SENSATA TECHNOLOGIES HOLDING PLC The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, and liquidity and capital resources. You should read the following discussion in conjunction with Item 1: Business and our Financial Statements, each included elsewhere in this Report. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources, and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties including, but not limited to, the risks and uncertainties described in Item 1A: Risk Factors included elsewhere in this Report. Our actual results may differ materially from those contained in or implied by any forward-looking statements. OverviewSensata continued to deliver mission-critical, highly engineered solutions to our customers in 2021. As we look towards 2022 and beyond, we are confident in our ability to sustain total outgrowth in the markets we serve of 400 to 600 basis points per year. We use the term "market outgrowth" to describe the impact of an increasing quantity and value of our products used in customer systems and applications, above normal market growth. It is only loosely correlated to normal unit demand fluctuations in the markets we serve. We believe we can deliver this end market outgrowth based on our high levels of new business awards and our large and expanding pipeline of new opportunities. In fiscal year 2021, we continued to produce strong market outgrowth of 960 basis points, including 860 basis points and 1,930 basis points in our automotive and heavy vehicle and off-road ("HVOR") businesses, respectively. We are also targeting adding 400 to 600 basis points of inorganic revenue growth annually through acquisitions. We believe that the overall business environment provides opportunities to further strengthen our portfolio through strategically important, value-creating acquisitions and/or joint ventures. We are also pursuing new technology collaborations and partnerships with third parties to expand our capabilities and accelerate our megatrend-driven growth potential. We will continue to innovate on behalf of our customers, solving some of their most demanding engineering challenges. We will also continue to provide differentiated, Electrification and Insights solutions to our broad array of customers. Solving these mission-critical challenges enablesSensata to continue to deliver differentiated value for both our customers and shareholders while also increasing investments in our growth opportunities and our people. We continue to invest in our megatrend growth initiatives that are enabling large and rapidly growing opportunities forSensata across all our end markets. We are working to become a leading and foundational player in electrification components and sub-systems across broad industrial, transportation, and stationary energy storage end-markets and to be a comprehensive solutions provider in select end-market segments. We are making progress in Electrification and Insights, both organically through new business wins and inorganically through bolt-on acquisitions or joint ventures. To better pursue clean energy components and system opportunities, in the third quarter of 2021 we reorganized our Sensing Solutions operating segment, moving the portion of our electrical protection product category that includes high-voltage contactors, inverters, and battery management systems from the industrial business unit to a new business unit, Clean Energy Solutions. This business unit will focus largely on the industrial and stationary, commercial/industrial energy storage end-markets. Applications include e-bikes, stationary charging infrastructure, battery-energy storage, and renewable energy applications. With the acquisition ofSpear Power Systems ("Spear") andSendyne Corp ("Sendyne") as described in Item 1: Business - Business Combinations included elsewhere in this Report, we are expanding our portfolio with energy storage systems and electrical sensing products to expand on existing and new end-markets and applications. These acquisitions expand on our capabilities in battery management systems and high-voltage contactors introduced with the previous acquisitions ofLithium Balance and GIGAVAC, LLC ("GIGAVAC"), respectively. With our Insights megatrend initiative, we are focusing on becoming the leader in delivering data-driven insight, connectivity, and prognostics to commercial fleet operators and asset managers, by providing solutions that increase overall productivity and operational efficiency. This initiative addresses a large and fast-growing market opportunity to deliver data insights across heavy, medium, and light vehicle fleets; supply chain and logistics including cargo, container, and warehouse segments; and high-value stationary asset monitoring. As discussed in Item 1: Business - Business Combinations included elsewhere in this Report, we acquiredXirgo Technologies, LLC ("Xirgo") andSmartWitness Holdings, Inc. ("SmartWitness") in fiscal year 2021, expanding our capabilities to provide data insights to transportation and logistics customers through telematics, video telematics, asset tracking devices, and other cloud-based solutions. 33
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We continue our journey onSensata's long-standing mission to help create a cleaner, safer, and more connected world, not just for our customer's products but also through our own operations. We're on our way to achieving the targets laid out in our first sustainability report, bolstering the long-term sustainability and success of the company for all of its stakeholders. Refer to Item 1: Business included elsewhere in this Report for detailed discussion of our business strategies, including those related to our key megatrend initiatives, and market drivers of our business. Fiscal Year 2021 Markets and Financial Results We analyze revenue in terms of inorganic revenue growth/decline (i.e. changes in foreign currency exchange rate and acquisitions/divestitures) vs organic revenue growth/decline (market growth and market outgrowth). Market results We believe regulatory requirements for safer vehicles, higher fuel efficiency, and lower emissions, as well as customer demand for operator productivity and convenience, drive the need for advancements in powertrain management, efficiency, safety, and operator controls. These advancements lead to sensor growth rates that we expect to exceed underlying production growth in many of our key end-markets, which we expect will continue to offer us significant growth opportunities. In fiscal year 2021, global production of light vehicles increased 1.2% from fiscal year 2020, according to third-party data. This increase from the significant decline in 2020 was tempered due to global supply constraints, including shortages of semiconductor components. Global production in the HVOR markets we serve increased 24% from fiscal year 2020. OurChina on-road truck business saw significant market outgrowth from the adoption of NS6 emissions regulations, and we are also benefiting from a wave of electromechanical operator controls being installed in new off-road equipment. In addition, we have continued to see recovery in the global industrial end-markets. Market outgrowth We continue to produce strong market outgrowth, above our previously-stated target ranges. For the year endedDecember 31, 2021 , we delivered 960 basis points of market outgrowth, including 860 basis points, 1,930 basis points, and 580 basis points in our automotive, HVOR, and Sensing Solutions businesses, respectively. During fiscal year 2021, we closed$640 million in new business wins ("NBOs"), including$270 million in Electrification wins, in each case the highest we have ever closed. We define NBOs as incremental revenue to our current base of business that is expected to be recognized on average in the fifth year after entry into the agreement, when programs typically reach their normal volume. Revenue Consolidated net revenue for the year endedDecember 31, 2021 increased 25.5% compared to the year endedDecember 31, 2020 . Excluding an increase of 2.3% attributed to changes in foreign currency exchange rates and an increase of 2.5% due to the effect of acquisitions, consolidated net revenue increased 20.7% on an organic basis compared to the year endedDecember 31, 2020 . Automotive net revenue for the year endedDecember 31, 2021 increased 17.6% compared to the year endedDecember 31, 2020 . Excluding an increase of 2.5% attributed to changes in foreign currency exchange rates, automotive net revenue increased 15.1% on an organic basis compared to the year endedDecember 31, 2020 , representing market outgrowth of 860 basis points, excluding the estimated effects of original equipment manufacturer ("OEM") efforts to replenish inventory channels. This outgrowth was led by new product launches in powertrain and emissions, safety, and electrification-related applications and systems. HVOR net revenue for the year endedDecember 31, 2021 increased 63.3% compared to the year endedDecember 31, 2020 . Excluding an increase of 2.1% attributed to changes in foreign currency exchange rates and an increase of 14.8% due to the effect of acquisitions, HVOR net revenue increased 46.4% on an organic basis compared to the year endedDecember 31, 2020 , representing market outgrowth of 1,930 basis points, excluding the estimated effects of OEM efforts to replenish inventory channels. OurChina on-road truck business saw significant market outgrowth from the adoption of NS6 emissions regulations, and we are also benefiting from a wave of electromechanical operator controls being installed in new off-road equipment. Sensing Solutions net revenue for the year endedDecember 31, 2021 increased 18.4% compared to the year endedDecember 31, 2020 . Excluding an increase of 1.7% attributed to changes in foreign currency exchange rates and an increase of 0.3% due to the effect of acquisitions, Sensing Solutions net revenue increased 16.4% on an organic basis compared to the year 34
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endedDecember 31, 2020 , representing market outgrowth of 580 basis points. This outgrowth was driven by new Electrification launches. Operating Income We continue to see elevated costs related to the global supply chain shortages, which are causing production delays on a vast and varied number of products across industries and geographies and increased procurement and logistics costs, which are contributing to a higher cost and inflationary environment that has impacted our margins in fiscal year. Despite these elevated costs, which we are working to mitigate, operating income increased$295.5 million , or 87.5%, to$633.2 million (16.6% of net revenue) compared to$337.7 million (11.1% of net revenue) in fiscal year 2020. This increase is the result of (1) improved gross margins, due mainly to higher organic sales volumes as well as the turnaround effect of the settlement of litigation brought byWasica Finance GmbH ("Wasica") in 2020, partially offset by increased costs related to global supply chain shortages, and (2) lower restructuring costs. These improvements were partially offset by (1) higher spend to support megatrend growth initiatives, (2) higher incentive compensation aligned to improved financial performance, and (3) the turnaround effect of temporary salary reductions and furloughs taken in the second quarter 2020. We expect to see constraints on global production of light vehicles lifting slowly throughout the course of fiscal year 2022. Refer to Results of Operations - Operating Costs and Expenses included elsewhere in this Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations (this "MD&A") for additional discussion of our operating costs and expenses. Net Income Net income increased$199.3 million in fiscal year 2021, to$363.6 million , compared to$164.3 million in fiscal year 2020. This increase was primarily a result of higher operating income partially offset by higher taxes and the loss on redemption of the$750.0 million aggregate principal amount of 6.25% senior notes due 2026 (the "6.25% Senior Notes"). Forward-looking information We expect to see constraints on global production of light vehicles lifting slowly throughout the course of fiscal year 2022. We expect low single-digit end market growth across all our markets in fiscal year 2022, with automotive growth of approximately 7% and HVOR production approximately flat. However, in 2021, our customers ordered over production to compensate for supply chain shortages. We estimate this amounted to approximately$90 million of revenue over production in 2021 that will not repeat in fiscal year 2022. Our revenue outgrowth to market will continue to be driven by ongoing efforts to improve energy efficiency, safety, and the environment. We continue to invest in our megatrend initiatives both organically and inorganically, with the acquisitions of Lithium Balance, Xirgo, Spear, SmartWitness, and Sendyne, expanding not only our capabilities, but also our access to end-markets and product portfolios in these pivotal areas. Refer to Item 1: Business - Business Combinations included elsewhere in this Report for additional information related to these acquisitions. We expect continued significant growth in these megatrend areas over the coming years, driven by Electrification trends, the infrastructure requirements to support Electrification, and the proliferation of Insights on stationary and mobile equipment. Liquidity We have sufficient cash to take advantage of strategic opportunities as they arise. We generated$554.2 million of operating cash flow in fiscal year 2021, ending the year with$1.7 billion in cash. Our ability to generate positive cash flows allows us to continue to pursue the acquisition of innovative businesses that will expand our presence in our targeted growth vectors. InNovember 2021 , we resumed our share repurchase program, which we had previously suspended onApril 2, 2020 , and we repurchased 0.8 million shares for approximately$47.8 million in fiscal year 2021. OnJanuary 20, 2022 , we announced that our Board of Directors had authorized a new ordinary share repurchase program of$500 million (the "January 2022 Program"), which replaces the$500.0 million program previously authorized by our Board of Directors inJuly 2019 (the "July 2019 Program").Sensata's shareholders have previously approved the forms of share repurchase agreements and the potential broker counterparties needed to execute the buyback program. Refer to Liquidity and Capital Resources included elsewhere in this MD&A for additional information related to our share repurchase program. In the first quarter of 2021, we used the flexibility provided by our large cash balance to lower our cost of capital and extend our debt maturity by redeeming the full amount outstanding on the 6.25% Senior Notes. Subsequently, onMarch 29, 2021 , we issued the first$750.0 million of the$1.0 billion aggregate principal amount of 4.0% senior notes due 2029 (the "4.0% Senior Notes"), at par, and onApril 8, 2021 , we issued an additional$250.0 million of 4.0% Senior Notes at a price of 100.75%. The combined effect of these transactions was to extend the average maturity of our debt profile and lower our total cost of fixed debt. Proceeds from the 4.0% Senior Notes will be used for general corporate purposes, to fund future acquisitions and our 35
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capital deployment strategy, and for future debt repayments. Refer to Note 14:
Debt of our Financial Statements included elsewhere in this Report for
additional information related to these transactions and our overall debt.
