SENSATA TECHNOLOGIES HOLDING PLC The following discussion and analysis of our financial condition and results of operations supplements, and should be read in conjunction with, the discussion in Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2021 Annual Report. The following discussion should also be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Amounts and percentages in the following discussions have been calculated based on unrounded numbers. Accordingly, certain amounts may not appear to recalculate due to the effect of rounding.
Overview
For the three and six months endedJune 30, 2022 , net revenue increased 2.8% and 3.2%, respectively, from the corresponding periods of fiscal year 2021. This revenue growth was primarily driven by outgrowth to market and revenue from recent acquisitions. In addition, we continued to drive new business wins, with a significant portion coming in areas representing our megatrend initiatives of Electrification and Insights, and which will help drive future revenue growth. For the three and six months endedJune 30, 2022 , operating income decreased 15.7% and 17.8%, respectively, to$138.9 million (13.6% of net revenue) and$264.9 million (13.3% of net revenue), respectively, compared to$164.8 million (16.6% of net revenue) and$322.2 million (16.7% of net revenue), respectively, in the corresponding periods of fiscal year 2021. For the three and six months endedJune 30, 2022 , income before taxes decreased to$54.9 million and$84.9 million , respectively, compared to$120.6 million and$194.6 million , respectively, in the corresponding periods of fiscal year 2021.
Refer to discussion of the drivers of these changes under the heading Results of Operations included elsewhere in this Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A").
Acquisitions and Dispositions
In the first quarter of 2022, we completed the strategic acquisition of Elastic M2M for$51.4 million . Elastic M2M is a privately-held innovator of connected intelligence for operational assets across heavy-duty transport, warehouse, supply chain and logistics, industrial, light-duty passenger car, and a variety of other industry segments. Elastic M2M primarily serves telematics service providers and resellers, enabling them to leverage Elastic M2M's cloud platform and analytics capabilities to deliver sensor-based operational insights to their end users. This acquisition augments our cloud capabilities critical to delivering actionable sensor-based insights, an increasingly important capability in this fast-growing industry segment. OnJuly 12, 2022 , we completed the acquisition of Dynapower, a leading provider of high-voltage power conversion solutions for clean energy segments, for an aggregate cash purchase price of$580 million , subject to working capital and other 23
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adjustments. Dynapower is a leader in power conversion systems including inverters, converters, and rectifiers for renewable energy generation, green hydrogen production, electric vehicle charging stations, and microgrid applications, as well as industrial and defense applications. Dynapower also provides aftermarket sales and service to maintain its equipment in the field. We acquired Dynapower as a foundational addition to our Clean Energy Solutions strategy and complement to our recent acquisitions of GIGAVAC, Lithium Balance, and Spear. Dynapower's revenue is expected to exceed$100 million on an annualized basis in 2022 with projected revenue growth in excess of 30% over the next several years. InJuly 2022 , we sold the Qinex Business toBoyd Corporation for total consideration of approximately$219.0 million , subject to working capital and other adjustments. The Qinex Business manufactures semiconductor burn-in test sockets and thermal control solutions and was formed through the combination ofSensata's semiconductor interconnect business withWells-CTI in 2012. The Qinex Business is included in our Sensing Solutions segment (and Industrial Solutions reporting unit). We have not finalized the calculation of gain on the transaction but preliminarily expect it to be between approximately$125 million and$150 million . Results of Operations The table below presents our historical results of operations, in millions of dollars and as a percentage of net revenue, for the three and six months endedJune 30, 2022 compared to the three and six months endedJune 30, 2021 . We have derived the results of operations from the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Amounts and percentages in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not appear to recalculate due to the effect of rounding. For the three months ended For the six months ended June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Amount Margin* Amount Margin* Amount Margin* Amount Margin* Net revenue: Performance Sensing$ 746.9 73.2 %$ 741.9 74.7 %$ 1,464.6 73.4 %$ 1,456.4 75.3 % Sensing Solutions 273.7 26.8 250.8 25.3 531.7 26.6 478.8 24.7 Net revenue 1,020.5 100.0 992.7 100.0 1,996.3 100.0 1,935.2 100.0 Operating costs and expenses 881.6 86.4 827.9 83.4 1,731.4 86.7 1,613.0 83.3 Operating income 138.9 13.6 164.8 16.6 264.9 13.3 322.2 16.7 Interest expense, net (44.8) (4.4) (45.2) (4.6) (90.3) (4.5) (89.3) (4.6) Other, net (39.2) (3.8) 1.0 0.1 (89.7) (4.5) (38.4) (2.0) Income before taxes 54.9 5.4 120.6 12.1 84.9 4.3 194.6 10.1 Provision for income taxes 20.0 2.0 7.6 0.8 27.6 1.4 27.9 1.4 Net income$ 34.8 3.4 %$ 112.9 11.4 %$ 57.3 2.9 %$ 166.6 8.6 %
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* Represents the amount presented divided by total net revenue.
