Item 1.Financial Statements.
SENSATA TECHNOLOGIES HOLDING PLC
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
(unaudited)
| | | | | | | | | | | |
| June 30,
2022 | | December 31,
2021 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,558,578 | | | $ | 1,708,955 | |
Accounts receivable, net of allowances of $26,448 and $17,003 as of June 30, 2022 and December 31, 2021, respectively | 743,048 | | | 653,438 | |
| Inventories | 656,736 | | | 588,231 | |
| Prepaid expenses and other current assets | 161,367 | | | 126,370 | |
| | | |
| Total current assets | 3,119,729 | | | 3,076,994 | |
| Property, plant and equipment, net | 825,862 | | | 820,933 | |
| Goodwill | 3,534,438 | | | 3,502,063 | |
Other intangible assets, net of accumulated amortization of $2,351,560 and $2,277,393 as of June 30, 2022 and December 31, 2021, respectively | 904,929 | | | 946,731 | |
| Deferred income tax assets | 101,899 | | | 105,028 | |
| Other assets | 119,820 | | | 162,017 | |
| Total assets | $ | 8,606,677 | | | $ | 8,613,766 | |
| Liabilities and shareholders' equity | | | |
| Current liabilities: | | | |
| Current portion of long-term debt, finance lease and other financing obligations | $ | 6,566 | | | $ | 6,833 | |
| Accounts payable | 537,261 | | | 459,093 | |
| Income taxes payable | 15,309 | | | 26,517 | |
| Accrued expenses and other current liabilities | 327,993 | | | 343,816 | |
| | | |
| Total current liabilities | 887,129 | | | 836,259 | |
| Deferred income tax liabilities | 341,383 | | | 339,273 | |
| Pension and other post-retirement benefit obligations | 37,863 | | | 38,758 | |
| Finance lease and other financing obligations, less current portion | 25,623 | | | 26,564 | |
| Long-term debt, net | 4,213,512 | | | 4,214,946 | |
| Other long-term liabilities | 77,583 | | | 63,232 | |
| Total liabilities | 5,583,093 | | | 5,519,032 | |
| Commitments and contingencies (Note 12) | | | |
| Shareholders’ equity: | | | |
Ordinary shares, €0.01 nominal value per share, 177,069 shares authorized, and 174,924 and 174,287 shares issued as of June 30, 2022 and December 31, 2021, respectively | 2,239 | | | 2,232 | |
Treasury shares, at cost, 19,269 and 16,438 shares as of June 30, 2022 and December 31, 2021, respectively | (978,595) | | | (832,439) | |
| Additional paid-in capital | 1,841,925 | | | 1,812,244 | |
| Retained earnings | 2,164,734 | | | 2,132,257 | |
| Accumulated other comprehensive loss | (6,719) | | | (19,560) | |
| | | |
| | | |
| Total shareholders' equity | 3,023,584 | | | 3,094,734 | |
| Total liabilities and shareholders' equity | $ | 8,606,677 | | | $ | 8,613,766 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended | | For the six months ended |
| | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| Net revenue | $ | 1,020,548 | | | $ | 992,660 | | | $ | 1,996,318 | | | $ | 1,935,188 | |
| Operating costs and expenses: | | | | | | | |
| Cost of revenue | 686,603 | | | 658,285 | | | 1,343,683 | | | 1,293,634 | |
| Research and development | 47,971 | | | 42,913 | | | 93,951 | | | 78,869 | |
| Selling, general and administrative | 97,329 | | | 86,821 | | | 193,009 | | | 163,944 | |
| Amortization of intangible assets | 36,805 | | | 34,857 | | | 74,172 | | | 66,921 | |
| Restructuring and other charges, net | 12,897 | | | 5,029 | | | 26,630 | | | 9,611 | |
| Total operating costs and expenses | 881,605 | | | 827,905 | | | 1,731,445 | | | 1,612,979 | |
| Operating income | 138,943 | | | 164,755 | | | 264,873 | | | 322,209 | |
| Interest expense, net | (44,842) | | | (45,213) | | | (90,287) | | | (89,256) | |
| Other, net | (39,240) | | | 1,012 | | | (89,696) | | | (38,385) | |
| Income before taxes | 54,861 | | | 120,554 | | | 84,890 | | | 194,568 | |
| Provision for income taxes | 20,020 | | | 7,638 | | | 27,608 | | | 27,919 | |
| Net income | $ | 34,841 | | | $ | 112,916 | | | $ | 57,282 | | | $ | 166,649 | |
| Basic net income per share | $ | 0.22 | | | $ | 0.71 | | | $ | 0.36 | | | $ | 1.05 | |
| Diluted net income per share | $ | 0.22 | | | $ | 0.71 | | | $ | 0.36 | | | $ | 1.05 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended | | For the six months ended |
| | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| Net income | $ | 34,841 | | | $ | 112,916 | | | $ | 57,282 | | | $ | 166,649 | |
| Other comprehensive income: | | | | | | | |
| Cash flow hedges | 9,183 | | | 1,398 | | | 12,033 | | | 15,676 | |
| Defined benefit and retiree healthcare plans | 380 | | | 1,672 | | | 808 | | | 3,384 | |
| Other comprehensive income | 9,563 | | | 3,070 | | | 12,841 | | | 19,060 | |
| Comprehensive income | $ | 44,404 | | | $ | 115,986 | | | $ | 70,123 | | | $ | 185,709 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
| | | | | | | | | | | |
| | For the six months ended |
| | June 30, 2022 | | June 30, 2021 |
| Cash flows from operating activities: | | | |
| Net income | $ | 57,282 | | | $ | 166,649 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation | 62,882 | | | 62,833 | |
| Amortization of debt issuance costs | 3,433 | | | 3,426 | |
| | | |
| Share-based compensation | 15,739 | | | 11,475 | |
| Loss on debt financing | — | | | 30,066 | |
| Amortization of intangible assets | 74,172 | | | 66,921 | |
| Deferred income taxes | (5,211) | | | (7,070) | |
| Acquisition-related compensation payments | (15,000) | | | — | |
| Mark-to-market loss on equity investments, net | 71,100 | | | — | |
| Unrealized loss on derivative instruments and other | 20,669 | | | 12,700 | |
| Changes in operating assets and liabilities, net of the effects of acquisitions: | | | |
| Accounts receivable, net | (102,845) | | | (97,906) | |
| Inventories | (69,379) | | | (45,664) | |
| Prepaid expenses and other current assets | (17,762) | | | (8,280) | |
| Accounts payable and accrued expenses | 56,767 | | | 68,764 | |
| Income taxes payable | (11,384) | | | 6,448 | |
| Other | 1,425 | | | (2,431) | |
| Net cash provided by operating activities | 141,888 | | | 267,931 | |
| Cash flows from investing activities: | | | |
| Acquisitions, net of cash received | (48,989) | | | (421,951) | |
| Additions to property, plant and equipment and capitalized software | (74,069) | | | (63,572) | |
| Investment in debt and equity securities | (6,878) | | | (6,444) | |
| | | |
| | | |
| Other | 152 | | | 2,862 | |
| Net cash used in investing activities | (129,784) | | | (489,105) | |
| Cash flows from financing activities: | | | |
| Proceeds from exercise of stock options and issuance of ordinary shares | 14,577 | | | 17,957 | |
| Payment of employee restricted stock tax withholdings | (7,577) | | | (7,948) | |
| Proceeds from borrowings on debt | — | | | 1,001,875 | |
| Payments on debt | (5,664) | | | (757,889) | |
| Dividends paid | (17,225) | | | — | |
| Payments to repurchase ordinary shares | (144,279) | | | — | |
| | | |
| Payments of debt financing costs | (2,313) | | | (33,032) | |
| | | |
| Net cash (used in)/provided by financing activities | (162,481) | | | 220,963 | |
| Net change in cash and cash equivalents | (150,377) | | | (211) | |
| Cash and cash equivalents, beginning of year | 1,708,955 | | | 1,861,980 | |
| Cash and cash equivalents, end of period | $ | 1,558,578 | | | $ | 1,861,769 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
SENSATA TECHNOLOGIES HOLDING 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 March 31, 2022 | 174,583 | | | $ | 2,236 | | | (17,576) | | | $ | (899,697) | | | $ | 1,831,497 | | | $ | 2,154,563 | | | $ | (16,282) | | | | | | | $ | 3,072,317 | |
| Surrender of shares for tax withholding | — | | | — | | | (148) | | | (7,442) | | | — | | | — | | | — | | | | | | | (7,442) | |
| Stock options exercised | 39 | | | — | | | — | | | — | | | 1,229 | | | — | | | — | | | | | | | 1,229 | |
| Vesting of restricted securities | 450 | | | 5 | | | — | | | — | | | — | | | (5) | | | — | | | | | | | — | |
| Cash dividends paid | — | | | — | | | — | | | — | | | — | | | (17,225) | | | — | | | | | | | (17,225) | |
| Repurchase of ordinary shares | — | | | — | | | (1,693) | | | (78,898) | | | — | | | — | | | — | | | | | | | (78,898) | |
| Retirement of ordinary shares | (148) | | | (2) | | | 148 | | | 7,442 | | | — | | | (7,440) | | | — | | | | | | | — | |
| Share-based compensation | — | | | — | | | — | | | — | | | 9,199 | | | — | | | — | | | | | | | 9,199 | |
| | | | | | | | | | | | | | | | | | | |
| Net income | — | | | — | | | — | | | — | | | — | | | 34,841 | | | — | | | | | | | 34,841 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 9,563 | | | | | | | 9,563 | |
| Balance as of June 30, 2022 | 174,924 | | | $ | 2,239 | | | (19,269) | | | $ | (978,595) | | | $ | 1,841,925 | | | $ | 2,164,734 | | | $ | (6,719) | | | | | | | $ | 3,023,584 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | 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, 2021 | 174,287 | | | $ | 2,232 | | | (16,438) | | | $ | (832,439) | | | $ | 1,812,244 | | | $ | 2,132,257 | | | $ | (19,560) | | | | | | | $ | 3,094,734 | |
| Surrender of shares for tax withholding | — | | | — | | | (151) | | | (7,577) | | | — | | | — | | | — | | | | | | | (7,577) | |
| Stock options exercised | 329 | | | 4 | | | — | | | — | | | 13,942 | | | — | | | — | | | | | | | 13,946 | |
| Vesting of restricted securities | 459 | | | 5 | | | — | | | — | | | — | | | (5) | | | — | | | | | | | — | |
| | | | | | | | | | | | | | | | | | | |
| Cash dividends paid | — | | | — | | | — | | | — | | | — | | | (17,225) | | | — | | | | | | | (17,225) | |
| Repurchase of ordinary shares | — | | | — | | | (2,831) | | | (146,156) | | | — | | | — | | | — | | | | | | | (146,156) | |
| Retirement of ordinary shares | (151) | | | (2) | | | 151 | | | 7,577 | | | — | | | (7,575) | | | — | | | | | | | — | |
| Share-based compensation | — | | | — | | | — | | | — | | | 15,739 | | | — | | | — | | | | | | | 15,739 | |
| | | | | | | | | | | | | | | | | | | |
| Net income | — | | | — | | | — | | | — | | | — | | | 57,282 | | | — | | | | | | | 57,282 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 12,841 | | | | | | | 12,841 | |
| Balance as of June 30, 2022 | 174,924 | | | $ | 2,239 | | | (19,269) | | | $ | (978,595) | | | $ | 1,841,925 | | | $ | 2,164,734 | | | $ | (6,719) | | | | | | | $ | 3,023,584 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Ordinary Shares | | Treasury Shares | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | | | | | Total Shareholders' Equity |
| | Number | | Amount | | Number | | Amount | | | |
| Balance as of March 31, 2021 | 173,533 | | | $ | 2,223 | | | (15,631) | | | $ | (784,596) | | | $ | 1,775,320 | | | $ | 1,831,241 | | | $ | (33,545) | | | | | | | $ | 2,790,643 | |
| Surrender of shares for tax withholding | — | | | — | | | (132) | | | (7,727) | | | — | | | — | | | — | | | | | | | (7,727) | |
| Stock options exercised | 208 | | | 3 | | | — | | | — | | | 8,167 | | | — | | | — | | | | | | | 8,170 | |
| Vesting of restricted securities | 396 | | | 5 | | | — | | | — | | | — | | | (5) | | | — | | | | | | | — | |
| | | | | | | | | | | | | | | | | | | |
| Retirement of ordinary shares | (132) | | | (2) | | | 132 | | | 7,727 | | | — | | | (7,725) | | | — | | | | | | | — | |
| Share-based compensation | — | | | — | | | — | | | — | | | 6,376 | | | — | | | — | | | | | | | 6,376 | |
| | | | | | | | | | | | | | | | | | | |
| Net income | — | | | — | | | — | | | — | | | — | | | 112,916 | | | — | | | | | | | 112,916 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 3,070 | | | | | | | 3,070 | |
| 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | 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 | — | | | — | | | (136) | | | (7,948) | | | — | | | — | | | — | | | | | | | (7,948) | |
| Stock options exercised | 467 | | | 6 | | | — | | | — | | | 18,720 | | | — | | | — | | | | | | | 18,726 | |
| Vesting of restricted securities | 408 | | | 5 | | | — | | | — | | | — | | | (5) | | | — | | | | | | | — | |
| | | | | | | | | | | | | | | | | | | |
| Retirement of ordinary shares | (136) | | | (2) | | | 136 | | | 7,948 | | | — | | | (7,946) | | | — | | | | | | | — | |
| Share-based compensation | — | | | — | | | — | | | — | | | 11,475 | | | — | | | — | | | | | | | 11,475 | |
| | | | | | | | | | | | | | | | | | | |
| Net income | — | | | — | | | — | | | — | | | — | | | 166,649 | | | — | | | | | | | 166,649 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 19,060 | | | | | | | 19,060 | |
| 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 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
SENSATA TECHNOLOGIES HOLDING PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements reflect the financial position, results of operations, comprehensive income, cash flows, and changes in shareholders' equity of Sensata Technologies Holding plc, a public limited company incorporated under the laws of England and Wales, and its consolidated subsidiaries, collectively referred to as the "Company," "Sensata," "we," "our," or "us."