Acquisitions
We completed various acquisitions in 2021 in support of our key strategic
priorities. A summary of these acquisitions is included in the table below:
(In millions) Segment Purchase Price
Estimated
Acquisition Date Performance Sensing Sensing Solutions Cash Contingency
Lithium Balance(1) January 29, 2021 X $ 27.2 $ -
Xirgo April 1, 2021 X $ 401.7 $ -
Spear(2)(3) November 19, 2021 X $ 105.8 $ 8.6
SmartWitness(2) November 19, 2021 X $ 204.2 $ -
Sendyne(2) December 8, 2021 X $ 25.1 $ -
__________________________
(1) Step acquisition completed on the date indicated
(2) Purchase price accounting is preliminary
(3) Contingency estimated as of the date of acquisition, subject to change
Refer to Item 1: Business - Business Combinations and Note 21: Acquisitions of
our Financial Statements, each included elsewhere in this Report, for additional
information related to these acquisitions.
Summary
During fiscal year 2021, we experienced continued positive momentum from the
business and economic growth that began in the second half of 2020. We responded
well to the rapid changes in many of our end-markets, demonstrating the
strength, resiliency, and reliability of our business and organizational model,
enabling us to capitalize on the recovery in end-market demand and deliver on
customers' orders. We will continue to focus on delivering differentiated value
for both our customers and shareholders, while also increasing investments in
our growth opportunities and our people.
Selected Segment Information
We present financial information for two reportable segments, Performance
Sensing and Sensing Solutions. Set forth below is selected information for each
of these segments for the periods presented. 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.
The following table presents net revenue by segment for the identified periods:
For the year ended December 31,
2021 2020 2019
($ in millions) Amount Percent of Total Amount Percent of Total Amount Percent of Total
Net revenue:
Performance Sensing $ 2,847.9 74.5 % $ 2,223.8 73.0 % $ 2,546.0 73.8 %
Sensing Solutions 972.9 25.5 821.8 27.0 904.6 26.2
Total net revenue $ 3,820.8 100.0 % $ 3,045.6 100.0 % $ 3,450.6 100.0 %
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The following table presents segment operating income in
For the year ended December 31,
2021 2020 2019
Percent of Percent of Percent of
Segment Segment Segment
($ in millions) Amount Net Revenue Amount Net Revenue Amount Net Revenue
Segment operating income:
Performance Sensing $ 777.2 27.3 % $ 532.5 23.9 % $ 670.5 26.3 %
Sensing Solutions 293.2 30.1 % 241.2 29.4 % 294.0 32.5 %
Total segment operating income $ 1,070.4 $ 773.7 $ 964.4
For a reconciliation of total segment operating income to consolidated operating
income, refer to Note 20: Segment Reporting of our Financial Statements included
elsewhere in this Report.
Selected Geographic Information
We are a global business with significant operations around the world and a
diverse revenue mix by geography, customer, and end-market. The following table
presents (as a percentage of total) property, plant and equipment, net ("PP&E"),
and net revenue by geographic region for the identified periods:
PP&E, net as of December 31, Net revenue for the year ended December 31,
2021 2020 2021 2020 2019
Americas 32.3 % 33.1 % 38.0 % 39.3 % 42.3 %
Europe 22.0 % 24.4 % 26.2 % 26.8 % 28.1 %
Asia and rest of world 45.7 % 42.5 % 35.8 % 33.9 % 29.6 %
Refer to Note 20: Segment Reporting of our Financial Statements included
elsewhere in this Report for additional information related to our PP&E, net
balances by selected geographic area as of December 31, 2021 and 2020 and net
revenue by selected geographic area for the years ended December 31, 2021 , 2020,
and 2019.
Net Revenue by End-Market
Our net revenue for the years ended December 31, 2021 , 2020, and 2019 was
derived from the following end-markets (amounts are calculated based on
unrounded numbers, and may not appear to recalculate):
For the year ended December 31,
(Percentage of total) 2021 2020 2019
Automotive 54.0 % 57.5 % 58.8 %
HVOR 21.7 % 16.7 % 16.2 %
Industrial 10.8 % 11.0 % 10.2 %
Appliance and HVAC (1) 6.4 % 6.2 % 5.8 %
Aerospace 3.5 % 4.5 % 5.1 %
Other 3.6 % 4.1 % 3.9 %
__________________________
(1) Heating, ventilation and air conditioning
We are a significant supplier to multiple OEMs within many of these end-markets,
thereby reducing customer concentration risk.
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Factors Affecting Our Operating Results
The following discussion describes components of the consolidated statements of
operations as well as factors that impact those components. Refer to Note 2:
Significant Accounting Policies of our Financial Statements included elsewhere
in this Report, and Critical Accounting Policies and Estimates included
elsewhere in this MD&A for additional information related to the accounting
policies and estimates made related to these components. Refer to Results of
Operations included elsewhere in this MD&A for discussion of the actual impact
on our financial statements of these factors.
Net revenue
We generate revenue primarily from the sale of tangible products. Because we
derive a significant portion of our revenue from sales into the automotive
end-market, conditions in the automotive industry can have a significant impact
on the amount of revenue that we recognize. However, outside of the automotive
industry, we sell our products to end-users in a wide range of industries,
end-markets, and geographic regions. As a result, the drivers of demand for
these products vary considerably and are influenced by industry, market, or
geographic conditions. Our overall net revenue is impacted by various factors,
which we characterize as either "organic" or "inorganic."
Our net revenue may be impacted by the following organic factors:
•fluctuations in overall economic activity within the geographic regions in
which we operate;
•underlying growth in one or more of our end-markets, either worldwide or
particular geographies in which we operate;
•the number of our products used within existing applications, or the
development of new applications requiring these products, due to regulations or
other factors;
•the "mix" of products sold, including the proportion of new or upgraded
products and their pricing relative to existing products;
•changes in product sales prices (including quantity discounts, rebates, and
cash discounts for prompt payment);
•changes in the level of competition faced by our products, including the launch
of new products by competitors;
•our ability to successfully develop, launch, and sell new products and
applications; and
•the trend of the automotive market evolving from internal combustion engine
powertrain products to more environmentally-friendly vehicles that rely more
heavily on Electrification and other adjacent technologies.
Our net revenue may be impacted by the following inorganic factors:
•fluctuations in foreign currency exchange rates; and
•acquisitions and divestitures.
While the factors described above may impact net revenue in each of our
reportable segments, the magnitude of that impact can differ. For more
information about revenue risks relating to our business, refer to Item 1A: Risk
Factors included elsewhere in this Report.
Cost of revenue
We manufacture the majority of our products and subcontract only a limited
number of products to third parties. As such, our cost of revenue consists
principally of the following:
•Production Materials Costs. We source materials used in production on a global
basis to ensure a highly-effective and efficient supply chain, but we are still
impacted by local market conditions, including fluctuations in foreign currency
exchange rates. A portion of our production materials contains certain
commodities, resins, and metals, and the cost of these materials may vary with
underlying pricing and foreign currency exchange rates. However, we enter into
forward contracts to economically hedge a portion of our exposure to the
potential change in prices and fluctuation of exchange rates associated with
certain of these commodities. The terms of these contracts fix the price at a
future date for various notional amounts associated with these commodities.
Gains and losses recognized on these derivatives are recorded in other, net and
are not included in cost of revenue. Refer to Note 6: Other, Net of our
Financial Statements included elsewhere in this Report for additional
information.
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•Employee Costs. Employee costs include wages and benefits, including variable incentive compensation, for employees involved in our manufacturing operations and certain customer service and engineering activities, including variable incentive compensation. A significant portion of these costs can fluctuate on an aggregate basis in direct correlation with changes in production volumes. As a percentage of net revenue, these costs may decline as a result of economies of scale associated with higher production volumes, and conversely, may increase with lower production volumes. These costs also fluctuate based on local market conditions. We rely on contract workers for direct labor in certain geographies. As ofDecember 31, 2021 , we had approximately 1,900 direct labor contract workers on a worldwide basis. •Sustaining Engineering Activity Costs. These costs relate to modifications of existing products for use by new and existing customers in familiar applications as well as improvements made to our manufacturing processes. •Other. Our remaining cost of revenue primarily consists of: •gains and losses on certain foreign currency forward contracts that are designated as cash flow hedges; •material yields; •costs to import raw materials, such as tariffs; •depreciation of fixed assets used in the manufacturing process; •freight costs; •warehousing expenses; •maintenance and repair expenses; •costs of quality assurance; •operating supplies; and •other general manufacturing expenses, such as expenses for energy consumption and operating lease expense. Changes in cost of revenue as a percentage of net revenue have historically been impacted by a number of factors, including: •changes in the price of raw materials, including the impact of changes in costs to import such raw materials, such as tariffs; •changes in customer prices and surcharges; •implementation of cost improvement measures aimed at increasing productivity, including reduction of fixed production costs, refinements in inventory management, design and process driven changes, and the coordination of procurement within each subsidiary and at the business level; •product lifecycles, as we typically incur higher cost of revenue associated with new product development (related to excess manufacturing capacity and higher production costs during the initial stages of product launches) and during the phase-out of discontinued products; •changes in production volumes - production costs are capitalized in inventory based on normal production volumes, as revenue increases, the fixed portion of these costs does not; •transfer of production to our lower-cost manufacturing facilities; •changes in depreciation expense, including those arising from the adjustment of PP&E to fair value associated with acquisitions; •fluctuations in foreign currency exchange rates; •changes in product mix; •changes in logistics costs; •acquisitions and divestitures - acquired and divested businesses may generate higher or lower cost of revenue as a percentage of net revenue than our core business; and 39
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•the increase in the carrying value of inventory that is adjusted to fair value
as a result of the application of purchase accounting associated with
acquisitions.
Research and development expense
We develop products that address increasingly complex engineering and operating
performance requirements to help our customers solve their most difficult
challenges in the automotive, HVOR, fleet management, industrial, clean energy,
and aerospace industries. We believe that continued focused investment in
research and development ("R&D") is critical to our future growth and
maintaining our leadership positions in the markets we serve. Our R&D efforts
are directly related to timely development of new and enhanced products that are
central to our business strategy. We continually develop our technologies to
meet an evolving set of customer requirements and new product introductions. We
conduct such activities in areas that we believe will increase our long-term
revenue growth. Our development expense is typically associated with engineering
core technology platforms to specific applications and engineering major
upgrades that improve the functionality or reduce the cost of existing products.
In addition, we continually consider new technologies where we may have
expertise for potential investment or acquisition.
An increasing portion of our R&D activities are being directed towards
technologies and megatrends that we believe have the potential for significant
future growth, but that relate to products that are not currently within our
core business or include new features and capabilities for existing products.
Expenses related to these activities are less likely to result in increased
near-term revenue than our more mainstream development activities.
R&D expense consists of costs related to product design, development, and
process engineering. Costs related to modifications of existing products for use
by new and existing customers in familiar applications are presented in cost of
revenue and are not included in R&D expense. The level of R&D expense in any
period is related to the number of products in development, the stage of the
development process, the complexity of the underlying technology, the potential
scale of the product upon successful commercialization, and the level of our
exploratory research.
Selling, general and administrative expense
Selling, general and administrative ("SG&A") expense consists of all
expenditures incurred in connection with the sale and marketing of our products,
as well as administrative overhead costs, including:
•salary and benefit costs for sales and marketing personnel and administrative
staff;
•share-based incentive compensation expense;
•charges related to the use and maintenance of administrative offices, including
depreciation expense;
•other administrative costs, including expenses relating to information systems,
human resources, and legal and accounting services;
•other selling and marketing related costs, such as expenses incurred in
connection with travel and communications; and
•transaction costs associated with acquisitions.