Net Revenue
Net revenue for the three months endedJune 30, 2022 increased 2.8% compared to the three months endedJune 30, 2021 . Excluding a decrease of 2.2% attributed to changes in foreign currency exchange rates and an increase of 2.8% due to the effect of acquisitions, net revenue for the three months endedJune 30, 2022 increased 2.2% on an organic basis, representing market outgrowth of 650 basis points. Net revenue for the six months endedJune 30, 2022 increased 3.2% compared to the six months endedJune 30, 2021 . Excluding a decrease of 1.3% attributed to changes in foreign currency exchange rates and an increase of 3.4% due to the effect of acquisitions, net revenue for the six months endedJune 30, 2022 increased 1.1% on an organic basis, representing market outgrowth of 720 basis points.
Organic revenue growth (or decline), discussed throughout this MD&A, is a
financial measure not presented in accordance with
Performance Sensing
Performance Sensing net revenue for the three months endedJune 30, 2022 increased 0.7% compared to the three months endedJune 30, 2021 . Excluding a decrease of 2.2% attributed to changes in foreign currency exchange rates and an increase of 24
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3.0% due to the effect of acquisitions, Performance Sensing net revenue for the three months endedJune 30, 2022 was flat on an organic basis. Both automotive and HVOR contributed to these results as discussed below. Automotive net revenue for the three months endedJune 30, 2022 declined 2.3% compared to the three months endedJune 30, 2021 . Excluding a decline of 2.4% attributed to changes in foreign currency exchange rates, Automotive net revenue for the three months endedJune 30, 2022 grew 0.1% on an organic basis. HVOR net revenue for the three months endedJune 30, 2022 grew 7.7% compared to the three months endedJune 30, 2021 . Excluding a decline of 1.7% attributed to changes in foreign currency exchange rates and an increase of 10.0% due to the effect of acquisitions, HVOR net revenue for the three months endedJune 30, 2022 declined 0.6% on an organic basis. Performance Sensing net revenue for the six months endedJune 30, 2022 increased 0.6% compared to the six months endedJune 30, 2021 . Excluding a decrease of 1.4% attributed to changes in foreign currency exchange rates and an increase of 3.9% due to the effect of acquisitions, Performance Sensing net revenue for the six months endedJune 30, 2022 decreased 1.9% on an organic basis. Both automotive and HVOR contributed to these results as discussed below. Automotive net revenue for the six months endedJune 30, 2022 declined 4.4% compared to the six months endedJune 30, 2021 . Excluding a decrease of 1.5% attributed to changes in foreign currency exchange rates, automotive net revenue for the six months endedJune 30, 2022 declined 2.9% on an organic basis, primarily as a result of the impacts of original equipment manufacturer efforts to replenish inventory channels in 2021. HVOR net revenue for the six months endedJune 30, 2022 grew 13.6% compared to the six months endedJune 30, 2021 . Excluding a decrease of 1.2% attributed to changes in foreign currency exchange rates and an increase of 14.0% due to the effect of acquisitions, HVOR net revenue for the six months endedJune 30, 2022 grew 0.8% on an organic basis.
Sensing Solutions
Sensing Solutions net revenue for the three months endedJune 30, 2022 increased 9.1% compared to the three months endedJune 30, 2021 . Excluding a decline of 1.9% attributed to changes in foreign currency exchange rates and an increase of 2.0% due to the effect of acquisitions, Sensing Solutions net revenue for the three months endedJune 30, 2022 grew 9.0% on an organic basis. The organic revenue growth primarily reflects the launch of new industrial electrification applications, partially offset by declines in the Industrial market. Sensing Solutions net revenue for the six months endedJune 30, 2022 increased 11.1% compared to the six months endedJune 30, 2021 . Excluding a decline of 1.2% attributed to changes in foreign currency exchange rates and an increase of 2.0% due to the effect of acquisitions, Sensing Solutions net revenue for the six months endedJune 30, 2022 grew 10.3% on an organic basis. The organic revenue growth primarily reflects the launch of new industrial electrification applications, partially offset by declines in the Aerospace market.
