUs granted during the nine months ended September 30, 2017 vest on various dates between June 2018 and July 2020. |
| |
(2)
| PRSUs granted during the nine months ended September 30, 2017 vest on various dates between April and May 2020, with the amount ultimately vesting within the range shown in the table above, dependent on the extent to which certain performance criteria are met. |
Option Exercises
During the nine months ended September 30, 2017, 266 stock options were exercised, all of which were settled with shares reissued from treasury.
10.12. Commitments and Contingencies
Legal Proceedings and Claims
We are regularly involved in a number of claims and litigation matters that arise 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. 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 resultresults of operations, financial position, and/or cash flows.
13. Shareholders' Equity
Ordinary and Treasury Shares
Our authorized share capital consists of 177,069 ordinary shares with a nominal value of €0.01 per share. From time to time, our Board of Directors has authorized various share repurchase programs, which may be modified or terminated by the Board at any time. We currently have an authorized $500.0 million share repurchase program under which approximately $302.3 million remained available as of September 30, 2021. On April 2, 2020, we announced a temporary suspension of this share repurchase program. We intend to resume our share repurchase program in the fourth quarter.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss for the nine months ended September 30, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Cash Flow Hedges | | Defined Benefit and Retiree Healthcare Plans | | Accumulated Other Comprehensive Loss |
Balance at December 31, 2020 | | $ | (6,733) | | | $ | (42,802) | | | $ | (49,535) | |
Other comprehensive income before reclassifications, net of tax | | 16,032 | | | — | | | 16,032 | |
Reclassifications from accumulated other comprehensive loss, net of tax | | 2,619 | | | 3,978 | | | 6,597 | |
Other comprehensive income | | 18,651 | | | 3,978 | | | 22,629 | |
Balance at September 30, 2021 | | $ | 11,918 | | | $ | (38,824) | | | $ | (26,906) | |
The amounts reclassified from accumulated other comprehensive loss for the three and nine months ended September 30, 2021 and 2020 were as follows:
11. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, | | Affected Line in Condensed Consolidated Statements of Operations |
Component | | 2021 | | 2020 | | 2021 | | 2020 | |
Derivative instruments designated and qualifying as cash flow hedges: | | | | | | | | | | |
Foreign currency forward contracts | | $ | 1,976 | | | $ | (625) | | | $ | 9,816 | | | $ | (13,640) | | | Net revenue (1) |
Foreign currency forward contracts | | (3,557) | | | 3,371 | | | (6,324) | | | 1,796 | | | Cost of revenue (1) |
| | | | | | | | | | |
Total, before taxes | | (1,581) | | | 2,746 | | | 3,492 | | | (11,844) | | | Income before taxes |
Income tax effect | | 395 | | | (687) | | | (873) | | | 2,961 | | | Provision for income taxes |
Total, net of taxes | | $ | (1,186) | | | $ | 2,059 | | | $ | 2,619 | | | $ | (8,883) | | | Net income |
| | | | | | | | | | |
Defined benefit and retiree healthcare plans | | $ | 863 | | | $ | 1,438 | | | $ | 5,263 | | | $ | 8,150 | | | Other, net (2) |
| | | | | | | | | | |
| | | | | | | | | | |
Income tax effect | | (269) | | | (423) | | | (1,285) | | | (2,121) | | | Provision for income taxes |
Total, net of taxes | | $ | 594 | | | $ | 1,015 | | | $ | 3,978 | | | $ | 6,029 | | | Net income |
__________________________
(1) Refer to Note 15: Derivative Instruments and Hedging Activities for additional information on amounts to be reclassified from accumulated other comprehensive loss in future periods.
(2) Refer to Note 10:Pension and Other Post-Retirement Benefits for additional information on net periodic benefit cost/(credit).
14. 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 820, Fair Value Measurement.
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 September 30, 20172021 and December 31, 2016, aggregated by2020 are 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.
| | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
Assets | | | |
Foreign currency forward contracts | $ | 19,070 | | | $ | 16,163 | |
Commodity forward contracts | 2,625 | | | 8,902 | |
Total | $ | 21,695 | | | $ | 25,065 | |
| | | |
Liabilities | | | |
Foreign currency forward contracts | $ | 5,014 | | | $ | 24,660 | |
Commodity forward contracts | 6,983 | | | 310 | |
Total | $ | 11,997 | | | $ | 24,970 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets | | | | | | | | | | | |
Foreign currency forward contracts | $ | — |
| | $ | 8,869 |
| | $ | — |
| | $ | — |
| | $ | 32,757 |
| | $ | — |
|
Commodity forward contracts | — |
| | 4,847 |
| | — |
| | — |
| | 2,639 |
| | — |
|
Total | $ | — |
| | $ | 13,716 |
| | $ | — |
| | $ | — |
| | $ | 35,396 |
| | $ | — |
|
Liabilities | | | | | | | | | | | |
Foreign currency forward contracts | $ | — |
| | $ | 31,911 |
| | $ | — |
| | $ | — |
| | $ | 27,201 |
| | $ | — |
|
Commodity forward contracts | — |
| | 1,666 |
| | — |
| | — |
| | 3,790 |
| | — |
|
Total | $ | — |
| | $ | 33,577 |
| | $ | — |
| | $ | — |
| | $ | 30,991 |
| | $ | — |
|
Refer to Note 15: Derivative Instruments and Hedging Activities for additional information related to our forward contracts.Measured on a Nonrecurring Basis
We evaluated our goodwill and other indefinite-lived intangible assets for impairment as of October 1, 20162020 and determined that these assetsthey were not impaired. As ofDuring the nine months ended September 30, 2017,2021, no events or changes in circumstances occurred that would have triggered the need for an additional impairment review of goodwill or indefinite-lived intangiblethese assets.
A long-lived asset, which includes Property, plant, and equipment ("PP&E"), is considered held for sale when it meets certain criteria described in FASB ASC 360, Property, Plant, and Equipment. A long-lived asset classified as held for sale is initially measured at the lower of its carrying amount or fair value less cost to sell, and a loss is recognized for any initial adjustment of the asset's carrying amount to its fair value less cost to sell in the period the held for sale criteria are met. In the period that a long-lived asset is considered held for sale it is presented within Prepaid expenses and other current assets on our balance sheet where it remains until it is either sold or no longer meets the held for sale criteria. For comparative purposes, the prior year carrying amount of a long-lived asset considered held for sale is presented within Other assets on our balance sheet.
In the first quarter of 2017, we determined that one of our facilities met the held for sale criteria and recorded it at its fair value less costs to sell of $1.7 million (which approximated its net carrying value at that time). In the third quarter of 2017,2021, we soldreorganized our Sensing Solutions operating segment, moving the assetportion of our electrical protection product category that includes high voltage contactors, inverters, and battery management systems from the industrial business unit to a new business unit, Clean Energy Solutions. We have concluded that this reorganization has not impacted our reportable or operating segment evaluations. Clean Energy Solutions will focus on electric vehicle infrastructure, energy storage, smart grid, and renewable energy applications. The reorganization was effective beginning July 1, 2021. We evaluated our goodwill and other indefinite-lived intangible assets for an immaterial gain.
The fair value of assets held for sale is considered to be a Level 3 fair value measurementimpairment before and isafter the reorganization and determined based on the use of appraisals, input from market participants, our experience selling similar assets, internally developed cash flow models, or a combination thereof.
that they were not impaired.
Financial Instruments Not Recorded at Fair Value
The following table presents the carrying values and fair values of financial instruments not recorded at fair value in the condensed consolidated balance sheets as of September 30, 20172021 and December 31, 2016:2020. All fair value measures presented are categorized in Level 2 of the fair value hierarchy.
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
| Carrying Value (1) | | Fair Value | | Carrying Value (1) | | Fair Value |
Liabilities | | | | | | | |
Term Loan | $ | 452,623 | | | $ | 452,057 | | | $ | 456,096 | | | $ | 454,955 | |
4.875% Senior Notes | $ | 500,000 | | | $ | 532,500 | | | $ | 500,000 | | | $ | 538,750 | |
5.625% Senior Notes | $ | 400,000 | | | $ | 444,000 | | | $ | 400,000 | | | $ | 448,000 | |
5.0% Senior Notes | $ | 700,000 | | | $ | 771,750 | | | $ | 700,000 | | | $ | 777,000 | |
6.25% Senior Notes | $ | — | | | $ | — | | | $ | 750,000 | | | $ | 778,125 | |
4.375% Senior Notes | $ | 450,000 | | | $ | 483,750 | | | $ | 450,000 | | | $ | 487,125 | |
3.75% Senior Notes | $ | 750,000 | | | $ | 750,000 | | | $ | 750,000 | | | $ | 776,250 | |
4.0% Senior Notes | $ | 1,000,000 | | | $ | 1,012,500 | | | $ | — | | | $ | — | |
| | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Carrying Value (1) | | Fair Value | | Carrying Value (1) | | Fair Value |
| | Level 1 | | Level 2 | | Level 3 | | | Level 1 | | Level 2 | | Level 3 |
Liabilities | | | | | | | | | | | | | | | |
Term Loan | $ | 927,794 |
| | $ | — |
| | $ | 932,433 |
| | $ | — |
| | $ | 937,794 |
| | $ | — |
| | $ | 942,483 |
| | $ | — |
|
4.875% Senior Notes | $ | 500,000 |
| | $ | — |
| | $ | 525,000 |
| | $ | — |
| | $ | 500,000 |
| | $ | — |
| | $ | 514,375 |
| | $ | — |
|
5.625% Senior Notes | $ | 400,000 |
| | $ | — |
| | $ | 440,000 |
| | $ | — |
| | $ | 400,000 |
| | $ | — |
| | $ | 417,752 |
| | $ | — |
|
5.0% Senior Notes | $ | 700,000 |
| | $ | — |
| | $ | 736,750 |
| | $ | — |
| | $ | 700,000 |
| | $ | — |
| | $ | 686,000 |
| | $ | — |
|
6.25% Senior Notes | $ | 750,000 |
| | $ | — |
| | $ | 819,375 |
| | $ | — |
| | $ | 750,000 |
| | $ | — |
| | $ | 786,098 |
| | $ | — |
|
(1) Carrying value excludes Excluding any related debt discounts, or premiums, and deferred financing costs.
The fair values of the Term Loan and senior notes are primarily determined using observable prices in markets where these instruments are generally not traded on a daily basis.
Cash and cash equivalents accounts receivable, and accounts payable are carried at their cost, which approximates fair value because of their short-term nature.
In March 2016,addition to the above, we acquired $50.0 millionhold certain equity investments that do not have readily determinable fair values for which we use the measurement alternative prescribed in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 321, Investments - Equity Securities. Such investments are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of Series B Preferred Stockthe same issuer. There were no impairments or changes resulting from observable transactions for any of these investments and no adjustments were made to their carrying values.
Refer to the table below for the carrying values of equity investments using the measurement alternative, which are presented as a component of other assets in the condensed consolidated balance sheets.
| | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
Quanergy | $ | 50,000 | | | $ | 50,000 | |
Other | 15,000 | | | 15,000 | |
| | | |
Total | $ | 65,000 | | | $ | 65,000 | |
On June 22, 2021, Quanergy Systems, Inc., ("Quanergy") announced that it had entered into a definitive business combination agreement with CITIC Capital Acquisition Corp (NYSE: CCAC). Upon closing of the business combination, which we recognized asis expected to be in the fourth quarter of 2021, subject to customary closing conditions and the effectiveness of a cost methodRegistration Statement on Form S-4, the combined company is expected to be listed on the New York Stock Exchange ("NYSE") under the ticker symbol QNGY. We have assessed our investment in Quanergy based on our balance sheet. Asthe proposed terms of September 30, 2017, the fair value of this asset has not been estimated, asbusiness combination agreement and concluded that there arewere no indicators of impairment and it is not practicableas of September 30, 2021. Subsequent to estimate its fair value dueclosing, we will mark our investment to the restricted marketability of this investment.market each reporting period.
12.15. Derivative Instruments and Hedging Activities
Hedges of Foreign Currency Risk
We are exposed to fluctuations in various foreign currencies against our functional currency, the U.S. dollar. We use foreign currency forward agreements 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 instruments are not designated for hedge accounting treatment in accordance with FASB ASC 815, Derivatives and Hedging. Foreign currency forward contracts not designated as hedges are not speculative and are used to manage our exposure to foreign exchange movements.
For the three and nine months ended September 30, 20172021 and 2016,2020, amounts excluded from the ineffective portionassessment of the changes in the fair valueeffectiveness of our foreign currency forward agreementscontracts that are designated as cash flow hedges waswere not material and no amounts were excluded from the assessment of effectiveness.material. As of September 30, 2017,2021, we estimateestimated that $18.4$14.0 million of net lossesgains will be reclassified from Accumulatedaccumulated other comprehensive loss to earnings during the twelve-month period ending September 30, 2018.
2022.
As of September 30, 2017,2021, we had the following outstanding foreign currency forward contracts:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Notional (in millions) | | Effective Date(s) | | Maturity Date(s) | | Index (Exchange Rates) | | Weighted-Average Strike Rate | | Hedge Designation (1) |
13.0 EUR | | September 28, 2021 | | October 29, 2021 | | Euro ("EUR") to USD | | 1.17 USD | | Not designated |
383.8 EUR | | Various from November 19, 2019 to September 23, 2021 | | Various from October 29, 2021 to September 29, 2023 | | EUR to USD | | 1.19 USD | | Cash flow hedge |
881.0 CNY | | September 27, 2021 | | October 29, 2021 | | USD to Chinese Renminbi ("CNY") | | 6.49 CNY | | Not designated |
260.4 CNY | | Various from November 5, 2020 to January 5, 2021 | | Various from 10/19/21 to December 31, 2021 | | USD to CNY | | 6.68 CNY | | Cash flow hedge |
518.0 JPY | | September 28, 2021 | | October 29, 2021 | | USD to Japanese Yen ("JPY") | | 111.59 JPY | | Not designated |
| | | | | | | | | | |
Notional
(in millions) 21,416.7 KRW | | Effective Date(s) | | Maturity Date(s) | | Index | | Weighted- Average Strike Rate | | Hedge Designation |
65.0 EUR | | September 27, 2017 | | October 31, 2017 | | Euro to U.S. Dollar Exchange Rate | | 1.18 USD | | Not designated |
461.6 EUR | | Various from April 2015November 19, 2019 to September 201723, 2021 | | Various from October 201729, 2021 to December 2019August 31, 2023 | | EuroUSD to U.S. Dollar Exchange RateKorean Won ("KRW") | | 1.14 USD1,149.75 KRW | | DesignatedCash flow hedge |
500.0 CNY | | September 26, 2017 | | October 31, 2017 | | U.S. Dollar to Chinese Renminbi Exchange Rate | | 6.68 CNY | | Not designated |
132.0 CNY26.0 MYR | | September 27, 2021 | | October 29, 2021 | | USD to Malaysian Ringgit ("MYR") | | 4.19 MYR | | Not designated |
| | | | | | | | | | |
408.0 MXN | | September 28, 2021 | | October 29, 2021 | | USD to Mexican Peso ("MXN") | | 20.39 MXN | | Not designated |
3,290.0 MXN | | Various in February 2017from November 19, 2019 to September 23, 2019 | | Various from October 29, 2021 to December 2017September 29, 2023 | | U.S. DollarUSD to Chinese Renminbi Exchange RateMXN | | 7.05 CNY22.28 MXN | | DesignatedCash flow hedge |
110.0 JPY3.2 GBP | | September 27, 201728, 2021 | | October 31, 201729, 2021 | | U.S. DollarBritish Pound Sterling ("GBP") to Japanese Yen Exchange RateUSD | | 112.80 JPY1.35 USD | | Not designatedDesignated |
237.0 JPY52.4 GBP | | January 5, 2017Various from November 19, 2019 to September 23, 2021 | | Various from October to December 2017 | | U.S. Dollar to Japanese Yen Exchange Rate | | 113.71 JPY | | Designated |
45,258.3 KRW | | Various from April 201529, 2021 to September 201729, 2023 | | Various from October 2017GBP to August 2019USD | | U.S. Dollar to Korean Won Exchange Rate1.34 USD | | 1,140.77 KRW | | Designated |
36.5 MYR | | Various from April 2015 to November 2016 | | Various from October 2017 to October 2018 | | U.S. Dollar to Malaysian Ringgit Exchange Rate | | 4.19 MYR | | Designated |
182.0 MXN | | September 27, 2017 | | October 31, 2017 | | U.S. Dollar to Mexican Peso Exchange Rate | | 18.24 MXN | | Not designated |
2,166.8 MXN | | Various from April 2015 to September 2017 | | Various from October 2017 to August 2019 | | U.S. Dollar to Mexican Peso Exchange Rate | | 19.94 MXN | | Designated |
44.5 GBP | | Various from April 2015 to September 2017 | | Various from October 2017 to August 2019 | | British Pound Sterling to U.S. Dollar Exchange Rate | | 1.33 USD | | DesignatedCash flow hedge |
The notional amounts above represent the total quantities we have outstanding over the remaining contracted periods._________________________
Hedges of Commodity Risk
Our objective in using commodity forward contracts is to offset a portion of our exposure to the potential change in prices associated with certain commodities used in the manufacturing of our products, including silver, gold, nickel, aluminum, copper, platinum, and palladium. The terms of these forward contracts fix the price at a future date for various notional amounts associated with these commodities. These(1) Derivative financial instruments are not designated for hedge accounting treatment in accordance with FASB ASC 815. Commodity forward contracts not designated as hedges are not speculative and are used to manage our exposure to commodity price movements.currency exchange rate risk. They are intended to preserve economic value, and they are not used for trading or speculative purposes.