Changes in SG&A expense as a percentage of net revenue have historically been
impacted by a number of factors, including:
•changes in sales volume, as higher volumes enable us to spread the fixed
portion of our selling, marketing, and administrative expense over higher
revenue (e.g. expenses relating to our sales and marketing personnel can
fluctuate due to prolonged trends in sales volume, while expenses relating to
administrative personnel generally do not increase or decrease directly with
changes in sales volume);
•changes in customer prices and surcharges;
•changes in the mix of products we sell, as some products may require more
customer support and sales effort than others;
•new product launches in existing and new markets, as these launches typically
involve a more intense sales and marketing activity before they are integrated
into customer applications and systems;
•changes in our customer base, as new customers may require different levels of
sales and marketing attention;
•fluctuations in foreign currency exchange rates; and
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•acquisitions and divestitures - acquired and divested businesses may require different levels of SG&A expense as a percentage of net revenue than our core business. Depreciation expense Depreciation expense includes depreciation of PP&E, which includes assets held under finance lease and amortization of leasehold improvements. Depreciation expense is included in either cost of revenue or SG&A expense depending on the use of the asset as a manufacturing or administrative asset. Depreciation expense will vary according to the age of existing PP&E and the level of capital expenditures. Amortization expense We have recognized a significant amount of definite-lived intangible assets. Acquisition-related definite-lived intangible assets are amortized on an economic-benefit basis according to the useful lives of the assets, or on a straight-line basis if a pattern of economic benefits cannot be reliably determined. The amount of amortization expense related to definite-lived intangible assets depends on the amount and timing of definite-lived intangible assets acquired and where previously acquired definite-lived intangible assets are in their estimated life-cycle. In general, the economic benefit of a definite-lived intangible asset is concentrated towards the beginning of its useful life. Restructuring and other charges, net Restructuring and other charges, net consists of severance, outplacement, other separation benefits, and facility and other exit costs. These charges may be incurred as part of an announced restructuring plan or may be individual charges recognized related to acquired businesses or the termination of a limited number of employees that do not represent the initiation of a larger restructuring plan. Restructuring and other charges, net also includes the gain, net of transaction costs, from the sale of businesses and other operating income or expense that is not presented elsewhere in operating income. Amounts recognized in restructuring and other charges, net will vary according to the extent of our restructuring programs and other income or expense items not presented elsewhere in operating income. Interest expense, net As ofDecember 31, 2021 and 2020, we had gross outstanding indebtedness of$4,280.2 million and$4,036.6 million , respectively. This indebtedness consists of a secured credit facility and senior unsecured notes. Refer to Note 14: Debt of our Financial Statements included elsewhere in this Report for additional information. The credit agreement governing our secured credit facility (as amended, the "Credit Agreement") provides for senior secured credit facilities (the "Senior Secured Credit Facilities") consisting of a term loan facility (the "Term Loan"), the$420.0 million revolving credit facility (the "Revolving Credit Facility"), and incremental availability (the "Accordion") under which additional secured credit facilities could be issued under certain circumstances. Our respective senior unsecured notes (the "Senior Notes") accrue interest at fixed rates. However, the Term Loan and the Revolving Credit Facility accrue interest at variable interest rates, which drives some of the variability in interest expense, net. Refer to Item 7A: Quantitative and Qualitative Disclosures About Market Risk included elsewhere in this Report for more information regarding our exposure to potential changes in variable interest rates. Interest income, which is netted against interest expense on the consolidated statements of operations, relates to interest earned on our cash and cash equivalent balances, and varies according to the balances in, and the interest rates provided by, these investments. Other, net Other, net primarily includes gains and losses associated with the remeasurement of non-USD denominated monetary assets and liabilities into USD, changes in the fair value of derivative financial instruments not designated as cash flow hedges, debt financing transactions, and net periodic benefit cost, excluding service cost. Amounts recognized in other, net vary according to changes in foreign currency exchange rates, changes in the forward prices for the foreign currencies and commodities that we hedge, the number and magnitude of debt financing transactions we undertake, and the change in funded status of our pension and other post-retirement benefit plans. Refer to Note 6: Other, Net of our Financial Statements included elsewhere in this Report for additional information related to the components of other, net. Refer to Item 7A: Quantitative and Qualitative Disclosures About Market Risk included elsewhere 41
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in this Report for additional information related to our exposure to potential changes in foreign currency exchange rates and commodity prices. Refer to Note 14: Debt of our Financial Statements included elsewhere in this Report for additional information related to our debt financing transactions. Provision for (or benefit from) income taxes We are subject to income tax in the various jurisdictions in which we operate. The provision for (or benefit from) income taxes consists of: •current tax expense, which relates primarily to our profitable operations in non-U.S. tax jurisdictions and withholding taxes related to interest, royalties, and repatriation of foreign earnings; and •deferred tax expense (or benefit), which represents adjustments in book-to-tax basis differences primarily related to the step-up in fair value of fixed and intangible assets, including goodwill, acquired in connection with business combination transactions, the utilization of net operating losses, changes in tax rates, and changes in our assessment of the realizability of our deferred tax assets. Our current tax expense is favorably impacted by the amortization of definite-lived intangible assets and other tax benefits derived from our operating and capital structure, including tax incentives in both theU.K. andChina as well as favorable tax status inMexico . In addition, our tax structure takes advantage of participation exemption regimes that permit the receipt of intercompany dividends without incurring taxable income in those jurisdictions. While the extent of our future tax liability is uncertain, the impact of purchase accounting for past and future acquisitions, changes to debt and equity capitalization of our subsidiaries, and the realignment of the functions performed and risks assumed by our various subsidiaries are among the factors that will determine the future book and taxable income of each of our subsidiaries and ofSensata as a whole. Our effective tax rate will generally not equal theU.S. statutory tax rate due to various factors, the most significant of which are described below. As these factors fluctuate from year to year, our effective tax rate will change. The factors include, but are not limited to, the following: •establishing or releasing a portion of the valuation allowance related to our gross deferred tax assets; •foreign tax rate differential - we operate in locations outside theU.S. , includingBelgium ,Bulgaria ,China ,Malaysia ,Malta ,the Netherlands ,South Korea , and theU.K. , that historically have had statutory tax rates different than theU.S. statutory tax rate. This can result in a foreign tax rate differential that may reflect a tax benefit or detriment. This foreign tax rate differential can change from year to year based upon the jurisdictional mix of earnings and changes in current and future enacted tax rates, tax holidays, and favorable tax regimes available to certain of our foreign subsidiaries; •changes in tax laws and rates, alsoOrganization for Economic Co-operation and Development ("OECD") developments andEuropean Commission ("EC") challenges to sovereignEuropean Union member states; •losses incurred in certain jurisdictions, which cannot be currently benefited, as it is not more likely than not that the associated deferred tax asset will be realized in the foreseeable future; •foreign currency exchange gains and losses; •as a result of income tax audit settlements, final assessments, or lapse of applicable statutes of limitation, we may recognize an income tax expense or benefit including the reversal of previously accrued interest and penalties; and •in certain jurisdictions, we recognize withholding and other taxes on intercompany payments, including dividends, and such taxes are deducted if they cannot be credited against the recipient's tax liability in its country of residence. Seasonality Refer to Item 1: Business included elsewhere in this Report for discussion of our assessment of seasonality related to our business. Legal Proceedings Refer to Item 3: Legal Proceedings included elsewhere in this Report for discussion of legal proceedings related to our business. 42
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Results of Operations Our discussion and analysis of results of operations are based upon our Financial Statements included elsewhere in this Report. The Financial Statements have been prepared in accordance withU.S. generally accepted accounting principles ("GAAP"). The preparation of the Financial Statements requires us to make estimates and judgments that affect the amounts reported therein. We base our estimates on historical experience and assumptions believed to be reasonable under the circumstances, and we re-evaluate such estimates on an ongoing basis. Actual results could differ from our estimates under different assumptions or conditions. Our significant accounting policies and estimates are more fully described in Note 2: Significant Accounting Policies of our Financial Statements included elsewhere in this Report and Critical Accounting Policies and Estimates included elsewhere in this MD&A. The table below presents our historical results of operations in millions of dollars and as a percentage of net revenue. We have derived these results of operations from our Financial Statements. Amounts and percentages in the table below have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the effect of rounding. For the year ended December 31, 2021 2020 2019 Percent of Percent of Percent of Amount Net Revenue Amount Net Revenue Amount Net Revenue Net revenue: Performance Sensing$ 2,847.9 74.5 %$ 2,223.8 73.0 %$ 2,546.0 73.8 % Sensing Solutions 972.9 25.5 821.8 27.0 904.6 26.2 Total net revenue 3,820.8 100.0 % 3,045.6 100.0 % 3,450.6 100.0 % Operating costs and expenses 3,187.6 83.4 2,707.8 88.9 2,893.7 83.9 Operating income 633.2 16.6 337.7 11.1 556.9 16.1 Interest expense, net (179.3) (4.7) (171.8) (5.6) (158.6) (4.6) Other, net (40.0) (1.0) (0.3) 0.0 (7.9) (0.2) Income before taxes 413.9 10.8 165.6 5.4 390.4 11.3 Provision for income taxes 50.3 1.3 1.4 0.0 107.7 3.1 Net income$ 363.6 9.5 %$ 164.3 5.4 %$ 282.7 8.2 % Net revenue - Overall Net revenue for the year endedDecember 31, 2021 increased 25.5% compared to the year endedDecember 31, 2020 largely due to improved market results and our continued outperformance relative to those markets. Excluding an increase of 2.3% attributed to changes in foreign currency exchange rates and an increase of 2.5% due to the effect of acquisitions, net revenue increased 20.7% on an organic basis compared to the year endedDecember 31, 2020 . This represents market outgrowth of 960 basis points. Organic revenue growth (or decline), discussed throughout this MD&A, is a financial measure not presented in accordance withU.S. GAAP. Refer to Non-GAAP Financial Measures included elsewhere in this MD&A for additional information related to our use of organic revenue growth (or decline). Net revenue for the year endedDecember 31, 2020 declined 11.7% compared to the year endedDecember 31, 2019 largely due to end-market contraction caused by the COVID-19 pandemic. Excluding an increase of 0.2% attributed to changes in foreign currency exchange rates, net revenue declined 11.9% on an organic basis compared to the year endedDecember 31, 2019 . This represents market outgrowth of 650 basis points. Net Revenue - Performance Sensing Fiscal year 2021 vs. fiscal year 2020 Performance Sensing net revenue for the year endedDecember 31, 2021 increased 28.1% compared to the year endedDecember 31, 2020 . Excluding an increase of 2.4% attributed to changes in foreign currency exchange rates and an increase of 3.4% due to the effect of acquisitions, Performance Sensing net revenue increased 22.3% on an organic basis compared to the year endedDecember 31, 2020 , representing market outgrowth of 1,170 basis points. Price reductions, primarily to automotive customers, resulted in a 0.9% decrease in net revenue, and the impact of these price reductions is included in the 1,170 basis points of market outgrowth recognized by Performance Sensing. Both the Automotive and HVOR operating segments contributed to these results as discussed below. 43