Operating costs and expenses
Operating costs and expenses for the three and six months endedJune 30, 2022 and 2021 are presented, in millions of dollars and as a percentage of net revenue, in the following table. Amounts and percentages in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not appear to recalculate due to the effect of rounding. For the three months ended For the six months ended June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Amount Margin* Amount Margin* Amount Margin* Amount Margin* Operating costs and expenses: Cost of revenue$ 686.6 67.3 %$ 658.3 66.3 %$ 1,343.7 67.3 %$ 1,293.6 66.8 % Research and development 48.0 4.7 42.9 4.3 94.0 4.7 78.9 4.1 Selling, general and 97.3 9.5 86.8 8.7 193.0 9.7 163.9 8.5 administrative Amortization of intangible assets 36.8 3.6 34.9 3.5 74.2 3.7 66.9 3.5 Restructuring and other charges, 12.9 1.3 5.0 0.5 26.6 1.3 9.6 0.5
net
Total operating costs and expenses$ 881.6 86.4 %$ 827.9 83.4 %$ 1,731.4 86.7 %$ 1,613.0 83.3 %
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* Represents the amount presented divided by total net revenue.
Cost of revenue
For the three months endedJune 30, 2022 , cost of revenue as a percentage of net revenue increased from the three months endedJune 30, 2021 , primarily due to the impacts of inflation on material and logistics costs. 25
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For the six months endedJune 30, 2022 , cost of revenue as a percentage of net revenue increased from the six months endedJune 30, 2021 , primarily due to the impacts of inflation on material and logistics costs, partially offset by the favorable effect of changes in foreign currency exchange rates.
Research and development expense
For the three and six months endedJune 30, 2022 , research and development ("R&D") expense increased from the three and six months endedJune 30, 2021 , primarily as a result of higher spend to support megatrend growth initiatives and incremental R&D expense related to acquired businesses, partially offset by the favorable effect of foreign currency exchange rates.
R&D expense related to megatrends during the three and six months ended
Selling, general and administrative expense
For the three and six months endedJune 30, 2022 , selling, general and administrative ("SG&A") expense increased from the three and six months endedJune 30, 2021 , primarily as a result of (1) incremental SG&A expense related to acquired businesses, including related transaction costs, (2) higher selling costs to support growth and our ability to execute for our customers, and (3) higher share-based compensation, partially offset by the favorable effect of changes in foreign currency exchange rates. Refer to Note 4: Share-Based Payment Plans of our condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional information related to our share-based compensation.
Amortization of intangible assets
For the three and six months endedJune 30, 2022 , amortization expense increased from the three and six months endedJune 30, 2021 , primarily due to increased intangibles from recent acquisitions partially offset by the effect of the economic benefit amortization method. Refer to Note 16: Acquisitions and Divestitures of our condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional information related to recent acquisitions.
Restructuring and other charges, net
For the three and six months endedJune 30, 2022 , restructuring and other charges, net increased from the three and six months endedJune 30, 2021 , primarily due to acquisition-related incentive compensation partially offset by a gain resulting from reduction of the liability for contingent consideration for Spear. In addition, we did not incur restructuring charges related to the Q2 2020 Global Restructure Program in the three and six months endedJune 30, 2022 , compared to$3.8 million and$5.7 million in the three and six months endedJune 30, 2021 , respectively. Refer to Note 5: Restructuring and Other Charges, Net of our condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional information on the components of restructuring and other charges, net.
Operating income
For the three months endedJune 30, 2022 , operating income decreased compared to the three months endedJune 30, 2021 , primarily due to (1) increased acquisition-related incentive compensation, (2) higher spend to support our megatrends initiatives, (3) the impacts of lower volume, (4) increased transaction-related costs, (5) higher amortization due to acquired intangibles, (6) higher selling costs to support growth and our ability to execute for our customers, and (7) higher share-based compensation, partially offset by (1) a reduction in restructuring charges related to the Q2 2020 Global Restructure Program and (2) a gain recorded as a result of a reduction in the liability for contingent consideration due to Spear. For the six months endedJune 30, 2022 , operating income decreased compared to the six months endedJune 30, 2021 , primarily due to (1) increased acquisition-related incentive compensation, (2) higher amortization due to acquired intangibles, (3) the impacts of inflation, (4) higher spend to support our megatrends initiatives, (5) the impacts of lower volume, (6) higher selling costs to support growth and our ability to execute for our customers, (7) increased transaction-related costs, and (8) higher share-based compensation, partially offset by (1) a gain recorded as a result of a reduction in the liability for contingent consideration due to Spear, (2) a reduction in restructuring charges related to the Q2 2020 Global Restructure Program, and (3) the favorable effect of changes in foreign currency exchange rates.