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States ("U.S.") generally accepted accounting principles ("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. 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, 2021 filed with the U.S. Securities and Exchange Commission (the "SEC") on February 10, 2022 (the "2021 Annual Report").
All U.S. dollar ("USD") and share amounts presented, except per share amounts, are stated in thousands, unless otherwise indicated.
2. New Accounting Standards
There are no recently issued accounting standards that have been adopted in the current period or will be adopted in future periods that have had or are expected to have a material impact on our consolidated financial position or results of operations.
3. Revenue Recognition
The following table presents net revenue disaggregated by segment and end market for the three and six months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended June 30, 2022 | | For the three months ended June 30, 2021 |
| | Performance Sensing | | Sensing Solutions | | Total | | Performance Sensing | | Sensing Solutions | | Total |
| Automotive | | $ | 506,232 | | | $ | 9,932 | | | $ | 516,164 | | | $ | 518,367 | | | $ | 12,052 | | | $ | 530,419 | |
HVOR (1) | | 240,650 | | | — | | | 240,650 | | | 223,485 | | | — | | | 223,485 | |
| Industrial | | — | | | 122,094 | | | 122,094 | | | — | | | 105,474 | | | 105,474 | |
Appliance and HVAC (2) | | — | | | 57,675 | | | 57,675 | | | — | | | 63,187 | | | 63,187 | |
| Aerospace | | — | | | 38,558 | | | 38,558 | | | — | | | 32,793 | | | 32,793 | |
| Other | | — | | | 45,407 | | | 45,407 | | | — | | | 37,302 | | | 37,302 | |
| Total | | $ | 746,882 | | | $ | 273,666 | | | $ | 1,020,548 | | | $ | 741,852 | | | $ | 250,808 | | | $ | 992,660 | |
___________________________________
(1) Heavy vehicle and off-road
(2) Heating, ventilation and air conditioning
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the six months ended June 30, 2022 | | For the six months ended June 30, 2021 |
| | Performance Sensing | | Sensing Solutions | | Total | | Performance Sensing | | Sensing Solutions | | Total |
| Automotive | | $ | 1,008,594 | | | $ | 19,217 | | | $ | 1,027,811 | | | $ | 1,055,080 | | | $ | 23,552 | | | $ | 1,078,632 | |
| HVOR | | 455,985 | | | — | | | 455,985 | | | 401,284 | | | — | | | 401,284 | |
| Industrial | | — | | | 236,713 | | | 236,713 | | | — | | | 195,949 | | | 195,949 | |
| Appliance and HVAC | | — | | | 116,500 | | | 116,500 | | | — | | | 123,103 | | | 123,103 | |
| Aerospace | | — | | | 71,828 | | | 71,828 | | | — | | | 65,470 | | | 65,470 | |
| Other | | — | | | 87,481 | | | 87,481 | | | — | | | 70,750 | | | 70,750 | |
| Total | | $ | 1,464,579 | | | $ | 531,739 | | | $ | 1,996,318 | | | $ | 1,456,364 | | | $ | 478,824 | | | $ | 1,935,188 | |
4. Share-Based Payment Plans
The following table presents the components of non-cash compensation expense related to our equity awards for the three and six months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended | | For the six months ended |
| | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| Stock options | $ | 2 | | | $ | 305 | | | $ | 309 | | | $ | 765 | |
| Restricted securities | 9,197 | | | 6,071 | | | 15,430 | | | 10,710 | |
| Share-based compensation expense | $ | 9,199 | | | $ | 6,376 | | | $ | 15,739 | | | $ | 11,475 | |
Equity Awards
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 Sensata Technologies Holding plc 2021 Equity Incentive Plan during the six months ended June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) | | 29 | | | N/A | | $ | 46.30 | |
| Various executives and employees | | RSU (2) | | 518 | | | N/A | | $ | 50.72 | |
| Various executives and employees | | PRSU (3) | | 349 | | | 0.0% - 200.0% | | $ | 50.52 | |
____________________________________
(1) These RSUs cliff vest one year from the grant date (May 2023).
(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 January 2025 and June 2025.
(3) These PRSUs vest on various dates between April 2025 and June 2025. The number of units that ultimately vest is dependent on the achievement of certain performance criteria.
5. Restructuring and Other Charges, Net
The following table presents the components of restructuring and other charges, net for the three and six months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended | | For the six months ended |
| June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| Q2 2020 Global Restructure Program charges | $ | — | | | $ | 3,830 | | | $ | — | | | $ | 5,654 | |
| Other restructuring and other charges, net | | | | | | | |
| Severance costs, net | — | | | 407 | | | 587 | | | 593 | |
| Facility and other exit costs | 1,241 | | | 625 | | | 2,289 | | | 1,291 | |
| | | | | | | |
Other (1) | 11,656 | | | 167 | | | 23,754 | | | 2,073 | |
| Restructuring and other charges, net | $ | 12,897 | | | $ | 5,029 | | | $ | 26,630 | | | $ | 9,611 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
___________________________________
(1) Primarily includes expenses related to compensation arrangements entered into concurrent with the closing of acquisitions, partially offset by gains relating to changes in the fair value of acquisition-related contingent consideration amounts. Refer to Note 16: Acquisitions and Divestitures for additional information.
The following table presents a rollforward of the severance portion of our restructuring obligations for the six months ended June 30, 2022.
| | | | | | | | | | | | | | | | | |
| Q2 2020 Global Restructure Program | | Other | | Total |
| Balance as of December 31, 2021 | $ | 3,853 | | | $ | 3,380 | | | $ | 7,233 | |
| Charges, net of reversals | — | | | 587 | | | 587 | |
| Payments | (3,018) | | | (1,383) | | | (4,401) | |
| Foreign currency remeasurement | (14) | | | (159) | | | (173) | |
| Balance as of June 30, 2022 | $ | 821 | | | $ | 2,425 | | | $ | 3,246 | |
The severance liability as of June 30, 2022 was entirely recorded in accrued expenses and other current liabilities on our condensed consolidated balance sheet.
6. Other, Net
The following table presents the components of other, net for the three and six months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended | | For the six months ended |
| | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| Currency remeasurement (loss)/gain on net monetary assets | $ | (14,090) | | | $ | 1,988 | | | $ | (14,157) | | | $ | 511 | |
| Gain/(loss) on foreign currency forward contracts | 3,165 | | | (1,419) | | | 1,922 | | | (2,377) | |
| (Loss)/gain on commodity forward contracts | (18,254) | | | 1,186 | | | (8,830) | | | 33 | |
| Loss on debt financing | — | | | — | | | — | | | (30,066) | |
| Mark-to-market loss on investments, net | (11,821) | | | — | | | (71,100) | | | — | |
| Net periodic benefit cost, excluding service cost | (639) | | | (2,268) | | | (1,394) | | | (4,678) | |
| Other | 2,399 | | | 1,525 | | | 3,863 | | | (1,808) | |
| Other, net | $ | (39,240) | | | $ | 1,012 | | | $ | (89,696) | | | $ | (38,385) | |
7. Income Taxes
The following table presents the provision for income taxes for the three and six months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended | | For the six months ended |
| | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| | | | | | | |
| | | | | | | |
| Provision for income taxes | $ | 20,020 | | | $ | 7,638 | | | $ | 27,608 | | | $ | 27,919 | |
The provision for income taxes consists of (1) current tax expense, which relates primarily to our profitable operations in 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 represents adjustments in book-to-tax basis differences primarily related to (a) book versus tax basis in intangible assets, (b) changes in net operating loss carryforwards, and (c) changes in withholding taxes on unremitted earnings. Other items impacting deferred tax expense include changes in tax rates and 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 six months ended June 30, 2022 and 2021 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 six months ended |
| June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| Basic weighted-average ordinary shares outstanding | 156,477 | | | 158,208 | | | 156,950 | | | 157,986 | |
| Dilutive effect of stock options | 190 | | | 670 | | | 331 | | | 689 | |
| Dilutive effect of unvested restricted securities | 327 | | | 466 | | | 531 | | | 612 | |
| Diluted weighted-average ordinary shares outstanding | 156,994 | | | 159,344 | | | 157,812 | | | 159,287 | |
Certain potential ordinary shares were excluded from our calculation of diluted weighted-average ordinary shares outstanding because either they would have had an anti-dilutive effect on net income per share or they related to equity awards that were contingently issuable for which the contingency had not been satisfied. These potential ordinary shares were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended | | For the six months ended |
| June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| Anti-dilutive shares excluded | 1,426 | | | 8 | | | 715 | | | 7 | |
| Contingently issuable shares excluded | 1,383 | | | 1,089 | | | 1,192 | | | 1,020 | |
9. Inventories
The following table presents the components of inventories as of June 30, 2022 and December 31, 2021:
| | | | | | | | | | | |
| June 30,
2022 | | December 31,
2021 |
| Finished goods | $ | 223,919 | | | $ | 201,424 | |
| Work-in-process | 114,277 | | | 101,558 | |
| Raw materials | 318,540 | | | 285,249 | |
| Inventories | $ | 656,736 | | | $ | 588,231 | |
10. Pension and Other Post-Retirement Benefits
The following table presents the components of net periodic benefit cost/(credit) associated with our defined benefit and retiree healthcare plans for the three months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | Non-U.S. Plans | | |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Total |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| Service cost | $ | — | | | $ | — | | | $ | 2 | | | $ | 2 | | | $ | 982 | | | $ | 1,325 | | | $ | 984 | | | $ | 1,327 | |
| Interest cost | 113 | | | 120 | | | 18 | | | 21 | | | 426 | | | 401 | | | 557 | | | 542 | |
| Expected return on plan assets | (195) | | | (226) | | | — | | | — | | | (242) | | | (179) | | | (437) | | | (405) | |
| Amortization of net loss/(gain) | 226 | | | 401 | | | (43) | | | — | | | 330 | | | 462 | | | 513 | | | 863 | |
| Amortization of prior service (credit)/cost | — | | | — | | | (100) | | | (159) | | | 3 | | | 13 | | | (97) | | | (146) | |
| Loss on settlement | 103 | | | 1,414 | | | — | | | — | | | — | | | — | | | 103 | | | 1,414 | |
| | | | | | | | | | | | | | | |
| Net periodic benefit cost/(credit) | $ | 247 | | | $ | 1,709 | | | $ | (123) | | | $ | (136) | | | $ | 1,499 | | | $ | 2,022 | | | $ | 1,623 | | | $ | 3,595 | |
The following table presents the components of net periodic benefit cost/(credit) associated with our defined benefit and retiree healthcare plans for the six months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | Non-U.S. Plans | | |
| | Defined Benefit | | Retiree Healthcare | | Defined Benefit | | Total |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| Service cost | $ | — | | | $ | — | | | $ | 4 | | | $ | 4 | | | $ | 1,938 | | | $ | 2,303 | | | $ | 1,942 | | | $ | 2,307 | |
| Interest cost | 226 | | | 240 | | | 64 | | | 42 | | | 850 | | | 805 | | | 1,140 | | | 1,087 | |
| Expected return on plan assets | (390) | | | (452) | | | — | | | — | | | (486) | | | (357) | | | (876) | | | (809) | |
| Amortization of net loss/(gain) | 367 | | | 802 | | | (43) | | | — | | | 608 | | | 921 | | | 932 | | | 1,723 | |
| Amortization of prior service (credit)/cost | — | | | — | | | (200) | | | (318) | | | 5 | | | 16 | | | (195) | | | (302) | |
| Loss on settlement | 393 | | | 2,979 | | | — | | | — | | | — | | | — | | | 393 | | | 2,979 | |
| | | | | | | | | | | | | | | |
| Net periodic benefit cost/(credit) | $ | 596 | | | $ | 3,569 | | | $ | (175) | | | $ | (272) | | | $ | 2,915 | | | $ | 3,688 | | | $ | 3,336 | | | $ | 6,985 | |
Components of net periodic benefit cost/(credit) other than service cost are presented in other, net in the condensed consolidated statements of operations. Refer to Note 6: Other, Net.