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Automotive net revenue for the year endedDecember 31, 2021 increased 17.6% compared to the year endedDecember 31, 2020 . Excluding an increase of 2.5% attributed to changes in foreign currency exchange rates, automotive net revenue increased 15.1% on an organic basis compared to the year endedDecember 31, 2020 . Although automotive production was constrained due to global supply chain shortages, resulting in muted end-market growth of 1.2% for the year, we delivered organic revenue growth due to our continued outperformance relative to the automotive market, led by new product launches in powertrain and emissions, safety, and electrification-related applications and systems. Excluding the estimated effects of OEM efforts to replenish inventory channels, automotive outgrew its end-markets by 860 basis points in the year endedDecember 31, 2021 . HVOR net revenue for the year endedDecember 31, 2021 increased 63.3% compared to the year endedDecember 31, 2020 . Excluding an increase of 2.1% attributed to changes in foreign currency exchange rates and an increase of 14.8% due to the effect of acquisitions, HVOR net revenue increased 46.4% on an organic basis compared to the year endedDecember 31, 2020 . This organic revenue increase is primarily due to recovery of customer production combined with our continued outperformance relative to the HVOR markets. OurChina on-road truck business saw significant market outgrowth from the adoption of NS6 emissions regulations, and we are also benefiting from a wave of electromechanical operator controls being installed in new off-road equipment. Excluding the estimated effects of OEM efforts to replenish inventory channels, HVOR outgrew its end-markets by 1,930 basis points in the year endedDecember 31, 2021 . Fiscal year 2020 vs. fiscal year 2019 Performance Sensing net revenue for the year endedDecember 31, 2020 declined 12.7% compared to the year endedDecember 31, 2019 . Excluding an increase of 0.1% attributed to changes in foreign currency exchange rates, Performance Sensing net revenue declined 12.8% on an organic basis compared to the year endedDecember 31, 2019 , representing market outgrowth of 770 basis points. Price reductions, primarily to automotive customers, resulted in a 1.5% decrease in net revenue, and the impact of these price reductions is included in the 770 basis points of market outgrowth recognized by Performance Sensing. The organic revenue decline was driven primarily by impacts from the COVID-19 pandemic, which was mitigated in the second half of the year as OEM customers ramped production within their facilities through the half in an effort to replace production lost during shut-downs earlier in the year. The Performance Sensing results in fiscal year 2020 represented Automotive net revenue for the year endedDecember 31, 2020 declined 13.6% compared to the year endedDecember 31, 2019 . Excluding an increase of 0.3% attributed to changes in foreign currency exchange rates, Automotive net revenue declined 13.9% on an organic basis compared to the year endedDecember 31, 2019 . These results represented market outgrowth of 690 basis points compared to the combination of an automotive market that was down 18.5% and the impact of OEM customers working down inventories. This market outgrowth continues to be led by new product launches in emissions, electrification, and safety-related applications and systems. A high level of automotive production in the fourth quarter of 2020 resulted in customers using more inventory on hand to fill orders, negatively impacting fiscal year 2020 net revenue. HVOR net revenue for the year endedDecember 31, 2020 declined 9.2% compared to the year endedDecember 31, 2019 on both a reported and an organic basis. These results represented market outgrowth of 880 basis points compared to an HVOR market that was down 18.0%. OurChina on-road truck business continued to post better than expected growth as a result of the accelerated adoption of NS6 emissions regulations. Net Revenue - Sensing Solutions Fiscal year 2021 vs. fiscal year 2020 Sensing Solutions net revenue for the year endedDecember 31, 2021 increased 18.4% compared to the year endedDecember 31, 2020 . Excluding an increase of 1.7% attributed to changes in foreign currency exchange rates and an increase of 0.3% due to the effect of acquisitions, Sensing Solutions net revenue increased 16.4% on an organic basis compared to the year endedDecember 31, 2020 . The increase in net revenue was driven by the continued recovery of global industrial end-markets, as well as new Electrification launches and HVAC market recovery. Fiscal year 2020 vs. fiscal year 2019 Sensing Solutions net revenue for the year endedDecember 31, 2020 declined 9.2% compared to the year endedDecember 31, 2019 on both a reported and an organic basis. This decrease was the result of year over year declines in the industrial, appliance and HVAC, and aerospace end-markets. The global industrial and appliance and HVAC end-markets began recovering in the fourth quarter of 2020, which, in addition to supply chain restocking, reflected strong growth in HVAC and 5G applications. The decline in the aerospace industry continued throughout fiscal year 2020, reflecting reduced OEM production and significantly lower air traffic. New product launches in the fourth quarter of 2020, primarily in the defense market, partially offset this decline. 44
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Operating costs and expenses Operating costs and expenses for the years endedDecember 31, 2021 , 2020, and 2019 are presented, in millions of dollars and as a percentage of 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 year ended December 31, 2021 2020 2019 Percent of Percent of Percent of Amount Net Revenue Amount Net Revenue Amount Net Revenue Operating costs and expenses: Cost of revenue$ 2,542.4 66.5 %$ 2,119.0 69.6 %$ 2,267.4 65.7 % Research and development 159.1 4.2 131.4 4.3 148.4 4.3 Selling, general and administrative 337.0 8.8 294.7 9.7 281.4 8.2 Amortization of intangible assets 134.1 3.5 129.5 4.3 142.9 4.1 Restructuring and other charges, net 14.9 0.4 33.1 1.1 53.6 1.6 Total operating costs and expenses$ 3,187.6 83.4 %$ 2,707.8 88.9 %$ 2,893.7 83.9 % Cost of revenue Cost of revenue as a percentage of net revenue decreased in fiscal year 2021 primarily as a result of (1) higher volume and the nonrecurrence of productivity headwinds from our manufacturing facilities running at lower than normal capacity in fiscal year 2020 and (2) the nonrecurrence of a$29.2 million loss from fiscal year 2020 in intellectual property litigation originally brought againstAugust Cayman Company, Inc. ("Schrader") by Wasica. These favorable impacts on cost of revenue as a percentage of revenue were partially offset by increased costs related to global supply chain shortages. Cost of revenue as a percentage of net revenue increased in fiscal year 2020 primarily as a result of (1) productivity headwinds from lower volume, the resulting lower than normal capacity, and increased costs related to the COVID-19 pandemic, (2) a$29.2 million loss in fiscal year 2020 related to the judgment against us in intellectual property litigation originally brought against Schrader by Wasica, and (3) higher compensation to retain and incentivize critical employee talent. These unfavorable impacts were partially offset by (1) the impact of ongoing savings resulting from cost reduction activities taken in fiscal years 2019 and 2020, (2) the favorable effect of changes in foreign currency exchange rates, and (3) savings from temporary cost reductions in fiscal year 2020 (including salary reductions and furloughs). Research and development expense R&D expense increased in fiscal year 2021 primarily as a result of (1) higher spend to support megatrend growth initiatives, (2) incremental R&D expense related to acquired businesses, and (3) the unfavorable effect of changes in foreign currency exchange rates, partially offset by the impact on fiscal year 2021 of ongoing savings resulting from cost reduction activities taken in fiscal year 2020. R&D expense related to megatrends in fiscal year 2021 was$48.0 million , an increase of$22.0 million from fiscal year 2020. We currently expect approximately$60 million to$70 million in total spend related to megatrends in fiscal year 2022, the majority of which will be recorded as R&D expense. R&D expense decreased in fiscal year 2020 primarily as a result of the impact of ongoing savings resulting from cost reduction activities taken in fiscal years 2019 and 2020, somewhat offset by increased R&D expense related to our megatrend initiatives. R&D expense related to our megatrend initiatives was$26.1 million in fiscal year 2020, an increase of$6.8 million from fiscal year 2019. Selling, general and administrative expense SG&A expense increased in fiscal year 2021 primarily as a result of (1) incremental SG&A expense related to acquired businesses, including related transaction costs, (2) higher incentive compensation aligned to improved financial performance, (3) increased selling expenses attributed to organic revenue growth, and (4) the unfavorable impact of changes in foreign currency exchange rates. These increases were partially offset by the fiscal year 2020 completion of a project related to enhancements and improvements of our global operating processes to increase productivity and the resulting reduction in professional fees. SG&A expense increased in fiscal year 2020 primarily as a result of (1) higher incentive compensation to retain and incentivize critical employee talent, (2) increased costs related to enhancements and improvements of our global operating processes to 45
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increase productivity, and (3) incremental SG&A related to acquired businesses, partially offset by (1) the impact of ongoing savings resulting from cost reduction activities taken in fiscal years 2019 and 2020 and (2) savings from temporary cost reductions in fiscal year 2020 (including salary reductions and furloughs). Amortization of intangible assets Amortization expense increased in fiscal year 2021 primarily as a result of increased intangibles from recent acquisitions partially offset by the effect of the economic-benefit method of amortization as described in Note 2: Significant Accounting Policies of our Financial Statements included elsewhere in this Report. We expect amortization expense to be approximately$140.8 million in fiscal year 2022. Refer to Note 11:Goodwill and Other Intangible Assets, Net of our Financial Statements included elsewhere in this Report for additional information regarding definite-lived intangible assets and the related amortization. Amortization expense decreased in fiscal year 2020 primarily as a result of the effect of the economic-benefit method of amortization. Restructuring and other charges, net Restructuring and other charges, net decreased in fiscal year 2021 primarily due to lower restructuring charges incurred as part of a plan commenced in fiscal year 2020 to reorganize our business in response to the potential long-term impact of the global financial and health crisis caused by the COVID-19 pandemic (the "Q2 2020 Global Restructure Program"). Refer to Note 5: Restructuring and Other Charges, Net of our Financial Statements included elsewhere in this Report for additional information related to the Q2 2020 Global Restructure Program. Restructuring and other charges, net decreased in fiscal year 2020 primarily due to the nonrecurrence of certain charges incurred in fiscal year 2019 partially offset by charges incurred under the Q2 2020 Global Restructure Program. The fiscal year 2019 charges that did not recur include (1) a$17.8 million loss related to the termination of a supply agreement in connection with theMetal Seal Precision, Ltd. ("Metal Seal") litigation, (2)$12.7 million of benefits provided under a voluntary retirement incentive program offered to a limited number of eligible employees in theU.S. , and (3)$6.5 million of termination benefits provided under a one-time benefit arrangement related to the shutdown and relocation of an operating site inGermany . Restructuring and other charges, net for the years endedDecember 31, 2021 , 2020, and 2019 consisted of the following (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the effect of rounding): For the year ended
(In millions) 2021
2020 2019
Q2 2020 Global Restructure Program (1)$ 7.1 $
24.5 $ -
Other restructuring charges
Severance costs, net (2) 4.5
3.0 29.2
Facility and other exit costs 2.4
1.3 0.8
Other (3) 0.9
4.3 23.5
Restructuring and other charges, net$ 14.9 $
33.1
__________________________
(1) The Q2 2020 Global Restructure Program was completed in fiscal year 2021, with approximately 840 positions impacted. Since inception of the Q2 2020 Global Restructure Program, we have recognized cumulative costs of$33.2 million , of which$28.4 million related to severance charges and$4.8 million related to facility and other exit costs. (2) For each of the years endedDecember 31, 2021 , 2020, and 2019, these charges include termination benefits provided in connection with workforce reductions of manufacturing, engineering, and administrative positions, including the elimination of certain positions related to site consolidations, net of reversals. For the year endedDecember 31, 2020 , these charges also related to termination benefits arising from the shutdown and relocation of operating sites inNorthern Ireland andBelgium . For the year endedDecember 31, 2019 , these charges also included approximately$12.7 million of benefits provided under a voluntary retirement incentive program offered to a limited number of eligible employees in theU.S. , and$6.5 million of termination benefits provided under a one-time benefit arrangement related to the shutdown and relocation of an operating site inGermany . (3) Represents charges that are not included in one of the other classifications. In the year endedDecember 31, 2019 , we recognized a$17.8 million loss related to the termination of a supply agreement in connection with the Metal Seal litigation. 46
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Refer to Note 5: Restructuring and Other Charges, Net of our Financial Statements included elsewhere in this Report for additional information related to our restructuring and other charges, net. Operating income In fiscal year 2021, operating income increased$295.5 million or 87.5%, to$633.2 million (16.6% of net revenue) compared to$337.7 million (11.1% of net revenue) in fiscal year 2020. This increase was primarily driven by (1) improved gross margins, due mainly to higher organic sales volumes as well as the turnaround effect of the Wasica litigation settlement in fiscal year 2020, partially offset by increased costs related to global supply chain shortages, and (2) lower restructuring costs. These improvements were partially offset by (1) higher spend to support megatrend growth initiatives, (2) higher incentive compensation aligned to improved financial performance, and (3) the turnaround effect of temporary salary reductions and furloughs taken in the second quarter 2020. In fiscal year 2020, operating income decreased$219.1 million or 39.4%, to$337.7 million (11.1% of net revenue) compared to$556.9 million (16.1% of net revenue) in fiscal year 2019. This decrease was primarily driven by: (1) the impacts of the COVID-19 pandemic, most significantly lower revenues, productivity headwinds from our manufacturing facilities running at lower than normal capacity, and increased costs related to the COVID-19 pandemic; (2) charges related to the intellectual property litigation brought against Schrader by Wasica, which was settled in the third quarter, including$29.2 million recognized in the first quarter of 2020; (3)$24.5 million in severance charges recognized in fiscal year 2020 related to the Q2 2020 Global Restructure Program; and (4) higher compensation costs to retain and incentivize critical employee talent. These drivers of reduced operating income in fiscal year 2020 were partially offset by: (1) the non-recurrence of certain restructuring and other charges from fiscal year 2019 as discussed in Note 5: Restructuring and Other Charges, Net of our Financial Statements included elsewhere in this Report, including$17.8 million loss related to the termination of a supply agreement in connection with the Metal Seal litigation and charges related to benefits provided under a voluntary retirement incentive program; (2) cost savings of approximately$21.8 million realized in the second quarter of 2020 resulting from temporary salary reductions, furloughs, and government subsidies; (3) the impact of ongoing savings resulting from cost reduction activities taken in fiscal years 2019 and 2020; (4) the favorable effect of changes in foreign currency exchange rates; and (5) lower intangible amortization expense due to the impacts of the economic-benefit method of amortization. Interest expense, net Interest expense, net increased in fiscal year 2021 primarily as a result of (1) interest expense in fiscal year 2021 related to the issuance of the 4.0% Senior Notes, (2) additional interest expense in fiscal year 2021 related to the$750.0 million aggregate principal amount of 3.75% senior notes due 2031 (the "3.75% Senior Notes") as a result of their issuance in fiscal year 2020, partially offset by reduced interest as a result of the redemption of the 6.25% Senior Notes early in fiscal year 2021. Refer to Overview-Debt Transactions elsewhere in this MD&A for additional information related to these transactions. Interest expense, net increased in fiscal year 2020 primarily due to (1) a full year of interest expense related to the$450.0 million aggregate principal amount of 4.375% senior notes due 2030 (the "4.375% Senior Notes"), which were issued in fiscal year 2019, (2) a partial year of interest expense related to the 3.75% Senior Notes, which were issued in 2020, (3) interest incurred on outstanding balances of the Revolving Credit Facility in fiscal year 2020, and (4) lower cash interest income due to declining interest rates. These increases were partially offset by lower interest expense on the Term Loan, which was partially repaid in fiscal year 2019 after issuance of the 4.375% Senior Notes. OnApril 1, 2020 , in order to enhance our financial flexibility given the general uncertainty associated with the COVID-19 pandemic, we withdrew$400.0 million from our Revolving Credit Facility. OnAugust 17, 2020 , we took advantage of historically low interest rates in issuing the 3.75% Senior Notes. Given improving market conditions and strengthening financial markets, we decided to use a portion of the proceeds to repay$400.0 million of outstanding borrowings under the Revolving Credit Facility. 47