Interest expense, net
For the three months endedJune 30, 2022 , interest expense, net decreased$0.4 million from the three months endedJune 30, 2021 , as increased interest rates impacted interest income earned on our cash equivalents balances slightly more than interest expense on our variable rate debt (the Term Loan). 26
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For the six months endedJune 30, 2022 , interest expense, net increased$1.0 million from the six months endedJune 30, 2021 , primarily as a result of (1) a full six months of interest expense on the 4.0% Senior Notes in the six months endedJune 30, 2022 , which were issued onMarch 29, 2021 andApril 8, 2021 , and (2) increased interest expense on our variable rate debt resulting from higher interest rates in the period, partially offset by (1) reduced interest expense resulting from ourMarch 5, 2021 redemption of the 6.25% Senior Notes and (2) increased interest income earned on our cash equivalents balances.
Other, net
Other, net primarily includes currency remeasurement gains and losses on net monetary assets, gains and losses on foreign currency and commodity forward contracts not designated as hedging instruments, mark-to-market gains and losses on investments, losses related to debt refinancing, and the portion of our net periodic benefit cost excluding service cost. Refer to Note 6: Other, Net of our condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for more details related to the components of other, net. For the three months endedJune 30, 2022 , other, net represented a net loss of$39.2 million , an unfavorable impact on earnings of$40.3 million compared to a net gain of$1.0 million in the three months endedJune 30, 2021 . This was primarily due to (1) increased losses on commodity forward contracts, (2) increased currency remeasurement losses on net monetary assets, primarily related to CNY, and (3)$11.8 million in mark-to-market losses on equity investments, primarily related to Quanergy. Refer to Note 14: Fair Value Measures of our condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q, for detailed information on our investment in Quanergy. For the six months endedJune 30, 2022 , other, net represented a net loss of$89.7 million , an unfavorable impact on earnings of$51.3 million compared to a net loss of$38.4 million in the six months endedJune 30, 2021 . This was largely due to (1)$71.1 million in mark-to-market losses on equity investments, primarily related to Quanergy, (2) increased losses on net monetary assets, primarily related to CNY, and (3) increased losses on commodity forward contracts, partially offset by the non-recurrence of a$30.1 million loss on debt financing related to the redemption of our 6.25% Senior Notes onMarch 5, 2021 . Provision for income taxes For the three months endedJune 30, 2022 , the provision for income taxes increased$12.4 million from the three months endedJune 30, 2021 , predominantly related to the jurisdictional mix of profits, the impacts of nondeductible earnout and compensation expenses resulting from recent acquisitions, and the inability to benefit the mark-to market loss on our investment in Quanergy. For the six months endedJune 30, 2022 , the provision for income taxes decreased$0.3 million from the six months endedJune 30, 2021 , predominantly related to the overall decrease in income before tax as impacted by the mix of profits in the various jurisdictions in which we operate, offset by the impacts of nondeductible expenses resulting from our recent acquisitions and the inability to benefit the mark-to-market loss on our investment in Quanergy. The provision for income taxes consists of (1) current tax expense, which relates primarily to our profitable operations in tax jurisdictions with limited or no net operating loss carryforwards and withholding taxes related to management fees, royalties, and the repatriation of foreign earnings; and (2) deferred tax expense (or benefit), which represents adjustments in book-to-tax basis differences primarily related to (a) book versus tax basis in intangible assets, (b) changes in net operating loss carryforwards, and (c) changes in withholding taxes on unremitted earnings. Other items impacting deferred tax expense include changes in tax rates and changes in our assessment of the realizability of our deferred tax assets.
Non-GAAP Financial Measures
This section provides additional information regarding certain non-GAAP
financial measures, including organic revenue growth (or decline), adjusted
operating income, adjusted operating margin, adjusted net income, adjusted
earnings per share ("EPS"), free cash flow, net leverage ratio, and adjusted
earnings before interest, taxes, depreciation, and amortization ("EBITDA"),
which are used by our management, Board of Directors, and investors. We use
these non-GAAP financial measures internally to make operating and strategic
decisions, including the preparation of our annual operating plan, evaluation of
our overall business performance, and as a factor in determining compensation
for certain employees.
The use of our non-GAAP financial measures has limitations. They should be
considered as supplemental in nature and are not intended to be considered in
isolation from, or as an alternative to, reported net revenue growth (or
decline), operating income, operating margin, net income, diluted EPS, net cash
provided by operating activities, total debt, finance lease and other financing
obligations, respectively, calculated in accordance with U.S. GAAP. In addition,
our measures of organic revenue growth (or decline), adjusted operating income,
adjusted operating margin, adjusted net income, adjusted EPS, free cash flow,
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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.