11. Debt
The following table presents the components of long-term debt, finance lease and other financing obligations as of June 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | |
| | Maturity Date | | June 30,
2022 | | December 31,
2021 |
| Term Loan | | September 20, 2026 | | $ | 449,150 | | | $ | 451,465 | |
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 | |
| | | | | | |
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 | | | 1,000,000 | |
| | | | | | |
| | | | | | |
| Less: debt discount, net of premium | | | | (4,317) | | | (5,207) | |
| Less: deferred financing costs | | | | (26,691) | | | (26,682) | |
| Less: current portion | | | | (4,630) | | | (4,630) | |
| Long-term debt, net | | | | $ | 4,213,512 | | | $ | 4,214,946 | |
| | | | | | |
| Finance lease and other financing obligations | | | | $ | 27,559 | | | $ | 28,767 | |
| Less: current portion | | | | (1,936) | | | (2,203) | |
| Finance lease and other financing obligations, less current portion | | | | $ | 25,623 | | | $ | 26,564 | |
Our debt consists of secured credit facilities and various tranches of senior unsecured notes. Refer to Note 14: Debt of our 2021 Annual Report for additional information related to our existing indebtedness.
Secured Credit Facilities
On June 23, 2022, certain of our indirect, wholly-owned subsidiaries, including Sensata Technologies, Inc. ("STI"), Sensata Technologies Intermediate Holding B.V. ("STIHBV"), and Sensata Technologies B.V. (“STBV”), entered into an amendment (the “Eleventh Amendment”) to (i) the credit agreement, dated as of May 12, 2011 (as amended, supplemented, waived, or otherwise modified, the “Credit Agreement”), and (ii) the Foreign Guaranty, dated as of May 12, 2011.
Among other changes to the Credit Agreement, the Eleventh Amendment (i) increased the aggregate principal amount of the revolving credit facility under the Credit Agreement (the "Revolving Credit Facility") to $750.0 million; (ii) extended the maturity date of the Revolving Credit Facility to June 23, 2027 (which could be accelerated to June 22, 2026 if, prior to June 22, 2026, the term loan under the Credit Agreement (the "Term Loan") is not refinanced with a maturity date that is on or after June 23, 2027); (iii) released the Foreign Guarantors (as defined in the Credit Agreement), excluding STBV, from their obligations to guarantee the obligations of STI and the other Loan Parties (as defined in the Credit Agreement) relating to the Revolving Credit Facility and certain related obligations, subject to an obligation to reinstate such guaranties under certain conditions; (iv) replaced the LIBOR-based interest rates referenced by the Credit Agreement regarding revolving credit loans to (a) for revolving credit loans denominated in U.S. dollars, an interest rate based on the secured overnight financing rate ("SOFR") published by the Federal Reserve Bank of New York and (b) for revolving credit loans denominated in pounds sterling, an interest rate based on the Sterling Overnight Index Average ("SONIA"); and (v) certain of the operational and restrictive covenants and other terms and conditions of the Credit Agreement were modified to provide STI and its affiliates increased flexibility and permissions thereunder.
As of June 30, 2022, we had $746.1 million available under our $750.0 million 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 June 30, 2022, no amounts had been drawn against these outstanding letters of credit.
Accounting for Debt Financing Transactions
In the six months ended June 30, 2022, in connection with the entry into the Eleventh Amendment, we recognized $2.6 million of deferred financing costs, which are presented as a reduction of long-term debt on our condensed consolidated balance sheets.
In the six months ended June 30, 2021, in connection with the redemption of $750.0 million aggregate principal amount of 6.25% senior notes due 2026 (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.
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 June 30, 2022 and December 31, 2021, accrued interest totaled $44.5 million and $45.1 million, respectively.
12. Commitments and Contingencies
We are regularly involved in a number of claims and litigation matters that arise in the ordinary course of business. Although it is not feasible to predict the outcome of these matters, based upon our experience and current information known to us, we do not expect the outcome of these matters, either individually or in the aggregate, to have a material adverse effect on our results of operations, financial condition, and/or cash flows.
13. Shareholders' Equity
Cash Dividends
On May 25, 2022, we paid a cash dividend of $0.11 per share, or $17.2 million in aggregate, to shareholders of record as of May 11, 2022.
Treasury Shares
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. On January 20, 2022, we announced that our Board of Directors had authorized a new $500.0 million ordinary share repurchase program (the “January 2022 Program”), which replaced the previous $500.0 million program approved in July 2019, which had availability of $254.5 million as of December 31, 2021. As of June 30, 2022, $370.6 million remained available for repurchase under the January 2022 Program.
Accumulated Other Comprehensive Loss
The following table presents the components of accumulated other comprehensive loss for the six months ended June 30, 2022:
| | | | | | | | | | | | | | | | | | | | |
| | Cash Flow Hedges | | Defined Benefit and Retiree Healthcare Plans | | Accumulated Other Comprehensive Loss |
| Balance as of December 31, 2021 | | $ | 16,831 | | | $ | (36,391) | | | $ | (19,560) | |
| Other comprehensive income before reclassifications, net of tax | | 26,111 | | | — | | | 26,111 | |
| Reclassifications from accumulated other comprehensive loss, net of tax | | (14,078) | | | 808 | | | (13,270) | |
| Other comprehensive income | | 12,033 | | | 808 | | | 12,841 | |
| Balance as of June 30, 2022 | | $ | 28,864 | | | $ | (35,583) | | | $ | (6,719) | |
The following table presents the amounts reclassified from accumulated other comprehensive loss for the three and six months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended June 30, | | For the six months ended June 30, | | Affected Line in Condensed Consolidated Statements of Operations |
| Component | | 2022 | | 2021 | | 2022 | | 2021 | |
| Derivative instruments designated and qualifying as cash flow hedges: | | | | | | | | | | |
| Foreign currency forward contracts | | $ | (9,476) | | | $ | 3,433 | | | $ | (13,740) | | | $ | 7,840 | | | Net revenue (1) |
| Foreign currency forward contracts | | (2,603) | | | (2,024) | | | (5,232) | | | (2,767) | | | Cost of revenue (1) |
| | | | | | | | | | |
| Total, before taxes | | (12,079) | | | 1,409 | | | (18,972) | | | 5,073 | | | Income before taxes |
| Income tax effect | | 3,116 | | | (352) | | | 4,894 | | | (1,268) | | | Provision for income taxes |
| Total, net of taxes | | $ | (8,963) | | | $ | 1,057 | | | $ | (14,078) | | | $ | 3,805 | | | Net income |
| | | | | | | | | | |
| Defined benefit and retiree healthcare plans | | $ | 519 | | | $ | 2,131 | | | $ | 1,130 | | | $ | 4,400 | | | Other, net (2) |
| | | | | | | | | | |
| | | | | | | | | | |
| Income tax effect | | (139) | | | (459) | | | (322) | | | (1,016) | | | Provision for income taxes |
| Total, net of taxes | | $ | 380 | | | $ | 1,672 | | | $ | 808 | | | $ | 3,384 | | | 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
Measured on a Recurring Basis
The fair values of our derivative assets and liabilities measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021 are shown in the below table. All fair value measures presented are categorized in Level 2 of the fair value hierarchy.
| | | | | | | | | | | |
| | June 30,
2022 | | December 31,
2021 |
| Assets | | | |
| Foreign currency forward contracts | $ | 45,074 | | | $ | 25,112 | |
| Commodity forward contracts | 616 | | | 2,979 | |
| Total | $ | 45,690 | | | $ | 28,091 | |
| | | |
| Liabilities | | | |
| Foreign currency forward contracts | $ | 6,270 | | | $ | 3,073 | |
| Commodity forward contracts | 12,047 | | | 4,492 | |
| Total | $ | 18,317 | | | $ | 7,565 | |
Refer to Note 15: Derivative Instruments and Hedging Activities for additional information related to our forward contracts.
Quanergy
As of December 31, 2021, we held a $50.0 million investment in Quanergy Systems, Inc. ("Quanergy") Series B Preferred Stock (the "Series B Investment"). The Series B Investment did not have a readily determinable fair value and was held using 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 the same issuer.
On June 22, 2021, Quanergy announced that it had entered into a definitive business combination agreement (the "Merger Agreement") with CITIC Capital Acquisition Corp ("CITIC") (NYSE: CCAC). On July 16, 2021, CITIC filed a Registration Statement on Form S-4 (together with subsequent amendments, the "SPAC Form S-4") with the SEC, the effectiveness of which was a condition to closing of the business combination (the "SPAC Merger"). At December 31, 2021, we assessed our investment in Quanergy based on the proposed terms of the Merger Agreement and concluded that there were no indicators of impairment.
On January 6, 2022, the SPAC Form S-4 was declared effective by the SEC. An extraordinary general meeting of shareholders of CITIC was held on January 31, 2022, at which time the SPAC Merger was approved. The SPAC Merger closed on February 8, 2022. Beginning on February 9, 2022, the combined company, which retained the name "Quanergy Systems, Inc.," was listed on the New York Stock Exchange (the "NYSE") under the ticker symbol QNGY.
Upon closing of the SPAC Merger, our investment in Quanergy comprised the following:
•5.0 million common shares, which represented the conversion of the $50.0 million Series B Investment (at a $10.00 per common share implied valuation);
•750 thousand common shares, purchased in exchange for a $7.5 million contribution as part of a private investment in public equity ("PIPE") subscription agreement; and
•2.5 million warrants (the "Warrants"), each of which represent the right to purchase one common share at a price of $0.01 per share, received from Quanergy as up-front consideration for a four-year technical and marketing support agreement (the "Support Agreement").