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Other, net Other, net for the years endedDecember 31, 2021 , 2020, and 2019 consisted of the following (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the effect of rounding): For the year ended December 31, (In millions) 2021 2020 2019
Currency remeasurement gain/(loss) on net monetary assets (1)
$ 10.8 $ (6.8) (Loss)/gain on foreign currency forward contracts (2) (7.6) (6.8) 2.2 (Loss)/gain on commodity forward contracts (2) (3.0) 10.0 4.9 Loss on debt financing (3) (30.1) - (4.4) Net periodic benefit cost, excluding service cost (7.5) (10.0) (3.2) Other 4.6 (4.5) (0.7) Other, net$ (40.0) $ (0.3) $ (7.9) __________________________ (1) Relates to the remeasurement of non-USD denominated monetary assets and liabilities into USD. (2) Relates to changes in the fair value of derivative financial instruments that are not designated as hedges. Refer to Note 19: Derivative Instruments and Hedging Activities of our Financial Statements included elsewhere in this Report for additional information related to gains and losses related to our commodity and foreign currency forward contracts. Refer to Item 7A: Quantitative and Qualitative Disclosures About Market Risk included elsewhere in this Report for an analysis of the sensitivity of other, net to changes in foreign currency exchange rates and commodity prices. (3) Refer to Note 14: Debt of our Financial Statements included elsewhere in this Report for additional information related to our debt financing transactions. Provision for income taxes The components of provision for income taxes for the years endedDecember 31, 2021 , 2020, and 2019 are described in more detail in the table below (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the effect of rounding): For the year ended
(In millions) 2021
2020 2019
Tax computed at statutory rate of 21% (1)$ 86.9 $
34.8
Valuation allowances (2) 20.5
8.9 19.6
Foreign tax rate differential (4) (30.5)
(22.0) (19.1)
Research and development incentives (3) (11.1)
(7.4) (8.4)
Reserve for tax exposure (16.3)
(0.2) 20.1
Withholding taxes not creditable 13.3
12.2 9.5
Change in tax laws or rates (7.1)
11.2 5.1
Intangible property transfers (5) - (54.2) - Other (6) (5.4) 18.0 (1.1) Provision for income taxes$ 50.3 $ 1.4 $ 107.7 __________________________ (1) Represents the product of the applicable statutory tax rate and income before taxes, as reported in the consolidated statements of operations. (2) During the years endedDecember 31, 2021 , 2020, and 2019, we established an additional valuation allowance and recognized a deferred tax expense. The valuation allowance as ofDecember 31, 2021 and 2020 was$225.9 million and$202.1 million , respectively. A significant portion of our valuation allowance is against interest carryforwards due to our assessment of our inability to utilize these carryforwards based on our forecasts of future taxable income. The remaining valuation allowance primarily relates to foreign tax credits, capital loss carryforwards, goodwill tax basis, and net operating losses in jurisdictions outside theU.S. It is more likely than not that these attributes will not be utilized in the foreseeable future. However, any future release of all or a portion of this valuation allowance resulting from a change in this assessment will impact our future provision for (or benefit from) income taxes. (3) InChina , we benefit from the R&D super deduction regime. In theU.K. , certain of our subsidiaries are eligible for lower 48
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tax rates under the "patent box" regime. In theU.S. , we benefit from the federal research and development credit. (4) We operate in locations outside theU.S. , includingBelgium ,Bulgaria ,China ,Malaysia ,Malta ,the Netherlands ,South Korea , and theU.K. , that historically have had statutory tax rates different than theU.S. statutory tax rate. This can result in a foreign tax rate differential that may reflect a tax benefit or detriment. This foreign tax rate differential can change from year to year based upon the jurisdictional mix of earnings and changes in current and future enacted tax rates. Certain of our subsidiaries are currently eligible, or have been eligible, for tax exemptions or reduced tax rates in their respective jurisdictions. (5) In the fourth quarter of 2020, we completed the transfer of intangible property which resulted in a net$54.2 million deferred tax benefit. (6) Refer to Note 7: Income Taxes of our Financial Statements included elsewhere in this Report for additional information related to other components of our rate reconciliation. We do not believe that there are any known trends related to the reconciling items noted above that are reasonably likely to result in our liquidity increasing or decreasing in any material way. Non-GAAP Financial Measures This section provides additional information regarding certain non-GAAP financial measures, including organic revenue growth (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, operating cash flows, total debt, finance lease, and other financing obligations, or EBITDA, respectively, calculated in accordance withU.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 withU.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 withU.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 withU.S. GAAP. We define adjusted net income as follows: net income (or loss) determined in accordance withU.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. 49
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Free cash flow Free cash flow is defined as net cash provided by operating activities less additions to PP&E 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 withU.S. GAAP, excluding interest expense, net, provision for (or benefit from) income taxes, depreciation expense, amortization of intangible assets, and the following non-GAAP adjustments, if applicable: (1) restructuring related and other, (2) financing and other transaction costs, (3) deferred loss or gain on derivative instruments, and (4) step-up inventory amortization. Refer to Non-GAAP Adjustments below for additional discussion of these adjustments. Net leverage ratio Net leverage ratio represents net debt (total debt, finance lease, and other financing obligations less cash and cash equivalents) divided by last twelve months ("LTM") adjusted EBITDA. We believe that the net leverage ratio is a useful measure to management and investors in understanding trends in our overall financial condition. Non-GAAP adjustments Many of our non-GAAP adjustments relate to a series of strategic initiatives developed by our management aimed at better positioning us for future revenue growth and an improved cost structure. These initiatives have been modified from time to time to reflect changes in overall market conditions and the competitive environment facing our business. These initiatives include, among other items, acquisitions, divestitures, restructurings of certain business, supply chain, or corporate activities, and various financing transactions. We describe these adjustments in more detail below, each of which is net of current tax impacts, as applicable. •Restructuring related and other: includes charges, net related to certain restructuring and other exit activities as well as other costs (or income) that we believe are either unique or unusual to the identified reporting period, and that we believe impact comparisons to prior period operating results. Such costs include charges related to optimization of our manufacturing processes to increase productivity. This type of activity occurs periodically, however each action is unique, discrete, and driven by various facts and circumstances. Such amounts are excluded from internal financial statements and analyses that management uses in connection with financial planning, and in its review and assessment of our operating and financial performance, including the performance of our segments. •Financing and other transaction costs: includes losses or gains related to debt financing transactions, losses or gains related to the divestiture of a business, and costs incurred, including for legal, accounting, and other professional services, that are directly related to an acquisition, divestiture, or equity financing transaction. •Deferred loss or gain on derivative instruments: includes unrealized losses or gains on derivative instruments that do not qualify for hedge accounting as well as the impact of commodity prices on our raw material costs relative to the strike price on our commodity forward contracts. •Step-up depreciation and amortization: includes depreciation and amortization expense associated with the step-up in fair value of assets acquired in connection with a business combination (e.g., PP&E, 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. We adjust our results recorded in accordance withU.S. GAAP by the amortization of debt issuance costs, which are deferred as a contra-liability against our long-term debt, net on the consolidated balance sheets and which are reflected in interest expense on the consolidated statements of operations. •Where applicable, the current income tax effect of non-GAAP adjustments. 50
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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 withU.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 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 year ended December 31, 2021 ($ in millions, except per share amounts) Operating Income Operating Margin Net Income Diluted EPS Reported (GAAP)$ 633.2 16.6 %$ 363.6 $ 2.28 Non-GAAP adjustments: Restructuring related and other (d) 23.6 0.6 21.4 0.13 Financing and other transaction costs (b) 13.2 0.3 41.0 0.26 Step-up depreciation and amortization 127.6 3.3 127.6 0.80 Deferred loss on derivative instruments 8.3 0.2 11.3 0.07 Amortization of debt issuance costs - - 6.9 0.04 Deferred taxes and other tax related (c) - - (4.9) (0.03) Total adjustments 172.8 4.5 203.3 1.28 Adjusted (non-GAAP)$ 806.0 21.1 %$ 566.8 $ 3.56 For the year ended December 31, 2020 ($ in millions, except per share amounts) Operating Income Operating Margin Net Income Diluted EPS Reported (GAAP)$ 337.7 11.1 %$ 164.3 $ 1.04 Non-GAAP adjustments: Restructuring related and other (d) 87.4 2.9 93.8 0.59 Financing and other transaction costs 8.2 0.3 6.4 0.04 Step-up depreciation and amortization 125.7 4.1 125.7 0.79 Deferred loss/(gain) on derivative instruments 3.1 0.1 (7.0) (0.04) Amortization of debt issuance costs - - 6.9 0.04 Deferred taxes and other tax related (a) - - (40.9) (0.26) Total adjustments 224.4 7.4 184.9 1.17 Adjusted (non-GAAP)$ 562.1 18.5 %$ 349.2 $ 2.21 For the year ended December 31, 2019 ($ in millions, except per share amounts) Operating Income Operating Margin Net Income Diluted EPS Reported (GAAP)$ 556.9 16.1 %$ 282.7 $ 1.75 Non-GAAP adjustments: Restructuring related and other (d) 61.9 1.8 62.2 0.38 Financing and other transaction costs 28.9 0.8 34.9 0.22 Step-up depreciation and amortization 139.6 4.0 139.6 0.86 Deferred gain on derivative instruments (1.6) (0.0) (6.5) (0.04) Amortization of debt issuance costs - - 7.8 0.05 Deferred taxes and other tax related - - 55.2 0.34 Total adjustments 228.8 6.6 293.2 1.81 Adjusted (non-GAAP)$ 785.7 22.8 %$ 575.9 $ 3.56 __________________________ 51
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(a) In the fourth quarter of 2020, we completed the transfer of intangible property which resulted in a net$54.2 million deferred tax benefit. (b) Includes a$30.1 million loss recognized in fiscal year 2021 related to the early redemption of the 6.25% Senior Notes. The loss primarily reflects the payment of$23.4 million for the early redemption premium, with the remaining loss representing write-off of debt discounts and deferred financing costs. The loss is presented in other, net in our consolidated statements of operations. (c) Includes $10.9 million of current tax expense related to the repatriation of earnings from certain Asian subsidiaries to their parent company inthe Netherlands . The decision to repatriate these earnings was the result of our goal to reduce our balance sheet exposure and corresponding earnings volatility related to changes in foreign currency exchange rates as well as to fund our deployment of capital. (d) The following table presents the components of our restructuring related and other non-GAAP adjustment to net income for fiscal years 2021, 2020, and 2019 (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the effect of rounding): For the year ended December 31, (In millions) 2021 2020 2019 Business and corporate repositioning (i)$ 10.7 $ 35.8 $ 40.1 Supply chain repositioning and transition (ii) 8.2 30.8 16.0 Pre-acquisition legal matters (iii) 6.0 31.5 5.3 Other - - 2.7 Income tax effect (iv) (3.5) (4.2) (1.8)
Total non-GAAP restructuring related and other (v)
__________________________
i.Fiscal year 2020 includes charges incurred under the Q2 2020 Global Restructure Program and charges for other business and corporate workforce rationalization. Fiscal year 2019 includes benefits provided under a voluntary retirement incentive program, costs related to the shutdown and relocation of an operating site inGermany , and charges for other business and corporate workforce rationalization. ii.Primarily includes costs related to optimization of our manufacturing processes to increase productivity and rationalize our manufacturing footprint and supply chain workforce rationalization. iii.Represents charges incurred related to legal matters associated with acquired businesses, for which new information is brought to light after the measurement period for the business combination is closed, but for which the liability relates to events or activities that occurred prior to our acquisition of the business. Fiscal year 2020 primarily includes the settlement of intellectual property litigation brought against Schrader by Wasica. iv.We treat deferred taxes as a non-GAAP adjustment. Accordingly, the income tax effect of the restructuring related and other non-GAAP adjustment refers only to the current income tax effect. v.Total presented is the non-GAAP adjustment to net income. Certain portions of these adjustments are non-operating and are excluded from the non-GAAP adjustments to operating income. The following table presents a reconciliation of net cash provided by operating activities calculated in accordance withU.S. GAAP to free cash flow. For the year ended December 31, (In millions) 2021 2020 2019 Net cash provided by operating activities$ 554.2 $ 559.8 $ 619.6 Additions to property, plant and equipment and capitalized software (144.4) (106.7) (161.3) Free cash flow$ 409.7 $ 453.1 $ 458.3 52