Free cash flow
Free cash flow is defined as net cash provided by operating activities less additions to property, plant and equipment and capitalized software. We believe free cash flow is useful to management and investors as a measure of cash generated by business operations that will be used to repay scheduled debt maturities and can be used to, among other things, fund acquisitions, repurchase ordinary shares, and (or) accelerate the repayment of debt obligations.
Adjusted EBITDA
Adjusted EBITDA is defined as net income (or loss), determined in accordance 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 gain or loss on derivative instruments, and (4) step-up inventory amortization. Refer to Non-GAAP Adjustments below for additional discussion of these adjustments.
Net leverage ratio
Net leverage ratio represents net debt (total debt, finance lease and other financing obligations less cash and cash equivalents) divided by last twelve months ("LTM") adjusted EBITDA. We believe that the net leverage ratio is a useful measure to management and investors in understanding trends in our overall financial condition.
Non-GAAP adjustments
Many of our non-GAAP adjustments relate to a series of strategic initiatives
developed by our management aimed at better positioning us for future revenue
growth and an improved cost structure. These initiatives have been modified from
time to time to reflect changes in overall market conditions and the competitive
environment facing our business. These initiatives include, among other items,
acquisitions, divestitures, restructurings of certain business, supply chain, or
corporate activities, and
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various financing transactions. We describe these adjustments in more detail below, each of which is net of current tax impacts, as applicable.
•Restructuring related and other: includes charges, net related to certain restructuring and other exit activities as well as other costs (or income) that we believe are either unique or unusual to the identified reporting period, and that we believe impact comparisons to prior period operating results. Such costs include charges related to optimization of our manufacturing processes to increase productivity. This type of activity occurs periodically, however each action is unique, discrete, and driven by various facts and circumstances. Such amounts are excluded from internal financial statements and analyses that management uses in connection with financial planning, and in its review and assessment of our operating and financial performance, including the performance of our segments. •Financing and other transaction costs: includes losses or gains related to debt financing transactions, losses or gains related to the divestiture of a business, costs incurred, including for legal, accounting, and other professional services, that are directly related to an acquisition, divestiture, or equity financing transaction, mark-to-market losses or gains on our equity investments, expenses related to compensation arrangements entered into concurrent with the closing of an acquisition, and gains related to changes in the fair value of acquisition-related contingent consideration amounts. •Deferred loss or gain on derivative instruments: includes unrealized losses or gains on derivative instruments that do not qualify for hedge accounting as well as the impact of commodity prices on our raw material costs relative to the strike price on our commodity forward contracts. •Step-up depreciation and amortization: includes depreciation and amortization expense associated with the step-up in fair value of assets acquired in connection with a business combination (e.g., property, plant and equipment, definite-lived intangible assets, and inventories). •Deferred taxes and other tax related: includes adjustments for book-to-tax basis differences due primarily to the step-up in fair value of fixed and intangible assets and goodwill, the utilization of net operating losses, and adjustments to our valuation allowance in connection with certain acquisitions and tax law changes. Other tax related items include certain adjustments to unrecognized tax benefits and withholding tax on repatriation of foreign earnings.
•Amortization of debt issuance costs: represents interest expense related to the amortization of deferred financing costs as well as debt discounts, net of premiums.
•Where applicable, the current income tax effect of non-GAAP adjustments.
Our definition of adjusted net income excludes the deferred provision for (or benefit from) income taxes and other tax related items described above. As we treat deferred income taxes as an adjustment to compute adjusted net income, the deferred income tax effect associated with the reconciling items presented below would not change adjusted net income for any period presented.