The 5.75 million common share investment in Quanergy (including the investment in the PIPE) has a historical cost basis of $57.5 million. The fair value of the Warrants was determined to be equal to their intrinsic value at closing of the SPAC Merger in accordance with the guidance in FASB ASC Topic 815, Derivatives and Hedging. At closing of the SPAC Merger, the common shares underlying the Warrants were valued at $7.05 per share (the closing market price on February 8, 2022). The intrinsic value of the Warrants, reflecting the $0.01 exercise price, was $17.6 million, which was recorded as deferred income.
A summary of our investment in Quanergy is presented in the table below, as of June 30, 2022 (at $0.41 per share), March 31, 2022 (at $1.84 per share), February 8, 2022 (at $7.05 per share), and December 31, 2021. Our investment in Quanergy is presented in other assets on our condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | June 30,
2022 | | March 31,
2022 | | February 8,
2022 | | December 31,
2021 |
| Series B Investment | | $ | — | | | $ | — | | | $ | — | | | $ | 50,000 | |
Common shares (1) | | 3,075 | | | 9,200 | | | 50,000 | | | — | |
| PIPE investment | | 308 | | | 1,380 | | | 7,500 | | | — | |
Warrants (1) | | — | | | 4,575 | | | 17,600 | | | — | |
| Total equity investment in Quanergy | | $ | 3,383 | | | $ | 15,155 | | | $ | 75,100 | | | $ | 50,000 | |
___________________________________
(1) In the three months ended June 30, 2022, we converted the Warrants into common shares. Accordingly, as of June 30, 2022, we had 7.5 million common shares outstanding (excluding the PIPE investment), compared to 5.0 million common shares outstanding as of March 31, 2022.
For the three and six months ended June 30, 2022, we recorded losses (presented in in other, net on our condensed consolidated statements of operations) to adjust the carrying value of our aggregate investment in Quanergy to its fair value at June 30, 2022 as follows:
| | | | | | | | | | | | | | |
| | For the three months ended June 30, 2022 | | For the six months ended June 30, 2022 |
| Mark-to-market loss | | $ | (11,772) | | | $ | (71,717) | |
As noted above, in exchange for the Warrants, we entered into the Support Agreement, whereby we agreed to provide technical and business development services to Quanergy for a term of four years from the effective date of February 8, 2022. This transaction is an exchange of noncash consideration for services and was accounted for under FASB ASC Topic 845, Nonmonetary Transactions, using the fair value of the Warrants at February 8, 2022 ($17.6 million) as the measure of compensation received. We have deferred this consideration and are recognizing it in earnings on a straight-line basis over the term of the agreement (48 months).
Measured on a Nonrecurring Basis
We evaluated our goodwill and other indefinite-lived intangible assets for impairment as of October 1, 2021 and determined that they were not impaired. No events or changes in circumstances occurred in the six months ended June 30, 2022 that would have triggered the need for an additional impairment review of our goodwill and other indefinite-lived intangible assets.
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 June 30, 2022 and December 31, 2021. All fair value measures presented are categorized in Level 2 of the fair value hierarchy.
| | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
| | Carrying Value(1) | | Fair Value | | Carrying Value(1) | | Fair Value |
| Liabilities | | | | | | | |
| Term Loan | $ | 449,150 | | | $ | 443,535 | | | $ | 451,465 | | | $ | 450,901 | |
4.875% Senior Notes | $ | 500,000 | | | $ | 491,250 | | | $ | 500,000 | | | $ | 526,250 | |
5.625% Senior Notes | $ | 400,000 | | | $ | 395,000 | | | $ | 400,000 | | | $ | 438,000 | |
5.0% Senior Notes | $ | 700,000 | | | $ | 672,000 | | | $ | 700,000 | | | $ | 759,500 | |
| | | | | | | |
4.375% Senior Notes | $ | 450,000 | | | $ | 383,625 | | | $ | 450,000 | | | $ | 479,250 | |
3.75% Senior Notes | $ | 750,000 | | | $ | 601,875 | | | $ | 750,000 | | | $ | 747,188 | |
4.0% Senior Notes | $ | 1,000,000 | | | $ | 850,000 | | | $ | 1,000,000 | | | $ | 1,022,500 | |
| | | | | | | |
___________________________________
(1) Excluding any related debt discounts, premiums, and deferred financing costs.
Cash and cash equivalents are carried at cost, which approximates fair value because of their short-term nature.
In addition to the above, we hold certain equity investments that do not have readily determinable fair values for which we use the measurement alternative prescribed in FASB ASC Topic 321. 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.
| | | | | | | | | | | |
| June 30,
2022 | | December 31,
2021 |
Quanergy Systems, Inc. (1) | $ | — | | | $ | 50,000 | |
| Other | 15,000 | | | 15,000 | |
| | | |
| Total | $ | 15,000 | | | $ | 65,000 | |
___________________________________
(1) As of June 30, 2022, Quanergy is no longer classified as an equity investment without a readily determinable fair value. See additional discussion under the heading Quanergy elsewhere in this Note.
15. Derivative Instruments and Hedging Activities
Hedges of Foreign Currency Risk
For the three and six months ended June 30, 2022 and 2021, amounts excluded from the assessment of effectiveness of our foreign currency forward contracts that are designated as cash flow hedges were not material. As of June 30, 2022, we estimated that $34.8 million of net gains will be reclassified from accumulated other comprehensive loss to earnings during the twelve-month period ending June 30, 2023.
As of June 30, 2022, 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) |
| 21.0 EUR | | June 28, 2022 | | July 29, 2022 | | Euro ("EUR") to USD | | 1.05 USD | | Not designated |
| 358.9 EUR | | Various from August 2020 to June 2022 | | Various from July 2022 to June 2024 | | EUR to USD | | 1.17 USD | | Cash flow hedge |
| 388.0 CNY | | June 27, 2022 | | July 29, 2022 | | USD to Chinese Renminbi ("CNY") | | 6.70 CNY | | Not designated |
| 756.2 CNY | | Various from October 2021 to March 2022 | | Various from July 2022 to December 2022 | | USD to CNY | | 6.46 CNY | | Cash flow hedge |
| 60.0 JPY | | June 28, 2022 | | July 29, 2022 | | USD to Japanese Yen ("JPY") | | 135.93 JPY | | Not designated |
| | | | | | | | | | |
| 24,760.0 KRW | | Various from August 2020 to June 2022 | | Various from July 2022 to May 2024 | | USD to Korean Won ("KRW") | | 1,191.72 KRW | | Cash flow hedge |
| | | | | | | | | | |
| 22.0 MYR | | June 27, 2022 | | July 29, 2022 | | USD to Malaysian Ringgit ("MYR") | | 4.40 MYR | | Not designated |
| | | | | | | | | | |
| 70.0 MXN | | June 28, 2022 | | July 29, 2022 | | USD to Mexican Peso ("MXN") | | 20.13 MXN | | Not designated |
| 3,458.7 MXN | | Various from August 2020 to June 2022 | | Various from July 2022 to June 2024 | | USD to MXN | | 22.15 MXN | | Cash flow hedge |
| 10.0 GBP | | June 28, 2022 | | July 29, 2022 | | British Pound Sterling ("GBP") to USD | | 1.22 USD | | Not Designated |
| 60.0 GBP | | Various from August 2020 to June 2022 | | Various from July 2022 to June 2024 | | GBP to USD | | 1.33 USD | | Cash flow hedge |
___________________________________
(1) Derivative financial instruments not designated as hedges are used to manage our exposure to currency exchange rate risk. They are intended to preserve economic value, and they are not used for trading or speculative purposes.
Hedges of Commodity Risk
As of June 30, 2022, we had the following outstanding commodity forward contracts, none of which were designated for hedge accounting treatment in accordance with FASB ASC Topic 815:
| | | | | | | | | | | | | | | | | | | | |
| Commodity | | Notional | | Remaining Contracted Periods | | Weighted-Average Strike Price Per Unit |
| Silver | | 1,092,999 troy oz. | | July 2022 - May 2024 | | $24.58 |
| Gold | | 8,443 troy oz. | | July 2022 - May 2024 | | $1,862.15 |
| Nickel | | 273,088 pounds | | July 2022 - May 2024 | | $9.94 |
| Aluminum | | 4,353,117 pounds | | July 2022 - May 2024 | | $1.23 |
| Copper | | 8,450,120 pounds | | July 2022 - May 2024 | | $4.32 |
| Platinum | | 12,141 troy oz. | | July 2022 - May 2024 | | $1,023.00 |
| Palladium | | 1,429 troy oz. | | July 2022 - May 2024 | | $2,344.77 |
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 June 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Asset Derivatives | | Liability Derivatives |
| | Balance Sheet Location | | June 30,
2022 | | December 31,
2021 | | Balance Sheet Location | | June 30,
2022 | | December 31,
2021 |
| Derivatives designated as hedging instruments | | | | | | |
| Foreign currency forward contracts | Prepaid expenses and other current assets | | $ | 38,849 | | | $ | 20,562 | | | Accrued expenses and other current liabilities | | $ | 4,991 | | | $ | 1,981 | |
| Foreign currency forward contracts | Other assets | | 6,152 | | | 4,391 | | | Other long-term liabilities | | 1,238 | | | 904 | |
| Total | | | $ | 45,001 | | | $ | 24,953 | | | | | $ | 6,229 | | | $ | 2,885 | |
| Derivatives not designated as hedging instruments | | | | | | | | |
| Commodity forward contracts | Prepaid expenses and other current assets | | $ | 482 | | | $ | 2,583 | | | Accrued expenses and other current liabilities | | $ | 7,778 | | | $ | 3,422 | |
| Commodity forward contracts | Other assets | | 134 | | | 396 | | | Other long-term liabilities | | 4,269 | | | 1,070 | |
| Foreign currency forward contracts | Prepaid expenses and other current assets | | 73 | | | 159 | | | Accrued expenses and other current liabilities | | 41 | | | 188 | |
| Total | | | $ | 689 | | | $ | 3,138 | | | | | $ | 12,088 | | | $ | 4,680 | |
These fair value measurements were 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 June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives designated as
hedging instruments | | Amount of Deferred Gain/(Loss) Recognized in Other Comprehensive Income | | Location of Net Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Net Income | | Amount of Net Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Net Income |
| 2022 | | 2021 | | | 2022 | | 2021 |
| Foreign currency forward contracts | | $ | 28,192 | | | $ | (6,353) | | | Net revenue | | $ | 9,476 | | | $ | (3,433) | |
| Foreign currency forward contracts | | $ | (3,765) | | | $ | 6,808 | | | Cost of revenue | | $ | 2,603 | | | $ | 2,024 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Derivatives not designated as
hedging instruments | | Amount of (Loss)/Gain Recognized in Net Income | | Location of (Loss)/Gain Recognized in Net Income |
| 2022 | | 2021 | |
| Commodity forward contracts | | $ | (18,254) | | | $ | 1,186 | | | Other, net |
| Foreign currency forward contracts | | $ | 3,165 | | | $ | (1,419) | | | 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 six months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives designated as
hedging instruments | | Amount of Deferred Gain Recognized in Other Comprehensive Income | | Location of Net Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Net Income | | Amount of Net Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Net Income |
| 2022 | | 2021 | | | 2022 | | 2021 |
| Foreign currency forward contracts | | $ | 33,778 | | | $ | 12,446 | | | Net revenue | | $ | 13,740 | | | $ | (7,840) | |
| Foreign currency forward contracts | | $ | 1,380 | | | $ | 3,383 | | | Cost of revenue | | $ | 5,232 | | | $ | 2,767 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Derivatives not designated as
hedging instruments | | Amount of (Loss)/Gain Recognized in Net Income | | Location of (Loss)/Gain Recognized in Net Income |
| 2022 | | 2021 | |
| Commodity forward contracts | | $ | (8,830) | | | $ | 33 | | | Other, net |
| Foreign currency forward contracts | | $ | 1,922 | | | $ | (2,377) | | | Other, net |
Credit Risk Related Contingent Features
We have agreements with our derivative counterparties that contain a provision whereby if we default on our indebtedness and repayment of the indebtedness has been accelerated by the lender, then we could also be declared in default on our derivative obligations.