WeHedges of Commodity Risk
As of September 30, 2021, we had the following outstanding commodity forward contracts, none of which were designated as derivativesfor hedge accounting treatment in qualifying hedging relationships, as of September 30, 2017:
accordance with FASB ASC Topic 815, Derivatives and Hedging: |
| | | | | | | | | | | | | | | | | | | |
Commodity | | Notional | | Remaining Contracted Periods | | Weighted-Average Strike Price Per Unit |
Silver | | 1,109,4551,144,155 troy oz. | | October 20172021 - August 2019September 2023 | | $17.6924.68 |
Gold | | 12,15010,247 troy oz. | | October 20172021 - August 2019September 2023 | | $1,269.401,822.43 |
Nickel | | 287,659247,207 pounds | | October 20172021 - August 2019September 2023 | | $4.687.91 |
Aluminum | | 5,554,3703,482,343 pounds | | October 20172021 - August 2019September 2023 | | $0.841.06 |
Copper | | 7,394,0184,355,707 pounds | | October 20172021 - August 2019September 2023 | | $2.544.01 |
Platinum | | 8,03612,880 troy oz. | | October 20172021 - August 2019September 2023 | | $996.801,032.88 |
Palladium | | 1,9271,678 troy oz. | | October 20172021 - August 2019September 2023 | | $759.112,434.27 |
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 condensed consolidated balance sheets as of September 30, 20172021 and December 31, 2016:2020:
| | | Asset Derivatives | | Liability Derivatives | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value | | Fair Value | | Asset Derivatives | | Liability Derivatives |
| Balance Sheet Location | | September 30, 2017 | | December 31, 2016 | | Balance Sheet Location | | September 30, 2017 | | December 31, 2016 | | Balance Sheet Location | | September 30, 2021 | | December 31, 2020 | | Balance Sheet Location | | September 30, 2021 | | December 31, 2020 |
Derivatives designated as hedging instruments | | | | | | | | | Derivatives designated as hedging instruments | | | | | | |
Foreign currency forward contracts | Prepaid expenses and other current assets | | $ | 6,909 |
| | $ | 24,796 |
| | Accrued expenses and other current liabilities | | $ | 23,838 |
| | $ | 20,990 |
| Foreign currency forward contracts | Prepaid expenses and other current assets | | $ | 15,613 | | | $ | 11,281 | | | Accrued expenses and other current liabilities | | $ | 3,756 | | | $ | 18,834 | |
Foreign currency forward contracts | Other assets | | 1,956 |
| | 5,693 |
| | Other long-term liabilities | | 7,327 |
| | 3,814 |
| Foreign currency forward contracts | Other assets | | 3,424 | | | 4,728 | | | Other long-term liabilities | | 880 | | | 5,182 | |
Total | | $ | 8,865 |
| | $ | 30,489 |
| | $ | 31,165 |
| | $ | 24,804 |
| Total | | $ | 19,037 | | | $ | 16,009 | | | $ | 4,636 | | | $ | 24,016 | |
Derivatives not designated as hedging instruments | | | | | | | | | Derivatives not designated as hedging instruments | | | | | | |
Commodity forward contracts | Prepaid expenses and other current assets | | $ | 4,173 |
| | $ | 2,097 |
| | Accrued expenses and other current liabilities | | $ | 1,400 |
| | $ | 2,764 |
| Commodity forward contracts | Prepaid expenses and other current assets | | $ | 2,441 | | | $ | 7,598 | | | Accrued expenses and other current liabilities | | $ | 4,712 | | | $ | 149 | |
Commodity forward contracts | Other assets | | 674 |
| | 542 |
| | Other long-term liabilities | | 266 |
| | 1,026 |
| Commodity forward contracts | Other assets | | 184 | | | 1,304 | | | Other long-term liabilities | | 2,271 | | | 161 | |
Foreign currency forward contracts | Prepaid expenses and other current assets | | 4 |
| | 2,268 |
| | Accrued expenses and other current liabilities | | 746 |
| | 2,397 |
| Foreign currency forward contracts | Prepaid expenses and other current assets | | 33 | | | 154 | | | Accrued expenses and other current liabilities | | 378 | | | 644 | |
Total | | $ | 4,851 |
| | $ | 4,907 |
| | $ | 2,412 |
| | $ | 6,187 |
| Total | | $ | 2,658 | | | $ | 9,056 | | | $ | 7,361 | | | $ | 954 | |
These fair value measurements arewere all categorized within Level 2 of the fair value hierarchy.
The following tables present the effect of our derivative financial instruments on the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive income for the three months ended September 30, 20172021 and 2016:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 |
| 2021 | | 2020 | | | 2021 | | 2020 |
Foreign currency forward contracts | | $ | 9,379 | | | $ | (12,666) | | | Net revenue | | $ | (1,976) | | | $ | 625 | |
Foreign currency forward contracts | | $ | (3,832) | | | $ | 7,021 | | | Cost of revenue | | $ | 3,557 | | | $ | (3,371) | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
Derivatives designated as hedging instruments | | Amount of Deferred (Loss)/Gain Recognized in Other Comprehensive 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 |
| | September 30, 2017 | | September 30, 2016 | | | | September 30, 2017 | | September 30, 2016 |
Foreign currency forward contracts | | $ | (16,688 | ) | | $ | (6,929 | ) | | Net revenue | | $ | (4,075 | ) | | $ | 2,771 |
|
Foreign currency forward contracts | | $ | 1,614 |
| | $ | (6,450 | ) | | Cost of revenue | | $ | (1,953 | ) | | $ | (4,834 | ) |
|
| | | | | | | | | | |
Derivatives not designated as hedging instruments | | Amount of Gain/(Loss) Recognized in Net Income | | Location of Gain/(Loss) Recognized in Net Income |
| | September 30, 2017 | | September 30, 2016 | | |
Commodity forward contracts | | $ | 2,956 |
| | $ | 1,318 |
| | Other, net |
Foreign currency forward contracts | | $ | (3,865 | ) | | $ | (3,827 | ) | | Other, net |
| | | | | | | | | | | | | | | | | | | | |
Derivatives not designated as hedging instruments | | Amount of (Loss)/Gain Recognized in Net Income | | Location of (Loss)/Gain Recognized in Net Income |
| 2021 | | 2020 | |
Commodity forward contracts | | $ | (6,495) | | | $ | 6,138 | | | Other, net |
Foreign currency forward contracts | | $ | (2,414) | | | $ | (1,060) | | | Other, net |
The following tables present the effect of our derivative financial instruments on the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive income for the nine months ended September 30, 20172021 and 2016:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 |
| 2021 | | 2020 | | | 2021 | | 2020 |
Foreign currency forward contracts | | $ | 21,825 | | | $ | (6,076) | | | Net revenue | | $ | (9,816) | | | $ | 13,640 | |
Foreign currency forward contracts | | $ | (449) | | | $ | (17,342) | | | Cost of revenue | | $ | 6,324 | | | $ | (1,796) | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
Derivatives designated as hedging instruments | | Amount of Deferred (Loss)/Gain Recognized in Other Comprehensive Loss | | 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 |
| | September 30, 2017 | | September 30, 2016 | | | | September 30, 2017 | | September 30, 2016 |
Foreign currency forward contracts | | $ | (56,479 | ) | | $ | (12,810 | ) | | Net revenue | | $ | 3,678 |
| | $ | 15,075 |
|
Foreign currency forward contracts | | $ | 23,041 |
| | $ | (20,319 | ) | | Cost of revenue | | $ | (13,356 | ) | | $ | (14,857 | ) |
| | Derivatives not designated as hedging instruments | | Amount of Gain/(Loss) Recognized in Net Income | | Location of Gain/(Loss) Recognized in Net Income | Derivatives not designated as hedging instruments | | Amount of (Loss)/Gain Recognized in Net Income | | Location of (Loss)/Gain Recognized in Net Income |
| | September 30, 2017 | | September 30, 2016 | | | |
Derivatives not designated as hedging instruments | | Derivatives not designated as hedging instruments | | 2021 | | 2020 | | Location of (Loss)/Gain Recognized in Net Income |
| $ | 6,439 |
| | $ | 12,049 |
| | Other, net | | $ | (6,462) | | | $ | 5,990 | | |
Foreign currency forward contracts | | $ | (10,542 | ) | | $ | (7,912 | ) | | Other, net | Foreign currency forward contracts | | $ | (4,791) | | | $ | (4,424) | | | 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 September 30, 2017,2021, the termination value of outstanding derivatives in a liability position, excluding any adjustment for non-performance risk, was $33.8$12.1 million. As of September 30, 2017,2021, we havehad 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.
13. Other, Net16. Acquisitions
Other, net consistedXirgo Technologies, LLC
On February 11, 2021, we entered into a securities purchase agreement (the "Xirgo SPA") to acquire all of the outstanding equity interests of Xirgo Technologies, LLC ("Xirgo"), a leading provider of telematics and data insight, headquartered in Camarillo, California. The transaction contemplated by the Xirgo SPA closed on April 1, 2021 for an aggregate cash purchase price of $401.7 million, subject to certain post-closing items. The purchase price is net of $7.0 million related to employee retention, reflected in operating cash flows. The product offerings and technology of Xirgo will augment our existing portfolio in advancing our Insights megatrend initiative. We are integrating Xirgo into our Performance Sensing reportable segment.
The following gains/(losses)table summarizes the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed:
| | | | | | | | |
Net working capital, excluding cash | | $ | 11,536 | |
Property, plant and equipment | | 1,427 | |
Goodwill | | 177,268 | |
Other intangible assets | | 249,612 | |
Other assets | | 508 | |
Deferred income tax liabilities | | (45,506) | |
Other long-term liabilities | | (292) | |
Fair value of net assets acquired, excluding cash and cash equivalents | | 394,553 | |
Cash and cash equivalents | | 7,117 | |
Fair value of net assets acquired | | $ | 401,670 | |
The allocation of purchase price of Xirgo is preliminary, and is based on management’s judgments after evaluating several factors, including preliminary valuation assessments of tangible and intangible assets. The final allocation of the purchase 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 $177.3 million, which represents future economic benefits expected to arise from synergies from combining operations and the extension of existing customer relationships. The amount of goodwill recognized 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 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 Lives (years) |
Acquired definite-lived intangible assets | | | | |
Customer relationships | | $ | 198,540 | | | 15 |
Completed technologies | | 44,130 | | | 10 |
Tradenames | | 6,930 | | | 11 |
Other | | 12 | | | 1 |
Total definite-lived intangible assets acquired | | $ | 249,612 | | | 14 |
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.
Spear Power Systems
On August 23, 2021, we entered into a securities purchase agreement ("SPA") to acquire all of the outstanding equity interests of Spear Power Systems ("Spear") for $100 million plus $30 million of contingent consideration. Spear is headquartered in Grandview, Missouri, and is a leader in electrification solutions, developing next generation scalable lithium-ion battery storage systems for demanding land, sea, and air applications. The transaction contemplated by this SPA is subject to clearance under the Hart-Scott-Rodino Act and other customary closing conditions, and is expected to be completed in the fourth quarter of 2021. The acquisition of Spear advances Sensata’s electrification portfolio and strategy into new clean energy markets. Spear expands on Sensata’s acquisition of Lithium Balance in battery management systems and provides energy storage solutions for original equipment manufacturers ("OEMs") and system integrators in fast-growing end markets that offer significant growth opportunities. Spear will be integrated into our Sensing Solutions Segment.
SmartWitness Holdings, Inc.
On October 4, 2021, we entered into an SPA to acquire all of the outstanding equity interests of SmartWitness Holdings, Inc. ("SmartWitness") for $191.4 million. SmartWitness is headquartered in Schaumburg, Illinois and expands the capabilities of Sensata Insights into high growth video telematics applications, providing access to applications that will drive adoption of traditional and video telematics solutions. SmartWitness will be integrated into the Performance Sensing reportable segment.
17. Segment Reporting
We operate in, and report financial information for, the three and nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Currency remeasurement gain on net monetary assets | $ | 3,989 |
| | $ | 1,707 |
| | $ | 11,010 |
| | $ | 550 |
|
Loss on foreign currency forward contracts | (3,865 | ) | | (3,827 | ) | | (10,542 | ) | | (7,912 | ) |
Gain on commodity forward contracts | 2,956 |
| | 1,318 |
| | 6,439 |
| | 12,049 |
|
Other | 32 |
| | 76 |
| | 283 |
| | 205 |
|
Other, net | $ | 3,112 |
| | $ | (726 | ) | | $ | 7,190 |
| | $ | 4,892 |
|
14. Segment Reporting
We organize our business into twofollowing 2 reportable segments,segments: Performance Sensing and Sensing Solutions,Solutions. The Performance Sensing reportable segment consists of 2 operating segments, Automotive and HVOR, each of which meet the criteria for aggregation in FASB ASC Topic 280, Reportable Segments. The Sensing Solutions reportable segment is also an operating segment.
Our operating segments are businesses that we manage as components of an enterprise, for which separate financial information 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 profit,segment operating income, which excludes amortization expense,of intangible assets, restructuring and specialother charges, net, certain costs associated with our strategic megatrend initiatives, and certain corporate costs/costs or credits not associated with the operations of the segment, including share-based compensation expense and a portion of depreciation expense associated with assets recordedrecognized 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 profit,segment operating income, 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, profit from operationsoperating income or other measures of financial performance prepared in accordance with U.S. GAAP. The accounting policies of each of our reporting segments are materially consistent with those in the summary of significant accounting policies as described in Note 2, "Significant2: Significant Accounting Policies" of the audited consolidated financial statements and notes thereto included in our 2020 Annual Report on Form 10-K for the year ended December 31, 2016.Report.