Non-GAAP reconciliations
The following tables present reconciliations of certain financial measures calculated in accordance 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 tables below have been calculated based on unrounded numbers, accordingly, certain amounts may not appear to recalculate due to the effect of rounding. For the three months ended June 30, 2022 For the three months ended June 30, 2021 (Dollars in millions, except per Operating Operating share amounts) Operating Income Margin Net Income Diluted EPS Operating Income Margin Net Income Diluted EPS Reported (GAAP)$ 138.9
13.6 %
16.6 %$ 112.9 $ 0.71 Non-GAAP adjustments: Restructuring related and other 3.9 0.4 4.3 0.03 5.7 0.6 6.9 0.04 Financing and other transaction 14.4 1.4 28.3 0.18 2.5 0.3 1.3 0.01 costs Step-up depreciation and 35.3 3.5 35.3 0.22 33.7 3.4 33.7 0.21 amortization Deferred loss on derivative 1.2 0.1 15.4 0.10 2.6 0.3 1.1 0.01 instruments Amortization of debt issuance - - 1.7 0.01 - - 1.7 0.01 costs Deferred taxes and other tax - - 9.7 0.06 - - (6.2) (0.04) related Total adjustments 54.8 5.4 94.7 0.60 44.6 4.5 38.4 0.24 Adjusted (non-GAAP)$ 193.8 19.0 %$ 129.5 $ 0.83 $ 209.3 21.1 %$ 151.4 $ 0.95 29
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For the six months ended June 30, 2022 For the six months ended June 30, 2021
(Dollars in millions, except per Operating Operating
share amounts) Operating Income Margin Net Income Diluted EPS Operating Income Margin Net Income Diluted EPS Reported (GAAP)$ 264.9 13.3
%
16.7 %
8.0 0.4 8.3 0.05 10.3 0.5 14.2 0.09
Financing and other transaction 30.3 1.5 102.8 0.65 7.1 0.4 34.1 0.21
costs
Step-up depreciation and 71.3 3.6 71.3 0.45 63.4 3.3 63.4 0.40
amortization
Deferred loss on derivative 1.8 0.1 8.5 0.05 4.4 0.2 3.3 0.02
instruments
Amortization of debt issuance - - 3.4 0.02 - - 3.4 0.02
costs
Deferred taxes and other tax - - 1.3 0.01 - - 3.9 0.02 related Total adjustments 111.4 5.6 195.7 1.24 85.2 4.4 122.3 0.77 Adjusted (non-GAAP)$ 376.3 18.8 %$ 253.0 $ 1.60 $ 407.4 21.1 %$ 289.0 $ 1.81
The following table provides a reconciliation of net cash provided by operating
activities in accordance with
For the six months ended June 30,
(in millions) 2022 2021
Net cash provided by operating activities (GAAP) $ 141.9 $ 267.9
Additions to property, plant and equipment and capitalized
software (74.1) (63.6)
Free cash flow (non-GAAP) $ 67.8 $ 204.4 The following table provides a reconciliation of net income in accordance with
For the three months ended June For the six months ended June
30, 30,
(in millions) LTM (1) 2022 2021 2022 2021
Net income $ 254.2 $ 34.8 $ 112.9 $ 57.3 $ 166.6
Interest expense, net 180.3 44.8 45.2 90.3 89.3
Provision for income taxes 50.0 20.0 7.6 27.6 27.9
Depreciation expense 125.0 31.4 31.6 62.9 62.8
Amortization of intangible
assets 141.4 36.8 34.9 74.2 66.9
EBITDA 750.9 167.9 232.3 312.2 413.6
Non-GAAP adjustments
Restructuring related and other 17.7 4.3 7.0 8.5 14.4
Financing and other transaction
costs 107.3 28.7 1.7 103.8 37.6
Deferred loss on derivative
instruments 17.6 19.4 1.4 10.7 4.4
Adjusted EBITDA $ 893.5 $ 220.4 $ 242.4 $ 435.2 $ 470.0 ___________________________________
(1) Last twelve months
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The following table provides a reconciliation of total debt, finance lease and
other financing obligations in accordance with
June 30, December 31,
(Dollars in millions) 2022 2021
Current portion of long-term debt, finance lease and other financing obligations
$ 6.6 $ 6.8 Finance lease and other financing obligations, less current portion
25.6 26.6
Long-term debt, net 4,213.5 4,214.9
Total debt, finance lease and other financing obligations 4,245.7 4,248.3
Less: discount, net of premium (4.3) (5.2)
Less: deferred financing costs (26.7) (26.7)
Total gross indebtedness 4,276.7 4,280.2
Less: cash and cash equivalents 1,558.6 1,709.0
Net debt $
2,718.1
Adjusted EBITDA (LTM)$ 893.5 $ 928.3 Net leverage ratio 3.0 2.8
Liquidity and Capital Resources
As ofJune 30, 2022 andDecember 31, 2021 , we held cash and cash equivalents in the following regions (amounts have been calculated based on unrounded numbers; accordingly, certain amounts may not appear to recalculate due to the effect of rounding): (In millions) June 30, December 31, 2022 2021 United Kingdom$ 23.9 $ 20.4 United States 598.8 25.0 The Netherlands 607.1 1,304.3 China 261.6 293.8 Other 67.2 65.5 Total$ 1,558.6 $ 1,709.0 The amount of cash and cash equivalents held in these geographic regions fluctuates throughout the year due to a variety of factors, such as our use of intercompany loans and dividends and the timing of cash receipts and disbursements in the normal course of business. Our earnings are not considered to be permanently reinvested in certain jurisdictions in which they were earned. We recognize a deferred tax liability on these unremitted earnings to the extent the remittance of such earnings cannot be recovered in a tax-free manner. In certain jurisdictions, our cash balances are subject to withholding taxes immediately upon withdrawal of funds to a different jurisdiction. In addition, in order to take advantage of incentive programs offered by various jurisdictions, including tax incentives, we are required to maintain minimum cash balances in these jurisdictions. The transfer of cash from these jurisdictions could result in loss of incentives or higher cash tax expense, but those impacts are not expected to be material. Our cash and cash equivalent balances are held in the following significant currencies: As of June 30, 2022 (In millions) USD EUR GBP CNY Other United Kingdom$ (0.6) € 0.0 £ 15.5 ¥ - United States 598.8 0.0 - - The Netherlands 588.1 17.8 - - China 147.2 - - 766.2 Other 44.9 3.1 - - Total$ 1,378.4 € 20.9 £ 15.5 ¥766.2 USD Equivalent$ 22.0 $ 18.9 $ 114.5 $ 24.8 31