As of June 30, 2022, the termination value of outstanding derivatives in a liability position, excluding any adjustment for non-performance risk, was $18.6 million. As of June 30, 2022, we had 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.
16. Acquisitions and Divestitures
Acquisitions
Spear Power Systems
On November 19, 2021, we acquired all of the equity interests of Spear Power Systems ("Spear"), a leader in electrification solutions that supports our newly-established Clean Energy Solutions business unit, for an aggregate purchase price of $113.7 million, subject to certain post-closing items, including a contingent consideration arrangement whereby we may be required to pay up to an additional $30.0 million to the selling shareholders. Using a present value technique, we estimated the acquisition-date fair value of the contingent consideration arrangement to be $8.6 million, which is reflected in the aggregate purchase price. As of June 30, 2022, having evaluated updated financial forecasts, we determined that the fair value of the contingent consideration arrangement was $0.0 million. Changes to the fair value of this contingent consideration arrangement, subsequent to its acquisition-date fair value, are recognized in earnings and presented in restructuring and other charges, net. We are integrating Spear into the Sensing Solutions reportable segment.
As of June 30, 2022, the allocation of purchase price of Spear 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. Refer to Note 21: Acquisitions of the audited consolidated financial statements and notes thereto included in our 2021 Annual Report for detailed information regarding the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed as of December 31, 2021.
SmartWitness Holdings, Inc.
On November 19, 2021, we acquired all of the equity interests of SmartWitness Holdings, Inc. ("SmartWitness"), a privately held innovator of video telematics technology for heavy- and light-duty fleets, for an aggregate purchase price of $206.4 million, including $204.2 million of cash paid at closing, subject to certain post-closing items. In addition to the aggregate purchase price, we paid $8.6 million of cash at closing related to an employee retention arrangement. We are integrating SmartWitness into the Performance Sensing reportable segment.
As of June 30, 2022, the allocation of purchase price of SmartWitness 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. Refer to Note 21: Acquisitions of the audited consolidated financial statements and notes thereto included in our 2021 Annual Report for detailed information regarding the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed as of December 31, 2021.
Elastic M2M Inc.
On February 11, 2022, we acquired all of the equity interests of Elastic M2M Inc. ("Elastic M2M") for an aggregate cash purchase price of $51.4 million, subject to certain post-closing items. In addition to the aggregate cash purchase price, the previous shareholders of Elastic M2M are entitled to up to $30.0 million of additional acquisition-related incentive compensation, pending the completion of certain technical milestones in fiscal year 2022 and achievement of financial targets
in fiscal years 2022 and 2023. In three and six months ended June 30, 2022, we recognized $3.4 million and $18.4 million, respectively, of that acquisition-related incentive compensation. This incentive compensation is recorded in restructuring and other charges, net. We paid $15.0 million of this acquisition-related incentive compensation in the six months ended June 30, 2022, which is reflected as an operating cash outflow on our condensed consolidated statement of cash flows for the six months ended June 30, 2022.
Elastic M2M is a privately-held innovator of connected intelligence for operational assets across heavy-duty transport, warehouse, supply chain and logistics, industrial, light-duty passenger car, and a variety of other industry segments. Elastic M2M primarily serves telematics service providers and resellers, enabling them to leverage Elastic M2M’s cloud platform and analytics capabilities to deliver sensor-based operational insights to their end users. This acquisition augments our cloud capabilities critical to delivering actionable sensor-based insights, an increasingly important capability in this fast-growing industry segment. We are integrating Elastic M2M into the Performance Sensing reportable segment.
The following 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 | | $ | (156) | |
| Goodwill | | 24,708 | |
| Other intangible assets | | 33,500 | |
| Deferred income tax liabilities | | (8,222) | |
| Fair value of net assets acquired, excluding cash and cash equivalents | | 49,830 | |
| Cash and cash equivalents | | 1,597 | |
| Fair value of net assets acquired | | $ | 51,427 | |
The following table presents the acquired intangible assets, their preliminary estimated fair values, and weighted-average lives:
| | | | | | | | | | | | | | |
| | Acquisition Date Fair Value | | Weighted-Average Lives (years) |
| Acquired definite-lived intangible assets | | | | |
| Customer relationships | | $ | 23,300 | | | 13 |
| Completed technologies | | 10,200 | | | 10 |
| | | | |
| | | | |
| Total definite-lived intangible assets acquired | | $ | 33,500 | | | 12 |
The definite-lived intangible assets were valued using the income approach. We primarily used the relief-from-royalty method to value completed technologies, and we used the multi-period excess earnings method to value customer relationships. These valuation methods incorporate assumptions including expected discounted future net cash flows resulting from either the future estimated after-tax royalty payments avoided as a result of owning the completed technologies or the future earnings related to existing customer relationships.
The allocation of purchase price of Elastic M2M is preliminary and is based on management’s judgments after evaluating several factors, including preliminary valuation assessments of 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 of $24.7 million recognized as a result of this acquisition represents future economic benefits expected to arise from synergies from combining operations and the extension of existing customer relationships. The goodwill recognized in this acquisition will not be deductible for tax purposes.
Dynapower Company, LLC
On April 22, 2022, we entered into a stock purchase agreement (the "SPA") to acquire all of the outstanding equity interests of Dynapower Company, LLC ("Dynapower"), a leader in power conversion systems including inverters, converters, and rectifiers for renewable energy generation, green hydrogen production, electric vehicle charging stations, and microgrid applications, as well as industrial and defense applications. Dynapower also provides aftermarket sales and service to maintain its equipment in the field. Dynapower will be a foundational addition to our Clean Energy Solutions strategy and will complement our recent acquisitions of GIGAVAC, Lithium Balance, and Spear.
We expect to integrate Dynapower into our Sensing Solutions reportable segment. The transaction contemplated by the SPA closed on July 12, 2022 for an aggregate purchase price of $580 million of cash consideration, subject to certain post-closing
items. Due to the recent closing of this acquisition, the initial accounting for this acquisition is incomplete, and we are not able to provide the disclosures otherwise required by FASB ASC Topic 805, Business Combinations.
Divestiture - Qinex Business
On May 27, 2022, we entered into an asset purchase agreement with Boyd Corporation to sell our semiconductor test and thermal business (the "Qinex Business") for total consideration of approximately $219.0 million, subject to working capital and other adjustments. The transaction closed in July 2022.
The assets and liabilities of the Qinex Business constitute a disposal group that meets the held for sale criteria described in FASB ASC Topic 360, Property, Plant and Equipment as of June 30, 2022. However, total assets held for sale of approximately $70 million (including allocated goodwill of approximately $45 million based on preliminary valuation assessments) and total liabilities held for sale of approximately $2 million were not deemed material for separate presentation on our condensed consolidated balance sheet as of June 30, 2022. The final allocation of goodwill will be completed when the final valuations are completed. We have not finalized the calculation of gain on the transaction but preliminarily expect it to be between approximately $125 million and $150 million.
The Qinex Business manufactures semiconductor burn-in test sockets and thermal control solutions and was formed through the combination of Sensata’s semiconductor interconnect business with Wells-CTI in 2012. The Qinex Business is included in our Sensing Solutions segment (and Industrial Solutions reporting unit). We allocated goodwill to the Qinex Business based on its fair value relative to the fair value of the remaining Industrial Solutions reporting unit. We determined that the fair value of the Qinex Business, less costs to sell, exceeded the carrying amount of the related disposal group.
17. Segment Reporting
We present financial information for two reportable segments, Performance Sensing and Sensing Solutions. The Performance Sensing reportable segment consists of two operating segments, Automotive and HVOR, which meet the criteria for aggregation in FASB ASC Topic 280, Segment Reporting. 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 operating income, which excludes amortization of intangible assets, restructuring and other charges, net, certain costs associated with our strategic megatrend initiatives, and certain corporate 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 recognized in connection with acquisitions. Corporate and other costs excluded from an operating (and reportable) segment’s performance are separately stated below and also include costs that are related to functional areas such as finance, information technology, legal, and human resources. We believe that segment operating income, 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, operating income or other measures of financial performance prepared in accordance with U.S. GAAP. The accounting policies of each of our operating and reportable segments are materially consistent with those described in Note 2: Significant Accounting Policies of the audited consolidated financial statements and notes thereto included in our 2021 Annual Report.
The following table presents net revenue and segment operating income for our reportable segments and other operating results not allocated to our reportable segments for the three and six months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended | | For the six months ended |
| | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| Net revenue: | | | | | | | |
| Performance Sensing | $ | 746,882 | | | $ | 741,852 | | | $ | 1,464,579 | | | $ | 1,456,364 | |
| Sensing Solutions | 273,666 | | | 250,808 | | | 531,739 | | | 478,824 | |
| Total net revenue | $ | 1,020,548 | | | $ | 992,660 | | | $ | 1,996,318 | | | $ | 1,935,188 | |
| Segment operating income (as defined above): | | | | | | | |
| Performance Sensing | $ | 185,519 | | | $ | 202,064 | | | $ | 366,157 | | | $ | 397,908 | |
| Sensing Solutions | 79,488 | | | 76,549 | | | 152,003 | | | 143,443 | |
| Total segment operating income | 265,007 | | | 278,613 | | | 518,160 | | | 541,351 | |
| Corporate and other | (76,362) | | | (73,972) | | | (152,485) | | | (142,610) | |
| Amortization of intangible assets | (36,805) | | | (34,857) | | | (74,172) | | | (66,921) | |
| Restructuring and other charges, net | (12,897) | | | (5,029) | | | (26,630) | | | (9,611) | |
| Operating income | 138,943 | | | 164,755 | | | 264,873 | | | 322,209 | |
| Interest expense, net | (44,842) | | | (45,213) | | | (90,287) | | | (89,256) | |
| Other, net | (39,240) | | | 1,012 | | | (89,696) | | | (38,385) | |
| Income before taxes | $ | 54,861 | | | $ | 120,554 | | | $ | 84,890 | | | $ | 194,568 | |
18. Subsequent Events
In July 2022, we completed the sale of the Qinex Business and the acquisition of Dynapower. Refer to Note 16: Acquisitions and Divestitures for additional information on these transactions.
Cautionary Statements Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by terminology such as "may," "will," "could," "should," "expect," "anticipate," "believe," "estimate," "predict," "project," "forecast," "continue," "intend," "plan," "potential," "opportunity," "guidance," and similar terms or phrases. Forward-looking statements involve, among other things, expectations, projections, and assumptions about future financial and operating results, objectives, business and market outlook, megatrends, priorities, growth, shareholder value, capital expenditures, cash flows, demand for products and services, share repurchases, and Sensata’s strategic initiatives, including those relating to acquisitions and dispositions and the impact of such transactions on our strategic and operational plans and financial results. These statements are subject to risks, uncertainties, and other important factors relating to our operations and business environment, and we can give no assurances that these forward-looking statements will prove to be correct.
A wide variety of potential risks, uncertainties, and other factors could materially affect our ability to achieve the results either expressed or implied by these forward-looking statements, including, but not limited to, risks related to public health crises, instability and changes in the global markets, supplier interruption or non-performance, the acquisition or disposition of businesses, adverse conditions or competition in the industries upon which we are dependent, intellectual property, product liability, warranty and recall claims, market acceptance of new product introductions and product innovations, labor disruptions or increased labor costs, and changes in existing environmental or safety laws, regulations, and programs.
Investors and others should carefully consider the foregoing factors and other uncertainties, risks, and potential events including, but not limited to, those described in Item 1A: Risk Factors included in our 2021 Annual Report and as may be updated from time to time in Item 1A: Risk Factors included in our quarterly reports on Form 10-Q or other subsequent filings with the SEC. All such forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update these statements other than as required by law.