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The following table presents a reconciliation of net income calculated in
accordance with
For the year ended December 31,
(In millions) 2021 2020 2019
Net income $ 363.6 $ 164.3 $ 282.7
Interest expense, net 179.3 171.8 158.6
Provision for income taxes 50.3 1.4 107.7
Depreciation expense 125.0 125.7 115.9
Amortization of intangible assets 134.1 129.5 142.9
EBITDA 852.3 592.6 807.7
Non-GAAP Adjustments
Restructuring related and other 23.6 93.1 64.1
Financing and other transaction costs 41.0 6.4 34.9
Deferred loss/(gain) on derivative instruments 11.3 (7.0) (6.5)
Adjusted EBITDA $ 928.3 $ 685.1 $ 900.1 The following table presents a reconciliation of total debt, finance lease, and
other financing obligations calculated in accordance with
For the year ended December 31,
($ in millions) 2021 2020 2019
Current portion of long-term debt, finance lease and other financing obligations
$ 6.8
26.6 27.9 28.8
Long-term debt, net 4,214.9 3,213.7 3,219.9
Total debt, finance lease, and other financing
obligations 4,248.3 3,998.9 3,255.6
Less: debt discount, net of premium (5.2) (9.6) (11.8)
Less: deferred financing costs (26.7) (28.1) (24.5)
Total gross indebtedness 4,280.2 4,036.6 3,291.8
Less: cash and cash equivalents 1,709.0 1,862.0 774.1
Net debt $ 2,571.3 $ 2,174.6 $ 2,517.7
Adjusted EBITDA (LTM) $ 928.3 $ 685.1 $ 900.1
Net leverage ratio 2.8 3.2 2.8
Liquidity and Capital Resources
As of December 31, 2021 and 2020, 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):
As of December 31,
(In millions) 2021 2020
United Kingdom $ 20.4 $ 25.3
United States 25.0 17.2
The Netherlands 1,304.3 1,514.1
China 293.8 185.2
Other 65.5 120.2
Total cash and cash equivalents $ 1,709.0 $ 1,862.0
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.
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Cash Flows The table below summarizes our primary sources and uses of cash for the years endedDecember 31, 2021 , 2020, and 2019. We have derived this summarized statement of cash flows from our Financial Statements included elsewhere in this Report. 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. For the year ended December 31, (In millions) 2021 2020 2019 Net cash provided by/(used in): Operating activities: Net income adjusted for non-cash items$ 678.2 $ 405.3 $ 630.3 Changes in operating assets and liabilities, net (124.0) 154.5 (10.7) Operating activities 554.2 559.8 619.6 Investing activities (882.1) (182.1) (208.8) Financing activities 174.9 710.2 (366.5) Net change in cash and cash equivalents$ (153.0)
Operating Activities Net cash provided by operating activities decreased slightly in fiscal year 2021 compared to fiscal year 2020. Net income adjusted for non-cash items increased significantly from fiscal year 2020, which was substantially offset by changes in working capital. Refer to Results of Operations included elsewhere in this MD&A for discussion of the drivers of changes in net income from fiscal year 2020. In fiscal year 2021, management of working capital resulted in a reduction of cash due to higher raw material purchases in order to maximize production flexibility given widespread parts shortages in our supply chain and higher accounts receivables as a result of higher revenue and timing of receipts from customers. In addition, net cash provided by operating activities was reduced by cash paid at closing of certain acquisitions related to employee retention arrangements. We have non-cancelable purchase agreements with various suppliers, primarily for services such as information technology support. The terms of these agreements are fixed and determinable. We have cash commitments under these agreements of$46.2 million and$16.5 million in fiscal years 2022 and 2023, respectively. Refer to Note 15: Commitments and Contingencies of our Financial Statements included elsewhere in this Report for additional information related to our non-cancelable purchase agreements. The decrease in net cash provided by operating activities in fiscal year 2020 compared to fiscal year 2019 relates primarily to lower net income adjusted for non-cash items, partially offset by reduced inventories and the timing of supplier payments and customer receipts. Investing Activities Investing activities primarily include the acquisition or divestiture of a business or assets, cash paid for additions to PP&E and capitalized software, and the acquisition or sale of certain debt and equity securities. Net cash used in investing activities increased in fiscal year 2021 primarily due to cash paid for acquisitions. One of our primary uses of cash on hand is to acquire businesses that will extend our market position within our key growth vectors. In fiscal year 2021, we completed five acquisitions, Lithium Balance, Xirgo, Spear, SmartWitness, and Sendyne. Refer to Item 1: Business - Business Combinations and Note 21: Acquisitions of our Financial Statements, each included elsewhere in this Report, for additional information. In addition, we took advantage of strong operating cash flows to increase our capital expenditures in fiscal year 2021. In fiscal year 2022, we anticipate additions to PP&E and capitalized software of approximately$165.0 million to$175.0 million , which we expect to be funded with cash flows from operations. The decrease in cash used in investing activities in fiscal year 2020 compared to fiscal year 2019 relates primarily to lower capital expenditures, partially offset by additional cash paid for acquisitions. Financing Activities In fiscal year 2021, net cash provided by financing activities decreased primarily due to the impact of debt financing transactions. In fiscal year 2021, we issued$1.0 billion of 4.0% Senior Notes and redeemed the$750.0 million aggregate 54
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principal amount outstanding on the 6.25% Senior Notes, representing net cash inflow of$218.8 million (including associated fees). This compares to the issuance of$750.0 million aggregate principal amount of 3.75% Senior Notes in fiscal year 2020 and the borrowing and subsequent repayment of$400.0 million on the Revolving Credit Facility, which, including associated fees, provided net cash inflow of$732.8 million . In fiscal year 2020 cash provided by financing activities was$710.2 million compared to cash used in financing activities of$366.5 million in fiscal year 2019. This change was primarily driven by issuance of the 3.75% Senior Notes and lower volume of share repurchases. Indebtedness and Liquidity The following table details our gross outstanding indebtedness as ofDecember 31, 2021 , and the associated interest expense for the year then ended (amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the effect of rounding): Interest Expense, net for the year ended Balance as of December 31, (In millions) December 31, 2021 2021 Term Loan$ 451.5 $ 8.5 4.875% Senior Notes 500.0 24.4 5.625% Senior Notes 400.0 22.5 5.0% Senior Notes 700.0 35.0 6.25% Senior Notes(1) - 8.3 4.375% Senior Notes 450.0 19.7 3.75% Senior Notes 750.0 28.1 4.0% Senior Notes 1,000.0 30.0 Finance lease and other financing obligations 28.8 2.5 Total gross outstanding indebtedness$ 4,280.2 Other interest expense, net (1) 0.4 Interest expense, net$ 179.3 __________________________ (1) We redeemed the full outstanding balance on the 6.25% Senior Notes in March 2021. (2) Other interest expense, net includes amortization of debt issuance costs and fees related to our unused balance on the Revolving Credit Facility, largely offset by interest income and interest costs capitalized in accordance withFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Subtopic 835-20, Capitalization of Interest. Debt Instruments As ofDecember 31, 2021 , our debt instruments include the Term Loan, the$500.0 million aggregate principal amount of 4.875% senior notes due 2023 (the "4.875% Senior Notes"), the$400.0 million aggregate principal amount of 5.625% senior notes due 2024 (the "5.625% Senior Notes"), the$700.0 million aggregate principal amount of 5.0% senior notes due 2025 (the "5.0% Senior Notes"), the 4.375% Senior Notes due 2030, the 3.75% Senior Notes due 2031, and the 4.0% Senior Notes due 2029. OnMarch 5, 2021 , we redeemed the$750.0 million amount outstanding on the 6.25% Senior Notes due 2026 at a redemption price equal to 103.125% of the aggregate principal amount of the outstanding 6.25% Senior Notes, plus accrued and unpaid interest to (but not including) the redemption date. OnMarch 29, 2021 , we issued$750.0 million aggregate principal amount of the 4.0% Senior Notes at par. OnApril 8, 2021 , we issued an additional$250.0 million of the 4.0% Senior Notes, which were priced at 100.75%. Refer to Note 14: Debt of our Financial Statements included elsewhere in this Report for additional information related to the redemption of the 6.25% Senior Notes, the issuance of the 4.0% Senior Notes, and the terms of our other debt instruments held as ofDecember 31, 2021 . The aggregate principal amount of each tranche of our Senior Notes is due in full at its maturity date. The Term Loan must be repaid in full on or prior to its final maturity date. Loans made pursuant to the Revolving Credit Facility must be repaid in full at its maturity date and can be repaid prior to then at par. All letters of credit issued thereunder will terminate at the final 55
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maturity of the Revolving Credit Facility unless cash collateralized prior to such time. The following table presents the remaining mandatory principal repayments of long-term debt, in millions, excluding finance lease payments, other financing obligations, and discretionary repurchases of debt, in each of the years endedDecember 31, 2022 through 2026 and thereafter. Amounts have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the effect of rounding. For the year ended December 31, Aggregate Maturities 2022 $ 4.6 2023 504.6 2024 404.6 2025 704.6 2026 432.9 Thereafter 2,200.0 Total long-term debt principal payments $ 4,251.5 Capital Resources The Credit Agreement provides for the Senior Secured Credit Facilities consisting of the Term Loan, the Revolving Credit Facility, and the Accordion. Our sources of liquidity include cash on hand, cash flows from operations, and available capacity under the Revolving Credit Facility. As ofDecember 31, 2021 , there was$416.1 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 ofDecember 31, 2021 , 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 ofDecember 31, 2021 , availability under the Accordion was approximately$1.1 billion . Our primary uses of cash on hand are to acquire businesses that will extend our market position within our key growth vectors of Electrification and Insights and, following the resumption of our share repurchase program inNovember 2021 , repurchase our ordinary shares, which augments our existing capital deployment strategies and enables us to drive attractive returns on invested capital over the long-term. We believe, based on our current level of operations for the year endedDecember 31, 2021 , and taking into consideration the restrictions and covenants included in the Credit Agreement and Senior Notes Indentures discussed below and in Note 14: Debt of our Financial Statements included elsewhere in this Report that these sources of liquidity will be sufficient to fund our operations, capital expenditures, ordinary share repurchases, and debt service for at least the next twelve months. However, we cannot make assurances that our business will generate sufficient cash flows from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. Further, our highly-leveraged nature may limit our ability to procure additional financing in the future. The Credit Agreement 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 the Senior Secured Credit Facilities. The Credit Agreement also requires mandatory prepayments of the outstanding borrowings under the Senior Secured Credit Facilities upon certain asset dispositions and casualty events, in each case subject to certain reinvestment rights, and upon the incurrence of certain indebtedness (excluding any permitted indebtedness). These provisions were not triggered during the year endedDecember 31, 2021 . All obligations under the Senior Secured Credit Facilities are unconditionally guaranteed by certain of our subsidiaries (the "Guarantors"). The collateral for such borrowings under the Senior Secured Credit Facilities consists of substantially all present and future property and assets of our indirect, wholly-owned subsidiary, STBV, and the Guarantors. Our ability to raise additional financing, and our borrowing costs, may be impacted by short- and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on our performance as measured by certain credit metrics such as interest coverage and leverage ratios. As ofJanuary 28, 2022 ,Moody's Investors Service's corporate credit rating for STBV was Ba2 with a stable outlook, and S&P'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 56