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As of December 31, 2021
(In millions) USD EUR GBP CNY Other
United Kingdom $ 1.8 € 0.0 £ 13.2 ¥ -
United States 25.0 - - -
The Netherlands 1,294.2 8.9 - -
China 50.8 - - 1,549.4
Other 51.0 1.7 - -
Total $ 1,422.8 € 10.6 £ 13.2 ¥ 1,549.4
USD Equivalent $ 12.0 $ 17.8 $ 243.1 $ 13.3
Cash Flows:
The table below summarizes our primary sources and uses of cash for the six
months ended June 30, 2022 and 2021. We have derived this summarized statements
of cash flows from the condensed consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q. Amounts in the table below have
been calculated based on unrounded numbers. Accordingly, certain amounts may not
appear to recalculate due to the effect of rounding.
For the six months ended
(In millions) June 30, 2022 June 30, 2021
Net cash provided by/(used in):
Operating activities:
Net income adjusted for non-cash items $ 285.1 $ 347.0
Changes in operating assets and liabilities, net (143.2) (79.1)
Operating activities 141.9 267.9
Investing activities (129.8) (489.1)
Financing activities (162.5) 221.0
Net change $ (150.4) $ (0.2)
Operating activities. Net cash provided by operating activities for the six
months ended June 30, 2022 decreased compared to the corresponding period of the
prior year, primarily due to increased raw material purchases in order to
maximize production flexibility given widespread parts shortages in our supply
chain and in anticipation of volume increases later in the year, a cash payment
of $15.0 million for earned acquisition-related incentive compensation related
to Elastic M2M, and timing of supplier payments and customer receipts.
Investing activities. Net cash used in investing activities for the six months
ended June 30, 2022 decreased compared to the corresponding period of the prior
year, primarily due to lower cash paid for acquisitions, which included Elastic
M2M in the six months ended June 30, 2022 and Xirgo Technologies, LLC in the six
months ended June 30, 2021 . This impact was partially offset by higher capital
expenditures. For fiscal year 2022, we anticipate capital expenditures of
approximately $135.0 million to $145.0 million , which we expect to fund with
cash on hand.
Financing activities. In the six months ended June 30, 2022 , net cash used in
financing activities was primarily driven by $144.3 million cash paid for share
repurchases and $17.2 million paid for cash dividends, each of which did not
have a comparable payment in the prior year. In the six months ended June 30,
2021 , cash provided by financing activities was primarily the result of the
issuance of $1.0 billion of the 4.0% Senior Notes, partially offset by the
redemption of $750.0 million of the 6.25% Senior Notes. In addition, in fiscal
year 2021 we used $33.0 million in cash related to debt financing transactions.
Indebtedness and Liquidity
As of
Capital Resources
Senior Secured Credit Facilities
The Credit Agreement provides for senior secured credit facilities consisting of
the Term Loan, the Revolving Credit Facility, and incremental availability (the
"Accordion") under which additional secured credit facilities could be issued
under certain circumstances.
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OnJune 23, 2022 , certain of our indirect, wholly-owned subsidiaries, including STI, STIHBV, and STBV, entered into the Eleventh Amendment to the Credit Agreement and the Foreign Guaranty, dated as ofMay 12, 2011 . Among other changes to the Credit Agreement, the Eleventh Amendment (i) increased the aggregate principal amount of the Revolving Credit Facility to$750.0 million ; (ii) extended the maturity date of the Revolving Credit Facility toJune 23, 2027 (which could be accelerated toJune 22, 2026 if, prior toJune 22, 2026 , the Term Loan is not refinanced with a maturity date that is on or afterJune 23, 2027 ); (iii) released the Foreign Guarantors (as defined in the Credit Agreement), excluding STBV, from their obligations to guarantee the obligations of STI and the other Loan Parties (as defined in the Credit Agreement) relating to the Revolving Credit Facility and certain related obligations, subject to an obligation to reinstate such guaranties under certain conditions; (iv) replaced the LIBOR-based interest rates referenced by the Credit Agreement regarding revolving credit loans to (a) for revolving credit loans denominated inU.S. dollars, an interest rate based on the SOFR published by theFederal Reserve Bank of New York and (b) for revolving credit loans denominated in pounds sterling, an interest rate based on the SONIA; and (v) certain of the operational and restrictive covenants and other terms and conditions of the Credit Agreement were modified to provide STI and its affiliates increased flexibility and permissions thereunder.