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 supplements, and should be read in conjunction with, the discussion in Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2021 Annual Report. The following discussion should also be read in conjunction with 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
For the three and six months ended June 30, 2022, net revenue increased 2.8% and 3.2%, respectively, from the corresponding periods of fiscal year 2021. This revenue growth was primarily driven by outgrowth to market and revenue from recent acquisitions. In addition, we continued to drive new business wins, with a significant portion coming in areas representing our megatrend initiatives of Electrification and Insights, and which will help drive future revenue growth.
For the three and six months ended June 30, 2022, operating income decreased 15.7% and 17.8%, respectively, to $138.9 million (13.6% of net revenue) and $264.9 million (13.3% of net revenue), respectively, compared to $164.8 million (16.6% of net revenue) and $322.2 million (16.7% of net revenue), respectively, in the corresponding periods of fiscal year 2021. For the three and six months ended June 30, 2022, income before taxes decreased to $54.9 million and $84.9 million, respectively, compared to $120.6 million and $194.6 million, respectively, in the corresponding periods of fiscal year 2021.
Refer to discussion of the drivers of these changes under the heading Results of Operations included elsewhere in this Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A").
Acquisitions and Dispositions
In the first quarter of 2022, we completed the strategic acquisition of Elastic M2M for $51.4 million. Elastic M2M is a privately-held innovator of connected intelligence for operational assets across heavy-duty transport, warehouse, supply chain and logistics, industrial, light-duty passenger car, and a variety of other industry segments. Elastic M2M primarily serves telematics service providers and resellers, enabling them to leverage Elastic M2M’s cloud platform and analytics capabilities to deliver sensor-based operational insights to their end users. This acquisition augments our cloud capabilities critical to delivering actionable sensor-based insights, an increasingly important capability in this fast-growing industry segment.
On July 12, 2022, we completed the acquisition of Dynapower, a leading provider of high-voltage power conversion solutions for clean energy segments, for an aggregate cash purchase price of $580 million, subject to working capital and other
adjustments. Dynapower is a leader in power conversion systems including inverters, converters, and rectifiers for renewable energy generation, green hydrogen production, electric vehicle charging stations, and microgrid applications, as well as industrial and defense applications. Dynapower also provides aftermarket sales and service to maintain its equipment in the field. We acquired Dynapower as a foundational addition to our Clean Energy Solutions strategy and complement to our recent acquisitions of GIGAVAC, Lithium Balance, and Spear. Dynapower's revenue is expected to exceed $100 million on an annualized basis in 2022 with projected revenue growth in excess of 30% over the next several years.
In July 2022, we sold the Qinex Business to Boyd Corporation for total consideration of approximately $219.0 million, subject to working capital and other adjustments. The Qinex Business manufactures semiconductor burn-in test sockets and thermal control solutions and was formed through the combination of Sensata’s semiconductor interconnect business with Wells-CTI in 2012. The Qinex Business is included in our Sensing Solutions segment (and Industrial Solutions reporting unit). We have not finalized the calculation of gain on the transaction but preliminarily expect it to be between approximately $125 million and $150 million.
Results of Operations
The table below presents our historical results of operations, in millions of dollars and as a percentage of net revenue, for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021. 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 appear to recalculate due to the effect of rounding.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended | | For the six months ended |
| | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| Amount | | Margin* | | Amount | | Margin* | | Amount | | Margin* | | Amount | | Margin* |
| Net revenue: | | | | | | | | | | | | | | | |
| Performance Sensing | $ | 746.9 | | | 73.2 | % | | $ | 741.9 | | | 74.7 | % | | $ | 1,464.6 | | | 73.4 | % | | $ | 1,456.4 | | | 75.3 | % |
| Sensing Solutions | 273.7 | | | 26.8 | | | 250.8 | | | 25.3 | | | 531.7 | | | 26.6 | | | 478.8 | | | 24.7 | |
| Net revenue | 1,020.5 | | | 100.0 | | | 992.7 | | | 100.0 | | | 1,996.3 | | | 100.0 | | | 1,935.2 | | | 100.0 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Operating costs and expenses | 881.6 | | | 86.4 | | | 827.9 | | | 83.4 | | | 1,731.4 | | | 86.7 | | | 1,613.0 | | | 83.3 | |
| Operating income | 138.9 | | | 13.6 | | | 164.8 | | | 16.6 | | | 264.9 | | | 13.3 | | | 322.2 | | | 16.7 | |
| Interest expense, net | (44.8) | | | (4.4) | | | (45.2) | | | (4.6) | | | (90.3) | | | (4.5) | | | (89.3) | | | (4.6) | |
| Other, net | (39.2) | | | (3.8) | | | 1.0 | | | 0.1 | | | (89.7) | | | (4.5) | | | (38.4) | | | (2.0) | |
| Income before taxes | 54.9 | | | 5.4 | | | 120.6 | | | 12.1 | | | 84.9 | | | 4.3 | | | 194.6 | | | 10.1 | |
| Provision for income taxes | 20.0 | | | 2.0 | | | 7.6 | | | 0.8 | | | 27.6 | | | 1.4 | | | 27.9 | | | 1.4 | |
| Net income | $ | 34.8 | | | 3.4 | % | | $ | 112.9 | | | 11.4 | % | | $ | 57.3 | | | 2.9 | % | | $ | 166.6 | | | 8.6 | % |
___________________________________
* Represents the amount presented divided by total net revenue.
Net Revenue
Net revenue for the three months ended June 30, 2022 increased 2.8% compared to the three months ended June 30, 2021. Excluding a decrease of 2.2% attributed to changes in foreign currency exchange rates and an increase of 2.8% due to the effect of acquisitions, net revenue for the three months ended June 30, 2022 increased 2.2% on an organic basis, representing market outgrowth of 650 basis points.
Net revenue for the six months ended June 30, 2022 increased 3.2% compared to the six months ended June 30, 2021. Excluding a decrease of 1.3% attributed to changes in foreign currency exchange rates and an increase of 3.4% due to the effect of acquisitions, net revenue for the six months ended June 30, 2022 increased 1.1% on an organic basis, representing market outgrowth of 720 basis points.
Organic revenue growth (or decline), discussed throughout this MD&A, is a financial measure not presented in accordance with U.S. GAAP. Refer to the section entitled Non-GAAP Financial Measures below for additional information related to our use of organic revenue growth (or decline).
Performance Sensing
Performance Sensing net revenue for the three months ended June 30, 2022 increased 0.7% compared to the three months ended June 30, 2021. Excluding a decrease of 2.2% attributed to changes in foreign currency exchange rates and an increase of
3.0% due to the effect of acquisitions, Performance Sensing net revenue for the three months ended June 30, 2022 was flat on an organic basis. Both automotive and HVOR contributed to these results as discussed below.
Automotive net revenue for the three months ended June 30, 2022 declined 2.3% compared to the three months ended June 30, 2021. Excluding a decline of 2.4% attributed to changes in foreign currency exchange rates, Automotive net revenue for the three months ended June 30, 2022 grew 0.1% on an organic basis. HVOR net revenue for the three months ended June 30, 2022 grew 7.7% compared to the three months ended June 30, 2021. Excluding a decline of 1.7% attributed to changes in foreign currency exchange rates and an increase of 10.0% due to the effect of acquisitions, HVOR net revenue for the three months ended June 30, 2022 declined 0.6% on an organic basis.
Performance Sensing net revenue for the six months ended June 30, 2022 increased 0.6% compared to the six months ended June 30, 2021. Excluding a decrease of 1.4% attributed to changes in foreign currency exchange rates and an increase of 3.9% due to the effect of acquisitions, Performance Sensing net revenue for the six months ended June 30, 2022 decreased 1.9% on an organic basis. Both automotive and HVOR contributed to these results as discussed below.
Automotive net revenue for the six months ended June 30, 2022 declined 4.4% compared to the six months ended June 30, 2021. Excluding a decrease of 1.5% attributed to changes in foreign currency exchange rates, automotive net revenue for the six months ended June 30, 2022 declined 2.9% on an organic basis, primarily as a result of the impacts of original equipment manufacturer efforts to replenish inventory channels in 2021. HVOR net revenue for the six months ended June 30, 2022 grew 13.6% compared to the six months ended June 30, 2021. Excluding a decrease of 1.2% attributed to changes in foreign currency exchange rates and an increase of 14.0% due to the effect of acquisitions, HVOR net revenue for the six months ended June 30, 2022 grew 0.8% on an organic basis.
Sensing Solutions
Sensing Solutions net revenue for the three months ended June 30, 2022 increased 9.1% compared to the three months ended June 30, 2021. Excluding a decline of 1.9% attributed to changes in foreign currency exchange rates and an increase of 2.0% due to the effect of acquisitions, Sensing Solutions net revenue for the three months ended June 30, 2022 grew 9.0% on an organic basis. The organic revenue growth primarily reflects the launch of new industrial electrification applications, partially offset by declines in the Industrial market.
Sensing Solutions net revenue for the six months ended June 30, 2022 increased 11.1% compared to the six months ended June 30, 2021. Excluding a decline of 1.2% attributed to changes in foreign currency exchange rates and an increase of 2.0% due to the effect of acquisitions, Sensing Solutions net revenue for the six months ended June 30, 2022 grew 10.3% on an organic basis. The organic revenue growth primarily reflects the launch of new industrial electrification applications, partially offset by declines in the Aerospace market.
Operating costs and expenses
Operating costs and expenses for the three and six months ended June 30, 2022 and 2021 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 six months ended |
| | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| Amount | | Margin* | | Amount | | Margin* | | Amount | | Margin* | | Amount | | Margin* |
| Operating costs and expenses: | | | | | | | | | | | | | | | |
| Cost of revenue | $ | 686.6 | | | 67.3 | % | | $ | 658.3 | | | 66.3 | % | | $ | 1,343.7 | | | 67.3 | % | | $ | 1,293.6 | | | 66.8 | % |
| Research and development | 48.0 | | | 4.7 | | | 42.9 | | | 4.3 | | | 94.0 | | | 4.7 | | | 78.9 | | | 4.1 | |
| Selling, general and administrative | 97.3 | | | 9.5 | | | 86.8 | | | 8.7 | | | 193.0 | | | 9.7 | | | 163.9 | | | 8.5 | |
| Amortization of intangible assets | 36.8 | | | 3.6 | | | 34.9 | | | 3.5 | | | 74.2 | | | 3.7 | | | 66.9 | | | 3.5 | |
| Restructuring and other charges, net | 12.9 | | | 1.3 | | | 5.0 | | | 0.5 | | | 26.6 | | | 1.3 | | | 9.6 | | | 0.5 | |
| Total operating costs and expenses | $ | 881.6 | | | 86.4 | % | | $ | 827.9 | | | 83.4 | % | | $ | 1,731.4 | | | 86.7 | % | | $ | 1,613.0 | | | 83.3 | % |
___________________________________
* Represents the amount presented divided by total net revenue.
Cost of revenue
For the three months ended June 30, 2022, cost of revenue as a percentage of net revenue increased from the three months ended June 30, 2021, primarily due to the impacts of inflation on material and logistics costs.
For the six months ended June 30, 2022, cost of revenue as a percentage of net revenue increased from the six months ended June 30, 2021, primarily due to the impacts of inflation on material and logistics costs, partially offset by the favorable effect of changes in foreign currency exchange rates.
Research and development expense
For the three and six months ended June 30, 2022, research and development ("R&D") expense increased from the three and six months ended June 30, 2021, primarily as a result of higher spend to support megatrend growth initiatives and incremental R&D expense related to acquired businesses, partially offset by the favorable effect of foreign currency exchange rates.
R&D expense related to megatrends during the three and six months ended June 30, 2022 was $17.6 million and $34.0 million, respectively, increases of $5.0 million and $10.1 million, respectively, from the three and six months ended June 30, 2021.