The following table presents Netnet revenue and Segment profitsegment operating income for the reportedreportable segments and other operating results not allocated to the reportedreportable segments for the three and nine months ended September 30, 20172021 and 2016:2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| September 30, 2021 | | September 30, 2020 | | September 30, 2021 | | September 30, 2020 |
Net revenue: | | | | | | | |
Performance Sensing | $ | 706,466 | | | $ | 580,936 | | | $ | 2,162,830 | | | $ | 1,534,832 | |
Sensing Solutions | 244,555 | | | 207,377 | | | 723,379 | | | 604,255 | |
Total net revenue | $ | 951,021 | | | $ | 788,313 | | | $ | 2,886,209 | | | $ | 2,139,087 | |
Segment operating income (as defined above): | | | | | | | |
Performance Sensing | $ | 193,742 | | | $ | 151,626 | | | $ | 591,650 | | | $ | 347,428 | |
Sensing Solutions | 75,262 | | | 58,229 | | | 218,705 | | | 170,545 | |
Total segment operating income | 269,004 | | | 209,855 | | | 810,355 | | | 517,973 | |
Corporate and other | (72,749) | | | (60,967) | | | (215,359) | | | (203,803) | |
Amortization of intangible assets | (34,571) | | | (32,562) | | | (101,492) | | | (98,397) | |
Restructuring and other charges, net | (345) | | | 10,519 | | | (9,956) | | | (32,197) | |
Operating income | 161,339 | | | 126,845 | | | 483,548 | | | 183,576 | |
Interest expense, net | (45,137) | | | (44,129) | | | (134,393) | | | (124,340) | |
Other, net | (9,403) | | | 9,194 | | | (47,788) | | | (1,511) | |
Income before taxes | $ | 106,799 | | | $ | 91,910 | | | $ | 301,367 | | | $ | 57,725 | |
18. Subsequent Events
On October 4, 2021, we entered into the SmartWitness SPA to acquire all of the outstanding equity interests of SmartWitness for $191.4 million. Refer to Note 16: Acquisitions for additional information.
|
| | | | | | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Net revenue: | | | | | | | |
Performance Sensing | $ | 603,932 |
| | $ | 584,650 |
| | $ | 1,825,904 |
| | $ | 1,797,395 |
|
Sensing Solutions | 215,122 |
| | 205,148 |
| | 640,295 |
| | 616,497 |
|
Total net revenue | $ | 819,054 |
| | $ | 789,798 |
| | $ | 2,466,199 |
| | $ | 2,413,892 |
|
Segment profit (as defined above): | | | | | | | |
Performance Sensing | $ | 162,655 |
| | $ | 155,228 |
| | $ | 483,491 |
| | $ | 453,540 |
|
Sensing Solutions | 72,372 |
| | 67,314 |
| | 209,911 |
| | 198,737 |
|
Total segment profit | 235,027 |
| | 222,542 |
| | 693,402 |
| | 652,277 |
|
Corporate and other | (53,379 | ) | | (48,335 | ) | | (152,681 | ) | | (133,025 | ) |
Amortization of intangible assets | (40,317 | ) | | (50,562 | ) | | (121,578 | ) | | (151,572 | ) |
Restructuring and special charges | (1,329 | ) | | (837 | ) | | (18,768 | ) | | (3,167 | ) |
Profit from operations | 140,002 |
| | 122,808 |
| | 400,375 |
| | 364,513 |
|
Interest expense, net | (40,263 | ) | | (41,176 | ) | | (120,578 | ) | | (125,201 | ) |
Other, net | 3,112 |
| | (726 | ) | | 7,190 |
| | 4,892 |
|
Income before taxes | $ | 102,851 |
| | $ | 80,906 |
| | $ | 286,987 |
| | $ | 244,204 |
|
15. 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 three and nine months ended September 30, 2017 and 2016, the weighted-average ordinary shares outstanding for basic and diluted net income per share were as follows:
|
| | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Basic weighted-average ordinary shares outstanding | 171,269 |
| | 170,840 |
| | 171,116 |
| | 170,656 |
|
Dilutive effect of stock options | 618 |
| | 431 |
| | 567 |
| | 504 |
|
Dilutive effect of unvested restricted securities | 358 |
| | 207 |
| | 340 |
| | 199 |
|
Diluted weighted-average ordinary shares outstanding | 172,245 |
| | 171,478 |
| | 172,023 |
| | 171,359 |
|
Net income and net income per share are presented in the condensed consolidated statements of operations.
Certain potential ordinary shares were excluded from our calculation of diluted weighted-average ordinary shares outstanding because they would have had an anti-dilutive effect on net income per share or because they related to share-based awards that were contingently issuable, for which the contingency had not been satisfied. These potential ordinary shares are as follows:
|
| | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Anti-dilutive shares excluded | 1,584 |
| | 1,355 |
| | 1,635 |
| | 1,418 |
|
Contingently issuable shares excluded | 884 |
| | 735 |
| | 783 |
| | 632 |
|
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995Cautionary Statements Concerning Forward-Looking Statements
This report containsQuarterly Report on Form 10-Q, including any documents incorporated by reference herein, includes "forward-looking statements" within the meaning of Section 27A of the Private Securities Litigation Reform Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). All statements, other than statements of historical facts included in this report, are1995. These forward-looking statements includingrelate to analyses and other information concerning our possible or assumedthat are based on forecasts of future results or operations,and estimates of amounts not yet determinable. These forward-looking statements also relate to our future prospects, developments, and business strategies, financing plans, competitive position, potential growth opportunities, potential operation performance, improvements, acquisitions, divestitures, the effects of competition, and the effects of future legislation or regulations. Forward-lookingstrategies. These forward-looking statements are typicallymay be identified by use of termsterminology such as "may," "believe,"will," "could," "should," "expect," "anticipate," "intend,"believe," "estimate," "predict," "project," "target,"forecast," "goal,"continue," "intend," "plan," "should," "will," "predict," "guidance," "potential," "forecast," "outlook," "could," "budget," "objectives," "strategy" and similar expressions that conveyterms or phrases, or the uncertaintynegative of future events or outcomes.such terminology, including references to assumptions. However, these terms are not the exclusive means of identifying such statements.
Forward-looking statements involve risks,contained herein, or in other statements made by us, are made based on management’s expectations and beliefs concerning future events impacting us. These statements are subject to uncertainties and assumptions. Actualother 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 mayto differ materially from those matters expressed in theseor implied by forward-looking statements. Investors should not place undue reliance on any forward-looking statements. We do not have any intention or obligation to update forward-looking statements after we file this report except as required by law.
Although we believe that theour plans, intentions, and expectations reflected in, or suggested by, such forward-looking statements are reasonable, this information is based upon assumptionswe 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 anticipated resultsfinancial condition.
We believe that are subject to numerous uncertainties and risks. Thethe following and other risksimportant factors, among others (including those described in greater detail in “Part 1. Item 1A.1A: Risk Factors”Factors, included in our 2020 Annual Report on Form 10-K forReport), could affect our future performance and the fiscal year ended December 31, 2016, couldliquidity and value of our securities and cause our actual results to differ materially from those expressed inor implied by forward-looking statements:statements made by us or on our behalf:
conditions affecting•Future risks and existing uncertainties associated with the COVID-19 pandemic, which continues to have a significant adverse impact on our business and operations including: (i) full or partial shutdowns of our facilities as mandated by government decrees, (ii) limited ability to adjust certain costs due to government actions, (iii) significant travel restrictions and “work-from-home” orders limiting the availability of our workforce, (iv) supplier constraints and supply-chain interruptions, (v) logistics challenges and limitations, (vi) reduced demand for our products infrom certain customers, (vii) uncertainties associated with a protracted economic slowdown that could negatively affect the industries we serve, particularly the automotive industry;
competition and pricing pressure;
raw material availability, quality, and cost;
financial condition of and relationships with,our customers and vendors;suppliers, and (viii) uncertainties and volatility in the global capital markets;
reliance on third-party suppliers;
•instability and changes to current policies by the U.S. government;
changes in tax rates;
conditions in the global markets, we operate inincluding regulatory, political, economic, governmental, and serve, includingmilitary matters, such as the impact of the anticipated exit of the United Kingdom (the "U.K.") from the European Union;Union (the "EU");
•adverse conditions or competition in the industries upon which we are dependent, including the automotive industry;
•losses and costs as a result of intellectual property, product liability, warranty, and recall claims;
•market acceptance of new product introductions and product innovations;
•inability to realize all of the revenue or achieve anticipated gross margins from products subject to existing purchase orders for which we are currently engaged in development;
•supplier interruption or non-performance, limiting our access to manufactured components or raw materials;
•risks associated with current and future acquisitions and divestitures;related to the acquisition or disposition of businesses, or the restructuring of our business;
•labor disputesdisruptions or increased labor costs;
global risks of business interruptions, such as natural disasters and political, economic, and military instability;•competitive pressure from customers that could require us to reduce prices or result in reduced demand;
risks associated with •security breaches, cyber theft of our intellectual property, and other disruptions to our information technology infrastructure;infrastructure, or improper disclosure of confidential, personal, or proprietary data;
risks related to compliance with current and future laws and regulations;
•our ability to protect our intellectual property rights;attract and retain key senior management and qualified technical, sales, and other personnel;
•foreign currency risks, of litigation;changes in socioeconomic conditions, or changes to monetary and fiscal policies;
•our level of indebtedness, and abilityor our inability to operate withinmeet debt service obligations or comply with the limitations imposed by our debt instruments; and
various risks associated with being a Dutch corporation.
There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect that may cause actual results to differ materially from thosecovenants contained in any forward-looking statementsthe credit agreement and senior notes indentures;
•changes to current policies, such as trade tariffs, by various governments worldwide;
•risks related to the potential for goodwill impairment;
•the impact of challenges by taxing authorities of our historical and future tax positions or our allocation of taxable income among our subsidiaries, unfavorable developments in taxation sentiments in countries where we may makedo business, and that may affect our operatingchallenges to the sovereign taxation regimes of EU member states by the European Commission and financial performance.the Organization for Economic Co-operation and Development;
•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 our domicile in the U.K.
In addition, the extent to which the COVID-19 pandemic will continue to impact our business and financial results going forward will be dependent on future developments, such as the length and severity of the crisis, the potential resurgence of the crisis, future government actions in response to the crisis and the overall impact of the COVID-19 pandemic on the global economy and capital markets, among many other factors, all of which remain highly uncertain and unpredictable.
All forward-looking statements attributable to us or persons acting on our behalf speak only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements contained in this Quarterly Report on Form 10-Q. 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 our 2020 Annual Report and in the other documents that we file with the U.S. Securities and Exchange Commission (the "SEC"). You can read these documents at www.sec.gov or on our website at www.sensata.com.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2020 Annual Report, on Form 10-K for the year ended December 31, 2016, filed with the U.S. Securities and Exchange CommissionSEC on February 2, 2017,12, 2021, and the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Amounts and percentages in the following discussions have been calculated based on unrounded numbers. Accordingly, certain amounts may not appear to recalculate due to the effect of rounding.
Overview
During the third quarter of 2021, we experienced continued positive momentum from the business and economic growth that began in the second half of 2020 and continued through the first half of 2021. Sensata responded well to the rapid changes in many of our end markets, demonstrating the strength, resiliency, and reliability of our business and organizational model, enabling us to capitalize on the recovery in end-market demand and deliver on customers’ orders. However, as we continue to see elevated costs related to the worldwide supply chain shortages and logistics costs, we are working to diminish those effects, including commercial actions with our customers.
Sensata has benefited from its resilient, flexible, and focused organization, which continues to successfully navigate the ever-changing supply chain landscape and deliver on our customers’ needs. We will continue to focus on delivering industry-leading margins for our shareholders, while also increasing investments in our growth opportunities and our people. Additionally, we believe that the overall business environment provides opportunities to further strengthen our portfolio through strategically important, value-creating acquisitions and/or joint ventures. We are also pursuing new technology collaborations and partnerships with third parties to expand our capabilities and accelerate our megatrend-driven growth potential.
2021 interim results
Improved market results, combined with our response to increased demand, drove net revenue growth of 20.6% and 34.9% in the three and nine months ended September 30, 2021, respectively, compared to the three and nine months ended September 30, 2020. In the three months ended September 30, 2021, Performance Sensing net revenue increased 21.6% and Sensing Solutions net revenue increased 17.9% from the three months ended September 30, 2020. In the nine months ended September 30, 2021, Performance Sensing net revenue increased 40.9% and Sensing Solutions net revenue increased 19.7% from the nine months ended September 30, 2020.
We continue to produce strong market outgrowth, above our target ranges. For the three and nine months ended September 30, 2021, we delivered 1,190 basis points and 1,040 basis points, respectively, of market outgrowth. We use the term "market outgrowth" to describe the impact of an increasing quantity and value of our products used in customer systems and applications. It is only loosely correlated to normal unit demand fluctuations in the markets we serve.
Our automotive and HVOR businesses delivered market outgrowth of 1,150 basis points and 2,400 basis points, respectively, in the three months ended September 30, 2021 and market outgrowth of 1,020 basis points and 2,030 basis points, respectively, in the nine months ended September 30, 2021. Refer to Results of Operations—Net Revenue included elsewhere in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") for additional discussion.
We continue to see elevated costs related to the worldwide supply chain shortages and logistics costs, and we are working to diminish those effects, including commercial actions with our customers. Despite these elevated costs, in the three months ended September 30, 2021, operating income increased $34.5 million to $161.3 million, compared to $126.8 million in the three months ended September 30, 2020. In the nine months ended September 30, 2021, operating income increased $300.0 million to $483.5 million, compared to $183.6 million in the nine months ended September 30, 2020. These improved results were due in large part to higher revenues, partially offset by increased costs related to industry-wide supply chain shortages, higher spend to support megatrend growth initiatives and higher incentive compensation aligned to improved financial performance. Refer to Results of Operations—Operating costs and expenses included elsewhere in this MD&A for additional discussion of our improved operating costs and expenses.
In the three months ended September 30, 2021, net income increased $8.2 million to $85.0 million, compared to $76.7 million in the three months ended September 30, 2020. In the nine months ended September 30, 2021, net income increased $209.0 million to $251.6 million, compared to $42.6 million in the nine months ended September 30, 2020. These increases were primarily a result of improved operating results, partially offset by (1) higher taxes, (2) losses from our commodity forward contracts, and (3) foreign currency remeasurement on net monetary assets, each as discussed elsewhere in our Results of Operations. For the nine months ended September 30, 2021 net income also reflected the loss on redemption of the 6.25% Senior Notes as discussed at Results of Operations—Other, net.
Forward-looking information
For the fourth quarter of 2021, we expect automotive production to be down approximately 28% compared to the prior year, given ongoing production slowdowns caused by global supply chain shortages. We do not see production constraints from the global supply chain shortages lifting in the near term.
Our revenue outgrowth to market will be increasingly driven by enhanced positioning in our megatrend areas of Electrification (across our markets) and Insights. We continue to invest in these growth initiatives both organically and inorganically, with Xirgo, and now the pending acquisitions of Spear and SmartWitness, expanding not only our capabilities, but also our access to end markets and product portfolios in these pivotal areas. We expect continued significant growth in these megatrend areas over the coming years, driven by electrification trends, the infrastructure requirements to support electrification, and the proliferation of Internet of Things on stationary and mobile equipment.
Since 2018, we have delivered average market outgrowth of 570 basis points as a company, including 1,050 basis points in our HVOR business and 650 basis points in our automotive business. Our revenue by end market should grow consistent with each market’s production growth plus our targeted outgrowth of approximately 400 to 500 basis points across the entire company. In addition, we intend to continue to make acquisitions to further expand our market position in our megatrend areas and we aim to have this activity add a material amount to revenue growth each year.