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the Credit Agreement. The Credit Agreement and the Senior Notes Indentures contain restrictions and covenants (described in more detail in Note 14: Debt of our Financial Statements included elsewhere in this Report) that limit the ability of STBV and certain of its subsidiaries to, among other things, incur subsequent indebtedness, sell assets, pay dividends, and make other restricted payments. These restrictions and covenants, which are subject to important exceptions and qualifications set forth in the Credit Agreement and Senior Notes Indentures, were taken into consideration when we established our share repurchase programs and will be evaluated periodically with respect to future potential funding of those program. We do not believe that these restrictions and covenants will prevent us from funding share repurchases under our share repurchase programs with available cash and cash flows from operations. As ofDecember 31, 2021 , we believe that we were in compliance with all the covenants and default provisions under the Credit Agreement and the Senior Notes Indentures. Share repurchase program From time to time, our Board of Directors has authorized various share repurchase programs, which may be modified or terminated by our Board of Directors at any time. Under these programs, we may repurchase ordinary shares at such times and in amounts to be determined by our management, based on market conditions, legal requirements, and other corporate considerations, on the open market or in privately negotiated transactions, provided that such transactions were completed pursuant to an agreement and with a third party approved by our shareholders at the annual general meeting. OnApril 2, 2020 , we announced a temporary suspension of theJuly 2019 Program, which we resumed inNovember 2021 . During the years endedDecember 31, 2021 and 2020, we repurchased approximately 0.8 million and 0.9 million ordinary shares, respectively, at a weighted-average price per share of$59.28 and$39.17 , respectively, under theJuly 2019 Program. As ofDecember 31, 2021 , approximately$254.5 million remained available under theJuly 2019 Program. OnJanuary 20, 2022 , we announced that our Board of Directors had authorized theJanuary 2022 Program, which replaces theJuly 2019 Program.Sensata's shareholders have previously approved the forms of share repurchase agreements and the potential broker counterparties needed to execute the buyback program. Critical Accounting Policies and Estimates As discussed in Note 2: Significant Accounting Policies of our Financial Statements included elsewhere in this Report, which more fully describes our significant accounting policies, the preparation of consolidated financial statements in accordance withU.S. GAAP requires us to exercise judgment in the process of applying our accounting policies. It also requires that we make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. The accounting policies and estimates that we believe are most critical to the portrayal of our financial condition and results of operations are listed below. We believe these policies require the most difficult, subjective, and complex judgments in estimating the effect of inherent uncertainties. Revenue Recognition The discussion below details the most significant judgments and estimates we make regarding recognition of revenue in accordance with FASB ASC Topic 606, Revenue from Contracts with Customers. In accordance with FASB ASC Topic 606, we recognize revenue to depict the transfer of promised goods to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods using a five-step model. The most critical judgments and estimates we make in the implementation of this model relate to identifying the contract with the customer and determination of the transaction price associated with the performance obligation(s) in the contract, specifically related to variable consideration. While many of the agreements with our customers specify certain terms and conditions that apply to any transaction between the parties, many of which are in effect for a defined term, the vast majority of these agreements do not result in contracts (as defined in FASB ASC Topic 606) because they do not create enforceable rights and obligations on the parties. Specifically, (1) the parties are not committed to perform any obligations in accordance with the specified terms and conditions until a customer purchase order is received and accepted by us and (2) there is a unilateral right of each party to terminate the agreement at any time without compensating the other party. For this reason, the vast majority of our contracts (as defined in FASB ASC Topic 606) are customer purchase orders. If this assessment were to change, it could result in a material change to the amount of net revenue recognized in a period. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. In determining the transaction price related to a contract, we determine whether the amount promised in a contract includes a variable amount (variable consideration). Variable consideration may be specified in the customer purchase order, in another agreement that identifies terms and conditions of the transaction, or based on our 57
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customary practices. We have identified certain types of variable consideration that may be included in the transaction price related to our contracts, including sales returns (which generally include a right of return for defective or non-conforming product) and trade discounts (including retrospective volume discounts and early payment incentives). Such variable consideration has not historically been material. However, should our judgments and estimates regarding variable consideration change, it could result in a material change to the amount of net revenue recognized in a period.Goodwill , Intangible Assets, and Long-Lived Assets Businesses acquired are recognized at their fair value on the date of acquisition, with the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed recognized as goodwill. Intangible assets acquired may include either definite-lived or indefinite-lived intangible assets, or both. In accordance with FASB ASC Topic 350, Intangibles-Goodwill and Other, goodwill and intangible assets determined to have an indefinite useful life are not amortized. Instead these assets are evaluated for impairment on an annual basis, and whenever events or business conditions change that could indicate that the asset is impaired.Goodwill Our judgments regarding the existence of indicators of goodwill impairment are based on several factors, including the performance of the end-markets served by our customers, as well as the actual financial performance of our reporting units and their respective financial forecasts over the long-term. We evaluate goodwill and indefinite-lived intangible assets for impairment in the fourth quarter of each fiscal year, unless events occur which trigger the need for an earlier impairment review. Identification of reporting units. Our reporting units have been identified based on the definitions and guidance provided in FASB ASC Topic 350. Identification of reporting units includes an analysis of the components that comprise each of our operating segments, which considers, among other things, the manner in which we operate our business and the availability of discrete financial information. Components of an operating segment are aggregated to form one reporting unit if the components have similar economic characteristics. We periodically review these reporting units to ensure that they continue to reflect the manner in which the business is operated. As ofDecember 31, 2020 , we had identified seven reporting units, Automotive, HVOR, Electrical Protection, Industrial Sensing, Aerospace, Power Management, and Interconnection. In the third quarter of 2021, we reorganized our Sensing Solutions operating segment, which resulted in realignment of our reporting units. As a result of this reorganization, our electrical protection product category that includes high-voltage contactors, inverters, and battery management systems was moved to a new reporting unit, Clean Energy Solutions. The remaining portions of our Electrical Protection, Industrial Sensing, Power Management, and Interconnection reporting units were consolidated into a new reporting unit, Industrial Solutions. This reorganization had no impact on our Aerospace reporting unit. Accordingly, as ofOctober 1, 2021 , we had five reporting units, Automotive, HVOR, Industrial Solutions, Aerospace, and Clean Energy Solutions. With the acquisition of SmartWitness in the fourth quarter of 2021, we formed Sensata Insights, a business unit organized under the HVOR operating segment, to drive growth of our smart and connected offerings to the transportation market, including both those developed organically and through the acquisition of Xirgo and SmartWitness. We concluded that Sensata Insights was a separate reporting unit from HVOR. Accordingly, as ofDecember 31, 2021 , we had six reporting units, Automotive, HVOR, Sensata Insights, Industrial Solutions, Aerospace, and Clean Energy Solutions. We have concluded that these reorganizations have not impacted our reportable or operating segment evaluations. We reassigned assets and liabilities, including goodwill, to these new reporting units as required by FASB ASC Topic 350. We evaluated our goodwill and other indefinite-lived intangible assets for impairment before and after the formation of these reporting units and determined that they were not impaired. Assignment of assets, liabilities, and goodwill to reporting units. Some assets and liabilities relate to the operations of multiple reporting units. We allocate these assets and liabilities to the reporting units based on methods that we believe are reasonable and supportable. We apply that allocation method on a consistent basis from year to year. Other assets and liabilities, such as debt, cash and cash equivalents, and PP&E associated with our corporate offices, are viewed as being corporate in nature. Accordingly, we do not assign these assets and liabilities to our reporting units. In the event we reorganize our business, we reassign the assets (including goodwill) and liabilities among the affected reporting units using a reasonable and supportable methodology. As businesses are acquired, we assign assets acquired (including goodwill) and liabilities assumed to a new or existing reporting unit as of the date of the acquisition. In the event a disposal group meets the definition of a business, goodwill is allocated to the disposal group based on the relative fair value of the disposal group to the retained portion of the related reporting unit. 58
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Evaluation of goodwill for impairment. We have the option to first assess qualitative factors to determine whether a quantitative analysis must be performed. The objective of a qualitative analysis is to assess whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. We make this assessment based on macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and other relevant factors as applicable. If we elect not to use this option, or if we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then we prepare a discounted cash flow analysis to determine whether the carrying value of the reporting unit exceeds its estimated fair value. If the carrying value of a reporting unit exceeds its estimated fair value, we recognize an impairment of goodwill for the amount of this excess, in accordance with the guidance in FASB ASC Topic 350. We evaluated the goodwill of each reporting unit for impairment as ofOctober 1, 2021 using a combination of the quantitative and qualitative methods. As a result of this evaluation we determined that none of our reporting units were impaired. For reporting units that were evaluated using the quantitative method, we estimated the fair values of our reporting units using the discounted cash flow method. For this method, we prepared detailed annual projections of future net cash flows for the reporting unit for the subsequent five fiscal years (the "Discrete Projection Period"). We estimated the value of the net cash flows beyond the fifth fiscal year (the "Terminal Year") by applying a multiple to the projected Terminal Year EBITDA. The net cash flows from the Discrete Projection Period and the Terminal Year were discounted at an estimated weighted-average cost of capital ("WACC") appropriate for each reporting unit. The estimated WACC was derived, in part, from comparable companies appropriate to each reporting unit. We believe that our procedures for estimating discounted future net cash flows, including the Terminal Year valuation, were reasonable and consistent with accepted valuation practices. The preparation of forecasts of revenue growth and profitability for use in the long-range forecasts, the selection of the discount rates, and the estimation of the multiples used in valuing the Terminal Year involve significant judgments. Changes to these assumptions could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period. Types of events that could result in a goodwill impairment. As noted above, the assumptions used in the quantitative calculation of fair value of our reporting units, including the long-range forecasts, the selection of the discount rates, and the estimation of the multiples or long-term growth rates used in valuing the Terminal Year involve significant judgments. Changes to these assumptions could affect the estimated fair values of our reporting units calculated in prior years and could result in a goodwill impairment charge in a future period. We believe that certain factors, such as a future recession, any material adverse conditions in the automotive industry and other industries in which we operate, and other factors identified in Item 1A: Risk Factors included elsewhere in this Report could cause us to revise our long-term projections and could reduce the multiples used to determine Terminal Year value. Such revisions could result in a goodwill impairment charge in the future. We consider a combination of quantitative and qualitative factors to determine whether a reporting unit is at risk of failing the goodwill impairment test, including: the timing of our most recent quantitative impairment tests and the relative amount by which a reporting unit's fair value exceeded its then carrying value, the inputs and assumptions underlying our valuation models and the sensitivity of our fair value measurements to those inputs and assumptions, the impact that adverse economic or market conditions may have on the degree of uncertainty inherent in our long-term operating forecasts, and changes in the carrying value of a reporting unit's net assets from the time of our most recent goodwill impairment test. Based on the results of this analysis, we do not consider any of our reporting units to be at risk of failing the goodwill impairment test. Evaluation of other intangible assets for impairment Indefinite-lived intangible assets. Similar to goodwill, we perform an annual impairment review of our indefinite-lived intangible assets in the fourth quarter of each fiscal year, unless events occur that trigger the need for an earlier impairment review. We have the option to first assess qualitative factors in determining whether it is more likely than not that an indefinite-lived intangible asset is impaired. If we elect not to use this option, or we determine that it is more likely than not that the asset is impaired, we perform a quantitative impairment analysis in which we estimate the fair value of the indefinite-lived intangible asset and compare that amount to its carrying value. In performing this analysis, we estimate the fair value by using the relief-from-royalty method, in which we make assumptions about future conditions impacting the fair value of our indefinite-lived intangible assets, including projected growth rates, cost of capital, effective tax rates, and royalty rates. Impairment, if any, is based on the excess of the carrying value over the fair value of these assets. We evaluated our indefinite-lived intangible assets for impairment as ofOctober 1, 2021 (using the quantitative method) and determined that the estimated fair values of these assets exceeded their carrying values at that date. Should certain assumptions used in the development of the fair values of our indefinite-lived intangible assets change, we may be required to recognize an impairment charge in the future. 59
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Definite-lived intangible assets. Reviews are regularly performed to determine
whether facts or circumstances exist that indicate that the carrying values of
our definite-lived intangible assets to be held and used are impaired. If we
determine that such facts or circumstances exist, we estimate the recoverability
of these assets by comparing the projected undiscounted net cash flows
associated with these assets to their respective carrying values. If the sum of
the projected undiscounted net cash flows falls below the carrying value of an
asset, the impairment charge is measured as the excess of the carrying value
over the fair value of that asset. We determine fair value by using the
appropriate income approach valuation methodology depending on the nature of the
definite-lived intangible asset.