Selling, general and administrative expense
For the three and six months ended June 30, 2022, selling, general and administrative ("SG&A") expense increased from the three and six months ended June 30, 2021, primarily as a result of (1) incremental SG&A expense related to acquired businesses, including related transaction costs, (2) higher selling costs to support growth and our ability to execute for our customers, and (3) higher share-based compensation, partially offset by the favorable effect of changes in foreign currency exchange rates. Refer to Note 4: Share-Based Payment Plans of our condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional information related to our share-based compensation.
Amortization of intangible assets
For the three and six months ended June 30, 2022, amortization expense increased from the three and six months ended June 30, 2021, primarily due to increased intangibles from recent acquisitions partially offset by the effect of the economic benefit amortization method. Refer to Note 16: Acquisitions and Divestitures of our condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional information related to recent acquisitions.
Restructuring and other charges, net
For the three and six months ended June 30, 2022, restructuring and other charges, net increased from the three and six months ended June 30, 2021, primarily due to acquisition-related incentive compensation partially offset by a gain resulting from reduction of the liability for contingent consideration for Spear. In addition, we did not incur restructuring charges related to the Q2 2020 Global Restructure Program in the three and six months ended June 30, 2022, compared to $3.8 million and $5.7 million in the three and six months ended June 30, 2021, respectively. 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 the components of restructuring and other charges, net.
Operating income
For the three months ended June 30, 2022, operating income decreased compared to the three months ended June 30, 2021, primarily due to (1) increased acquisition-related incentive compensation, (2) higher spend to support our megatrends initiatives, (3) the impacts of lower volume, (4) increased transaction-related costs, (5) higher amortization due to acquired intangibles, (6) higher selling costs to support growth and our ability to execute for our customers, and (7) higher share-based compensation, partially offset by (1) a reduction in restructuring charges related to the Q2 2020 Global Restructure Program and (2) a gain recorded as a result of a reduction in the liability for contingent consideration due to Spear.
For the six months ended June 30, 2022, operating income decreased compared to the six months ended June 30, 2021, primarily due to (1) increased acquisition-related incentive compensation, (2) higher amortization due to acquired intangibles, (3) the impacts of inflation, (4) higher spend to support our megatrends initiatives, (5) the impacts of lower volume, (6) higher selling costs to support growth and our ability to execute for our customers, (7) increased transaction-related costs, and (8) higher share-based compensation, partially offset by (1) a gain recorded as a result of a reduction in the liability for contingent consideration due to Spear, (2) a reduction in restructuring charges related to the Q2 2020 Global Restructure Program, and (3) the favorable effect of changes in foreign currency exchange rates.
Interest expense, net
For the three months ended June 30, 2022, interest expense, net decreased $0.4 million from the three months ended June 30, 2021, as increased interest rates impacted interest income earned on our cash equivalents balances slightly more than interest expense on our variable rate debt (the Term Loan).
For the six months ended June 30, 2022, interest expense, net increased $1.0 million from the six months ended June 30, 2021, primarily as a result of (1) a full six months of interest expense on the 4.0% Senior Notes in the six months ended June 30, 2022, which were issued on March 29, 2021 and April 8, 2021, and (2) increased interest expense on our variable rate debt resulting from higher interest rates in the period, partially offset by (1) reduced interest expense resulting from our March 5, 2021 redemption of the 6.25% Senior Notes and (2) increased interest income earned on our cash equivalents balances.
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, mark-to-market gains and losses on investments, losses related to debt refinancing, and the portion of our net periodic benefit cost excluding service cost. Refer to Note 6: Other, Net of our condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for more details related to the components of other, net.
For the three months ended June 30, 2022, other, net represented a net loss of $39.2 million, an unfavorable impact on earnings of $40.3 million compared to a net gain of $1.0 million in the three months ended June 30, 2021. This was primarily due to (1) increased losses on commodity forward contracts, (2) increased currency remeasurement losses on net monetary assets, primarily related to CNY, and (3) $11.8 million in mark-to-market losses on equity investments, primarily related to Quanergy. Refer to Note 14: Fair Value Measures of our condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for detailed information on our investment in Quanergy.
For the six months ended June 30, 2022, other, net represented a net loss of $89.7 million, an unfavorable impact on earnings of $51.3 million compared to a net loss of $38.4 million in the six months ended June 30, 2021. This was largely due to (1) $71.1 million in mark-to-market losses on equity investments, primarily related to Quanergy, (2) increased losses on net monetary assets, primarily related to CNY, and (3) increased losses on commodity forward contracts, partially offset by the non-recurrence of a $30.1 million loss on debt financing related to the redemption of our 6.25% Senior Notes on March 5, 2021.
Provision for income taxes
For the three months ended June 30, 2022, the provision for income taxes increased $12.4 million from the three months ended June 30, 2021, predominantly related to the jurisdictional mix of profits, the impacts of nondeductible earnout and compensation expenses resulting from recent acquisitions, and the inability to benefit the mark-to market loss on our investment in Quanergy.
For the six months ended June 30, 2022, the provision for income taxes decreased $0.3 million from the six months ended June 30, 2021, predominantly related to the overall decrease in income before tax as impacted by the mix of profits in the various jurisdictions in which we operate, offset by the impacts of nondeductible expenses resulting from our recent acquisitions and the inability to benefit the mark-to-market loss on our investment in Quanergy.
The provision for income taxes consists of (1) current tax expense, which relates primarily to our profitable operations in 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 represents adjustments in book-to-tax basis differences primarily related to (a) book versus tax basis in intangible assets, (b) changes in net operating loss carryforwards, and (c) changes in withholding taxes on unremitted earnings. Other items impacting deferred tax expense include changes in tax rates and changes in our assessment of the realizability of our deferred tax assets.
Non-GAAP Financial Measures
This section 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 are used by our management, Board of Directors, and investors. We use these non-GAAP financial 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 has 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, net cash provided by operating activities, total debt, finance lease and other financing obligations, 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. GAAP, excluding the period-over-period impact of foreign currency exchange rate differences as well as the net impact of material acquisitions and 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 as 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-year period.
Adjusted operating income, adjusted operating margin, adjusted net income, and adjusted EPS
We define adjusted operating income as operating income, determined in accordance with U.S. GAAP, excluding certain non-GAAP adjustments which are described below. Adjusted operating margin is calculated by dividing adjusted operating income by net revenue determined in accordance with U.S. GAAP. We define adjusted net income 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 by the number of diluted weighted-average ordinary shares outstanding in the period.
Management uses adjusted operating income, adjusted operating margin, adjusted net income, and adjusted EPS as measures of operating performance, for planning purposes (including the preparation of our annual operating budget), to allocate resources to enhance the financial performance of our business, to evaluate the effectiveness of our business strategies, in communications with our Board of Directors and investors concerning our financial performance, and as factors 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 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 gain or loss 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.
•Financing and other transaction costs: includes losses or gains related to debt financing transactions, losses or gains related to the divestiture of a business, costs incurred, including for legal, accounting, and other professional services, that are directly related to an acquisition, divestiture, or equity financing transaction, mark-to-market losses or gains on our equity investments, expenses related to compensation arrangements entered into concurrent with the closing of an acquisition, and gains related to changes in the fair value of acquisition-related contingent consideration amounts.
•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 inventories).
•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 benefits and withholding tax on repatriation of foreign earnings.
•Amortization of debt issuance costs: represents interest expense related to the amortization of deferred financing costs as well as debt discounts, net of premiums.
•Where applicable, the current income tax effect of non-GAAP adjustments.
Our definition of adjusted net income 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, 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 present 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 related to these adjustments. Amounts and percentages in the tables 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 June 30, 2022 | | For the three months ended June 30, 2021 |
| (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) | | $ | 138.9 | | | 13.6 | % | | $ | 34.8 | | | $ | 0.22 | | | $ | 164.8 | | | 16.6 | % | | $ | 112.9 | | | $ | 0.71 | |
| Non-GAAP adjustments: | | | | | | | | | | | | | | | | |
| Restructuring related and other | | 3.9 | | | 0.4 | | | 4.3 | | | 0.03 | | | 5.7 | | | 0.6 | | | 6.9 | | | 0.04 | |
| Financing and other transaction costs | | 14.4 | | | 1.4 | | | 28.3 | | | 0.18 | | | 2.5 | | | 0.3 | | | 1.3 | | | 0.01 | |
| Step-up depreciation and amortization | | 35.3 | | | 3.5 | | | 35.3 | | | 0.22 | | | 33.7 | | | 3.4 | | | 33.7 | | | 0.21 | |
| Deferred loss on derivative instruments | | 1.2 | | | 0.1 | | | 15.4 | | | 0.10 | | | 2.6 | | | 0.3 | | | 1.1 | | | 0.01 | |
| Amortization of debt issuance costs | | — | | | — | | | 1.7 | | | 0.01 | | | — | | | — | | | 1.7 | | | 0.01 | |
| Deferred taxes and other tax related | | — | | | — | | | 9.7 | | | 0.06 | | | — | | | — | | | (6.2) | | | (0.04) | |
| Total adjustments | | 54.8 | | | 5.4 | | | 94.7 | | | 0.60 | | | 44.6 | | | 4.5 | | | 38.4 | | | 0.24 | |
| Adjusted (non-GAAP) | | $ | 193.8 | | | 19.0 | % | | $ | 129.5 | | | $ | 0.83 | | | $ | 209.3 | | | 21.1 | % | | $ | 151.4 | | | $ | 0.95 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the six months ended June 30, 2022 | | For the six months ended June 30, 2021 |
| (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) | | $ | 264.9 | | | 13.3 | % | | $ | 57.3 | | | $ | 0.36 | | | $ | 322.2 | | | 16.7 | % | | $ | 166.6 | | | $ | 1.05 | |
| Non-GAAP adjustments: | | | | | | | | | | | | | | | | |
| Restructuring related and other | | 8.0 | | | 0.4 | | | 8.3 | | | 0.05 | | | 10.3 | | | 0.5 | | | 14.2 | | | 0.09 | |
| Financing and other transaction costs | | 30.3 | | | 1.5 | | | 102.8 | | | 0.65 | | | 7.1 | | | 0.4 | | | 34.1 | | | 0.21 | |
| Step-up depreciation and amortization | | 71.3 | | | 3.6 | | | 71.3 | | | 0.45 | | | 63.4 | | | 3.3 | | | 63.4 | | | 0.40 | |
| Deferred loss on derivative instruments | | 1.8 | | | 0.1 | | | 8.5 | | | 0.05 | | | 4.4 | | | 0.2 | | | 3.3 | | | 0.02 | |
| Amortization of debt issuance costs | | — | | | — | | | 3.4 | | | 0.02 | | | — | | | — | | | 3.4 | | | 0.02 | |
| Deferred taxes and other tax related | | — | | | — | | | 1.3 | | | 0.01 | | | — | | | — | | | 3.9 | | | 0.02 | |
| Total adjustments | | 111.4 | | | 5.6 | | | 195.7 | | | 1.24 | | | 85.2 | | | 4.4 | | | 122.3 | | | 0.77 | |
| Adjusted (non-GAAP) | | $ | 376.3 | | | 18.8 | % | | $ | 253.0 | | | $ | 1.60 | | | $ | 407.4 | | | 21.1 | % | | $ | 289.0 | | | $ | 1.81 | |
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 six months ended June 30, |
| (in millions) | | 2022 | | 2021 | | |
| Net cash provided by operating activities (GAAP) | | $ | 141.9 | | | $ | 267.9 | | | |
| Additions to property, plant and equipment and capitalized software | | (74.1) | | | (63.6) | | | |
| Free cash flow (non-GAAP) | | $ | 67.8 | | | $ | 204.4 | | | |
The following table provides a reconciliation of net income in accordance with U.S. GAAP to Adjusted EBITDA.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | For the three months ended June 30, | | For the six months ended June 30, |
| (in millions) | | LTM (1) | | 2022 | | 2021 | | 2022 | | 2021 |
| Net income | | $ | 254.2 | | | $ | 34.8 | | | $ | 112.9 | | | $ | 57.3 | | | $ | 166.6 | |
| Interest expense, net | | 180.3 | | | 44.8 | | | 45.2 | | | 90.3 | | | 89.3 | |
| Provision for income taxes | | 50.0 | | | 20.0 | | | 7.6 | | | 27.6 | | | 27.9 | |
| Depreciation expense | | 125.0 | | | 31.4 | | | 31.6 | | | 62.9 | | | 62.8 | |
| Amortization of intangible assets | | 141.4 | | | 36.8 | | | 34.9 | | | 74.2 | | | 66.9 | |
| EBITDA | | 750.9 | | | 167.9 | | | 232.3 | | | 312.2 | | | 413.6 | |
| Non-GAAP adjustments | | | | | | | | | | |
| Restructuring related and other | | 17.7 | | | 4.3 | | | 7.0 | | | 8.5 | | | 14.4 | |
| Financing and other transaction costs | | 107.3 | | | 28.7 | | | 1.7 | | | 103.8 | | | 37.6 | |
| Deferred loss on derivative instruments | | 17.6 | | | 19.4 | | | 1.4 | | | 10.7 | | | 4.4 | |
| Adjusted EBITDA | | $ | 893.5 | | | $ | 220.4 | | | $ | 242.4 | | | $ | 435.2 | | | $ | 470.0 | |
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(1) Last twelve months
The following table provides a reconciliation of total debt, finance lease and other financing obligations in accordance with U.S. GAAP to net leverage ratio.