One headwind affecting our outlook is the expected impact from the global supply chain shortages and logistics costs, due in part to large-scale shutdowns early in 2020 caused by the COVID-19 pandemic. These shortages have resulted in paused production on certain vehicles and increased procurement costs. These shortages have impacted our margins in the first nine months of 2021, and we believe that impacts from the supply chain shortages will continue throughout next year.
Electrification
Our automotive addressable market is large today and growing, with expectations that it will continue to grow over the next 10 years. Applications in internal combustion vehicles make up most of our current automotive addressable market. While the Electrification applications that we serve represent a smaller market today, these applications are expected to grow very rapidly until they become an even larger opportunity for us than internal combustion engines by 2030.
Our content in electric vehicles represents, on average, a 20% uplift in content value as compared to internal combustion vehicles of a similar class. This content uplift is derived from the broad array of our sensors and other components that we design into battery electric vehicles. Our design win activity within Electrification has been growing rapidly; including an 80% increase in Electrification wins last year. In addition, approximately 50% of our automotive design wins for the nine months ended September 30, 2021 are with electric vehicles. Looking forward, based on the business wins we’re gaining and the products we are developing, we estimate that our battery-electric content per vehicle is on a path to double that of an internal combustion engine vehicle within five years.
We provide many of our innovative and differentiated components such as braking, tire, and environmental control from traditional vehicles for use in electrical vehicle applications. Specific to electric vehicles, we also provide and are developing several components that enable safe and efficient operation of electrified platforms such as high voltage electrical protection, advanced temperature sensing, highly sensitive electric motor position, and next-generation current sensing.
In addition, we achieved a meaningful milestone in our Electrification megatrend initiative when we agreed to a joint venture with Churod Electronics ("Churod") on April 8, 2021, which will contribute access to its ceramic, high-levitation contactor intellectual property. This joint venture extends our electrical protection capabilities to mass-market electric vehicles and other electrified equipment worldwide and expands our contactor capabilities in the automotive market to vehicles that operate with lower voltage while maintaining differentiated technology, which are more common in Asia. This enables us to offer a broader Electrification solution set for electric vehicle manufacturers globally.
In the third quarter of 2021, we reorganized our Sensing Solutions operating segment, moving the portion of our electrical protection product category that includes high voltage contactors, inverters, and battery management systems from the industrial business unit to a new business unit, Clean Energy Solutions. This business unit will focus on electric vehicle infrastructure, energy storage, smart grid, and renewable energy applications.
Electrification technology is expanding in many markets, not just in passenger vehicles. Manufacturers of bikes, heavy trucks, material handling equipment, marine vessels, aircraft, and spacecraft are addressing ever-tightening greenhouse gas emissions regulations and taking advantage of falling battery costs to provide electrified solutions to their customers. However, not all customers can design all aspects of an electrified solution in house. Thanks to capabilities we have added, or are pending addition via acquisition, we will be able to provide either the subsystem of assembled components to manage battery charging in the form of a power distribution unit or, using technology from Lithium Balance and the pending acquisition of Spear, we will be able to provide the full energy storage system including battery management and a customized battery pack.
In addition, our Electrification megatrend initiative represents a market opportunity in the charging infrastructure necessary to support this ecosystem. We see additional opportunities in industrial and grid applications, some of which are more nascent today. Sensata is already a leading provider of high-voltage protection on electric vehicles and charging infrastructure and we seek to be the partner of choice for heavy vehicle and industrial OEMs transitioning to electrified solutions as well. We also intend to participate in other areas of the evolving market that enable Electrification to become more widespread.
In support of the Clean Energy Solutions business unit, on August 23, 2021, we entered into an SPA to acquire all of the outstanding equity interests of Spear for $100 million plus $30 million of contingent consideration. Spear is headquartered in Grandview, Missouri, and is a leader in electrification solutions, developing next generation scalable lithium-ion battery storage systems for demanding land, sea and air applications. The transaction contemplated by this SPA is subject to clearance under the Hart-Scott-Rodino Act and other customary closing conditions, and is expected to be completed in the fourth quarter of 2021. The acquisition of Spear advances Sensata’s Electrification portfolio and strategy into new clean energy markets. Spear expands on Sensata’s acquisition of Lithium Balance in battery management systems and GIGAVAC in high voltage contactors, and provides energy storage solutions for OEMs and system integrators in fast-growing end markets that offer significant growth opportunities. With this pending acquisition, we will be able to provide full battery energy storage systems for a variety of specialty transportation markets. These are highly demanding solutions that include very robust safety features.
Sensata Insights
The Insights megatrend initiative addresses a large and fast-growing market, and we are gaining traction with both current and new customers across various sectors.
On April 1, 2021, we completed the acquisition of Xirgo, a leading telematics and data insights provider for fleet management across the transportation and logistics segments, for $408.7 million, which includes $7.0 million related to employee retention, reflected in operating cash flows. This acquisition represented a meaningful milestone in our Insights megatrend initiative, greatly expanding our ability to provide data insights to transportation and logistics customers, as well as adding a new customer base for these solutions. Xirgo brings a comprehensive suite of telematics and asset tracking devices, cloud-based data insight solutions, as well as emerging sensing applications and data services. This acquisition is consistent with our strategy to move beyond serving vehicle OEMs and engage with the broader transportation and logistics ecosystem. Xirgo is complementary to, and meaningfully extends, our organic Insights solutions for commercial fleet managers, adding cargo, container, and light-vehicle fleet management to our heavy vehicle OEM and fleet focus. We have branded these offerings, which serve our Insights megatrend initiative, as Sensata Insights.
In addition, on October 4, 2021, we entered into an SPA to acquire all of the outstanding equity interests of SmartWitness, a privately held innovator of video telematics technology for heavy and light duty fleets, for $191.4 million. SmartWitness is headquartered in Schaumburg, Illinois and expands the capabilities of Sensata Insights into high growth video telematics applications, providing access to applications that will drive adoption of traditional and video telematics solutions. SmartWitness’ solutions comprise proprietary software and hardware purpose-built for telematics service providers, providing a complementary fit with our Insights business. Since its founding in 2007, SmartWitness has been a pioneer in video telematics that expands on traditional offerings to include contextually aware data capture that enhances the monitoring of vehicles and their surroundings to increase safety and lower insurance costs for fleets. SmartWitness will be integrated into the Performance Sensing reportable segment and will be included in Sensata Insights.
Refer to Note 16: Acquisitions of our condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional information in the acquisitions of Xirgo, Spear, and SmartWitness.
Liquidity
We have sufficient cash to take advantage of strategic opportunities as they arise. At December 31, 2020, we had cash and cash equivalents of $1,862.0 million. In the nine months ended September 30, 2021, we generated operating cash flows of $393.2 million, ending the quarter on September 30, 2021 with cash and cash equivalents of $1,958.1 million. This enables us to continue to acquire targeted, innovative businesses that will expand our presence in our targeted growth vectors.
In the first quarter of 2021, we used the flexibility provided by our large cash balance to lower our cost of capital and extend our debt maturity by redeeming the 6.25% Senior Notes and issuing the 4.0% Senior Notes. Refer to Overview—Debt Transactions below for additional discussion of these transactions. On April 1, 2021, we used $408.7 million, net of $7.1 million of cash received, to acquire Xirgo, which will help advance our Insights megatrend initiative. Cash paid to acquire Xirgo includes $7.0 million related to employee retention and which is reflected in operating cash flows. Refer to Overview—Sensata Insights above for additional discussion of this acquisition. In addition, on April 8, 2021, we took advantage of continued favorability in the capital markets and issued an additional $250.0 million of 4.0% Senior Notes, priced at 100.75%.
Debt Transactions
On March 5, 2021, we redeemed the $750.0 million aggregate principal amount outstanding on the 6.25% Senior Notes. The redemption was at a price of 103.125% of principal, resulting in additional payment of $23.4 million upon redemption. We recognized a loss of $30.1 million as a result of this transaction, consisting primarily of the premium payment and write-off of deferred financing costs. Subsequently, on March 29, 2021, we issued $750.0 million aggregate principal amount of 4.0% Senior Notes, at par, and on April 8, 2021, we issued an additional $250.0 million of 4.0% Senior Notes at a price of 100.75%. The combined effect of these transactions was to extend the average maturity of our debt profile and lower our total cost of fixed debt. Refer to Note 11: Debt of our condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional information on these transactions and our overall debt. Proceeds from the 4.0% Senior Notes will be used for general corporate purposes, to fund future acquisitions and our capital deployment strategy, and for future debt repayments.
Q2 2020 Global Restructure Program
On June 30, 2020, in response to the potential long-term impact of the COVID-19 pandemic on our business, we commenced the Q2 2020 Global Restructure Program, consisting of voluntary and involuntary reductions-in-force and certain site closures, in order to align our cost structure to the then anticipated future demand outlook. As of September 30, 2021, we have completed all actions contemplated under the Q2 2020 Global Restructure Program, with approximately 840 positions impacted. Since inception of the Q2 2020 Global Restructure Program, we have recognized cumulative costs of $33.2 million, of which $28.4 million related to severance charges and $4.8 million related to facility and exit costs. As of September 30, 2021, we have a liability of approximately $7.5 million related to actions taken under this plan. We expect to settle these remaining liabilities with cash on hand. Refer to Note 5: Restructuring and Other Charges, Net of our condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional information on this plan.
Sustainability Report
In September 2021, we published our first Sustainability Report, which shares our environmental, social, and governance ("ESG") strategies, performance, and goals that support our vision of creating a cleaner, more efficient, electrified, and connected world.
Our sustainability efforts focus on four key areas of prioritization against which we will measure progress:
•Empowering our workforce: We promote a culture that values inclusion and diversity and prioritizes employee well-being and safety, while supporting our communities and suppliers.
•Innovating for Sustainability: We develop products and technology solutions that help create a safer, cleaner, more efficient and connected world.
•Protecting the Environment: We focus on building products that reduce environmental impact and improve technological efficiencies while optimizing and reducing our operational footprint through energy, water, and waste reduction.
•Operating Responsibly: We consider transparency and accountability as fundamental in everything that we do, guiding our approach to governance, risk management, and ESG.
As described in the Sustainability Report, we conducted a materiality assessment to identify the ESG issues that were most important to our business and stakeholders. We identified the following key issues and set corresponding goals as follows:
◦Diversity, Equity, and Inclusion: Our goal is to reach (1) 30% female representation in manager and above roles worldwide and (2) 25% racial/ethically diverse representation in manager and above roles in the U.S. by 2026.
◦Energy and Emissions: Our goal is to achieve carbon neutrality by 2050 and reduce greenhouse gas emissions intensity by 10% by 2026.
◦Responsible Sourcing: Our goals in this area are by 2026 to (1) achieve 75% response rate on our responsible sourcing campaigns and (2) achieve 100% sourcing of conflict minerals and Cobalt from smelters that are conformant with the Responsible Minerals Assurance Process ("RMAP") or equivalent standard.
Results of Operations
The tablestable below presentpresents our historical results of operations, in millions of dollars and as a percentage of net revenue, for the three and nine months ended September 30, 20172021 compared to the three and nine months ended September 30, 2016.2020. We have derived the results of operations from the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Amounts and percentages in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not addappear to recalculate due to the effect of rounding.
Three Months Ended September 30, 2017 Compared to | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| September 30, 2021 | | September 30, 2020 | | September 30, 2021 | | September 30, 2020 |
| Amount | | Margin* | | Amount | | Margin* | | Amount | | Margin* | | Amount | | Margin* |
Net revenue: | | | | | | | | | | | | | | | |
Performance Sensing | $ | 706.5 | | | 74.3 | % | | $ | 580.9 | | | 73.7 | % | | $ | 2,162.8 | | | 74.9 | % | | $ | 1,534.8 | | | 71.8 | % |
Sensing Solutions | 244.6 | | | 25.7 | | | 207.4 | | | 26.3 | | | 723.4 | | | 25.1 | | | 604.3 | | | 28.2 | |
Net revenue | 951.0 | | | 100.0 | | | 788.3 | | | 100.0 | | | 2,886.2 | | | 100.0 | | | 2,139.1 | | | 100.0 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Operating costs and expenses | 789.7 | | | 83.0 | | | 661.5 | | | 83.9 | | | 2,402.7 | | | 83.2 | | | 1,955.5 | | | 91.4 | |
Operating income | 161.3 | | | 17.0 | | | 126.8 | | | 16.1 | | | 483.5 | | | 16.8 | | | 183.6 | | | 8.6 | |
Interest expense, net | (45.1) | | | (4.7) | | | (44.1) | | | (5.6) | | | (134.4) | | | (4.7) | | | (124.3) | | | (5.8) | |
Other, net | (9.4) | | | (1.0) | | | 9.2 | | | 1.2 | | | (47.8) | | | (1.7) | | | (1.5) | | | (0.1) | |
Income before taxes | 106.8 | | | 11.2 | | | 91.9 | | | 11.7 | | | 301.4 | | | 10.4 | | | 57.7 | | | 2.7 | |
Provision for income taxes | 21.8 | | | 2.3 | | | 15.2 | | | 1.9 | | | 49.8 | | | 1.7 | | | 15.1 | | | 0.7 | |
Net income | $ | 85.0 | | | 8.9 | % | | $ | 76.7 | | | 9.7 | % | | $ | 251.6 | | | 8.7 | % | | $ | 42.6 | | | 2.0 | % |
__________________________
* Represents the Three Months Ended September 30, 2016amount presented divided by total net revenue.
|
| | | | | | | | | | | | | |
| For the three months ended |
| September 30, 2017 | | September 30, 2016 |
($ in millions) | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue |
Net revenue: | | | | | | | |
Performance Sensing | $ | 603.9 |
| | 73.7 | % | | $ | 584.7 |
| | 74.0 | % |
Sensing Solutions | 215.1 |
| | 26.3 |
| | 205.1 |
| | 26.0 |
|
Net revenue | 819.1 |
| | 100.0 |
| | 789.8 |
| | 100.0 |
|
Operating costs and expenses: | | | | | | | |
Cost of revenue | 527.4 |
| | 64.4 |
| | 508.9 |
| | 64.4 |
|
Research and development | 34.0 |
| | 4.2 |
| | 31.6 |
| | 4.0 |
|
Selling, general and administrative | 76.0 |
| | 9.3 |
| | 75.0 |
| | 9.5 |
|
Amortization of intangible assets | 40.3 |
| | 4.9 |
| | 50.6 |
| | 6.4 |
|
Restructuring and special charges | 1.3 |
| | 0.2 |
| | 0.8 |
| | 0.1 |
|
Total operating costs and expenses | 679.1 |
| | 82.9 |
| | 667.0 |
| | 84.5 |
|
Profit from operations | 140.0 |
| | 17.1 |
| | 122.8 |
| | 15.5 |
|
Interest expense, net | (40.3 | ) | | (4.9 | ) | | (41.2 | ) | | (5.2 | ) |
Other, net | 3.1 |
| | 0.4 |
| | (0.7 | ) | | (0.1 | ) |
Income before taxes | 102.9 |
| | 12.6 |
| | 80.9 |
| | 10.2 |
|
Provision for income taxes | 14.8 |
| | 1.8 |
| | 11.1 |
| | 1.4 |
|
Net income | $ | 88.0 |
| | 10.7 | % | | $ | 69.8 |
| | 8.8 | % |
Net RevenueNet revenue
Net revenue for the three months ended September 30, 20172021 increased $29.3 million, or 3.7%, to $819.1 million from $789.8 million for the three months ended September 30, 2016. This increase in net revenue was composed of a 3.3% increase in Performance Sensing and a 4.9% increase in Sensing Solutions. Excluding a 0.1% increase due to changes in foreign currency exchange rates, organic revenue growth was 3.6% when20.6% compared to the three months ended September 30, 2016.2020 largely due to improved market results and our continued outperformance relative to those markets. Excluding an increase of 1.7% attributed to changes in foreign currency exchange rates and an increase of 2.3% due to the effect of the acquisition of Xirgo, net revenue for the three months ended September 30, 2021 increased 16.6% on an organic basis. This organic revenue growth reflects increased customer demand and represents market outgrowth of 1,190 basis points. Organic revenue growth (or decline), discussed throughout this MD&A, is a non-GAAP financial measure.measure not presented in accordance with U.S. GAAP. Refer to the section entitled Non-GAAP Financial Measures below for furtheradditional information onrelated to our use of this measure.organic revenue growth (or decline). Our continued investment in megatrend initiatives is playing a part in revenue growth by expanding our capabilities, as well as our access to end markets and product portfolios. We are continuing to monitor all of our end markets and customers to ensure that our resources are balanced against forecasts and prioritized against critical growth opportunities.