Evaluation of long-lived assets for impairment
We periodically re-evaluate the carrying values and estimated useful lives of
long-lived assets whenever events or changes in circumstances indicate that the
carrying values of these assets may not be recoverable. We use estimates of
undiscounted net cash flows from long-lived assets to determine whether the
carrying values of such assets are recoverable over the assets' remaining useful
lives. These estimates include assumptions about our future performance and the
performance of the end-markets we serve. If an asset is determined to be
impaired, the impairment is the amount by which its carrying value exceeds its
fair value. These evaluations are performed at a level where discrete net cash
flows may be attributed to either an individual asset or a group of assets.
Income Taxes
As part of the process of preparing our financial statements, we are required to
estimate our provision for (or benefit from) income taxes in each of the
jurisdictions in which we operate. This involves estimating our actual current
tax expense, including assessing the risks associated with tax audits, together
with assessing temporary differences resulting from the different treatment of
items for tax and accounting purposes. These differences result in deferred tax
assets and liabilities. Management judgment is required in determining various
elements of our provision for (or benefit from) income taxes, including the
amount of tax benefits on uncertain tax positions, and deferred tax assets that
should be recognized.
In accordance with FASB ASC Topic 740, Income Taxes, we record uncertain tax
positions on the basis of a two-step process. First, we determine whether it is
more likely than not that the tax positions will be sustained based on the
technical merits of the position. Second, for those tax positions that meet the
more-likely-than-not recognition threshold, we recognize the largest amount of
tax benefit that is greater than 50 percent likely to be realized upon ultimate
settlement with the relevant tax authority. Significant judgment is required in
evaluating whether our tax positions meet this two-step process. The
more-likely-than-not recognition threshold must be met in each reporting period
to support continued recognition of any tax benefits claimed, both in the
current year, as well as any year which remains open for review by the relevant
tax authority at the balance sheet date. Penalties and interest related to
uncertain tax positions may be classified as either income taxes or another
expense line item in the consolidated statements of operations. We classify
interest and penalties related to uncertain tax positions within the provision
for (or benefit from) income taxes line of the consolidated statements of
operations.
We recognize deferred tax assets to the extent that we believe these assets are
more likely than not to be realized. In measuring our deferred tax assets, we
consider all available evidence, both positive and negative, including future
reversals of existing taxable temporary differences, projected future taxable
income, tax-planning strategies, and results of recent operations in various
jurisdictions, to determine whether, based on the weight of that evidence, a
valuation allowance is needed for all or some portion of the deferred tax
assets. Significant judgment is required in considering the relative impact of
these items along with the weight that should be given to each category,
commensurate with the extent to which it can be objectively verified. The more
negative evidence that exists, the more positive evidence is necessary, and the
more difficult it is to support a conclusion that a valuation allowance is not
needed. Additionally, we utilize the "more likely than not" criteria established
in FASB ASC Topic 740 to determine whether the future tax benefit from the
deferred tax assets should be recognized.
Ultimately, the ability to realize our deferred tax assets is based on our
assessment of future taxable income, which is based on estimated future results.
In the event that actual results differ from these estimates, or we adjust our
estimates in the future, we may need to adjust our valuation allowance
assessment, which could materially impact our consolidated financial position
and results of operations.
Pension and Other Post-Retirement Benefits
We sponsor various pension and other post-retirement benefit plans covering our
current and former employees in several countries.
The funded status of pension and other post-retirement benefit plans is measured
as the difference between the fair value of plan assets and the benefit
obligation at the measurement date. Changes in the funded status of a pension or
other post-retirement
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benefit plan are recognized in the year in which they occur by adjusting the recognized (net) liability or asset with an offsetting adjustment to either net income or other comprehensive income. Our most difficult and subjective judgments and estimates relate to the valuation of our benefit obligations. Benefit obligations represent the actuarial present value of all benefits attributed by the pension formula as of the measurement date to employee service rendered before that date and can be categorized as projected benefit obligations or accumulated benefit obligations. The value of projected benefit obligations takes into consideration various actuarial assumptions, including future compensation levels and the probability of payment between the measurement date and the expected date of payment. Accumulated benefit obligations differ from projected benefit obligations only in that they include no assumptions about future compensation levels. The most significant assumptions used to determine a plan's funded status and net periodic benefit cost relate to discount rate, expected return on plan assets, and rate of increase in healthcare costs. These assumptions are reviewed annually. Refer to Note 13: Pension and Other Post-Retirement Benefits of our Financial Statements included elsewhere in this Report for additional information related to the values determined for each of these assumptions in the last three fiscal years. The discount rate reflects the current rate at which the pension and other post-retirement liabilities could be effectively settled, considering the timing of expected payments for plan participants. It is used to discount the estimated future obligations of the plans to the present value of the liability reflected in the financial statements. In estimating this rate in countries that have a market of high-quality fixed-income investments, we consider rates of return on these investments included in various bond indices, adjusted to eliminate the effects of call provisions and differences in the timing and amounts of cash outflows related to the bonds. In other countries where a market of high-quality fixed-income investments does not exist, we estimate the discount rate using government bond yields or long-term inflation rates. The expected return on plan assets reflects the average rate of earnings expected on the funds invested to provide for the benefits included in the projected benefit obligation. To determine the expected return on plan assets, we consider the historical returns earned by similarly invested assets, the rates of return expected on plan assets in the future, and our investment strategy and asset mix with respect to the plans' funds. The rate of increase of healthcare costs directly impacts the estimate of our future obligations in connection with our post-retirement medical benefits. Our estimate of healthcare cost trends is based on historical increases in healthcare costs under similarly designed plans, the level of increase in healthcare costs expected in the future, and the design features of the underlying plan. Other assumptions used include employee demographic factors such as compensation rate increases, retirement patterns, employee turnover rates, and mortality rates. Our review of demographic assumptions includes analyzing historical patterns and/or referencing industry standard tables, combined with our expectations around future compensation and staffing strategies. The difference between these assumptions and our actual experience results in the recognition of an actuarial gain or loss. Future changes to assumptions, or differences between actual and expected outcomes, can significantly affect our future net periodic benefit cost, projected benefit obligations, and accumulated other comprehensive loss. Share-Based Compensation FASB ASC Topic 718, Compensation-Stock Compensation, requires that a company measure at fair value any new or modified share-based compensation arrangements with employees, such as stock options and restricted securities, and recognize as compensation expense that fair value over the requisite service period. We estimate the fair value of stock options on the date of grant using the Black-Scholes-Merton option-pricing model. Key assumptions used in this model are (1) the fair value of the underlying ordinary shares, (2) the time period for which we expect the stock options will be outstanding (the expected term), (3) the expected volatility of the price of our ordinary shares, (4) the risk-free interest rate, and (5) the expected dividend yield. Expected term and expected volatility are the judgments that we believe are the most critical and subjective in estimating fair value (and related share-based compensation expense) of our stock option awards. The expected term is determined based upon our own historical average term of exercised and outstanding stock options. We consider our own historical volatility, as well as our implied volatility, in estimating expected volatility for stock options. Implied volatility provides a forward-looking indication and may offer insight into expected volatility. Other assumptions used include risk-free interest rate and expected dividend yield. The risk-free interest rate is based on the yield for aU.S. Treasury security having a maturity similar to the expected term of the related stock option grant. This assumption is dependent on the assumed expected term. The dividend yield of 0% is based on our history of having never 61
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declared or paid any dividends on our ordinary shares, as well as our intention, at the time of grant, of not declaring dividends in the foreseeable future. Refer to Item 5: Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases ofEquity Securities included elsewhere in this Report for additional information related to limitations on our ability to pay dividends. Certain of our restricted securities include performance conditions that require us to estimate the probable outcome of the performance condition. This assessment is based on management's judgment using internally developed forecasts and is assessed at each reporting period. Compensation expense is recognized if it is probable that the performance condition will be achieved. We elect to recognize share-based compensation expense net of estimated forfeitures as permitted by FASB ASC Topic 718, and therefore only recognize compensation expense for those awards expected to vest over the requisite service period. The forfeiture rate is based on our estimate of forfeitures by plan participants after consideration of historical forfeiture rates. Compensation expense recognized for each award ultimately reflects the number of units that actually vest. Material changes to any of these assumptions may have a significant effect on our valuation of stock options, and, ultimately, the share-based compensation expense recognized in the consolidated statements of operations. Recently Issued Accounting Standards InOctober 2021 , the FASB issued Accounting Standards Update ("ASU") No. 2021-08, Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers to improve the accounting for acquired revenue contracts with customers in a business combination. The amendments in FASB ASU No. 2021-08 require that an entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with FASB ASC Topic 606 as if it had originated the contracts. Previous guidance required an entity to recognize contract assets and contract liabilities at fair value as of the acquisition date. The amendments in FASB ASU No. 2021-08 are effective for fiscal years beginning afterDecember 15, 2022 , including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We have elected to early adopt FASB ASU No. 2021-08 in the fourth quarter of 2021, and in accordance with the requirements of FASB ASU No. 2021-08 related to early adoption in an interim period, we have applied its provisions retrospectively to all acquisitions completed on or afterJanuary 1, 2021 and will apply them prospectively to all future acquisitions. There was no retrospective impact on our financial statements resulting from this adoption. Any future impact will be dependent on facts and circumstances of future acquisitions. There have been no other 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.
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