| | | | | | | | | | | | | | | | |
| (Dollars in millions) | | June 30,
2022 | | December 31,
2021 | | |
| Current portion of long-term debt, finance lease and other financing obligations | | $ | 6.6 | | | $ | 6.8 | | | |
| Finance lease and other financing obligations, less current portion | | 25.6 | | | 26.6 | | | |
| Long-term debt, net | | 4,213.5 | | | 4,214.9 | | | |
| Total debt, finance lease and other financing obligations | | 4,245.7 | | | 4,248.3 | | | |
| Less: discount, net of premium | | (4.3) | | | (5.2) | | | |
| Less: deferred financing costs | | (26.7) | | | (26.7) | | | |
| Total gross indebtedness | | 4,276.7 | | | 4,280.2 | | | |
| Less: cash and cash equivalents | | 1,558.6 | | | 1,709.0 | | | |
| Net debt | | $ | 2,718.1 | | | $ | 2,571.3 | | | |
| | | | | | |
| Adjusted EBITDA (LTM) | | $ | 893.5 | | | $ | 928.3 | | | |
| Net leverage ratio | | 3.0 | | 2.8 | | |
Liquidity and Capital Resources
As of June 30, 2022 and December 31, 2021, we held cash and cash equivalents in the 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) | June 30,
2022 | | December 31,
2021 |
| United Kingdom | $ | 23.9 | | | $ | 20.4 | |
| United States | 598.8 | | | 25.0 | |
| The Netherlands | 607.1 | | | 1,304.3 | |
| China | 261.6 | | | 293.8 | |
| Other | 67.2 | | | 65.5 | |
| Total | $ | 1,558.6 | | | $ | 1,709.0 | |
The amount of cash and cash equivalents held in these geographic regions fluctuates throughout the year due to a variety of factors, such as our use of intercompany loans and dividends and the timing of cash receipts and disbursements in the normal course of business. Our earnings are not considered to be permanently reinvested in certain jurisdictions in which they were earned. We recognize a deferred tax liability on these unremitted earnings to the extent the remittance of such earnings cannot be recovered in a tax-free manner.
In certain jurisdictions, our cash balances are subject to withholding taxes immediately upon withdrawal of funds to a different jurisdiction. In addition, in order to take advantage of incentive programs offered by various jurisdictions, including tax incentives, we are required to maintain minimum cash balances in these jurisdictions. The transfer of cash from these jurisdictions could result in loss of incentives or higher cash tax expense, but those impacts are not expected to be material.
Our cash and cash equivalent balances are held in the following significant currencies:
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| As of June 30, 2022 |
| (In millions) | USD | | EUR | | GBP | | CNY | | Other |
| United Kingdom | $ | (0.6) | | | € | 0.0 | | | £ | 15.5 | | | ¥ | — | | | |
| United States | 598.8 | | | 0.0 | | | — | | | — | | | |
| The Netherlands | 588.1 | | | 17.8 | | | — | | | — | | | |
| China | 147.2 | | | — | | | — | | | 766.2 | | | |
| Other | 44.9 | | | 3.1 | | | — | | | — | | | |
| Total | $ | 1,378.4 | | | € | 20.9 | | | £ | 15.5 | | | ¥ | 766.2 | | | |
| USD Equivalent | | | $ | 22.0 | | | $ | 18.9 | | | $ | 114.5 | | | $ | 24.8 | |
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| As of December 31, 2021 |
| (In millions) | USD | | EUR | | GBP | | CNY | | Other |
| United Kingdom | $ | 1.8 | | | € | 0.0 | | | £ | 13.2 | | | ¥ | — | | | |
| United States | 25.0 | | | — | | | — | | | — | | | |
| The Netherlands | 1,294.2 | | | 8.9 | | | — | | | — | | | |
| China | 50.8 | | | — | | | — | | | 1,549.4 | | | |
| Other | 51.0 | | | 1.7 | | | — | | | — | | | |
| Total | $ | 1,422.8 | | | € | 10.6 | | | £ | 13.2 | | | ¥ | 1,549.4 | | | |
| USD Equivalent | | | $ | 12.0 | | | $ | 17.8 | | | $ | 243.1 | | | $ | 13.3 | |
Cash Flows:
The table below summarizes our primary sources and uses of cash for the six months ended June 30, 2022 and 2021. We have derived this 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 appear to recalculate due to the effect of rounding.
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| | For the six months ended |
| (In millions) | June 30, 2022 | | June 30, 2021 |
| Net cash provided by/(used in): | | | |
| Operating activities: | | | |
Net income adjusted for non-cash items | $ | 285.1 | | | $ | 347.0 | |
| Changes in operating assets and liabilities, net | (143.2) | | | (79.1) | |
| Operating activities | 141.9 | | | 267.9 | |
| Investing activities | (129.8) | | | (489.1) | |
| Financing activities | (162.5) | | | 221.0 | |
| Net change | $ | (150.4) | | | $ | (0.2) | |
Operating activities. Net cash provided by operating activities for the six months ended June 30, 2022 decreased compared to the corresponding period of the prior year, primarily due to increased raw material purchases in order to maximize production flexibility given widespread parts shortages in our supply chain and in anticipation of volume increases later in the year, a cash payment of $15.0 million for earned acquisition-related incentive compensation related to Elastic M2M, and timing of supplier payments and customer receipts.
Investing activities. Net cash used in investing activities for the six months ended June 30, 2022 decreased compared to the corresponding period of the prior year, primarily due to lower cash paid for acquisitions, which included Elastic M2M in the six months ended June 30, 2022 and Xirgo Technologies, LLC in the six months ended June 30, 2021. This impact was partially offset by higher capital expenditures. For fiscal year 2022, we anticipate capital expenditures of approximately $135.0 million to $145.0 million, which we expect to fund with cash on hand.
Financing activities. In the six months ended June 30, 2022, net cash used in financing activities was primarily driven by $144.3 million cash paid for share repurchases and $17.2 million paid for cash dividends, each of which did not have a comparable payment in the prior year. In the six months ended June 30, 2021, cash provided by financing activities was primarily the result of the issuance of $1.0 billion of the 4.0% Senior Notes, partially offset by the redemption of $750.0 million of the 6.25% Senior Notes. In addition, in fiscal year 2021 we used $33.0 million in cash related to debt financing transactions.
Indebtedness and Liquidity
As of June 30, 2022, we had $4.3 billion in gross indebtedness, which includes finance lease and other financing obligations and excludes debt discounts, premiums, and deferred financing costs.
Capital Resources
Senior Secured Credit Facilities
The Credit Agreement provides for senior secured credit facilities consisting of the Term Loan, the Revolving Credit Facility, and incremental availability (the "Accordion") under which additional secured credit facilities could be issued under certain circumstances.
On June 23, 2022, certain of our indirect, wholly-owned subsidiaries, including STI, STIHBV, and STBV, entered into the Eleventh Amendment to the Credit Agreement and the Foreign Guaranty, dated as of May 12, 2011. Among other changes to the Credit Agreement, the Eleventh Amendment (i) increased the aggregate principal amount of the Revolving Credit Facility to $750.0 million; (ii) extended the maturity date of the Revolving Credit Facility to June 23, 2027 (which could be accelerated to June 22, 2026 if, prior to June 22, 2026, the Term Loan is not refinanced with a maturity date that is on or after June 23, 2027); (iii) released the Foreign Guarantors (as defined in the Credit Agreement), excluding STBV, from their obligations to guarantee the obligations of STI and the other Loan Parties (as defined in the Credit Agreement) relating to the Revolving Credit Facility and certain related obligations, subject to an obligation to reinstate such guaranties under certain conditions; (iv) replaced the LIBOR-based interest rates referenced by the Credit Agreement regarding revolving credit loans to (a) for revolving credit loans denominated in U.S. dollars, an interest rate based on the SOFR published by the Federal Reserve Bank of New York and (b) for revolving credit loans denominated in pounds sterling, an interest rate based on the SONIA; and (v) certain of the operational and restrictive covenants and other terms and conditions of the Credit Agreement were modified to provide STI and its affiliates increased flexibility and permissions thereunder.
Sources of liquidity
Our sources of liquidity include cash on hand, cash flows from operations, and available capacity under the Revolving Credit Facility. As of June 30, 2022, we had $746.1 million available under 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 June 30, 2022, 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 June 30, 2022, availability under the Accordion was approximately $0.6 billion.
We believe, based on our current level of operations and taking into consideration the restrictions and covenants included in the Credit Agreement and Senior Notes Indentures, that the sources of liquidity described above will be sufficient to fund our operations, capital expenditures, dividend payments, ordinary share repurchases, and debt service for at least the next twelve months. However, we cannot make assurances that our business will generate sufficient cash flows from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. Further, our highly-leveraged nature may limit our ability to procure additional financing in the future.
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 July 20, 2022, Moody’s Investors Service’s corporate credit rating for STBV was Ba2 with a stable outlook, and Standard & Poor’s corporate credit rating for STBV was BB+ with a stable outlook. Any future downgrades to STBV's credit ratings may increase our future borrowing costs but will not reduce availability under the Credit Agreement.
Restrictions and Covenants
The Credit Agreement provides that if our senior 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 the outstanding borrowings under our senior secured credit facilities. The Credit Agreement also requires mandatory prepayments of the outstanding borrowings under our 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 six months ended June 30, 2022. We do not expect that the sale of the Qinex Business, which occurred subsequent to June 30, 2022, will trigger these provisions.
The Credit Agreement and the Senior 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, 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 2021 Annual Report. These restrictions and covenants, which are subject to important exceptions and qualifications set forth in the Credit Agreement and Senior Notes Indentures, were taken into consideration when we established our share repurchase programs and will be evaluated periodically with respect to future potential funding of those programs. As of June 30, 2022, 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 (the "January 2022 Program") under which approximately $370.6 million remained available as of June 30, 2022.
Dividends
On May 25, 2022, we paid a cash dividend of $0.11 per share, or $17.2 million in aggregate, to shareholders of record as of May 11, 2022. On July 21, 2022, we announced that our Board had declared a quarterly dividend of $0.11 per share, payable on August 24, 2022 to shareholders of record as of August 10, 2022.
Recently Issued Accounting Pronouncements
There are no recently issued accounting standards that have been adopted in the current period or will be adopted in future periods that have had or are expected to have a material impact on our consolidated financial position or results of operations.
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 included in our 2021 Annual Report.