Net revenue for the nine months ended September 30, 2021 increased 34.9% compared to the nine months ended September 30, 2020 largely due to improved market results and our continued outperformance relative to those markets. Excluding an increase of 3.0% attributed to changes in foreign currency exchange rates and an increase of 2.0% due to the effect of the acquisition of Xirgo, net revenue for the nine months ended September 30, 2021 increased 29.9% on an organic basis. This organic revenue growth reflects increased customer demand and represents market outgrowth of 1,040 basis points.
Performance Sensing
Performance Sensing net revenue for the three months ended September 30, 20172021 increased $19.3 million, or 3.3%, to $603.9 million from $584.7 million for the three months ended September 30, 2016. Excluding a 0.2% increase due to changes in foreign currency exchange rates, organic revenue growth was 3.1% when21.6% compared to the three months ended September 30, 2016.2020. Excluding an increase of 1.8% attributed to changes in foreign currency exchange rates and an increase of 3.1% due to the effect of the acquisition of Xirgo, Performance Sensing net revenue for the three months ended September 30, 2021 increased 16.7% on an organic basis. Both automotive and HVOR contributed to these results as discussed below.
Automotive net revenue for the three months ended September 30, 2021 grew 7.0% compared to the three months ended September 30, 2020. Excluding growth of 1.8% attributed to changes in foreign currency exchange rates, automotive net revenue for the three months ended September 30, 2021 grew 5.2% on an organic basis. Although automotive production was constrained due to supply chain shortages, resulting in end-market contraction of 21.6%, it increased significantly from the abnormally low levels experienced in the third quarter of 2020, which contributed to the organic revenue growth. In addition, our automotive business benefited from new product launches in powertrain and emissions, safety, and electrification-related applications and systems. We continued to outperform the automotive end market, delivering 1,150 basis points of market outgrowth, excluding the effects of OEM efforts to replenish inventory channels.
HVOR net revenue for the three months ended September 30, 2021 grew 75.1% compared to the three months ended September 30, 2020. Excluding growth of 1.8% attributed to changes in foreign currency exchange rates and growth of 14.4% due to the effect of the acquisition of Xirgo, HVOR net revenue for the three months ended September 30, 2021 grew 58.9% on an organic basis. Similar to automotive, HVOR market production improved significantly from the prior year period despite being adversely impacted by the global supply chain shortages and logistics costs. Our China on-road truck business continued to post better than expected growth from the adoption of NS6 emissions regulations, and we are also benefiting from a wave of electromechanical operator controls being installed in new off-road equipment. In addition, HVOR delivered 2,400 basis points of market outgrowth in the quarter, excluding the effects of OEM efforts to replenish inventory channels.
Performance Sensing net revenue for the nine months ended September 30, 2021 increased 40.9% compared to the nine months ended September 30, 2020. Excluding an increase of 3.3% attributed to changes in foreign currency exchange rates and an increase of 2.9% due to the effect of the acquisition of Xirgo, Performance Sensing net revenue for the nine months ended September 30, 2021 increased 34.7% on an organic basis. Both automotive and HVOR contributed to these results as discussed below.
Automotive net revenue for the nine months ended September 30, 2021 grew 30.7% compared to the the nine months ended September 30, 2020. Excluding growth of 3.4% attributed to changes in foreign currency exchange rates, automotive net revenue for the nine months ended September 30, 2021 grew 27.3% on an organic basis. Although automotive production was constrained due to supply chain shortages, we delivered organic revenue growth due to recovery of customer production combined with our continued outperformance relative to the automotive market, which was led by new product launches in powertrain and emissions, safety, and electrification-related applications and systems. Excluding the effects of OEM efforts to replenish inventory channels, automotive outgrew its end markets by 1,020 basis points in the nine months ended September 30, 2021.
HVOR net revenue for the nine months ended September 30, 2021 grew 74.8% compared to the nine months ended September 30, 2020. Excluding growth of 3.1% attributed to changes in foreign currency exchange rates and growth of 12.2% due to the effect of the acquisition of Xirgo, HVOR net revenue for the nine months ended September 30, 2021 grew 59.5% on an organic basis. This organic revenue increase is primarily due to recovery of customer production combined with our continued outperformance relative to the HVOR markets. Our China on-road truck business continued to post better than expected growth was primarily drivenfrom the adoption of NS6 emissions regulations, and we are also benefiting from a wave of electromechanical operator controls being installed in new off-road equipment. Excluding the effects of OEM efforts to replenish inventory channels, HVOR outgrew its end markets by our heavy vehicle off road ("HVOR") business, including content growth, most notably2,030 basis points in the construction and agriculture markets, as well as market growth, principally in the on-road truck markets in North America and China. In general, regulatory requirements for safer vehicles, higher fuel efficiency, and lower emissions, such as the Corporate Average Fuel Economy ("CAFE") requirements in the U.S., "Euro 6d" requirements in Europe, and "China National 6" requirements in Asia, as well as consumer demand for operator productivity and convenience,nine months ended September 30, 2021.
drive the need for advancements in engine management, safety features, efficiency, and operator controls that in turn can lead to a growing demand for our sensors.Sensing Solutions
Sensing Solutions net revenue for the three months ended September 30, 20172021 increased 17.9% compared to the three months ended September 30, 2020. Excluding growth of 1.5% attributed to changes in foreign currency exchange rates, Sensing Solutions net revenue for the three months ended September 30, 2021 grew 16.4% on an organic basis. The increase in net revenue was driven by the continued recovery of global and industrial end markets in the third quarter, as well as new electrification launches and strong growth in our HVAC business. Aerospace saw growth in the quarter reflecting somewhat improved OEM production and air traffic, which drives our aerospace aftermarket business. In addition, new product launches, primarily in defense and improvements in aftermarket, enabled our aerospace business to grow faster than market this quarter.
Sensing Solutions net revenue for the nine months ended September 30, 2021 increased 19.7% compared to the nine months ended September 30, 2020. Excluding growth of 2.2% attributed to changes in foreign currency exchange rates, Sensing Solutions net revenue for the nine months ended September 30, 2021 grew 17.5% on an organic basis. The increase in net revenue was mainly driven by the continued recovery of global and industrial end markets, as well as new electrification launches and strong growth in our HVAC business.
Operating costs and expenses
Operating costs and expenses for the three and nine months ended September 30, 2021 and 2020 are presented, in millions of dollars and as a percentage of net revenue, in the following table. Amounts and percentages in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not appear to recalculate due to the effect of rounding.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| September 30, 2021 | | September 30, 2020 | | September 30, 2021 | | September 30, 2020 |
| Amount | | Margin* | | Amount | | Margin* | | Amount | | Margin* | | Amount | | Margin* |
Operating costs and expenses: | | | | | | | | | | | | | | | |
Cost of revenue | $ | 628.9 | | | 66.1 | % | | $ | 530.3 | | | 67.3 | % | | $ | 1,922.6 | | | 66.6 | % | | $ | 1,509.1 | | | 70.5 | % |
Research and development | 40.1 | | | 4.2 | | | 33.4 | | | 4.2 | | | 118.9 | | | 4.1 | | | 98.1 | | | 4.6 | |
Selling, general and administrative | 85.8 | | | 9.0 | | | 75.7 | | | 9.6 | | | 249.7 | | | 8.7 | | | 217.7 | | | 10.2 | |
Amortization of intangible assets | 34.6 | | | 3.6 | | | 32.6 | | | 4.1 | | | 101.5 | | | 3.5 | | | 98.4 | | | 4.6 | |
Restructuring and other charges, net | 0.3 | | | 0.0 | | | (10.5) | | | (1.3) | | | 10.0 | | | 0.3 | | | 32.2 | | | 1.5 | |
Total operating costs and expenses | $ | 789.7 | | | 83.0 | % | | $ | 661.5 | | | 83.9 | % | | $ | 2,402.7 | | | 83.2 | % | | $ | 1,955.5 | | | 91.4 | % |
__________________________
* Represents the amount presented divided by total net revenue.
Cost of revenue
For the three months ended September 30, 2021, cost of revenue as a percentage of net revenue decreased from the three months ended September 30, 2020, primarily as a result of (1) improvement of various factors that drove cost of revenue as a percentage of revenue up in the third quarter of 2020 (primarily related to the COVID-19 pandemic) such as volume declines and productivity headwinds from our manufacturing facilities running at lower than normal capacity, (2) the impact in the third quarter of 2021 of ongoing savings resulting from cost reduction activities taken in fiscal year 2020, and (3) the favorable effect of changes in foreign currency exchange rates. These favorable impacts on cost of revenue as a percentage of revenue were partially offset by increased costs related to industry-wide supply chain shortages.
For the nine months ended September 30, 2021, cost of revenue as a percentage of net revenue decreased from the nine months ended September 30, 2020, primarily as a result of (1) improvement of various factors that drove cost of revenue as a percentage of revenue up in the nine months ended September 30, 2020 (primarily related to the COVID-19 pandemic) such as volume declines and productivity headwinds from our manufacturing facilities running at lower than normal capacity and (2) the impact in the nine months ended September 30, 2021 of ongoing savings resulting from cost reduction activities taken in fiscal year 2020. In addition, the nine months ended September 30, 2020 included a $29.2 million loss related to a judgment against us in intellectual property litigation with Wasica, which we settled in the third quarter of 2020. These favorable impacts on cost of revenue as a percentage of revenue were partially offset by (1) increased costs related to industry-wide supply chain shortages, (2) the turnaround of the positive impact in the first nine months of 2020 of temporary salary and furlough cost savings implemented in the second quarter of 2020 in response to the COVID-19 pandemic, and (3) the unfavorable effect of changes in foreign currency exchange rates.
Research and development expense
For the three months ended September 30, 2021, research and development ("R&D") expense increased $6.6 million (19.9%) from the three months ended September 30, 2020, primarily as a result of (1) higher spend to support megatrend growth initiatives, (2) incremental R&D expense related to acquired businesses, and (3) the unfavorable effect of changes in foreign currency exchange rates, partially offset by the impact on the third quarter of 2021 of ongoing savings resulting from cost reduction activities taken in fiscal year 2020.
For the nine months ended September 30, 2021, R&D expense increased $20.8 million (21.2%) from the nine months ended September 30, 2020, primarily as a result of (1) higher spend to support megatrend growth initiatives, (2) incremental R&D expense related to acquired businesses, (3) the unfavorable effect of changes in foreign currency exchange rates, and (4) the turnaround impact of cost savings actions taken in the second quarter of 2020, including temporary salary reductions and furloughs, partially offset by the impact on the nine months ended September 30, 2021 of ongoing savings resulting from cost reduction activities taken in fiscal year 2020.
R&D expense related to megatrends during the three and nine months ended September 30, 2021 was $12.9 million and $36.7 million, respectively, an increase of $5.3 million and $18.2 million, respectively, from the three and nine months ended September 30, 2020.
Selling, general and administrative expense
For the three months ended September 30, 2021, selling, general and administrative ("SG&A") expense increased $10.0 million or 4.9%to $85.8 million (9.0% of revenue) from $75.7 million (9.6% of revenue) in the three months ended September 30, 2020. The increase in SG&A expense is primarily a result of (1) incremental SG&A expense related to acquired businesses, including related transaction costs, (2) higher incentive compensation aligned to improved financial performance, (3) increased selling expenses attributed to organic revenue growth, and (4) the unfavorable impact of changes in foreign currency exchange rates. These increases were partially offset by (1) the impact on the third quarter of 2021 of ongoing savings resulting from cost reduction activities taken in fiscal year 2020 and (2) the 2020 completion of a project related to enhancements and improvements of our global operating processes to increase productivity and the resulting reduction in professional fees.
For the nine months ended September 30, 2021, SG&A expense increased $32.0 million to $249.7 million (8.7% of revenue) from $217.7 million (10.2% of revenue) in the nine months ended September 30, 2020. The increase in SG&A expense is primarily a result of (1) incremental SG&A expense related to acquired businesses, including related transaction costs, (2) higher incentive compensation aligned to improved financial performance, (3) increased selling expenses attributed to organic revenue growth, (4) the unfavorable impact of changes in foreign currency exchange rates, and (5) the turnaround impact of cost savings actions taken in the second quarter of 2020, including temporary salary reductions, furloughs, and savings from repositioning actions. These increases were partially offset by (1) the impact on the nine months ended September 30, 2021 of ongoing savings resulting from cost reduction activities taken in fiscal year 2020 and (2) the 2020 completion of a project related to enhancements and improvements of our global operating processes to increase productivity and the resulting reduction in professional fees.
Amortization of intangible assets
For the three and nine months ended September 30, 2021, amortization expense increased 6.2% and 3.1%, respectively, from the three and nine months ended September 30, 2020 primarily due to $215.1increased intangibles from recent acquisitions partially offset by the effect of the economic benefit amortization method.
Restructuring and other charges, net
For the three months ended September 30, 2021, we incurred restructuring and other charges, net of $0.3 million, an increase of $10.9 million (103.3%) from $205.1a net credit of $(10.5) million for the three months ended September 30, 2016. Excluding a 0.3% decline due to changes in foreign currency exchange rates, organic revenue growth was 5.2% when compared to2020. In the three months ended September 30, 2016. The organic revenue growth was primarily due2020, we settled a patent infringement case brought by Wasica against Schrader and released $11.7 million of the related liability, which is presented in restructuring and other charges, net. Refer to market strength across all of our key end-markets, particularlyOverview—Q2 2020 Global Restructure Program elsewhere in China, as well as content growth, primarily inthis MD&A for additional discussion on the heating, ventilation and air-conditioning ("HVAC") and industrial markets.Q2 2020 Global Restructure Program.
Cost of revenue
Cost of revenue forFor the threenine months ended September 30, 20172021, we incurred restructuring and 2016 was $527.4other charges, net of $10.0 million, (64.4%a decrease of net revenue) and $508.9$22.2 million (64.4% of net revenue), respectively.
Research and development expense
Research and development ("R&D"(69.1%) expensefrom $32.2 million for the threenine months ended September 30, 2017 and 2016 was $34.02020. This includes a decrease of $15.4 million and $31.6 million, respectively. We invest in R&D to support new platform and technology developments, both in our recently acquired and existing businesses, in order to drive future revenue growth. The level of R&D expense is related to the number of products in development, the stage of such products in 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.
Selling, general and administrative expense
Selling, general and administrative ("SG&A") expense for the three months ended September 30, 2017 and 2016 was $76.0 million and $75.0 million, respectively. SG&A expense consists of all expenditurescharges incurred in connection with the sales and marketing of our products, as well as administrative overhead costs. These costs are fixed or variable in nature, and we may at times experience increased or decreased variable costs for reasons other than increased or decreased net revenue. As a result, SG&A expense will not necessarily remain consistent as a percentage of revenue.