Sources of liquidity
Our sources of liquidity include cash on hand, cash flows from operations, and available capacity under the Revolving Credit Facility. As ofJune 30, 2022 , we had$746.1 million available under the Revolving Credit Facility, net of$3.9 million of obligations in respect of outstanding letters of credit issued thereunder. Outstanding letters of credit are issued primarily for the benefit of certain operating activities. As ofJune 30, 2022 , no amounts had been drawn against these outstanding letters of credit. Availability under the Accordion varies each period based on our attainment of certain financial metrics as set forth in the terms of the Credit Agreement and the indentures under which our senior notes were issued (the "Senior Notes Indentures"). As ofJune 30, 2022 , availability under the Accordion was approximately$0.6 billion . We believe, based on our current level of operations and taking into consideration the restrictions and covenants included in the Credit Agreement and Senior Notes Indentures, that the sources of liquidity described above will be sufficient to fund our operations, capital expenditures, dividend payments, ordinary share repurchases, and debt service for at least the next twelve months. However, we cannot make assurances that our business will generate sufficient cash flows from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. Further, our highly-leveraged nature may limit our ability to procure additional financing in the future. Our ability to raise additional financing, and our borrowing costs, may be impacted by short- and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on our performance as measured by certain credit metrics such as interest coverage and leverage ratios. As ofJuly 20, 2022 , Moody's Investors Service's corporate credit rating for STBV was Ba2 with a stable outlook, andStandard & Poor's corporate credit rating for STBV was BB+ with a stable outlook. Any future downgrades to STBV's credit ratings may increase our future borrowing costs but will not reduce availability under the Credit Agreement. Restrictions and Covenants The Credit Agreement provides that if our senior secured net leverage ratio exceeds a specified level we are required to use a portion of our excess cash flow, as defined in the Credit Agreement, generated by operating, investing, or financing activities to prepay some or all of the outstanding borrowings under our senior secured credit facilities. The Credit Agreement also requires mandatory prepayments of the outstanding borrowings under our senior secured credit facilities upon certain asset dispositions and casualty events, in each case subject to certain reinvestment rights, and upon the incurrence of certain indebtedness (excluding any permitted indebtedness). These provisions were not triggered during the six months endedJune 30, 2022 . We do not expect that the sale of the Qinex Business, which occurred subsequent toJune 30, 2022 , will trigger these provisions. The Credit Agreement and the Senior Notes Indentures contain restrictions and covenants that limit the ability of our wholly-owned subsidiary, STBV, and certain of its subsidiaries to, among other things, incur subsequent indebtedness, sell assets, pay dividends, and make other restricted payments. For a full discussion of these restrictions and covenants, refer to Part II, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations-Capital Resources included in our 2021 Annual Report. These restrictions and covenants, which are subject to important exceptions and qualifications set forth in the Credit Agreement and Senior Notes Indentures, were taken into consideration when we established our share repurchase programs and will be evaluated periodically with respect to future potential funding of those programs. As ofJune 30, 2022 , we believe we were in compliance with all covenants and default provisions under our credit arrangements. 33
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Share repurchase programs
From time to time, our Board of Directors has authorized various share repurchase programs, which may be modified or terminated by our Board at any time. We currently have an authorized$500.0 million share repurchase program (the "January 2022 Program") under which approximately$370.6 million remained available as ofJune 30, 2022 .
Dividends
OnMay 25, 2022 , we paid a cash dividend of$0.11 per share, or$17.2 million in aggregate, to shareholders of record as ofMay 11, 2022 . OnJuly 21, 2022 , we announced that our Board had declared a quarterly dividend of$0.11 per share, payable onAugust 24, 2022 to shareholders of record as ofAugust 10, 2022 .
Recently Issued Accounting Pronouncements
There are no recently issued accounting standards that have been adopted in the current period or will be adopted in future periods that have had or are expected to have a material impact on our consolidated financial position or results of operations.
Critical Accounting Policies and Estimates
For a discussion of the critical accounting policies that require the use of significant judgments and estimates by management, refer to Part II, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates included in our 2021 Annual Report.
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