Amortization of intangible assets
Amortization expense associated with definite-lived intangible assetsQ2 2020 Global Restructure Program from the prior year period. In addition, for the threenine months ended September 30, 2017 and 2016 was $40.3 million and $50.6 million, respectively. Definite-lived intangible assets are amortized on an economic benefit basis according to2020, the useful livesrelease of the assets, or on a straight-line basis if a pattern of economic benefits cannot be reliably determined. In general, the economic benefit of an intangible asset is concentrated towards the beginning of that intangible asset's useful life. Amortization expense decreased as certain intangible assets, primarilyliability related to the Sensors & Controls and High Temperature Sensing acquisitions in 2006 and 2011, respectively, are at, or are nearing, the end of their useful lives.
Restructuring and special charges
Restructuring and special charges for the three months ended September 30, 2017 and 2016 were $1.3 million and $0.8 million, respectively. The restructuring and special charges for the three months ended September 30, 2017 consisted primarily of facility exit costs of $1.3 million related to the closing of our facility in Minden, Germany that was part of the acquisition of certain subsidiaries of Custom Sensors & Technologies Ltd. ("CST"). The restructuring and special charges for the three months ended September 30, 2016 consisted primarily of facility exit costs related to the relocation of manufacturing lines from our facility in the Dominican Republic to a manufacturing facility in Mexico, and severance charges recorded in connection with acquired businesses and the termination of a limited number of employees. We completed the cessation of manufacturing in our Dominican Republic facilityWasica settlement in the third quarter of 2016.2020 largely offset a charge of $12.1 million resulting from a prejudgment interest-related award granted by the court on behalf of Wasica in intellectual property litigation in the second quarter of 2020.
Interest expense, net
Interest expense, net for the three months ended September 30, 2017 and 2016 was $40.3 million and $41.2 million, respectively.
Other, net
Other, net for the three months ended September 30, 2017 and 2016 represented a net gain of $3.1 million and a net loss of $0.7 million, respectively. The change in Other, net relates to fluctuations in foreign currency exchange rates, net of any offsetting hedge gain or loss and fluctuations in commodity prices relative to the strike prices on outstanding forward contracts. Refer to Note 13, "Other,5: Restructuring and Other Charges, Net" of our condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for a detail of the components of Other,additional information on our restructuring and other charges, net.
Operating income
Provision for income taxes
Provision for income taxes forIn the three months ended September 30, 2017 and 2016 was $14.82021, operating income increased $34.5 million and $11.1to $161.3 million respectively. 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 on interest and royalty income, and deferred tax expense, which relates to 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, and the utilization(17.0% of net operating losses.
The changerevenue) compared to $126.8 million (16.1% of net revenue) in the provision for income taxes was primarily due to a change in the amount and distribution of income recorded in various jurisdictions, the impact of changes in foreign currency exchange rates, and a change in our U.S. valuation allowance associated with the acquisition of CST, for which deferred tax liabilities were established related primarily to the step-up of tangible assets for book purposes, for which we recorded a benefit from income taxes of $5.1 million during the three months ended September 30, 2016.
Nine Months Ended September 30, 2017 Compared2020. The increase was primarily due to (1) increase in volume from depressed levels experienced last year due to the Nine Months Ended September 30, 2016COVID-19 pandemic and (2) improved gross margins, which were somewhat tempered by increased costs related to industry-wide supply chain shortages. These improvements were partially offset by increases in other operating costs and expenses, driven primarily by (1) higher incentive compensation aligned to improved financial performance, (2) higher spend to support megatrend growth initiatives, and (3) the release of the liability related to the Wasica settlement in the third quarter of 2021.
|
| | | | | | | | | | | | | |
| For the nine months ended |
| September 30, 2017 | | September 30, 2016 |
($ in millions) | Amount | | Percent of Net Revenue | | Amount | | Percent of Net Revenue |
Net revenue: | | | | | | | |
Performance Sensing | $ | 1,825.9 |
| | 74.0 | % | | $ | 1,797.4 |
| | 74.5 | % |
Sensing Solutions | 640.3 |
| | 26.0 |
| | 616.5 |
| | 25.5 |
|
Net revenue | 2,466.2 |
| | 100.0 |
| | 2,413.9 |
| | 100.0 |
|
Operating costs and expenses: | | | | | | | |
Cost of revenue | 1,601.2 |
| | 64.9 |
| | 1,574.8 |
| | 65.2 |
|
Research and development | 97.0 |
| | 3.9 |
| | 95.2 |
| | 3.9 |
|
Selling, general and administrative | 227.3 |
| | 9.2 |
| | 224.6 |
| | 9.3 |
|
Amortization of intangible assets | 121.6 |
| | 4.9 |
| | 151.6 |
| | 6.3 |
|
Restructuring and special charges | 18.8 |
| | 0.8 |
| | 3.2 |
| | 0.1 |
|
Total operating costs and expenses | 2,065.8 |
| | 83.8 |
| | 2,049.4 |
| | 84.9 |
|
Profit from operations | 400.4 |
| | 16.2 |
| | 364.5 |
| | 15.1 |
|
Interest expense, net | (120.6 | ) | | (4.9 | ) | | (125.2 | ) | | (5.2 | ) |
Other, net | 7.2 |
| | 0.3 |
| | 4.9 |
| | 0.2 |
|
Income before taxes | 287.0 |
| | 11.6 |
| | 244.2 |
| | 10.1 |
|
Provision for income taxes | 47.8 |
| | 1.9 |
| | 48.3 |
| | 2.0 |
|
Net income | $ | 239.2 |
| | 9.7 | % | | $ | 195.9 |
| | 8.1 | % |
Net revenue
Net revenue forIn the nine months ended September 30, 20172021, operating income increased $52.3$300.0 million or 2.2%, to $2,466.2$483.5 million from $2,413.9(16.8% of net revenue) compared to $183.6 million for(8.6% of net revenue) in the nine months ended September 30, 2016. This2020. The increase was primarily due to (1) increase in net revenue was composed of a 1.6% increase in Performance Sensing and 3.9% increase in Sensing Solutions. Excluding a 1.4% declinevolume from depressed levels experienced last year due to changes in foreign currency exchange rates, particularlythe COVID-19 pandemic, (2) improved gross margins, which were somewhat tempered by increased costs related to industry-wide supply chain shortages, and (3) lower restructuring costs. These improvements were partially offset by (1) higher incentive compensation aligned to improved financial performance, (2) higher spend to support megatrend growth initiatives, and (3) the Euroturnaround effect of temporary salary reductions and Chinese Renminbi, organic revenue growth was 3.6% whenfurloughs taken in the second quarter 2020.
We expect that the supply chain shortages will increase our operating costs in the fourth quarter of 2021, compared to the fourth quarter of 2020, and that it will continue to impact our operating results into 2022. If the impacts of this shortage are more severe than we expect, it could result in deterioration of our results, potentially for a longer period than currently anticipated.
Interest expense, net
For the three months ended September 30, 2021, interest expense, net increased $1.0 million (2.3%) from the three months ended September 30, 2020, primarily as a result of (1) interest expense on the 4.0% Senior Notes, which were issued on March 29, 2021 and April 8, 2021 and (2) interest expense on the 3.75% Senior Notes, which were issued on August 17, 2020, partially offset by the reduced interest expense resulting from our March 5, 2021 redemption of the 6.25% Senior Notes.
For the nine months ended September 30, 2016. Organic revenue growth is a non-GAAP financial measure. Refer to the section entitled Non-GAAP Financial Measures for further information on our use of this measure.
Performance Sensing2021, interest expense, net revenue forincreased $10.1 million (8.1%) from the nine months ended September 30, 20172020, primarily as a result of (1) interest expense on the 3.75% Senior Notes and (2) interest expense on the 4.0% Senior Notes, partially offset by the reduced interest impact of our redemption of the 6.25% Senior Notes.
Refer to Overview—Debt Transactions elsewhere in this MD&A for additional information related to these transactions.
Other, net
Other, net primarily includes currency remeasurement gains and losses on net monetary assets, gains and losses on foreign currency and commodity forward contracts not designated as hedging instruments, losses related to debt refinancing, and the portion of our net periodic benefit cost excluding service cost. In the three months ended September 30, 2021, other, net represented a net loss of $9.4 million, an unfavorable change of $18.6 million compared to a net gain of $9.2 million in the three months ended September 30, 2020. This was primarily due to increased $28.5 million, or 1.6%, to $1,825.9 millionlosses from $1,797.4 million forour commodity forward contracts and increased foreign currency remeasurement losses on net monetary assets.
In the nine months ended September 30, 2016. Excluding2021, other, net represented a 1.6% decline duenet loss of $47.8 million, an increase of $46.3 million compared to changesa net loss of $1.5 million in foreign currency exchange rates, particularly related to the Euro and Chinese Renminbi, organic revenue growth was 3.2% when compared to the nine months ended September 30, 2016.2020. This organic revenue growth was primarily driven by our HVOR business, primarily as a result of content growth in the construction and agriculture markets, as well as the on-road truck markets in North America and China. In addition, we believe that the major end-markets within HVOR have been recovering, including the North American Class 8 truck market, which has been particularly weak in prior quarters and
represents a significant part of our HVOR business. Our automotive end-markets in Asia, primarily in China, experienced growth from both content and an expanding market.
Sensing Solutions net revenue for the nine months ended September 30, 2017 increased $23.8 million, or 3.9%, to $640.3 million from $616.5 million for the nine months ended September 30, 2016. Excluding a 0.7% decline due to changes in foreign currency exchange rates, particularly related to the Chinese Renminbi, organic revenue growth was 4.6% when compared to the nine months ended September 30, 2016. The organic revenue growth was primarily due to market strength across allthe loss of our key end-markets, particularly$30.1 million recognized in China, as well as content growth in our HVAC and industrial markets.
Costthe first quarter of revenue
Cost of revenue for the nine months ended September 30, 2017 and 2016 was $1,601.2 million (64.9% of net revenue) and $1,574.8 million (65.2% of net revenue), respectively.
Research and development expense
R&D expense for the nine months ended September 30, 2017 and 2016 was $97.0 million and $95.2 million, respectively. We invest in R&D to support new platform and technology developments, both in our recently acquired and existing businesses, in order to drive future revenue growth. The level of R&D expense is2021 related to the number of products in development, the stage of such products in the development process, the complexityredemption of the underlying technology, the potential scale of the product upon successful commercialization,6.25% Senior Notes, increased losses from our commodity forward contracts, and the level of our exploratory research.increased foreign currency remeasurement losses on net monetary assets.
Selling, general and administrative expense
SGRefer to Overview—Debt Transactions included elsewhere in this MD&A expense for the nine months ended September 30, 2017 and 2016 was $227.3 million and $224.6 million, respectively. SG&A expense consists of all expenditures incurred in connection with the sales and marketing of our products, as well as administrative overhead costs. These costs are fixed or variable in nature, and we may at times experience increased or decreased variable costs for reasons other than increased or decreased net revenue. As a result, SG&A expense will not necessarily remain consistent as a percentage of revenue.
Amortization of intangible assets
Amortization expense associated with definite-lived intangible assets for the nine months ended September 30, 2017 and 2016 was $121.6 million and $151.6 million, respectively. Definite-lived 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. In general, the economic benefit of an intangible asset is concentrated towards the beginning of that intangible asset's useful life. Amortization expense decreased as certain intangible assets, primarilyadditional information related to the Sensors & Controls and High Temperature Sensing acquisitions in 2006 and 2011, respectively, are at, or are nearing, the end of their useful lives.
Restructuring and special charges
Restructuring and special charges for the nine months ended September 30, 2017 and 2016 were $18.8 million and $3.2 million, respectively. The restructuring and special charges for the nine months ended September 30, 2017 consisted primarily of severance charges of $8.4 million and facility exit costs of $2.4 million recorded in connection with the closing of our facility in Minden, Germany that was partredemption of the acquisition of CST, facility exit costs related to a limited number of other line moves and exit activities, and severance costs related to the termination of a limited number of employees. The restructuring and special charges for the nine months ended September 30, 2016 consisted primarily of facility exit costs related to the relocation of manufacturing lines from our facility in the Dominican Republic to a manufacturing facility in Mexico, and severance charges recorded in connection with acquired businesses and the termination of a limited number of employees. We completed the cessation of manufacturing in our Dominican Republic facility in the third quarter of 2016.
Interest expense, net
Interest expense, net for the nine months ended September 30, 2017 and 2016 was $120.6 million and $125.2 million, respectively.
Other, net
Other, net for the nine months ended September 30, 2017 and 2016 represented net gains of $7.2 million and $4.9 million, respectively. The change in Other, net relates to fluctuations in foreign currency exchange rates net of any offsetting hedge gain or loss and fluctuations in commodity prices relative to the strike prices on outstanding forward contracts.6.25% Senior Notes. Refer to Note 13,
"6: Other, Net" of our condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for a detail of the components of Other,more detailed information on amounts included in other, net.
Provision for income taxes
ProvisionFor the three months ended September 30, 2021, provision for income taxes forincreased $6.7 million from the three months ended September 30, 2020, predominantly related to the overall increase in income before tax as impacted by the mix of profits in the various jurisdictions in which we operate.
For the nine months ended September 30, 20172021, the provision for income taxes increased $34.7 million from the nine months ended September 30, 2020, predominantly related to the overall increase in income before tax as impacted by the mix of profits in the various jurisdictions in which we operate, as well as the nonrecurrence of the benefit recognized in the first quarter of 2020 as a result of the enactment of the CARES Act, which was enacted by the U.S. federal government on March 27, 2020 in response to the global financial and 2016health crisis caused by the COVID-19 pandemic. In connection with this legislation, federal limitations on interest deductions were reduced and we recognized a deferred tax benefit of $7.5 million in the nine months ended September 30, 2020, as we were able to utilize additional interest expense that was $47.8 million and $48.3 million, respectively. previously subject to a valuation allowance.
The provision for income taxes consists of (1) current tax expense, which relates primarily to our profitable operations in non-U.S. tax jurisdictions with limited or no net operating loss carryforwards and withholding taxes on interestrelated to management fees, royalties, and royalty income,the repatriation of foreign earnings; and (2) deferred tax expense (or benefit), which relates torepresents adjustments in book-to-tax basis differences primarily related to the step-up(a) book versus tax basis in fair value of fixed and intangible assets, including goodwill, acquired(b) changes in connection with business combination transactions, and the utilization of net operating losses.
The change in the provision for income taxes was primarily due to a change in the amount and distribution of income recorded in various jurisdictions, the impact ofloss carryforwards, (c) changes in foreign currency exchangetax rates, and a change(d) changes in our U.S. valuation allowance associated withassessment of the acquisitionrealizability of certain subsidiaries of CST, for whichour deferred tax liabilities were established related primarily to the step-up of tangible assets for book purposes, for which we recorded a benefit from income taxes of $3.7 million during the nine months ended September 30, 2016.assets.
Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q includes references tosection provides additional information regarding certain non-GAAP financial measures, including organic revenue growth (or decline), adjusted operating income, adjusted operating margin, adjusted net income, adjusted earnings per share ("EPS"), free cash flow, net leverage ratio, and adjusted earnings before interest, taxes, depreciation, and amortization ("EBITDA"), which is aare used by our management, Board of Directors, and investors. We use these non-GAAP financial measure. measures internally to make operating and strategic decisions, including the preparation of our annual operating plan, evaluation of our overall business performance, and as a factor in determining compensation for certain employees.
The use of our non-GAAP financial measures have limitations. They should be considered as supplemental in nature and are not intended to be considered in isolation from, or as an alternative to, reported net revenue growth (or decline), operating income, operating margin, net income, diluted EPS, operating cash flows, segment operating margin, total debt, finance lease, and other financing obligations, or EBITDA, respectively, calculated in accordance with U.S. GAAP. In addition, our measures of organic revenue growth (or decline), adjusted operating income, adjusted operating margin, adjusted net income, adjusted EPS, free cash flow, net leverage ratio, and adjusted EBITDA may not be the same as, or comparable to, similar non-GAAP financial measures presented by other companies.
Organic revenue growth (or decline)
Organic revenue growth (or decline) is defined as the reported percentage change in net revenue, calculated in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"),GAAP, excluding the period-over-period impact of acquisitions, net of exited businesses that occurred within the previous 12 months and the effect of differences in foreign currency exchange rates betweenrate differences as well as the currentnet impact of material acquisitions and prior period.divestitures for the 12-month period following the respective transaction date(s).
We believe that organic revenue growth (or decline) provides investors with helpful information with respect to our operating performance, and we use organic revenue growth (or decline) to evaluate our ongoing operations andas well as for internal planning and forecasting purposes. We believe that organic revenue growth (or decline) 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 yearprior-year period.
However, organic revenue growth should be considered
Adjusted operating income (or loss), adjusted operating margin, adjusted net income (or loss), and adjusted EPS
We define adjusted operating income (or loss) as supplementaloperating income (or loss), determined in nature andaccordance with U.S. GAAP, excluding certain non-GAAP adjustments which are described below. Adjusted operating margin is not intended to be considered in isolation or as a substitute forcalculated by dividing adjusted operating income (or loss) by net revenue growth preparedcalculated in accordance with U.S. GAAP. In addition,We define adjusted net income (or loss) as follows: net income (or loss) determined in accordance with U.S. GAAP, excluding certain non-GAAP adjustments which are described in Non-GAAP Adjustments below. Adjusted EPS is calculated by dividing adjusted net income (or loss) by the number of diluted weighted-average ordinary shares outstanding in the period.
Management uses adjusted operating income (or loss), adjusted operating margin, adjusted net income (or loss), and adjusted EPS as measures of operating performance, for planning purposes (including the preparation of our measureannual operating budget), to allocate resources to enhance the financial performance of organic revenue growth may not beour business, to evaluate the sameeffectiveness of our business strategies, in communications with our Board of Directors and investors concerning our financial performance, and as or comparable to, similarfactors in determining compensation for certain employees. We believe investors and securities analysts also use these non-GAAP financial measures in their evaluation of our performance and the performance of other similar companies. These non-GAAP financial measures are not measures of liquidity.
Free cash flow
Free cash flow is defined as net cash provided by/(used in) operating activities less additions to property, plant and equipment and capitalized software. We believe free cash flow is useful to management and investors as a measure of cash generated by business operations that will be used to repay scheduled debt maturities and can be used to, among other things, fund acquisitions, repurchase ordinary shares, and (or) accelerate the repayment of debt obligations.
Adjusted EBITDA
Adjusted EBITDA is defined as net income (or loss), determined in accordance with U.S. GAAP, excluding interest expense, net, provision for (or benefit from) income taxes, depreciation expense, amortization of intangible assets, and the following non-GAAP adjustments, if applicable: (1) restructuring related and other, (2) financing and other transaction costs, (3) deferred loss or gain on derivative instruments, and (4) step-up inventory amortization. Refer to Non-GAAP Adjustments below for additional discussion of these adjustments.
Net leverage ratio
Net leverage ratio represents net debt (total debt, finance lease and other financing obligations less cash and cash equivalents) divided by last twelve months ("LTM") adjusted EBITDA. We believe that the net leverage ratio is a useful measure to management and investors in understanding trends in our overall financial condition.
Non-GAAP adjustments
Many of our non-GAAP adjustments 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 business, supply chain, or corporate activities, and various financing transactions. We describe these adjustments in more detail below, each of which is net of current tax impacts, as applicable.
•Restructuring related and other: includes charges, net related to certain restructuring and other exit activities 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 costs include charges related to optimization of our manufacturing processes to increase productivity. This type of activity occurs periodically, however each action is unique, discrete, and driven by various facts and circumstances. 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 the consolidated statements of operations.
•Financing and other transaction costs: includes losses or gains related to debt financing transactions, losses or gains related to the divestiture of a business, and costs incurred, including for legal, accounting, and other professional services, that are directly related to an acquisition, divestiture, or equity financing transaction.
•Deferred loss or gain on derivative instruments: includes unrealized losses or gains on derivative instruments that do not qualify for hedge accounting as well as the impact of commodity prices on our raw material costs relative to the strike price on our commodity forward contracts.
•Step-up depreciation and amortization: includes depreciation and amortization expense associated with the step-up in fair value of assets acquired in connection with a business combination (e.g., property, plant and equipment, definite-lived intangible assets, and inventory).
•Deferred taxes and other tax related: 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 valuation allowance in connection with certain acquisitions and tax law changes. Other tax related items include certain adjustments to unrecognized tax positions and withholding tax on repatriation of foreign earnings.
•Amortization of debt issuance costs. We adjust our results recorded in accordance with U.S. GAAP by the amortization of debt issuance costs, which are deferred as a contra-liability against our long-term debt, net on the consolidated balance sheets and which are reflected in interest expense on our consolidated statements of operations.
•Where applicable, the current tax effect of non-GAAP adjustments.
Our definition of adjusted net income (or loss) excludes the deferred provision for (or benefit from) income taxes and other tax related items described above. As we treat deferred income taxes as an adjustment to compute adjusted net income (or loss), the deferred income tax effect associated with the reconciling items presented below would not change adjusted net income for any period presented.
Non-GAAP reconciliations
The following tables provide reconciliations of certain financial measures calculated in accordance with U.S. GAAP to the related non-GAAP financial measures for the periods presented. Refer to Non-GAAP Adjustments section above for additional information on these adjustments. Amounts and percentages have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the effect of rounding.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, 2021 | | For the three months ended September 30, 2020 |
(Dollars in millions, except per share amounts) | | Operating Income | | Operating Margin | | Net Income | | Diluted EPS | | Operating Income | | Operating Margin | | Net Income | | Diluted EPS |
Reported (GAAP) | | $ | 161.3 | | | 17.0 | % | | $ | 85.0 | | | $ | 0.53 | | | $ | 126.8 | | | 16.1 | % | | $ | 76.7 | | | $ | 0.49 | |
Non-GAAP adjustments: | | | | | | | | | | | | | | | | |
Restructuring related and other | | 5.4 | | | 0.6 | | | 5.4 | | | 0.03 | | | (5.6) | | | (0.7) | | | 5.0 | | | 0.03 | |
Financing and other transaction costs | | (1.0) | | | (0.1) | | | 1.7 | | | 0.01 | | | 1.8 | | | 0.2 | | | 1.8 | | | 0.01 | |
Step-up depreciation and amortization | | 32.7 | | | 3.4 | | | 32.7 | | | 0.20 | | | 31.5 | | | 4.0 | | | 31.5 | | | 0.20 | |
Deferred loss/(gain) on derivative instruments | | 2.6 | | | 0.3 | | | 10.2 | | | 0.06 | | | 0.2 | | | 0.0 | | | (5.9) | | | (0.04) | |
Amortization of debt issuance costs | | — | | | — | | | 1.7 | | | 0.01 | | | — | | | — | | | 1.8 | | | 0.01 | |
Deferred taxes and other tax related | | — | | | — | | | 2.0 | | | 0.01 | | | — | | | — | | | (7.3) | | | (0.05) | |
Total adjustments | | 39.7 | | | 4.2 | | | 53.6 | | | 0.34 | | | 28.0 | | | 3.5 | | | 26.9 | | | 0.17 | |
Adjusted (non-GAAP) | | $ | 201.0 | | | 21.1 | % | | $ | 138.6 | | | $ | 0.87 | | | $ | 154.8 | | | 19.6 | % | | $ | 103.6 | | | $ | 0.66 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the nine months ended September 30, 2021 | | For the nine months ended September 30, 2020 |
(Dollars in millions, except per share amounts) | | Operating Income | | Operating Margin | | Net Income | | Diluted EPS | | Operating Income | | Operating Margin | | Net Income | | Diluted EPS |
Reported (GAAP) | | $ | 483.5 | | | 16.8 | % | | $ | 251.6 | | | $ | 1.58 | | | $ | 183.6 | | | 8.6 | % | | $ | 42.6 | | | $ | 0.27 | |
Non-GAAP adjustments: | | | | | | | | | | | | | | | | |
Restructuring related and other | | 15.7 | | | 0.5 | | | 19.6 | | | 0.12 | | | 79.0 | | | 3.7 | | | 76.8 | | | 0.49 | |
Financing and other transaction costs | | 6.1 | | | 0.2 | | | 35.8 | | | 0.22 | | | 7.2 | | | 0.3 | | | 7.2 | | | 0.05 | |
Step-up depreciation and amortization | | 96.0 | | | 3.3 | | | 96.0 | | | 0.60 | | | 95.6 | | | 4.5 | | | 95.6 | | | 0.61 | |
Deferred loss/(gain) on derivative instruments | | 7.0 | | | 0.2 | | | 13.5 | | | 0.08 | | | 1.0 | | | 0.0 | | | (5.0) | | | (0.03) | |
Amortization of debt issuance costs | | — | | | — | | | 5.1 | | | 0.03 | | | — | | | — | | | 5.0 | | | 0.03 | |
Deferred taxes and other tax related | | — | | | — | | | 5.9 | | | 0.04 | | | — | | | — | | | (7.8) | | | (0.05) | |
Total adjustments | | 124.9 | | | 4.3 | | | 175.9 | | | 1.10 | | | 182.9 | | | 8.6 | | | 171.9 | | | 1.09 | |
Adjusted (non-GAAP) | | $ | 608.4 | | | 21.1 | % | | $ | 427.5 | | | $ | 2.68 | | | $ | 366.5 | | | 17.1 | % | | $ | 214.5 | | | $ | 1.36 | |
The following table provides a reconciliation of net cash provided by operating activities in accordance with U.S. GAAP to free cash flow.
| | | | | | | | | | | | | | | | |
| | For the nine months ended September 30, |
(in millions) | | 2021 | | 2020 | | |
Net cash provided by operating activities | | $ | 393.2 | | | $ | 293.3 | | | |
Additions to property, plant and equipment and capitalized software | | (100.4) | | | (79.9) | | | |
Free cash flow | | $ | 292.8 | | | $ | 213.4 | | | |
The following table provides a reconciliation of net income in accordance with U.S. GAAP to Adjusted EBITDA.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | For the three months ended September 30, | | For the nine months ended September 30, |
(in millions) | | LTM | | 2021 | | 2020 | | 2021 | | 2020 |
Net income | | $ | 373.3 | | | $ | 85.0 | | | $ | 76.7 | | | $ | 251.6 | | | $ | 42.6 | |
Interest expense, net | | 181.8 | | | 45.1 | | | 44.1 | | | 134.4 | | | 124.3 | |
Provision for income taxes | | 36.0 | | | 21.8 | | | 15.2 | | | 49.8 | | | 15.1 | |
Depreciation expense | | 125.8 | | | 31.5 | | | 28.9 | | | 94.4 | | | 94.2 | |
Amortization of intangible assets | | 132.6 | | | 34.6 | | | 32.6 | | | 101.5 | | | 98.4 | |
EBITDA | | 849.6 | | | 218.0 | | | 197.5 | | | 631.6 | | | 374.7 | |
Non-GAAP Adjustments | | | | | | | | | | |
Restructuring related and other | | 31.6 | | | 4.3 | | | (5.1) | | | 18.7 | | | 80.2 | |
Financing and other transaction costs | | 35.0 | | | (1.8) | | | 1.8 | | | 35.8 | | | 7.2 | |
Deferred loss/(gain) on derivative instruments | | 11.5 | | | 9.1 | | | (5.9) | | | 13.5 | | | (5.0) | |
Adjusted EBITDA | | $ | 927.6 | | | $ | 229.6 | | | $ | 188.4 | | | $ | 699.6 | | | $ | 457.1 | |
The following table provides a reconciliation of total debt, finance lease, and other companies.financing obligations in accordance with U.S. GAAP to net leverage ratio.
| | | | | | | | | | | | | | | | |
(Dollars in millions) | | September 30, 2021 | | December 31, 2020 | | |
Current portion of long-term debt, finance lease and other financing obligations | | $ | 6.6 | | | $ | 757.2 | | | |
Finance lease and other financing obligations, less current portion | | 27.0 | | | 27.9 | | | |
Long-term debt, net | | 4,214.4 | | | 3,213.7 | | | |
Total debt, finance lease, and other financing obligations | | 4,248.0 | | | 3,998.9 | | | |
Less: discount | | (5.7) | | | (9.6) | | | |
Less: deferred financing costs | | (28.0) | | | (28.1) | | | |
Total gross indebtedness | | 4,281.6 | | | 4,036.6 | | | |
Less: cash and cash equivalents | | 1,958.1 | | | 1,862.0 | | | |
Net debt | | $ | 2,323.5 | | | $ | 2,174.6 | | | |
| | | | | | |
Adjusted EBITDA (LTM) | | $ | 927.6 | | | $ | 685.1 | | | |
Net leverage ratio | | 2.5 | | 3.2 | | |
Liquidity and Capital Resources
WeAs of September 30, 2021 and December 31, 2020, we held cash and cash equivalents of $613.0 million and $351.4 million at September 30, 2017 and December 31, 2016, respectively, of which $174.0 million and $37.8 million, respectively, was held in the Netherlands, $7.0 million and $5.7 million, respectively, was held by U.S. subsidiaries, and $432.0 million and $307.9 million, respectively, was held by other foreign subsidiaries. following regions (amounts have been calculated based on unrounded numbers; accordingly, certain amounts may not appear to recalculate due to the effect of rounding):
| | | | | | | | | | | |
(In millions) | September 30, 2021 | | December 31, 2020 |
United Kingdom | $ | 30.2 | | | $ | 25.3 | |
United States | 23.2 | | | 17.2 | |
The Netherlands | 1,580.2 | | | 1,514.1 | |
China | 269.9 | | | 185.2 | |
Other | 54.6 | | | 120.2 | |
Total | $ | 1,958.1 | | | $ | 1,862.0 | |
The amount of cash and cash equivalents held in the Netherlands and in our U.S. and other foreign subsidiariesthese geographic regions 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.
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 nine months ended September 30, 20172021 and 2016.2020. We have derived thethis summarized statements of cash flows from the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Amounts in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not addappear to recalculate due to the effect of rounding.
| | | | | | | | | | | |
| For the nine months ended |
(In millions) | September 30, 2021 | | September 30, 2020 |
Net cash provided by/(used in): | | | |
Operating activities: | | | |
Net income adjusted for non-cash items | $ | 516.8 | | | $ | 248.7 | |
Changes in operating assets and liabilities, net | (123.6) | | | 44.6 | |
Operating activities | 393.2 | | | 293.3 | |
Investing activities | (516.1) | | | (158.5) | |
Financing activities | 219.0 | | | 701.2 | |
Net change | $ | 96.2 | | | $ | 836.1 | |
|
| | | | | | | |
| For the nine months ended |
(in millions) | September 30, 2017 | | September 30, 2016 |
Net cash provided by/(used in): | | | |
Operating activities: | | | |
Net income adjusted for non-cash items | $ | 480.0 |
| | $ | 462.6 |
|
Changes in operating assets and liabilities, net of effects of acquisitions | (107.7 | ) | | (66.2 | ) |
Operating activities | 372.3 |
| | 396.4 |
|
Investing activities | (97.7 | ) | | (139.1 | ) |
Financing activities | (13.1 | ) | | (299.6 | ) |
Net change | $ | 261.5 |
| | $ | (42.4 | ) |
Operating activities. Net cash provided by operating activities forincreased in the nine months ended September 30, 2017 and 2016 was $372.3 million and $396.4 million, respectively. The decrease in cash provided by operating activities relates2021 primarily due to a build up of inventory to support anticipated line moves, higher cash paidnet income adjusted for interest, and higher cash paid related to severance obligations,non-cash items, partially offset by improved operating profitability. Thethe impact of changes in working capital. Changes in working capital in the nine months ended September 30, 2021 were primarily driven by higher cash paid for interest relatesaccounts receivable balances reflecting higher revenue in the third quarter of 2021 compared to the 6.25% Senior Notes, for which interest payments are due semi-annually on February 15 and August 15third quarter of each year. The payment made on February 15, 2016 did not represent payment for a full six-month period, as2020. In addition, during the 6.25% Senior Notesthree months ended September 30, 2021, we increased raw material purchases in order to maximize production flexibility given widespread parts shortages in our supply chain. These changes were issued on November 27, 2015.partially offset by increased accounts payable in the nine months ended September 30, 2021 compared to the prior year period.
Investing activities. Net cash used in investing activities forincreased in the nine months ended September 30, 20172021 primarily due to $415.0 million cash paid for the acquisitions of Lithium Balance and 2016 was $97.7 million and $139.1 million, respectively, which included $103.5 million and $94.6 million, respectively, in capital expenditures.Xirgo. In 2017,fiscal year 2021, we anticipate capital expenditures of approximately $130$145.0 million to $150$155.0 million, which we expect to be funded with netfrom cash provided by operating activities. Net cash used in investingon hand.
Financing activities for. In the nine months ended September 30, 2016 also included an investment of $50.0 million in preferred stock of Quanergy Systems, Inc.
Financing activities. Net2021, net cash used inprovided by financing activities fordecreased primarily due to the impact of debt financing transactions. In the nine months ended September 30, 20172021, we issued $1.0 billion of 4.0% Senior Notes and 2016redeemed the $750.0 million aggregate principal amount outstanding on the 6.25% Senior Notes, for net cash provided of $208.0 million (including associated fees). This compares to the issuance of $750 million aggregate principal amount of 3.75% Senior Notes in the nine months ended September 30, 2020 and the borrowing and subsequent repayment of $400.0 million on the Revolving Credit facility, which, including associated fees, provided net cash inflow of $736.5 million. This decline in net proceeds from the issuance of debt was $13.1partially offset by less cash paid to repurchase shares and increased proceeds from option exercises. We did not repurchase any ordinary shares in the nine months ended September 30, 2021, compared to ordinary share repurchases of $35.2 million and $299.6 million, respectively, which consisted primarilyin the nine months ended September 30, 2020. This decline is the result of $14.5 million and $297.7 million, respectively,our temporary suspension of share repurchases on April 2, 2020. Refer to Capital Resources—Share repurchase programs for additional discussion. We intend to resume our share repurchase program in payments on debt.the fourth quarter.
Indebtedness and Liquidity:Liquidity
Our liquidity requirements are significant due to our highly leveraged nature. As of September 30, 2017,2021, we had $3,313.6 million$4.3 billion in gross indebtedness, which includes capitalfinance lease and other financing obligations and excludesexcluded debt discounts and deferred financing costs.
A summary2021, we redeemed our 6.25% Senior Notes and issued the 4.0% Senior Notes, reducing our cost of capital and extending the maturity profile of our indebtedness asdebt. Refer to Overview—Debt Transactions included elsewhere in this MD&A for additional discussion of September 30, 2017 is as follows:these transactions.
|
| | | | | |
(in thousands) | Maturity Date | | September 30, 2017 |
Term Loan | October 14, 2021 | | $ | 927,794 |
|
4.875% Senior Notes | October 15, 2023 | | 500,000 |
|
5.625% Senior Notes | November 1, 2024 | | 400,000 |
|
5.0% Senior Notes | October 1, 2025 | | 700,000 |
|
6.25% Senior Notes | February 15, 2026 | | 750,000 |
|
Less: discount | | | (15,812 | ) |
Less: deferred financing costs | | | (29,971 | ) |
Less: current portion | | | (7,327 | ) |
Long-term debt, net | | | $ | 3,224,684 |
|
| | | |
Capital lease and other financing obligations | | | $ | 35,839 |
|
Less: current portion | | | (5,849 | ) |
Capital lease and other financing obligations, less current portion | | | $ | 29,990 |
|
Senior Secured Credit FacilitiesAsThe credit agreement governing our secured credit facility (as amended, the "Credit Agreement") provides for the Senior Secured Credit Facilities consisting of September 30, 2017, there was $415.3 million of availability underthe Term Loan, the Revolving Credit Facility, netand incremental availability (the "Accordion") under which additional secured credit facilities could be issued under certain circumstances.
Sources of $4.7 million in letters of credit. Outstanding letters of credit are issued primarily for the benefit of certain operating activities. As of September 30, 2017, no amounts had been drawn against these outstanding letters of credit, which are scheduled to expire on various dates in 2017 and 2018.
Capital Resourcesliquidity
Our sources of liquidity include cash on hand, cash flows from operations, and available capacity under the Revolving Credit Facility. In addition, our senior secured credit facilities provide for incremental facilities (the "Accordion"),As of September 30, 2021, we had $416.1 million available under which additional term loans may be issued or the capacity of the Revolving Credit Facility, may be increased.net of $3.9 million of obligations related to outstanding letters of credit issued thereunder. Outstanding letters of credit are issued primarily for the benefit of certain operating activities. As of September 30, 2017, $230.02021, no amounts had been drawn against these outstanding letters of credit. Availability under the Accordion varies each period based on our attainment of certain financial metrics as set forth in the terms of the Credit Agreement and the indentures under which our senior notes were issued (the "Senior Notes Indentures"). As of September 30, 2021, availability under the Accordion was approximately $1.0 billion. Our primary use of cash on hand is to acquire businesses that will extend our market position within our key growth vectors of Electrification and Insights. In addition, we intend to resume our share repurchase program, under which we have approximately $302 million remained available for issuance underrepurchase, in the Accordion.fourth quarter.
We believe, based on our current level of operations as reflected in our results of operations for the three and nine months ended September 30, 2017, and taking into consideration the restrictions and covenants discussed below,included in the Credit Agreement and Senior Notes Indentures, that thesethe sources of liquidity described above will be sufficient to fund our operations, capital expenditures, ordinary share repurchases (when resumed), 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 our indebtedness or to fund our other liquidity needs. Further, our highly leveragedhighly-leveraged nature may limit our ability to procure additional financing in the future.
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 October 23, 2017,20, 2021, Moody’s Investors Service’s corporate credit rating for Sensata Technologies B.V. ("STBV")STBV was Ba2 with a stable outlook, and Standard & Poor’s corporate credit rating for STBV was BB+ with a stable outlook. The Standard & Poor’s corporate credit rating represents an upgrade, effective on October 23, 2017, from the previous rating of BB with a positive outlook. Any future downgrades to STBV's credit ratings may increase our future borrowing costs but will not reduce availability under the Credit Agreement.
Restrictions and Covenants
The Credit Agreement provides that if our credit agreement datedsenior secured net leverage ratio exceeds a specified level we are required to use a portion of our excess cash flow, as defined in the Credit Agreement, generated by operating, investing, or financing activities to prepay some or all of May 12, 2011 (as amended, the "Credit Agreement")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 upon the incurrence of certain
indebtedness (excluding any permitted indebtedness). These provisions were not triggered during the nine months ended September 30, 2021.
The Credit Agreement and the indentures under which our senior notes were issuedSenior Notes Indentures contain restrictions and covenants that limit the ability of our wholly-owned subsidiary, 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. For a full discussion of these restrictions and covenants, refer to Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources," included in our 2020 Annual Report on Form 10-K forReport. These restrictions and covenants, which are subject to important exceptions and qualifications set forth in the year ended December 31, 2016.
Credit Agreement and Senior Notes Indentures, were taken into consideration when we established our share repurchase programs and will be evaluated periodically with respect to future potential funding of those programs. As of September 30, 2017,2021, we believe we were in compliance with all covenants and default provisions under our credit arrangements.
Share repurchase programs
From time to time, our Board of Directors has authorized various share repurchase programs, which may be modified or terminated by our Board at any time. We currently have an authorized $500.0 million share repurchase program under which approximately $302.3 million remained available as of September 30, 2021. On April 2, 2020, we announced a temporary suspension of this share repurchase program. We intend to resume our share repurchase program in the fourth quarter.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the "FASB")There are no recently issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), which creates one Accounting Standards Codification ("ASC")
Topic (FASB ASC 606, Revenue from Contracts with Customers)accounting standards that replaceshave been adopted in the current guidance found in FASB ASC 605, Revenue Recognition, and various other revenue accounting standards for specialized transactions and industries. FASB ASU No. 2014-09 outlines a comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue to depict the transfer of promised goodsperiod 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. FASB ASU No. 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,adopted in future periods that have had 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 adjustmentare expected to the opening balance of retained earnings at the effective date for contracts that still require performance by the entity.
In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date, which defers the effective date of FASB ASU No. 2014-09 by one year. FASB ASU No. 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. We have developed an implementation plan to adopt this new guidance. As part of this plan, we are currently assessing the impact of the new guidance on our financial position and results of operations. Based on our procedures performed to date, nothing has come to our attention that would indicate that the adoption of FASB ASU No. 2014-09 will have a material impact on our consolidated financial position or results of operations. However, we will continue to evaluate this assessment through the remainder of 2017. In addition, the adoption of FASB ASU No. 2014-09 requires new disclosures related to revenue recognition, which we are continuing to evaluate. We intend to adopt FASB ASU No. 2014-09 on January 1, 2018 using the modified retrospective transition method.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes 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 12 months or less) using a method similar to the current 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. At December 31, 2016, we were contractually obligated to make future payments of $69.8 million under our operating lease obligations in existence as of that date, primarily related to long-term facility leases. While we are in the early stages of our implementation process for FASB ASU No. 2016-02, and have not yet determined its impact on our consolidated financial statements, these leases would potentially be required to be presented on the balance sheet in accordance with the requirements of FASB ASU No. 2016-02. FASB ASU No. 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods, with early adoption permitted. FASB ASU No. 2016-02 must be applied using a modified retrospective approach, which requires recognition and measurement of leases at the beginning of the earliest period presented, with certain practical expedients available.
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, 2018, including interim periods within those annual reporting periods, with early adoption permitted. We are still evaluating the impact that this guidance will have on our consolidated financial statements, and we have not yet determined whether we will early adopt FASB ASU No. 2017-12.
Critical Accounting Policies and Estimates
For a discussion of the critical accounting policies that require the use of significant judgments and estimates by management, refer to Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates,"Estimates" included in our 2020 Annual Report on Form 10-K for the year ended December 31, 2016.Report.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
There have been noItem 3.Quantitative and Qualitative Disclosures About Market Risk.
No significant changes to our market risk have occurred since December 31, 2016.2020. For a discussion of market riskrisks affecting us, refer to Part II, Item 7A—"Quantitative and Qualitative Disclosures About Market Risk,"Risk" included in our 2020 Annual Report on Form 10-K for the year ended December 31, 2016.Report.
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Item 4. | Controls and Procedures. |
Item 4.Controls and Procedures.
The required certifications of our Chief Executive Officer, Chief Financial Officer, and Chief FinancialAccounting Officer are included as exhibits to this Quarterly Report on Form 10-Q. The disclosures set forth in this Item 4 contain information concerning the evaluation of our disclosure controls and procedures and changes in internal control over financial reporting referred to in these certifications. These certifications should be read in conjunction with this Item 4 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, Chief Financial Officer, and Chief FinancialAccounting Officer, we have evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017.2021. The term "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"), 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 U.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 September 30, 2017,2021, our Chief Executive Officer, Chief Financial Officer, and Chief FinancialAccounting Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
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 ninethree months ended September 30, 20172021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
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 U.S. generally accepted accounting principles.GAAP. 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.
PART II—OTHER INFORMATION
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Item 1. | Legal Proceedings. |
As discussed in Part I, Item 3—"1.Legal Proceedings," in our Annual Report on Form 10-K for the year ended December 31, 2016, weProceedings.
We are regularly involved in a number of claims and litigation matters that arise 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. 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 resultresults of operations, financial position,condition, or cash flows.
Item 1A.Risk Factors.
Information regarding risk factors appears in Part I, Item 1A—"1A: Risk Factors", included in our 2020 Annual Report on Form 10-K for the year ended December 31, 2016.Report. There have been no material changes to the risk factors disclosed therein.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased (in shares) | | 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) |
July 1 through July 31, 2021 | | 1,047 | | | $ | 58.44 | | | — | | | $ | 302.3 | |
August 1 through August 31, 2021 | | 2,465 | | | $ | 58.62 | | | — | | | $ | 302.3 | |
September 1 through September 30, 2021 | | 14,286 | | | $ | 58.30 | | | — | | | $ | 302.3 | |
Quarter total | | 17,798 | | | $ | 58.35 | | | — | | | $ | 302.3 | |
__________________________
(1) The number of ordinary shares presented were withheld upon the vesting of restricted securities to cover payment of employee withholding tax. These withholdings took place outside of a publicly announced repurchase plan.
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| | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased (in shares) | | 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) |
July 1 through July 31, 2017 | | 2,117 |
| (1) | $ | 45.03 |
| | — |
| | $ | 250.0 |
|
August 1 through August 31, 2017 | | — |
| | $ | — |
| | — |
| | $ | 250.0 |
|
September 1 through September 30, 2017 | | — |
| | $ | — |
| | — |
| | $ | 250.0 |
|
Total | | 2,117 |
| | $ | 45.03 |
| | — |
| | $ | 250.0 |
|
__________________
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(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 shares noted in the table above to cover such tax withholdings. These transactions took place outside of a publicly-announced repurchase plan. The weighted-average price per share listed in the above table is the weighted-average of the fair market prices at which we calculated the number of shares withheld to cover tax for the employees. |
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Item 3. | Defaults Upon Senior Securities. |
Item 3.Defaults Upon Senior Securities.
None.
Item 6.Exhibits.
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Item 6.Exhibit No. | Exhibits. |
Description |
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Exhibit No.3.1 | | Description |
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3.1 | | |
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4.1 | | |
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4.2 | | |
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4.331.1 | | |
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4.4 | | |
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31.1 | | |
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31.2 | | |
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32.131.3 | | |
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32.1 | | |
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101101.INS | | The following materials fromInline XBRL Instance Document - the Registrant's Quarterly Report on Form 10-Q forinstance document does not appear in the quarterly period ended September 30, 2017, formatted inInteractive Data File because its XBRL (eXtensible Business Reporting Language): (i)tags are embedded within the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to the Condensed Consolidated Financial Statements.Inline XBRL document. |
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101.SCH | | Inline XBRL Taxonomy Extension Schema Document. * |
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101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. * |
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101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. * |
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101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. * |
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101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. * |
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104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
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___________________________
* Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: October 24, 2017
SENSATA TECHNOLOGIES HOLDING N.V.
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SENSATA TECHNOLOGIES HOLDING PLC |
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/s/ Martha SullivanJeffrey Cote |
(Martha Sullivan)Jeffrey Cote) President and Chief Executive Officer and President
(Principal Executive Officer) |
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/s/ Paul Vasington |
(Paul Vasington) Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
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/s/ Maria Freve |
(Maria Freve) Vice President and Chief Accounting Officer (Principal Accounting Officer) |
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